Today, we have a guest post by Sean Kenny (Lund), who below summarises some lessons for policymakers from a recent working paper with John Turner (Queens) on the Irish banking system before joint-stock banks.
As the Irish economy continues to emerge from the financial crisis of 2008 and the controversial blanket guarantee which followed it, from the comfort of hindsight a number of decisions have been criticised by prominent commentators. In particular, the terms of the bailout package and the shouldering of bank debt by the Irish taxpayer have featured frequently in the debate. In other words, the domestic and international political machinery employed to address the collapse of the banking system was deemed by many to be inappropriate, as events unfolded all too rapidly. Over the critical weekend of the guarantee, concerns were raised that no currency would be available from ATM machines at the open of business the following Monday.
It is interesting to ponder what might have happened under such a scenario where no support mechanism, instead of an inadequate one, had existed and where money may in fact have disappeared from the economy. As my research with Professor John Turner (Queen’s University, Belfast) documents, such was largely the experience during the last Irish banking crisis of comparable scale in 1820. During this era, money consisted of alternative private bank notes which were redeemable in Bank of Ireland notes considered “as good as gold.”
No central bank existed and the Irish and British exchequers had recently amalgamated. If a private bank had lent unwisely, pushing too many of its notes into circulation, when their notes were presented for conversion at their counters, failure could quickly occur if its current loan income and reserves fell short of its short term liabilities (notes and deposits). Of course, this tendency was exacerbated by a lack of regulation on the issue of private currency, a lack of trust in the stability of small private partnership banks and a prevailing political ethos which saw no role for government involvement in ensuring financial stability.
The 1820 crisis, which began in Cork and spread north saw 40 per cent of Irish banks fail within three weeks, leaving large portions of the country with neither currency nor banks for many years. This had predictably adverse effects on the economy as investment and consumption were largely suspended. In a scene many of us are familiar with today, many bankers, consisting primarily of the politically-connected landed elite, shielded their personal estates from liquidators as their banks’ deposits and notes went unpaid, ruining whole communities in turn. In the worst affected areas, money was simply unavailable to pay wages or to engage in trade and so consumption and employment further collapsed while price falls continued as money became scarcer. As a petition signed by the Lord Mayor of Cork put it, “all confidence, as well as Trade, is suspended, there not being sufficient currency to represent property in its transfer”.
During the following five years, a twilight zone emerged from the ashes, during which an insufficient supply of private money in the form of trade bills was circulated amongst the merchant class who constantly petitioned for reform of the entire monetary and banking system. In this era of uncertainty, many survivor banks and businesses failed as debts could not be collected and the Bank of Ireland remained solely in Dublin.
The 1820 crisis marked the beginning of the end of a quarter century which one historian called a “financial pantomime” where more than 20 percent of the banking system failed on at least four separate occasions. Compared with our own age where banks are deemed “too big to fail”, this was an era in which banks were too small to survive with primitive legislation controlling their activities. So utterly decimated was the monetary and banking system following 1820, that new legislation was introduced in 1825 which replaced the small partnership banks with a system of well capitalised joint stock banks with unlimited liability for a large number of shareholders.
This revolutionised the Irish banking system and dramatically improved financial access through the coming decades. No major banking crisis was to visit Ireland again until 2008. In an age where private (crypto) currencies are being promoted as a panacea to the alleged ills of current monetary regimes, it is appropriate to recall that when private money dies, it is not only its holders and issuers who are affected when the scale of its exchange is significant. The demise of this group will reduce their investment, consumption and debt-servicing capabilities, which will in turn affect the wider economy. Instead, the utopia of a well-designed financial system in the context of a political apparatus which minimises the fallout when things go awry, then as now, remains a goal worthy of our finest endeavour.