We're used to thinking of modern finance as practically synonymous with computers. Banks are basically just big collections of Excel spreadsheets, keeping track of who owes what to whom. And most trading nowadays is done by clicking a button on a screen. But how did all this work before we had this type of technology? And what can previous technological revolutions tell us about the direction of new ones, such as the potential deployment of artificial intelligence? In this episode, we speak with Anne Murphy, history professor at the University of Portsmouth and the author of Virtuous Bankers: A Day in the Life of the Eighteenth-Century Bank of England, as well as John Handel, a postdoctoral fellow at the University of Virginia McIntire School of Commerce. They walk us through just how banking and finance was done in the days before computers, telephones and even the telegraph.
Key insights from the pod:
What the Bank of England looked like in the 1700s — 3:04
The first enclosed stock exchanges — 7:00
How bankers in the 1700s kept their ledgers — 9:47
How people trusted that their transactions actually happened -- 11:36
The beginning of arbitrage — 14:26
How the BoE preserved records — 18:40
The importance of fire prevention — 20:23
The role of brokerage clerks — 24:09
The use of the death penalty in maintaining market order — 29:56
Fraud prevention at the London Stock Exchange — 32:08
What technological change means for workers — 36:59
Tracy Alloway: (00:00)
Hello, and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.
Joe Weisenthal: (00:14)
And I'm Joe Weisenthal.
Tracy: (00:00)
Joe, do you remember the episode we did with Stewart Butterfield, the founder of Slack?
Joe: (00:21)
I do. Great episode software. Tech. I like when we have tech and software episodes that aren't about just like the markets, but how technology actually works.
Tracy: (00:31)
How it actually functions. Yes. Alright. Well, that's a good jumping off point because there was a moment in that episode where I think it was Stewart asked a very innocent question. Which is he basically said he had no idea how banking worked before the advent of computers.
Joe: (00:47)
I'm glad he said that because I have no idea either. And when I, you know, when I think about money, and by this point we all sort of know like, “oh, like money is, it's just a database entry.” Right. Well, that makes very a lot of sense to me at a world of Excel. But how did, like databases work? How did money as a database creation work before databases.
Tracy: (01:04)
Well, that's exactly it. Because nowadays I think money is almost synonymous with an electronic database. Yeah. Like that's basically what it is at this point. But of course, for hundreds and hundreds of years, we did not have things like Excel spreadsheets. So how did banking and finance and trade actually work in those conditions?
Joe: (01:23)
Yeah, and like I just don't understand how like people traded stocks or people went into a bank and said, I want to get my money, or without like, how are they not just like always losing track of how much money people had?
How are they always not just like forgetting, oh, you bought that stock. Like it just what? On pen and paper? Like type? Like in my mind they must have been losing track of stuff all the time.
Tracy: (01:41)
Well, I think I said this in the Stewart episode, but there were a lot of bank failures.
Joe: (01:47)
True.
Tracy: (01:48)
There were a lot of trading blowups.
Joe: (01:49)
True.
Tracy: (01:50)
So maybe they, you know, maybe the lack of technology was actually bad. Maybe that's the answer. But we do actually have the perfect guest to discuss this topic. We are going to be speaking with Anne Murphy. She is a professor of history and executive dean over at the University of Portsmouth. She just wrote a new book, it's called Virtuous Bankers: A Day in the Life of the Eighteenth- Century Bank of England.
So, the perfect person to talk about pre-computerized banking.
Joe: (02:14)
Awesome.
Tracy: (02:15)
We're also going to be speaking, this is a double feature. We're going to be speaking with John Handel, postdoctoral fellow at the McIntire School of Commerce at the University of Virginia. He's written a lot about trade and technology in the 1800s-1900s. So, we're going to take a journey through the history of finance.
Joe: (02:34)
I can't wait. I'm really excited about this. I have so many questions.
Tracy: (02:37)
Alright, Anne and John, thank you so much for coming on Odd Lots.
Anne Murphy: (02:40)
Oh, thank you for inviting me. It's lovely to be here.
John Handel: (02:43)
As they say in sports talk radio longtime listener, first time caller. So great to be here.
Tracy: (02:48)
Nice. So maybe I should attempt some kind of chronological order here. But why don't we start with you, Anne. I mean, you know, the clue is in the title of your book. What was it actually like, a day in the life of the Bank of England in the 1700s?
Anne: (03:04)
So it was a very busy place. The time I'm writing about is the 1780s. So, it's just after the War of American Independence and the British are having a moment of real introspection about their finances and trying to figure out whether everything is working well. Which is one of the reasons that the Bank of England kind of looks inward at itself at this time and really tries to figure out what it's doing and how it's doing it and whether it's doing it well or not.
But the bank at this time, it's a 24 hour a day place. It opens at dawn. You've got customers kind of milling around from about nine o'clock onwards, and it's doing everything you would expect a bank to do. But without those Excel spreadsheets, you know, it's doing them all with ledgers and quill and ink. And it's my view that it does it well and it doesn't lose its customers money. It has a pretty good grasp of where everybody is and where, whether there's money to trade and how it does all this stuff.
Joe: (04:04)
Wait, you said it was 24 hours and even the Fed, I don't think, is 24 hours. Or at least some of its operations have a certain, window or the closes or certain things don't happen on weekends. So were there certain aspects of banking that from a 24-hour standpoint were more advanced, I don't know, a few hundred years ago than there are today?
Anne: (04:25)
So it's not necessarily operating 24 hours a day.
Joe: (04:38)
Okay.
Anne: (04:39)
So its standard business day is around about nine-to-five. But because it can't just press an update button at the end of the day to make sure all of the accounts are updated for the start of the next working day, the process of updating accounts takes place in the evening.
So from about four o'clock all the way through sometimes to kind of ten or eleven o'clock in the evening, there are clerks updating the physical ledgers. So that next day when the brokers walk in or when those business owners who are there regularly walk in, their account is up to date and they're ready to go for the new business day.
But the other reason it's 24 hours is because it's a vulnerable place. So, it's at risk of fire, it's at risk of riot, it's at risk of people wanting to break in. So it has night watchmen who are there and active throughout the night to make sure that the bank is safe.
Tracy: (05:27)
I have a really basic question, which is, what are people doing at the Bank of England in 1780? You mentioned customers sort of milling outside of the building. What are they waiting to actually do?
Anne: (05:40)
One thing they're not doing so much is borrowing money from the bank. The bank's private lending is not very well advanced. They have their little bit of private lending early in the late 1600s, early 1700s, but it doesn't really take off.
What a lot of people there are doing is discounting bills of exchange. So they're borrowing money in that way and facilitating trade. Also in that way, they are managing notes. So they're coming to the bank to exchange ready money for bank notes, other bank notes for Bank of England notes or their bank notes that they have back to ready money again. And the note business is huge and occupies a lot of everybody's time. But they're also there to buy and sell government debt. So you could buy and sell government debt at the bank. It's probably the main place where you could do that throughout most of the 18th century. So that's one of the things that they're there to do.
Joe: (06:39)
So I want to get more into the sort of like pen and paper and the actual physical operations. But John, why don't you come in, talk to us a little bit about your area of focus. You're a little bit more on the trading and financial activities side. Talk a little bit about your specific years and area of focus in this sort of like, finance and trading pre-computers.
John: (07:00)
So my work is essentially the sequel to Anne's work. I pick up in the early 1800s, around when her book on the Bank of England finishes. I focus primarily on the London Stock Exchange and what's happening in this period is a lot of the trading that had gone on during the 1700s went on in dispersed, often open, locations. The lobby of the Bank of England, in alleyways, in coffee shops, in taverns even. But beginning in the early 1800s, there's this move to enclose financial markets and make them their own discrete spaces that would be governed by the Association of Brokers who are members of those exchanges.
And so the London Stock Exchange adopts a new set of rules and begins to build its own premises starting in 1801, and essentially stops allowing members of the public -- clients, investors, whomever -- to enter the exchange. The exchange becomes solely the province of brokers. But much like what Anne was saying, the London Stock Exchange is also a 24/7 institution.
It's not just the brokers who are there on the trading floor from 11am to 4pm, but there are armies of clerks who are responsible for settling and clearing trades after hours because the London Stock Exchange is global and it's trading with markets in North America, in Australia and Asia during the 19th century. Members are there working at telegraph offices, basically late into the night, as late as 8pm or 9pm.
And then one of the other things that's often overlooked is that there is a whole army of household servants. Basically live-in servants who actually lived at the London Stock Exchange. They brought their families. They were called waiters, but they were essentially the equivalent of porters. And they worked to guard the entrances of the exchange, deliver telegrams and letters to the brokers, keep the exchange clean. And they lived there 24/7 for most of the 19th century. So the London Stock Exchange too was a 24/7 institution with a very complex human ecosystem.
Joe: (08:59)
Tracy, do you know what I really want to see? I want a Netflix show that takes place in the lobby of the Bank of England. I think like a big series of like over the years I just… now I really want this show to exist.
Tracy: (09:09)
I think that would be perfect for like, Sorkin treatment. Yes. Alright.
But actually, this reminds me I was having lunch. Just last week with a couple of traders who were active in the eighties and the nineties, and they were talking about board boys. So they used to have board boys who would write down trades on a blackboard or a whiteboard, you know, who owes what to whom, when there was active trading activity on the floor. But this leads nicely into my next question, which is, it sounds like a lot of the record keeping or the distribution of money, the movement of money was just being done by people in the 1700s and the 1800s as well.
Anne: (09:47)
That's absolutely right. And one of the things we don't really know is how those individual stockbrokers were keeping their ledgers. So if you look at images of the bank's lobby, the kind of brokers’ exchange. You don't see much evidence of people writing things down. So it probably looks like a lot of people were keeping a sense of what they were doing in their head until such time as they went and registered it with the Bank of England's clerks.
The other really interesting thing is the Bank of England is operating an inscribed stock ledger system in which they keep the only legally binding record of stock ownership. So individuals didn't have a receipt that they would take away with them that would be legally binding. In fact the receipt that they were given was worthless. And thus they had to completely trust that the Bank of England could keep their ledgers straight, and that they could keep this sense of ownership within those ledgers, you know, completely trustworthy.
Joe: (10:53)
I'm so glad you brought that up because I was going to go to this question of the receipt, right? Like we place a trade online or do some transaction. Usually these days we'll get like some email that comes from the financial entity might have some string of eleven numbers and letters or something that we don't really care about unless there's something that we need to go back and dispute whether something has happened.
But talk to us a little bit more if like, there's just there are these entities in the background and they're working overnight and they're humans and they're writing things down, possibly making mistakes. Maybe both of you could talk about this a little bit, like that role of trust in the institution and what happens if, you know, there's a dispute.
Anne: (11:33)
So it's trust, but with checks and balances.
Joe: (11:35)
Okay.
Anne: (11:36)
So when a transaction happens, there's a buyer and there's a seller both the buyer and the seller are supposed to be there to sign off on the trade, so to one to sell and one to accept. It's also signed off by a clerk. There's a whole process of checking between the stock transfer books and the stock ledgers.
And also, any individual could go into the Bank of England, either them or their representatives, and they could look at the stock ledgers to check that their account stood as they understood it. So trust happens, but with checks and balances also.
John: (12:15)
So I would say in the 19th century, again, this begins to change, this process of how you've established trust in a financial market.
So it was actually quite difficult to create something like a receipt for a stock transaction, especially if you were far away from London. So if you, for instance, lived in the provinces of England, you sent an order down by mail to your broker in London. Finding a broker would be its own problem, but let's say you find one. How do you know that he got you a good market price?
One of the big issues was that the rule for marking prices, for putting a price on the blackboard that would then be included in the daily price list, it was by agreement of the brokers doing the deal. So you had to actually agree with the person that you either bought or sold stock for, that you would mark the price officially, you could often not mark the price.
So often the financial press calls the price list that the London Stock Exchange produce ‘a record of bad bargains.’ Because it was essentially brokers who would be covering themselves. If they got something outside of a market price for their client, they would rush to have it marked on the board so that it would show up in the newspapers or show up in a price list the next day, and they could go back to their client and say, oh, look, I got you the market price. It's here in the newspaper. It's here in the price list. Even though for most of the people that were immediate in the market that were in the vicinity of the market that day, it was oftentimes not actually the real price to the fair price that was predominant.
Tracy: (13:59)
So this actually sounds like the ultimate opportunity for arbitrage, right? Because you have different sources of information operating at different latencies. Really slow latencies where you know someone is running from one location right, to the other location.
Joe: (14:13)
Literally mailing your broker in London, sending trade requests…
Tracy: (14:15)
Sending your servant to get the latest price of something. I mean, how did that feed into trading activity? Were there a lot of people trying to take advantage of that?
John: (14:26)
Yeah, so the 19th century sees the emergence of the first specialty arbitrage firms that are closing pricing gaps in dual listed securities between different markets. But then there was also just a lot of taking advantage of sort of slow retail orders that showed up in the market.
So one of the things that happened — there's a recent paper on this — is that the introduction of something like the ticker tape. Rather than making stock trading more efficient, it actually exacerbated irrational sort of trend chasing in numbers because the ticker tape numbers that were sent out to investors far away were on a slight delay.
It took some time to — even via a ticker tape — send out numbers. But then if you think about it, the order has to be routed back towards the initial exchange after you see a number on the ticker tape. And so oftentimes the people who are trading on ticker tape prices are smaller investors. They send their order back to their broker and — per the name of the show — the broker would not want to place these small lots.
They would wait until they had aggregated a number of orders from smaller investors that were trading off the ticker tape and only then go back into the stock exchange and place a larger block order. And so there were all of these complaints that the prices on the ticker tape were never actually accurate.
You couldn't execute a price on a ticker tape. And so there were all of these issues with matching up the time and the latency of when information was produced. Whether it was the price list after the fact, whether it was the ticker tape during the day, it was very hard to get those to actually match what an accurate market price was.
So the firms that tended to do better were ones that used the telegraph and the telephone and were more professional arbitrage traders that took advantage of these prices. Again, rather than retail traders that had to rely on things like the price list or the ticker tape.
Joe: (16:17)
Anne?
Anne: (16:17)
So in the late 1700s, I guess it was a somewhat different environment. There was less, I think, obvious room for arbitrage, but there were a few people who dominated in the market and therefore the number of transactions that they could command gave them a pretty good return on the investment of their time. So they're spending a lot of time in the Bank of England's lobby in various different coffee houses.
They're picking up business with a lot of people. And therefore, you know, having a lot of turnover. There's not enough, I think movement, very often, for arbitrage to be particularly easy for them. But their dominance in the market certainly gives them a real kind of command of information, a real command of the market as a whole. And just that sort of turnover definitely yields them profits. The other thing they're really picking up profits from is the initial issues from the government. So what the government is doing is issuing to trusted contractors and prominent businessmen, so they're getting that initial issue at very easy prices, which they're then selling into a much wider market so that there's a real profit to be had there.
And the government's very conscious of that expense, but really up until the early 19th century, can't figure out how to do that or how to make that operation work better.
Joe: (17:44)
It's so interesting. Once again, like all of these things that are like, what's the term in the US for the bevy or like the 10 banks that get to bid on the treasuries?
Tracy: (17:51)
Oh, primary dealers.
Joe: (17:52)
Yeah, the primary dealers. Like all of these things…
Tracy: (17:54)
The new issue premium as well.
Joe: (17:44)
The new issue premium, exactly the same. And then the idea of like the ticker tape exacerbating trend-following as opposed to making the market more efficient and like all these things just like...
We talk about it all the time. They come up over and over again. You know, since both of you talked about this, and the need for 24/7 trade or transaction reconciliation. So the markets or the banking day closes at some time, and then all the clerks get to work and make sure all the books are settled.
Can you talk a little bit more about what happened overnight? Maybe both of you, Anne starting first in terms of like, are we talking about handwriting down pieces of paper, erasing pens? Like can you talk a little bit more about what the overnight clerks and all these different institutions did overnight to get ready for the next day?
Anne: (18:40)
Sure. So, the Bank of England's records actually preserved this in a great amount of detail. So we kind of know precisely what they're doing. So there are books that are worked in the banking hall. So the environment where most of the customers would be, and there are books that are worked in the accounts department as well.
So the evening clerks, they're kind of taking the books that work that are worked in the banking hall and they are transferring those records against customers accounts so that the customers accounts are updated. Not only are they transferring them, but they're also checking them. So it goes through a process of making sure that the books that are worked in the banking hall are adding up in the same way as the books that are worked in the accounts department.
And then the customers ledgers are adding up in the same way as the books that are worked in the accounts department. Then somebody else checks it. The other thing that they're doing is making sure that their really regular customers are kept on a separate account. So they would work up particular accounts for certain customers because they knew that they would be in early the next morning and they knew that they would come and trade very often.
So they knew that those accounts had to be updated early and they really needed to make sure that they understood where those customers accounts sat. Protection of the records is another thing. That's really interesting. We can go on to talk about that as well if that would be interesting.
Joe: (20:11)
So yeah, actually, why don't you just talk about that. You mentioned the fire aspect. I imagine that if it all caught on fire, it'd be absolutely disastrous for everyone to be able to… so talk a little bit about that aspect. Just preserving the physical records.
Anne: (20:23)
So the bank is doing a variety of things to make sure that it's not at risk of fire. It's really worried about fire throughout most of its existence through the sort of 18th century and into the 19th century. So it's a really aggressive landlord. It kind of does a slum clearance operation, particularly to create a firebreak around its buildings. It pushes out resident populations. It pushes out all the old wooden buildings. It's makes duplicates of a lot of its accounts and sends them out of the bank every night to the house of one of its directors so that they know that if records are lost by fire there is a duplicate sitting out in another office.
They have kind of technological solutions. So they have wheeled trucks in which they put the most important ledgers so that they can wheel them out overnight. They keep their own fire engines and they train the watchmen to operate those fire engines. And from the 1760s or so, they create a kind of archive building. They call it a library. And they attempt to fireproof that library by lining the building with copper.
Joe: (21:32)
Wow.
Anne: (21:32)
So that, you know, there's a really elaborate set of protection against attack and fire.
Tracy: (21:37)
Yeah, I remember when I was living in London, actually working at Bloomberg way back in the day, I used to walk past the Bank of England building every day on my way to work.
And it's just this enormous imposing building with these famously thick walls. Was that for fire prevention or was that for fear of theft?
Anne: (21:56)
So, probably not so much for fear of theft, but it was for fear of unrest and rioting. Mobs in 18th century London would very often… even if they weren't interested in attacking a building, they would sort of go into the building and sort of pull things apart, particularly buildings that hadn't lit their windows. So, you know, putting lights in your window, indicated to the mob that you were supportive of whatever they were protesting against or what they were rioting against. If you didn't put lights in your windows then your property was at risk. So one of the things that the bank does very early on is has these sorts of windowless walls at the ground floor level, right? So it doesn't have to, it doesn't have to light its windows, but also it protects itself against that possibility of people sort of coming in through the windows or breaking the windows.
The other thing it does, so there's a church next door to the bank. During the Gordon riots in 1780, the rioters try to get into the bank through the church. So almost the next day, the Bank of England's directors take the decision that the church has to go and they eventually manage to buy up the church and they buy out the church yard.
But if you ever go into the Bank of England today, you'll see one of the first things you see as you walk through the door is that there's a nice garden. The governor's office looks out onto this garden. That garden is the graveyard of the old St. Christopher le Stocks church. So when the governor is looking out onto his garden, he's actually looking out onto a graveyard.
Joe: (23:29)
John, why don't you come in and talk to us about the overnight clerks and the trade reconciliation and how it advanced at the point of your research?
John: (23:36)
Yeah. So in the 19th century, the brokers start to, to be more organized than they were in Anne's period. In her period, it's mostly the clerks at the Bank of England that are doing the lion's share of work on behalf of like most of the rest of the system.
But by the 19th century, individual firms, brokerage firms have developed a pretty advanced system of bookkeeping and again, an army of clerks. There's, oof, probably at least five clerks for every one broker, I would say. That would maybe a high estimate, but there's quite a few. So just to give a quick instance here.
Joe: (24:09)
Sure.
John: (24:09)
There would be one clerk who would be responsible for checking the bargains every day. So he would get a series of slips or tickets from the principal broker about all of the deals that had been done. This clerk would record them in a daybook and then go back over and check with the counterparties the next day, the next morning before the open just to make sure that they were on the same page about having executed a deal the night before.
The second aspect of this is that settlement, the actual exchange of cash or checks for securities, whether they're bonds or stocks, only happened every two weeks at the London Stock Exchange.
Joe: (24:45)
T+14.
John: (24:45)
Yes. Yes. We can talk about settlement time. It was very complicated in the 19th century because different exchanges had wildly different settlement procedures and settlement times.
The New York Stock Exchange settled overnight, so it was T-0, while London settled every two weeks. And this gave London brokers a lot more opportunity to balance out their books to operate with less capital. Whereas a lot of firms that were operating in London and New York would have to have pretty large margin accounts parked in New York just to meet any obligations that would come up in overnight settlement.
Which was again, not the case in London. Settlement in London tended to be viewed as much easier. And what would happen is at the end of the two weeks, you would have hundreds of clerks cram into the basement of the London Stock Exchange. It was the settlement room. And they would reconcile all of the transactions that had happened in the previous two weeks.
Often what happened is that they would pass around a ticket. So someone would write the name of a primary security like Union Pacific, and they would pass around the ticket, and you would write how many shares you either bought or sold of Union Pacific and at what price over those two weeks.
And it would get passed around until everyone had written their transaction on the ticket. And then it would be essentially translated into a balance sheet and netted out. So that there only needed to be one payment of differences and shares if things had just been sort of like shuffled back and forth on the books without actually netting out.
Joe: (26:17)
Right.
John: (26:18)
If that makes sense. So that was how they dealt with this very cumbersome, large process of settlement was by slowly recreating all of these individual transactions that took place on the floor once every two weeks.
Tracy: (26:29)
So, John, you know, we were talking about the actual design of the Bank of England. Talk to us about the design of the London Stock Exchange, because of course, you know, that was also a building that was built for a specific purpose.
John: (26:42)
Sort of. So one of the financial journalists in the early 1900s calls the London Stock Exchange a monument to the Middle Ages in the middle of the city.
Tracy: (26:51)
I love how people were like complaining about infrastructure back then.
Joe: (26:55)
Right?
Tracy: (26:55)
Nothing changes. Oh, this is from the Middle Ages.
John: (26:56)
And the London Stock Exchange, as opposed to, say the Bank of England was very… There's a sociologist, Juan Pablo Pardo-Guerra, who calls it opportunistic bricolage. It was just sort of thrown together based on what they needed at a particular moment.
And so it becomes this sort of strange agglomeration of buildings for most of the 1800s, it's just one wooden building, but they slowly add other buildings around to it. It's not until the 1880s that they finally enclose it. It's marbled and it's like actually looks like something more real and steady and has one continuous trading floor. That doesn't happen until quite late in the 19th century.
The one part that is quite consciously designed, however, is the settlement room in the basement and its connection to the big safe room that they have. So one of the problems with settlement in the 1800s and the 1700s and Anne’s period is that if you were walking around to settle up your deals, you had to carry a lot of -- especially if you were a stockbroker that was doing a large amount of business -- you had to carry a lot of share certificates, a lot of cash and money with you.
And it was very easy to lose it in the traffic of city life, let alone the bustle of an extremely crowded stock exchange. So, what the London Stock Exchange did was that they connected their settlement room where deals were actually netted and cleared and settled out. And right next door in the basement, they had a safe room where brokers could rent essentially small lockers and safes and store their securities and money in the basement so that they didn't have to transport it out in the street of the city.
The one complication to this was that one of these waiters, these live-in servants that I talked about earlier, one of them was in charge of the safe room. And it was very common for them This happened on a couple of occasions, it was a very cool room. And so they would show their friends the safe room.
Joe: (28:51)
I would do that.
John: (28:52)
And these are lower class guys who would sneak their friends in after hours at London Stock Exchange and show them the safe rooms, show them all the cool aspects of the building.
And this really irked the brokers. And so there was a lot of tension between these sorts of lower-class workers who were responsible for maintaining a lot of the exchanges, critical infrastructure, and the brokers who depended on, you know, safely storing their securities and money in the exchange.
Tracy: (29:31)
So we've been talking a lot about how finance used to operate in the 1700s, 1800s, and we've been mostly focusing on how it was supposed to work. Were there any famous or interesting examples of things going wrong? So, you know, a ledger gets lost or a certificate that's supposed to go from one place to another doesn't show up. Settlement doesn't work. Any examples?
Anne: (29:56)
So, one of my favorite stories is the story of Francis Fontan. And he's a very ordinary clerk in the late 18th century, but sooner or later, his marriage seems to break down and he finds himself a lady friend who has antinomian tendencies.
So, so the Antinomians believed that they were saved by grace, so it didn't really matter how they behaved because they were saved anyway. So this lady convinced Francis that they could sin all day and they could sin all night as long as they rose early in the morning and went to the chapel, run by a kind of itinerant preacher who was a friend of this lady.
So, Francis clearly enjoys this opportunity, but his new lifestyle costs him quite a bit of money, so he uses his position as a transfer clerk in the Bank of England to transfer shares from people he knows who are dead himself. And so he makes a fair bit of money out of that until, of course, inevitably he gets caught.
And the Bank of England at this point is exacting the ultimate penalty from its clerks who it catches transgressing in this way. So poor old Francis Fontan is condemned to death and is hung for his crimes. And there were several other incidents like this. And the Bank of England, no matter how well the clerk had behaved up until that point, it always extracts the ultimate penalty. It would always seek the death penalty against them. You know, as an example to the others.
Joe: (31:29)
Penalties for financial crimes in general were really more severe back then, weren't they?
Anne: (31:35)
Yeah. And there's some really interesting work particularly by a scholar called Carl Wennerlind who really equates that sort of the gallows as monetary policy in 18th-century Britain. That Britain is a commercial nation, and a commercial nation needs to be able to trust paper and trust the integrity of paper, and therefore the death penalty becomes part of that process of protecting the integrity of paper.
Joe: (32:04)
Wow.
Anne: (32:04)
And making sure that fraud is limited.
Tracy: (32:07)
And John, what about in the 1800s?
John: (32:08)
Oh, man. There are a ton I could choose from. I'll stay with two on this theme of the waiters. So one of the main points that I think is important to understand is that as financial markets became more complicated and larger as things like the telegraph and the ticker tape were introduced to financial markets, this actually made the brokers the principles more dependent on an army of sort of secondary laborers to execute trades profitably and quickly. Whether it was telegraph operators, whether it was their clerks, whether it was telegraph, messenger boys or waiters who delivered the messages. And so the London Stock Exchange is this really massive place. By the end of the 19th century, there are 2,500 member brokers. And that's not including any of their clerks. So it was very hard to keep track of where messages needed to be delivered and to whom.
Often, one of the ways that this was organized was there would be waiters stationed at the different doors at the London Stock Exchange, and if you entered and exited one door each day, you sort of had your waiter who knew you, who knew your schedule, who knew where he could find you if he needed to get you a message.
But oftentimes there was one order that was sent and a messenger boy ran it to the wrong door. Delivered it to the wrong waiter, and the waiter looked at the message and said, ‘I don't know this guy, he's not here,’ and sent it back. And the broker never got his order for days after the fact, and then dragged this waiter in front of the managers of London Stock Exchange and complained that he should have just directed it to another door.
But again, there were 2,500 brokers in the exchange. And so they let the waiter off the hook because they were, they excused his ignorance of this random broker who operated on the other side of the exchange.
Tracy: (33:52)
They didn't send him to the gallows?
John: (33:55)
No, they did not.
Tracy: (33:56)
It was very nice of them.
John: (32:57)
The only other thing I'd add to this as well is that there was still a prevalence for these waiters needed to have a lot of independence in order to do their job well. So one of the waiters was always responsible for going and collecting the mail from the general post office early in the morning.
And then making sure it was distributed to brokers in a timely manner before the market opened so that they could place any orders they'd received in the mail. One of the waiters tended to abuse this privilege, and he was gone for long periods of time. He claimed that he was delayed at the dead letter office, where they would ask for the names of letters that hadn't been delivered at the stock exchange. But really, he was out drinking and visiting pubs. And he finally gets caught when they find him passed out in the London Stock Exchange's bathroom with letters spewed everywhere.
Joe: (34:44)
So, Anne you know, you talked about the scene at the Bank of England with the bustling lobby and the clerks and 24/7. Can you talk a little bit more about like, was that scene replicated at other banks around the country, whether it was private banks or regional banks, and sort of is that scene at the Bank of England reflective of what other banks were like at that time?
Anne: (35:06)
So the Bank of England has a monopoly at this time. So it deliberately seeks this monopoly in order to keep other banks small. So banks in London ha are allowed to have no more than six partners. So, you know, they are very small, very discreet, very discreet and elite set of customers.
Very often you get many more provincial banks emerging from the 1780s onwards, but often they're quite small as well and relatively unstable because they're very reliant on the regional economy. And if the regional economy becomes problematic in some way or goes into recession then the banks are immediately affected.
So you get a lot of growth of banks and then a decline of banks. You do see banks represented in the banker's lobby though and you do see a lot of their work being done there. But they are not a huge force to be reckoned with. So, the Bank of England is dominant throughout this period, and it exercises that dominance as far as I can see.
Also the Bank of England's Clarks are not taking their skills out to other banking environments. So they come into the Bank of England, and they pretty much stay there until they die.
Tracy: (36:17)
So let me ask a big picture question now, which is, you know, we started this discussion talking about the episode we did with Stewart Butterfield. That was a conversation largely about technological revolution, the introduction of artificial intelligence and what it might mean for technology in particular. But as both of you look in the past, through your work at previous technological developments or revolutions in the world of finance and banking, what can history tell us about these sorts of developmental arcs? What should our takeaway be as we look at how things worked in the 1700s and 1800s to how they might work in the future?
John: (36:59)
I think my big takeaway is that most technological revolutions never really replace human labor, they just transformed the relationships of it. So what I mean by that again, I mentioned like the introduction of something like the telegraph or the ticker tape didn't actually replace a lot of the functions of people in the stock exchange.
The paper price list was still a really important cheque that was sent out to investors at the end of each day, and it created this influx of new laborers into financial markets to help operate the telegraph and the ticker tape. And then you see this sort of similar thing happen in the 20th century with the move to automated systems as well. Even though the waiters of the London Stock Exchange are essentially put out of business by the automation of stock trading. You no longer need these guys to deliver messages.
In a world of computers and telephones, you get an influx of computer coders and electrical engineers into exchanges in the 1960s through the 1980s to begin implementing new technological systems.
So the relationship between human work and technology shifts around, the crucial locus of it changes. But there's always a human element that emerges and there is critical human labor in maintaining and implementing these technological systems whenever they are introduced.
Tracy: (38:29)
So Joe, you know, I love financial history episodes. That was like the ultimate finance history episode.
Joe: (38:34)
There was so much in there that I really liked. And all these light bulbs go off about like, okay, what is the connection between like T+2 and…
Tracy: (38:44)
…T+14
Joe: (38:45)
The fact that like they had T-1, well they had T-1 and like people think like, ‘why don't we have T+0?’ And as John explained like, well, you have to keep more money and there's a financial inefficiency aspect of that. Like all of the, every time we talk finance, history, like all of these things like just suddenly make more sense. Right.
Tracy: (39:01)
Right. And also it feels like we often talk about things, and we think the restraints are technological. Like, well, why don't we settle things faster? But so often they're actually about, you know, preferences, habits, incentives that people have built up over time, and not the actual underlying technology.
Joe: (39:17)
Yeah. And you know, even like we talked about, like we framed this as like before computers, but we remember like both of us, like remember floor trading, right?
Tracy: (39:25)
Yes!
Joe: (39:26)
And that seems crazy. And I wonder how that worked and why they weren't losing… How could you trust that person you were talking to? And yeah, like even that sort of like, blows in my mind. And you know, it's interesting, I never really thought about this before, but I remember reading in history about how like the death penalty was often applied I finance. And it kind of makes sense like… Not to be an apologist for, you know, hanging clerks…
Tracy: (39:45)
Hanging white collar criminals in the 1700s?
Joe: (39:47)
…Hanging clerks in the 1700s. But like, okay, like this is like the, you have to have some sort of like, you know, this is, everyone trusts the Bank of England, get it right.
Tracy: (39:58)
Well this is Anne’s point. Anne's whole point is that like so much of what the Bank of England does is mixed in with Britain's reputation.
Joe: (40:07)
Yeah. Trust.
Tracy: (40:08)
…As an empire. Trust in the financial system and like ultimately all that political power is built on that foundation.
Joe: (40:14)
Right. And so you could imagine if you have like any sort of like lenience and you're a little slipping and you know, too many pages lost or too, and you could see how easy it was.
Also the part about architecture and clearing the space around the Bank of England so that no fires could come in. Duplicates. Like sending someone home with records, you know, again, like they do the same thing today with like storing things in multiple data centers. So yeah.
Tracy: (40:37)
Also the dead letter office. That sounds fascinating.
Joe: (40:40)
Nothing ever changes.
Tracy: (40:41)
All right, well we could go on, but shall we leave it there?
Joe: (40:42)
Let's leave it there.
Follow Anne on Twitter @18thc_finance and John @_john_handel