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The secondary market for bank shares in nineteenth-century Britain

  • Graeme G. Acheson (a1) and John D. Turner (a1)

Stock transferability and liquidity are viewed as vital characteristics of capital markets. Surprisingly, we know very little about the level of trading activity on, and liquidity of the market for, company stock during the rapid growth of the British capital market in the nineteenth century. This article attempts to shed some light on this important issue by examining the market for bank shares using trading data collected from bank archives. Our evidence suggests that trading activity and liquidity changed imperceptibly over the century. We also find that ownership structure is a major determinant of trading activity and liquidity; whereas shareholder liability regimes don't appear to affect liquidity.

La transférabilité et la liquidité du stock sont considérées comme des caractéristiques vitales du marché des capitaux. Etonnamment, nous connaissons très peu de choses sur le niveau des activités commerciales du marché britannique des capitaux au dix-neuvième siècle. Cette communication essaie d'éclairer cette question importante en examinant le marché des actions bancaires avec des données commerciales recueillies dans les archives bancaires. Notre preuve suggère que l'activité et la liquidité commerciales ont changé de manière imperceptible pendant le siècle. Nous trouvons également que la structure de propriété est un déterminant majeur de l'activité et la liquidité commerciales, tandis que les régimes de responsabilité des actionnaires n'ont pas l'air d'affecter la liquidité.

Übertragbarkeit von Aktien und Liquidität werden als wichtige Grundeigenschaften von Kapitalmärkten angesehen. Überraschenderweise wissen wir nur sehr wenig über den Grad der Handelsaktivitäten mit und die Liquidität des Marktes für Unternehmensaktien während des rapiden Wachstums des britischen Kapitalmarktes im 19. Jahrhundert. Diese Arbeit versucht, etwas Licht auf diese wichtige Frage zu werfen, indem sie den Markt für Bankaktien anhand von Daten, die aus Bankarchiven zusammen getragen wurden, untersucht. Unser Beweismaterial deutet darauf hin, dass sich Handelsaktivität und Liquidität im Laufe des Jahrhunderts nur unmerklich veränderten. Wir erfahren ebenfalls, dass die Eigentumsstruktur ein wichtiger bestimmender Faktor von Handelsaktivität und Liquidität ist; wohingegen Aktionärsverbindlichkeitssysteme die Liquidität scheinbar nicht beeinflussten.

La transferabilidad y la liquidez de las acciones se consideran características esenciales de los mercados de capitales. Sorprendentemente, sabemos muy poco sobre el nivel de actividad comercial y la liquidez del mercado con respecto a las acciones de empresa durante el rápido crecimiento del mercado de capitales británico en el siglo XIX. Este artículo intenta aclarar este tema tan importante mediante el examen del mercado en busca de acciones bancarias utilizando información comercial recopilada en los archivos bancarios. Nuestra evidencia sugiere que la actividad comercial y la liquidez cambiaron imperceptiblemente a lo largo del siglo. También concluimos que la estructura de la propiedad es un factor importante que determina la actividad comercial y la liquidez mientras que los régimenes de responsabilidad del accionista no parecen afectar la liquidez.

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2 Kraakman, R. R., Davies, P., Hansmann, H. et al. , The Anatomy of Corporate Law: a Comparative and Functional Approach (Oxford, 2004), pp. 1011.

3 Ekelund, R. B. and Tollison, R. D., ‘Mercantilist origins of the corporation’, The Bell Journal of Economics, 11 (1980); Ekelund, R. B. and Tollison, R. D., ‘Tradeable shares and the supply-side of corporate development: reply’, The Bell Journal of Economics, 14 (1983).

4 Bhide, A., ‘The hidden costs of stock market liquidity’, Journal of Financial Economics, 34 (1993), p. 43; Chordia, T., Roll, R. and Subrahmanyam, A., ‘Market liquidity and trading activity’, Journal of Finance, 56 (2001), p. 501; Woodward, S., ‘Limited liability in the theory of the firm’, Journal of Institutional and Theoretical Economics, 141 (1985), p. 602.

5 Levine, R. and Zervos, S., ‘Stock markets, banks, and economic growth’, American Economic Review, 88 (1998).

6 Anderson, B. L. and Cottrell, P. L., ‘Another Victorian capital market: a study of banking and bank investors on Merseyside’, Economic History Review, 28 (1975); Broadbridge, S. A., ‘The sources of railway share capital’, in Reed, M. C. (ed.), Railways in the Victorian Economy: Studies in Finance and Economic Growth (New York, 1968); Newton, L., ‘Towards financial integration: the development of English joint banks in London and the provinces’, in Olsson, U. (ed.), Business and European Integration Since 1800: Regional, National and International Perspectives (Göteborg, 1997); Reed, M. C., ‘Railways and the growth of the capital market’, in Reed, M. C. (ed.), Railways in the Victorian Economy: Studies in Finance and Economic Growth (New York, 1968); Reed, M. C., Investment in Railways in Britain, 1820–1844 (Oxford, 1975).

7 Michie, R. C., Money, Mania and Markets: Investment, Company Formation and the Stock Exchange in Nineteenth-Century Scotland (Edinburgh, 1981); Michie, R. C., The London Stock Exchange: a History (Oxford, 1999); Thomas, W. A., The Provincial Stock Exchanges (London, 1973).

8 A notable exception is the recent work of Hickson and Turner. See C. Hickson, R. and Turner, J. D., ‘Shareholder liability regimes in English banking: the impact upon the market for shares’, European Review of Economic History, 63 (2003); Hickson, C. R. and Turner, J. D., ‘Trading in the shares of unlimited liability banks in nineteenth century Ireland: the Bagehot hypothesis’, Journal of Economic History, 63 (2003); Hickson, C. R., Turner, J. D. and McCann, C., ‘Much ado about nothing: the introduction of limited liability and the market for nineteenth-century Irish bank stock’, Explorations in Economic History, 42 (2005).

9 Checkland, S. G., Scottish Banking A History, 1695–1973 (Glasgow, 1975), pp. 372–3; Harris, R., Industrializing English Law: Entrepreneurship and Business Organization (Cambridge, 2000), p. 221.

10 Grossman, R. S., ‘New indices of British equity prices, 1870–1913’, Journal of Economic History, 62 (2002), pp. 129–31. In terms of market capitalisation, banking was the second largest sector after the railways. In 1870 bank equity constituted 10.91 per cent of overall market capitalisation. By 1899, this figure was 16.36 per cent.

11 Bhide, ‘Stock market liquidity’; Holmstrom, B. and Tirole, J., ‘Market liquidity and performance monitoring’, Journal of Political Economy, 101 (1993).

12 Jeffreys, J. B., ‘The denomination and character of shares, 1855–1885’, Economic History Review, 16 (1946), p. 384; Winton, A., ‘Limitation of liability and the ownership structure of the firm’, Journal of Finance, 48 (1993), p. 505.

13 Copeland, T. E., ‘Liquidity changes following stock splits’, Journal of Finance 34 (1979); Han, K. C., ‘The effects of reverse stock splits on the liquidity of the stock’, Journal of Financial and Quantitative Analysis, 30 (1995).

14 Jeffreys, ‘Character of shares’.

15 Thomas, S. E., The Rise and Growth of Joint Stock Banking (London, 1934), p. 58.

16 7 Geo. IV, c. 46. See P. L. Cottrell and L. Newton, ‘Banking liberalisation in England and Wales, 1826–1844’, in Sylla, R., Tilly, R. and Tortella, G. (eds.), The State, the Financial System, and Economic Modernization (Cambridge, 1999), pp. 7783. A provision within this Act restricted note-issuing banks from establishing inside a 65-mile radius around London. Remaining legal doubts with regard to the establishment of non-issuing joint-stock banks within this radius were eliminated by the Bank of England Privileges Act (1833) – 3 & 4 Will. 4, c. 98. For further discussion on the background to this Act see Gregory, T. E., The Westminster Bank Through a Century (London, 1936), pp. 3249.

17 Hunt, B. C., The Development of the Business Corporation in England, 1800–1867 (Cambridge, MA, 1936), p. 50. According to William Clay, the Bank of England objected strongly to joint-stock banks having limited liability. See Clay, W., Speech of William Clay, Esq., M.P. on Moving for the Appointment of a Committee to Inquire into the Operation of the Act Permitting the Establishment of Joint-stock Banks. To Which are Added, Reflections on Limited Liability, Paid-up Capital, and Publicity of Accounts, as Applied to Such Institutions; With Some Remarks on an Article on Joint-stock Companies in the Last Number of the Edinburgh Review (London, 1837).

18 Checkland, Scottish Banking, p. 111; Munn, C. W., The Scottish Provincial Banking Companies 1747–1864 (Edinburgh, 1981), p. 4; Rait, R. S., The History of the Union Bank of Scotland (Glasgow, 1930), p. 14.

19 Campbell, R. H., ‘The law and the joint-stock company in Scotland’, in Payne, P. L. (ed.), Studies in Scottish Business History (London, 1967), p. 143; Clark, F. W., A Treatise on the Law of Partnership and Joint-Stock Companies According to the Law of Scotland (Edinburgh, 1864), p. 2.

20 Fleming, J. S., ‘On the theory and practice of banking in Scotland’, Journal of the Institute of Bankers, 4 (1883), p. 133; Munn, Scottish Provincial Banking, p. 85.

21 Checkland, Scottish Banking, pp. 372–3; Thomas, Joint Stock Banking, pp. 656–62.

22 20 & 21 Vict. c. 49; 21 & 22 Vict. c. 91.

23 Dun, J., ‘The banking institutions, bullion reserves, and non-legal-tender note circulation of the United Kingdom statistically investigated’, Journal of the Statistical Society, 39 (1876), p. 26. This figure excludes the Bank of England.

24 Sayers, R. S., Lloyds Bank in the History of English Banking. (Oxford, 1957), p. 222. According to the Banking Almanac, by 1879, only eight of the established English joint-stock banks had converted to limited liability, with all but one of the conversions occurring prior to 1866. The banks and the year of their conversion are as follows: Bank of Whitehaven (1866), County of Stafford (1873), Cumberland Union (1865), Halifax Commercial (1864), Liverpool Commercial (1860), Moore and Robinson's Nottinghamshire Bank (1866), Union Bank of Manchester (1862), Worcester City and County (1865).

25 The City of Glasgow failure has been described as ‘the last serious deposit bank failure in the UK’, Collins, M., Banks and Industrial Finance in Britain, 1800–1939 (Cambridge, 1991), p. 30. Although the failure of this bank did not result in any losses for depositors or note-holders, only 254 of the bank's 1,819 shareholders were solvent after the bank's liquidation, Checkland, Scottish Banking, p. 471.

26 White, L. H., Free Banking in Britain: Theory, Experience and Debate 1800–1845 (London, 1995), p. 50.

27 Levi, L., ‘The reconstruction of joint stock banks on the principle of limited liability’, The Bankers' Magazine, 40 (1880), p. 474; Hickson and Turner, ‘Shareholder liability regimes’, p. 104.

28 Anon, ‘Banking capital and limited liability’, The Bankers' Magazine, 42 (1882), p. 717; Sayers, Lloyds Bank, p. 222.

29 42 & 43 Vict., c.76.

30 Crick, W. F. and Wadsworth, J. E., A Hundred Years of Joint Stock Banking (London, 1936), p. 33; Gregory, Westminster Bank, vol. 1, p. 206.

31 The banks and the dates of their conversion to limited liability are: Bank of Westmorland (1888), Coventry Union Banking Company (merged with rival in 1889), Lancaster Banking Company (1896), Sheffield and Hallamshire Bank (1889), Stuckey's Banking Company (1892), Whitehaven Joint-stock Bank (1888), Wolverhampton and Staffordshire Banking Company (merged with rival in 1888).

32 Plumptre, C. C. M., Grant's Treatise on the Law Relating to Bankers and Banking Companies (London, 1882), p. 431.

33 Ibid., p. 456.

34 Killick, J. R. and Thomas, W. A., ‘The provincial stock exchanges, 1830–1870’, Economic History Review, 23 (1970).

35 Ibid., p. 102.

36 Hickson and Turner, ‘Bagehot hypothesis’.

37 Bell, G. J., Commentaries on the Laws of Scotland (Edinburgh, 1858), p. 224.

38 Easterbrook, F. and Fischel, D., ‘Limited liability and the corporation’, The University of Chicago Law Review, 52 (1985); Forbes, K. F., ‘Limited liability and the development of the business corporation’, Journal of Law, Economics, and Organisation, 2 (1986); Halpern, P., Trebilcock, M. and Turnbull, S., ‘An economic analysis of limited liability in corporation law’, University of Toronto Law Journal, 30 (1980); Hansmann, H. and Kraakman, R., ‘Toward unlimited liability for corporate torts’, Yale Law Journal, 100 (1991); Hansmann, H. and Kraakman, R., ‘The essential role of organizational law’, Yale Law Journal, 110 (2000); Winton, ‘Limitation of liability’; Woodward, ‘Limited liability’.

39 Halpern, P., ‘Limited and extended liability regimes’, in Newman, P. (ed.), The New Palgrave Dictionary of Law and Economics (London, 1998), p. 586.

40 30 Vict., c. 29.

41 Hall, F. G., The Bank of Ireland 1783–1946 (Dublin, 1949), pp. 251–2.

42 Hickson and Turner, ‘Bagehot hypothesis’.

43 RBS Archives: Sheffield and Rotherham Directors' Minute Books (SR/1/1, SR/1/2, SR/1/4), May 1848, Feb. 1851, Mar. 1859, June 1859. Sheffield and Rotherham Bank, Bank Shares Transfer Book, 1861–May 1885 (SR28/1), Dec. 1867 (2), July 1867 (1), Aug. 1873 (3), July 1877 (1).

44 RBS Archives: Sheffield and Rotherham Directors' Minute Book (SR/1/2), Feb. 1851.

45 RBS Archives: Sheffield and Rotherham Directors' Minute Book (SR/1/4), June 1859.

46 Withers, H., and Palgrave, R. H. I., National Monetary Commission: the English Banking System (Washington, 1910), p. 93.

47 Rae, G., The Country Banker: His Clients, Cares, and Work from an Experience of Forty Years (London, 1885), p. 233.

48 RBS Archives: Sheffield and Rotherham Bank, Bank Shares Transfer Book, 1861 – May 1885 (SR28/1-2); Bank of Whitehaven, Register of Transfers (BWH/7/1).

49 HSBC Archives: Huddersfield Banking Company, Stock Journal (H23). Barclays Archives: Bank of Liverpool, Register of Shareholders (ACC310-85). Lloyds-TSB Archives: Wilts and Dorset Banking Company, Shareholders' Register (3177). RBS Archives: Ashton, Stalybridge, Hyde & Glossop Bank, Stock Register (ASH/1). HBOS Archives: Caledonian Banking Company, Transfer Books (945/1/429/79-84); Central Bank of Scotland, Stock Journal (945/8/4/1); Union Bank of Scotland, Register of Transfers (2003/040/17 & 25).

50 Lloyds-TSB Archives: Hampshire Banking Company Shareholders' Register (1085).

51 HSBC Archives: Sheffield and Hallamshire Share Registers (598/1, 598/2).

52 Details of share transfers in this bank were not recorded in the minute books prior to 1851.

53 The minutes for 1863 and 1864 are missing.

54 HSBC Archives: Leicestershire Banking Company, Minutes of Directors (K15 to K23). Lloyds-TSB Archives: Liverpool Union Bank, Directors' Meeting Books (093 & 094). RBS Archives: Commercial Bank of Scotland, Board Minute Books (CS/13/1 to CA/13/10); Union Bank of London, Directors' Minute Books (UNI/1/1 to UNI/1/49); Sheffield and Rotherham Bank, Directors' Minute Books (SR/1/1 to SR/1/4); County of Stafford Bank, Minutes of the Directors (CST/4/1, CST/4/2, CST/25/1, CST/25/2).

55 RBS Archives: National Provincial Bank of England, Minute Book of Court of Directors (NAT/1/4 to NAT/1/19). The minutes up until 1842 did not give details of individual transfers. Prior to this, the minutes only stated ‘that share transfers were brought before the Court’.

56 Chordia, Roll and Subrahmanyam, ‘Market liquidity’.

57 Ibid., ‘Market liquidity’; Demsetz, H., ‘The cost of transacting’, Quarterly Journal of Economics, 82 (1968); Easley, D., Kiefer, N. M., O'Hara, M. and Paperman, J. B., ‘Liquidity, information, and infrequently traded stocks’, Journal of Finance, 51 (1996).

58 Furthermore, the bid–ask spread has several limitations as a measure of liquidity, especially for infrequently traded stocks; see Grossman, S. J. and Miller, M. H., ‘Liquidity and market structure’, Journal of Finance, 43 (1988), pp. 628–30.

59 Bhide, ‘Stock market liquidity’, p. 33.

60 K. C. Han, ‘The effects of reverse stock splits’, p. 164; Levine and Zervos, ‘Stock markets’, p. 538; Ogden, J. P., Jen, F. C., and O'Connor, P. F., Advanced Corporate Finance: Policies and Strategies (New Jersey, 2003), p. 109.

61 The indices were obtained from Gayer, A. D., Jacobson, A. and Finkelstein, I., ‘British share prices, 1811–1850’, Review of Economic Statistics, 22 (1940); Gayer, A. D., Rostow, W. W. and Schwartz, A. Jacobson, The Growth and Fluctuation of the British Economy (Oxford, 1953); and Smith, K. C. and Horne, G. F., An Index Number of Securities, 1867–1914 (London, 1934).

62 Cottrell and Newton, ‘Banking liberalisation’, p.103, suggest that the mania for railway shares lead to a contraction in demand for bank shares.

63 Checkland, Scottish Banking.

64 The effects of the 1866 crisis were particularly acute in Liverpool (Crick and Wadsworth, Joint Stock Banking, p. 188). P. L. Cottrell, has suggested that the impact of the Overend Gurney crisis on share trading was more severe than our results suggest. See Cottrell, P. L., Industrial Finance 1830–1914: the Finance and Organisation of English Manufacturing Industry (London, 1980), p. 58.

65 As this action was merely temporary, the bank reopened in June 1879.

66 Capie, F. and Collins, M., ‘Industrial lending by English commercial banks, 1860s–1914: why did banks refuse loans?’, Business History, 38 (1996); Capie, F. and Mills, T. C., ‘British bank conservatism in the late 19th century’, Explorations in Economic History, 32 (1995); Collins, M., ‘English bank development within a European context, 1870–1939’, Economic History Review, 51 (1998); Collins, M. and Baker, M., ‘Sectoral differences in English bank asset structures and the impact of mergers, 1860–1913’, Business History 43(2001); Collins, M. and Baker, M., Commercial Banks and Industrial Finance in England and Wales, 1860–1913 (Oxford, 2003).

67 Demsetz, H. and Lehn, K., ‘The structure of corporate ownership: causes and consequences’, Journal of Political Economy, 93 (1985); Bhide, ‘Stock market liquidity’.

68 Woodward, ‘Limited liability’, p. 606.

69 Hickson and Turner, ‘Bagehot hypothesis’.

70 Shareholder lists obtained from HBOS Archives: Union Bank of Scotland Shareholder List (1885), UBS 7/20/20; Barclays Archives: Bank of Liverpool, List of Shareholders (1879), ACC25-0204; British Library: Caledonian Banking Company, Official List of Shareholders (1878), 8219, p. 29.

71 In the modern finance literature a weak definition of concentrated ownership is when one shareholder owns more than 10 per cent of the stock. See Porta, R. La, Lopez-De-Silanes, F. and Shleifer, A., ‘Corporate ownership around the world’, Journal of Finance, 54 (1999); Faccio, M. and Lang, L., ‘The ultimate ownership of Western European corporations’, Journal of Financial Economics, 65 (2002).

72 Anderson and Cottrell, ‘Another Victorian capital market’, p. 599.

73 Although several of the larger banks in Table 5 did not have such provisions, the attraction of holding a large block in these banks might have been reduced by the low upper limit on the number of votes any one shareholder was entitled to cast at shareholder meetings.

74 Shareholder numbers increased from 651 in 1853 to 1,000 by 1859.

75 Loughran, T. and Schultz, P., ‘Liquidity: urban versus rural firms’, Journal of Financial Economics, 78 (2005).

76 Woodward, ‘Limited liability’.

77 Hickson, Turner and McCann, ‘Much ado’.

78 Ibid., p. 935.

79 Copeland, ‘Liquidity’, p. 115.

80 Han, ‘The effects of reverse stock splits’.

81 Han, ‘The effects of reverse stock splits’, p. 160.

82 The exceptions to this are as follows. The Leicestershire Banking Company's deed (clause 56) states that the at the bank's AGM, a conventional price would be fixed by a vote. This price had to be 10 per cent below the estimated bona fide real value. The Bank of Whitehaven's deed (clause 57) stated that the price to be paid should be equal to the average of the previous five transfers.

83 French, E. A., Unlimited Liability: The Case of the City of Glasgow Bank (London, 1985), p. 10.

84 British Parliamentary Papers Select Committee Report on Joint-stock Banks, 1836, Evidence of Austin (Q.1928) and Select Committee Report on Joint-stock Banks, 1837, Evidence of Gilbart (Q.2123–4).

85 Checkland, Scottish Banking, p. 481.

86 Easley et al., ‘Liquidity’, p. 1405.

87 Bhide, ‘Stock market liquidity’; Shleifer, A. and Vishny, R. W., ‘Large shareholders and corporate control’, Journal of Political Economy, 96 (1986).

88 Hickson and Turner, ‘Bagehot hypothesis’; Hickson, Turner and McCann, ‘Much ado’.

1 Turner acknowledges financial support provided by the trustees of the Houblon-Norman Fund and a British Academy grant (SG-36598). We are indebted to Edwin Green for his advice and encouragement at the beginning of this project. The access to archive material at Barclays, Lloyds-TSB, HBOS, Royal Bank of Scotland Group and HSBC was very much appreciated. Thanks to all the archivists who have looked after us: Jessie Campbell, Edwin Green, Seonaid McDonald, Rosemary Moore, Helen Redmond, Ruth Reed, Karen Sampson, Reto Tschan, Philip Winterbottom, Lucy Wright and Sian Yates.

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