Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Tracy Alloway.
Speaker 2: And I'm Joe whysent Thal.
Speaker 1: Joe, do you remember the episode we did with Stuart Butterfield,
Speaker 1: the founder of Slack.
Speaker 3: I do great episode Software Tech. I like when we
Speaker 3: have tech and software episodes that aren't about just like
Speaker 3: the markets, but like how technology actually.
Speaker 1: Works, how it actually functions. Yes, all right, Well that's
Speaker 1: a good jumping off point because there was a moment
Speaker 1: in that episode where I think it was Stuart asked
Speaker 1: a very innocent question, which is he basically said he
Speaker 1: had no idea how banking worked before the advent of computers.
Speaker 2: I'm glad he said that, because I have no idea either.
Speaker 3: And when I you know, when I think about money,
Speaker 3: and by this point we all sort of know like, oh,
Speaker 3: like money is it is just a database entry? Right,
Speaker 3: Well that makes a lot of sense to me at
Speaker 3: a world of excel. But how do like databases work?
Speaker 3: How did money as a database creation work before databases?
Speaker 1: Well, that's exactly it, because nowadays I think money is
Speaker 1: almost synonymous with an electronic database, Like that's basically what
Speaker 1: it is at this point. But of course, for hundreds
Speaker 1: and hundreds of years we did not have things like
Speaker 1: Excel spreadsheets, So how did banking and finance and trade
Speaker 1: actually work in those conditions?
Speaker 3: Yeah, and like I just don't understand how like people
Speaker 3: traded stocks or people went into a bank and said
Speaker 3: I want to get my money or without like, how
Speaker 3: are they not just like always losing track of how
Speaker 3: much money people had? How are they always not just
Speaker 3: like forgetting oh you bought that stock, like it's on
Speaker 3: pen and paper like type, Like in my mind, they
Speaker 3: must have been losing track of stuff all the time.
Speaker 1: Well, I think I said this in the Stewart episode,
Speaker 1: but there were a lot of bank failures, there were
Speaker 1: a lot of trading blow ups, so maybe they you know,
Speaker 1: maybe the lack of technology was Actually that's sad. But
Speaker 1: we do actually have the perfect guests to discuss this topic.
Speaker 1: We are going to be speaking with Anne Murphy. She
Speaker 1: is a professor of history and executive dean over at
Speaker 1: the University of Portsmouth. She just wrote a new book.
Speaker 1: It's called Virtuous Bankers, A Day in the Life of
Speaker 1: the eighteenth century Bank of England. So the perfect person
Speaker 1: to talk about pre computerized banking. We're also going to
Speaker 1: be speaking. This is a double feature. We're going to
Speaker 1: be speaking with John Handel, postdoctoral fellow at the McIntyre
Speaker 1: School of Commerce at the University of Virginia. He's written
Speaker 1: a lot about trade and technology in the eighteen hundreds
Speaker 1: early nineteen hundreds, so we're going to take a journey
Speaker 1: through the history of finance.
Speaker 2: I can't wait. I'm really excited about this. So I
Speaker 2: have so many questions.
Speaker 1: All right, an in, John, thank you so much for
Speaker 1: coming on our thoughts.
Speaker 4: Oh, thank you for inviting me. It's lovely to be here.
Speaker 5: As they say in sports talk radio, longtime listener, first
Speaker 5: time caller, I was just so great to be here.
Speaker 4: Nice.
Speaker 1: So maybe I should start in sort of I'm going
Speaker 1: to attempt chronological order here, but why don't we start
Speaker 1: with you? And I mean, you know, the clue is
Speaker 1: in the tie of your book. What was it actually
Speaker 1: like a day in the life of the Bank of
Speaker 1: England in the seventeen hundreds.
Speaker 4: So it was a very busy place. The time I'm
Speaker 4: writing about is the seventeen eighties, so it's just after
Speaker 4: the War of American Independence and the British are having
Speaker 4: a moment of real introspection about their finances and trying
Speaker 4: to figure out whether everything is working well, which is
Speaker 4: one of the reasons that the Bank of England kind
Speaker 4: of looks inward at itself at this time and really
Speaker 4: tries to figure out what it's doing and how it's
Speaker 4: doing it and whether it's doing it well or not.
Speaker 4: But the bank at this time, it's a twenty four
Speaker 4: hour a day place. It opens at dawn, You've got
Speaker 4: customers kind of milling around from about nine o'clock onwards,
Speaker 4: and it's doing everything you would expect a bank to do,
Speaker 4: but without those Excel spreadsheets. You know, it's doing them
Speaker 4: all with ledgers and quill and ink. And it's my
Speaker 4: view that it does it well and it doesn't lose
Speaker 4: its customers money. It has a pretty good grasp of
Speaker 4: where everybody is and whether there's money to trade, and
Speaker 4: how it does all this stuff.
Speaker 3: You said it's twenty four hours, and you know, even
Speaker 3: like the FED, I don't think is twenty four hours,
Speaker 3: or at least some of its operations have a certain
Speaker 3: window or the closes or certain things don't happen on weekend.
Speaker 3: So were there certain aspects of banking that from a
Speaker 3: twenty four hour standpoint were more advanced I don't know,
Speaker 3: a few hundred years ago than there are today.
Speaker 4: So it's not necessarily operating twenty four hours a day,
Speaker 4: so its standard business day is around about nine to five.
Speaker 4: But because it can't just press an update button at
Speaker 4: the end of the day to make sure all of
Speaker 4: the accounts are updated for the start of the next
Speaker 4: working day, the process of updating accounts takes place in
Speaker 4: the evening, So from about four o'clock all the way
Speaker 4: through sometimes to kind of ten eleven o'clock in the evening,
Speaker 4: there are clerks updating the physical ledgers so that next day,
Speaker 4: when the brokers walk in or when those business owners
Speaker 4: who are there regularly walk in, their account is up
Speaker 4: to date and they're ready to go for the new
Speaker 4: business day. But the other reason it's twenty four hours
Speaker 4: is because it's a vulnerable place. So it's at risk
Speaker 4: of fire, it's at risk of wyatt, it's at risk
Speaker 4: of people sort of wanting to break in, so it
Speaker 4: has night watchmen who are there and active throughout the
Speaker 4: night to make sure that the bank is safe.
Speaker 1: I have a really basic question, which is what are
Speaker 1: people doing at the bank of England in seventeen eighty.
Speaker 1: You mentioned customers sort of milling outside of the building.
Speaker 1: What are they waiting to actually do?
Speaker 4: So one thing they're not doing so much is borrowing
Speaker 4: money from the bank. The bank's private lending is not
Speaker 4: very well advanced. They have their little bit of private
Speaker 4: lending early in the sixteen late sixteen hundreds, early seventeen hundreds,
Speaker 4: but it doesn't really take off. What a lot of
Speaker 4: people there are doing is discounting bills of exchange, so
Speaker 4: they're borrowing money in that way and facilitating trade. Also
Speaker 4: in that way, they are managing notes, so they're coming
Speaker 4: to the bank to exchange ready money for banknotes, other banknotes,
Speaker 4: for Bank of England notes, or their banknotes that they
Speaker 4: have back to ready money again. And the note business
Speaker 4: is huge and occupies a lot of everybody's time. But
Speaker 4: they're also there to buy and sell government debt. So
Speaker 4: you could buy and sell government debt at the bank.
Speaker 4: It's probably the main place where you could do that
Speaker 4: throughout most of the eighteenth century. So that's one of
Speaker 4: the things that they're there to do.
Speaker 3: So I want to get more into the sort of
Speaker 3: like pen and paper and the actual physical operations.
Speaker 2: But John, why do you come in talk to us.
Speaker 3: A little bit about your area of focus and just
Speaker 3: sort of you're a little bit more on the trading
Speaker 3: and financial activities side. Let do you talk a little
Speaker 3: bit about your specific years in aero focus into sort
Speaker 3: of like finance and trading pre computers.
Speaker 5: So my work is essentially the sequel to Anne's work.
Speaker 5: I pick up in the early eighteen hundreds around when
Speaker 5: her book on the Bank of England finishes and what's
Speaker 5: happening I focus primarily in the London Stock Exchange. And
Speaker 5: what's happening in this period is a lot of the
Speaker 5: trading that had gone on during the seventeen hundreds went
Speaker 5: on in dispersed, often open locations, the lobby of the
Speaker 5: Bank of England, in alleyways, in coffee shops, in taverns
Speaker 5: even but beginning in the early eighteen hundreds, there's this
Speaker 5: move to enclose financial markets and make them their own,
Speaker 5: discreete spaces that would be governed by the association of
Speaker 5: brokers who were met members of those exchanges. And so
Speaker 5: the London Stock Exchange adopts a new set of rules
Speaker 5: and begins to build its own premises, starting in eighteen
Speaker 5: oh one and essentially stops allowing members of the public, clients, investors,
Speaker 5: whomever to enter the exchange. The exchange becomes solely the
Speaker 5: province of brokers. But much like what Anne was saying,
Speaker 5: the London Stock Exchange is also a twenty four to
Speaker 5: seven institution. It's not just the brokers who are there
Speaker 5: on the trading floor from eleven to four, but there
Speaker 5: are armies of clerks who are responsible for settling and
Speaker 5: clearing trades after hours. Because the London Stock Exchange is
Speaker 5: global and it's trading with markets in North America, in
Speaker 5: Australia and Asia. During the nineteenth century, members are there
Speaker 5: working at telegraph offices basically laid into the night as
Speaker 5: late as eight or nine pm. And then one of
Speaker 5: the other things that's often overlooked is that there is
Speaker 5: a whole army of household servants basically live in servants
Speaker 5: who actually lived at the London Stock Exchange. They brought
Speaker 5: their families. They were called waiters, but they were essentially
Speaker 5: the equivalent of porters, and they worked to guard the
Speaker 5: entrances of the exchange, deliver telegrams and letters to the brokers,
Speaker 5: keep the exchange clean and they lived there twenty four
Speaker 5: to seven for most of the nineteenth century, so the
Speaker 5: London Stock Exchange too, was a twenty four to seven
Speaker 5: institution with a very complex human ecosystem.
Speaker 3: Tracy, do you think you know what I really want
Speaker 3: to say? I want a Netflix show that takes place
Speaker 3: in the lobby of.
Speaker 2: The Bank of England.
Speaker 3: I think like a big series of like over the years.
Speaker 3: I just like now, I really want their show to exist.
Speaker 1: I think that would be perfect for like Sorkin treatment. Yes,
Speaker 1: all right, but actually this reminds me. I was having
Speaker 1: lunch just last week with a couple of traders who
Speaker 1: were active in the eighties and the nineties, and they
Speaker 1: were talking about board boys. So they used to have
Speaker 1: board boys who would write down trades on a blackboard
Speaker 1: or a whiteboard. I don't know, you know, who owes
Speaker 1: what to whom when there was active trading activity on
Speaker 1: the floor. But this leads nicely into my next question,
Speaker 1: which is it sounds like a lot of the record
Speaker 1: keeping or the distribution of money, the movement of money
Speaker 1: was just being done by people in the seventeen hundreds
Speaker 1: and the eighteen hundreds as well.
Speaker 4: That's absolutely right, and one of the things we don't
Speaker 4: really know is how those individual stockbrokers were keeping their ledgers.
Speaker 4: So if you look at images of the bank's lobby,
Speaker 4: the kind of brokers exchange, you don't see much evidence
Speaker 4: of people writing things down, So it probably looks like
Speaker 4: a lot of people were keeping a sense of what
Speaker 4: they were doing in their head until such time as
Speaker 4: they went and registered with the Bank of England's clerks.
Speaker 4: The other really interesting thing is the Bank of England
Speaker 4: is operating a inscribed stock ledger system in which they
Speaker 4: can keep the only legally binding record of stock ownership.
Speaker 4: So individuals didn't have a receipt that they would take
Speaker 4: away with them that would be legally binding. In fact,
Speaker 4: that the receipt that they were given was worthless, and
Speaker 4: thus they had to completely trust that the Bank of
Speaker 4: England could keep their ledgers straight and that could keep
Speaker 4: the sense of ownership within those ledgers, you know, completely trustworthy.
Speaker 3: I'm so glad you brought that up, because I was
Speaker 3: going to go to this question of the receipt right
Speaker 3: Like we placed a trade online or do some transaction,
Speaker 3: usually these days will get like some email that comes
Speaker 3: from the financial entity might have some string of eleven
Speaker 3: numbers and letters or something that we don't really care
Speaker 3: about unless there's something that we need to go back
Speaker 3: and dispute whether something has happened.
Speaker 2: But talk to us a little bit more.
Speaker 3: If like there's just these one entities in the background
Speaker 3: and they're working overnight and they're humans and they're writing
Speaker 3: things down, possibly making mistakes. Maybe both of you could
Speaker 3: talk about this a little bit, like that role of
Speaker 3: trust and the institution and what happens if you know
Speaker 3: there's a dispute.
Speaker 4: So it's trust, but with checks and balances. So when
Speaker 4: a transaction happens, there's a buyer and there's a seller,
Speaker 4: both the buyer and the seller are supposed to be
Speaker 4: there to sign off on the trade. So to one
Speaker 4: to sell and one to accept is also signed off
Speaker 4: by a clerk. There's a whole process of checking between
Speaker 4: the stock transfer books and the stock ledgers. And also
Speaker 4: any individual could go into the Bank of England, either
Speaker 4: them or their representatives, and they could look at the
Speaker 4: stock ledgers to check that their account stood as they
Speaker 4: understood it. So there are trust happens, but there's with
Speaker 4: checks and balances also, So.
Speaker 5: I would say in the nineteenth century again, this begins
Speaker 5: to change this process of how you've established trust in
Speaker 5: a financial market. So it's actually quite difficult to create
Speaker 5: something like a receipt for a stock transaction, especially if
Speaker 5: you were far away from London. So if you, for instance,
Speaker 5: lived in the provinces of England, you sent an order
Speaker 5: down by mail to your broker in London. Finding a
Speaker 5: broker would be its own problem. But let's say you
Speaker 5: find one, how do you know that he got you
Speaker 5: a good market price. One of the big issues was
Speaker 5: that the rule for marking prices, for putting a price
Speaker 5: on the blackboard that would then be included in the
Speaker 5: daily price list, it was by agreement of the brokers
Speaker 5: doing the deal, so you had to actually agree with
Speaker 5: the person that you either bought or sold stock for
Speaker 5: that you would mark the price. Officially, you could often
Speaker 5: not mark the price, so often the financial press calls
Speaker 5: the price list that the Lendon Stock Exchange produce a
Speaker 5: record of bad bargains, because it was essentially brokers who
Speaker 5: would be covering themselves if they got something outside of
Speaker 5: a market price for their client, they would rush to
Speaker 5: have it marked on the board so that it would
Speaker 5: show up in the newspapers or show up in a
Speaker 5: priceless the next day, and they could go back to
Speaker 5: their client and say, oh, look, I got you the
Speaker 5: market price. It's here in the newspaper. It's here in
Speaker 5: the price list, even though for most of the people
Speaker 5: that were immediate in the market, that were in the
Speaker 5: vicinity of the market that day, it was oftentimes not
Speaker 5: actually the real price or the fair price that was predominant.
Speaker 1: So this actually sounds like the ultimate opportunity for arbitrage,
Speaker 1: right because you have different sources of information operating at
Speaker 1: different latencies, really slow latencies where you know, someone is
Speaker 1: running from one location to the other local literally mailing
Speaker 1: yahiling broker in London, sending your servant to get the
Speaker 1: latest price of something. I mean, how did that feed
Speaker 1: into trading activity? Were there a lot of people trying
Speaker 1: to take advantage of that.
Speaker 5: Yeah, So the nineteenth century sees the emergence of the
Speaker 5: first specialty arbitrage firms that are closing pricing gaps in
Speaker 5: dual listed securities between different markets. But then there was
Speaker 5: also just a lot of taking advantage of sort of
Speaker 5: slow retail orders that showed up in the market. So
Speaker 5: one of the things that happened. There's a recent paper
Speaker 5: on this is that the introduction of something like the
Speaker 5: ticker tape, rather than making stock trading more efficient, it
Speaker 5: actually exacerbated irrational trend chasing in numbers because the ticker
Speaker 5: tape numbers that were sent out to investors far away
Speaker 5: were on a slight delay. It took some time to
Speaker 5: even via a ticker tape send out numbers. But then,
Speaker 5: if you think about it, the order has to be
Speaker 5: routed back towards the initial exchange after you see a
Speaker 5: number on the ticker tape, and so oftentimes the people
Speaker 5: who are trading on ticker tape prices are smaller investors.
Speaker 5: They send their order back to their broker, and per
Speaker 5: the name of the show, the broker would not want
Speaker 5: to place these small lots. They would wait until they
Speaker 5: had aggregated a number of orders from smaller investors that
Speaker 5: were trading off the ticker tape and only then go
Speaker 5: back into the stock exchange and place a larger block order.
Speaker 5: And so there were all of these complaints that the
Speaker 5: prices on the ticker tape were never actually accurate. You
Speaker 5: could execute a price on a ticker tape, and so
Speaker 5: there was all of these issues with matching up the
Speaker 5: time and the latency of when information was produced, whether
Speaker 5: it was the priceless after the fact, whether it was
Speaker 5: the ticker tape during the day. It was very hard
Speaker 5: to get those two actually match what an accurate market
Speaker 5: price was. So the firms that tended to do better
Speaker 5: were ones that use the telegraph and the telephone and
Speaker 5: were more professional arbitrage traders that took advantage of these
Speaker 5: prices again, rather than detail traders that had to rely
Speaker 5: on things like the price list or the ticker ty.
Speaker 4: So in the late seventeen hundreds, I guess it was
Speaker 4: a somewhat different environment. There was less i think obvious
Speaker 4: room for arbitrage, but there were a few people who
Speaker 4: dominated in the market and therefore the number of transactions
Speaker 4: that they could command gave them a pretty good return
Speaker 4: on the investment of their time. So they're spending a
Speaker 4: lot of time in the Bank of England's lobby, in
Speaker 4: various different coffeehouses, they're picking up business with a lot
Speaker 4: of people, and therefore, you know, sort of having a
Speaker 4: lot of turnover. There's not enough i think movement very
Speaker 4: often for arbitrage to be particularly easy for them, but
Speaker 4: their dominance in the market certainly gives them a real
Speaker 4: kind of command of information, a real command of the
Speaker 4: market as a whole, and just that sort of turnover
Speaker 4: definitely yields them profits. The other thing they're really picking
Speaker 4: up profits from is the initial issues from the government.
Speaker 4: So what the government is doing is issuing to trusted
Speaker 4: contractors and prominent businessmans. So they're getting that initial issue
Speaker 4: at very easy prices, which they're then selling into all
Speaker 4: much wider markets, so that there's a there's a real
Speaker 4: profit to be had there, and the government's very conscious
Speaker 4: of that expense, but really up until the early nineteenth
Speaker 4: century can't figure out how to do that and how
Speaker 4: to make that operation work better.
Speaker 3: It's so interesting once again, like all of these things
Speaker 3: that are like what's the term in the US for
Speaker 3: like the bevy or like the ten banks that get
Speaker 3: to bid on the treasury primary deal the primary dealers,
Speaker 3: all of these things, the.
Speaker 1: New issue premium, there's new.
Speaker 2: Issue premium exactly the same.
Speaker 3: And then the idea of like the ticker tape exacerbating
Speaker 3: trend following is opposed to making the market more efficient,
Speaker 3: like all these things, just like we talk about all
Speaker 3: the time. They come up over and over, and you know,
Speaker 3: since both of you talked about this and the need
Speaker 3: for twenty four to seven trade or transaction reconciliation.
Speaker 2: So the market or the.
Speaker 3: Banking day closes at some time and then all the
Speaker 3: clerks get to work and make sure all the books
Speaker 3: are settled. Can you talk a little bit more about
Speaker 3: what happened overnight, maybe both of you and starting for
Speaker 3: in terms of are we talking about handwriting down pieces
Speaker 3: of paper, erasing pens like, can you talk a little
Speaker 3: bit more about what the overnight clerks and all these
Speaker 3: different institutions did overnight to get ready for the next day.
Speaker 4: Sure, So the Bank of England's records actually preserve this
Speaker 4: in a great amount of detail, so we kind of
Speaker 4: know precisely what they're doing. So there are books that
Speaker 4: are worked in the banking hall and so the environment
Speaker 4: where most of the customers would be, and there are
Speaker 4: books that are worked in the accounts department as well.
Speaker 4: So the evening clerks they're kind of taking the books
Speaker 4: that are worked in the banking hall and they are
Speaker 4: transferring those records against customers accounts so that the customer's
Speaker 4: accounts are updated. Not only are they transferring them, but
Speaker 4: they're also checking them. So it goes through a process
Speaker 4: of making sure that the books that are worked in
Speaker 4: the banking hall are adding up in the same way
Speaker 4: as the books that have worked in the account's department,
Speaker 4: and then the customer's ledgers are adding up in the
Speaker 4: same way as the books that are worked in the
Speaker 4: account's department. Then somebody else checks it. The other thing
Speaker 4: that they're doing is making sure that they're really regular
Speaker 4: customers are kept on a separate account. So they would
Speaker 4: work up particular accounts for certain customers because they knew
Speaker 4: that they would be in early the next morning, and
Speaker 4: they knew that they would come and trade very often,
Speaker 4: so they knew that those accounts had to be updated early,
Speaker 4: and they really needed to make sure that the custom
Speaker 4: that they understood where those customers accounts sat. Protection of
Speaker 4: the records is another thing that's really interesting. We can
Speaker 4: go on to talk about that as well, if that
Speaker 4: would be interesting.
Speaker 3: Yeah, Actually, what are you interesting to talk about that?
Speaker 3: You mentioned the fire aspect. I imagine that if it
Speaker 3: all caught on fire be absolutely disastrous for everyone to
Speaker 3: be able to like, so talk a little bit about
Speaker 3: that aspect.
Speaker 2: Just preserving the physical records.
Speaker 4: So the bank is doing a variety of things to
Speaker 4: make sure that it's not at risk of fire. It's
Speaker 4: really worried about fire throughout most of its existence, through
Speaker 4: the sort of eighteenth century and into the nineteenth century,
Speaker 4: so it's a really aggressive landlord. It kind of does
Speaker 4: a slum clearance operation, particularly to create a fire break
Speaker 4: around its buildings. It sort of pushes out resident population.
Speaker 4: It pushes out all the old wooden buildings. It makes
Speaker 4: duplicates of a lot of its accounts and sends them
Speaker 4: out of the bank every night to the house of
Speaker 4: one of its directors, so that they know that if
Speaker 4: records are lost by fire, there is a duplicate sitting
Speaker 4: out in another office. They have kind of technological solutions,
Speaker 4: so they have wheeled trucks in which they put the
Speaker 4: most important ledgers so that they can wheel them out overnight.
Speaker 4: They keep their own fire engines and they train the
Speaker 4: watchmen to operate those fire engines. And from the seventeen
Speaker 4: sixties or so, they create a kind of archive building.
Speaker 4: They call it a library, and they attempt to fireproof
Speaker 4: that library by lining the building with copper, so that
Speaker 4: you know there's a really elaborate set of protection against
Speaker 4: attack and fire.
Speaker 1: Yeah, I remember when I was living in London, actually
Speaker 1: working at Bloomberg way back in the day. I used
Speaker 1: to walk past the Bank of England building every day
Speaker 1: on my way to work, and it's just this enormous,
Speaker 1: imposing building with these famously thick walls. Was that for
Speaker 1: fire prof or was that for fear of theft?
Speaker 4: So probably not so much for fear of theft, but
Speaker 4: it was for fear of unrest and rioting mobs in
Speaker 4: eighteenth century London would very often, even if they weren't
Speaker 4: interested in attacking a building, they would sort of they
Speaker 4: would go into the building and sort of pull things apart,
Speaker 4: particularly buildings that hadn't lit their windows. So you know,
Speaker 4: putting lights in your window indicated to the mob that
Speaker 4: you were you were supportive of whatever they were protesting against,
Speaker 4: or what they were they were rioting against. If you
Speaker 4: didn't put lights in your windows then then your your
Speaker 4: property was at risk. So one of the things that
Speaker 4: the Bank does very early on is has these sort
Speaker 4: of windowless walls at the ground floor level so it
Speaker 4: doesn't have to they don't have to light its windows.
Speaker 4: But also it protects itself against that that possibility of
Speaker 4: people sort of coming in through the windows or breaking
Speaker 4: the windows the other thing it does. So there's a
Speaker 4: church next door to the bank, which during the Gordon
Speaker 4: Riots in seventeen eighty, the rioters try to get into
Speaker 4: the bank through the church. So almost the next day
Speaker 4: the Bank of England's directors take the decision that the
Speaker 4: church has to go, and they eventually managed to buy
Speaker 4: up the church and they buy out the churchyard. But
Speaker 4: if you ever go into the Bank of England today,
Speaker 4: you'll see one of the first things you see as
Speaker 4: you walk through the door is that there's a nice
Speaker 4: garden which the governor's office looks out onto this garden.
Speaker 4: That garden is the graveyard of the old Saint Christophila
Speaker 4: Stock's church, So when the governor is looking out onto
Speaker 4: his garden, he's actually looking out onto a graveyard.
Speaker 3: John, why did you come in and talk to us
Speaker 3: about the overnight clerks and the trade reconciliation and how
Speaker 3: it advanced at the point of your research.
Speaker 5: Yeah, So in the nineteenth century, the brokers start to
Speaker 5: be more organized than they were in Anne's period. In
Speaker 5: her period, it's mostly the clerks at the Bank of
Speaker 5: England doing the lion's share of work on behalf of
Speaker 5: most of the rest of the system. But by the
Speaker 5: nineteenth century, individual firms, brokerage firms have developed a pretty
Speaker 5: advanced system of bookkeeping and again an army of clerks.
Speaker 5: There's probably at least five clerks for every one broker.
Speaker 5: I would say that would maybe a high estimate, but
Speaker 5: there's quite a few. So just to give a quick
Speaker 5: instance here, sure is there would be one clerk who
Speaker 5: would be responsible for checking the bargains every day, so
Speaker 5: he would get a series of slips or tickets from
Speaker 5: the principal broker about all of the deals that had
Speaker 5: been done. This clerk would record them in a day
Speaker 5: book and then go back over and check with the
Speaker 5: counterparties the next day, the next morning before the open,
Speaker 5: just to make sure that they were on the same
Speaker 5: page about having executed a deal the night before. The
Speaker 5: second aspect of this is that settlements, the actual exchange
Speaker 5: of cash or checks for securities, whether they're bonds or stocks,
Speaker 5: only happened every two weeks at the London Stock Exchange. Yes, yes,
Speaker 5: we can talk about settlement time. It was very complicated
Speaker 5: in the nineteenth century because different exchanges had wildly different
Speaker 5: settlement procedures and settlement times. The New York Stock Exchange
Speaker 5: settled overnight, so it was t minus zero, while London
Speaker 5: settled every two weeks, and this gave London brokers a
Speaker 5: lot more opportunity to balance out their books to operate
Speaker 5: with less capital, whereas a lot of firms that were
Speaker 5: operating in London and New York would have to have
Speaker 5: pretty large margin accounts parked in New York just to
Speaker 5: meet any obligations that would come up in overnight settlement,
Speaker 5: which was again not the case in London. Settlement in
Speaker 5: London tended to be viewed as much easier. And what
Speaker 5: would happen is at the end of the two weeks,
Speaker 5: you would have hundreds of clerics cram into the basement
Speaker 5: of the London Stock Exchange, it was the settlement room,
Speaker 5: and they would concile all of the transactions that had
Speaker 5: happened the previous two weeks. Often what happened is that
Speaker 5: they would pass around a ticket, so someone would write
Speaker 5: the name of a primary security like Union Pacific, and
Speaker 5: they would pass around the ticket and you would write
Speaker 5: how many shares you either bought or sold of Union
Speaker 5: Pacific and at what price over those two weeks, and
Speaker 5: it would get passed around until everyone had written their
Speaker 5: transaction on the ticket, and then it would be essentially
Speaker 5: translated into a balance sheet and netted out so that
Speaker 5: there only needed to be one payment of differences and
Speaker 5: shares if things had just been sort of like shuffled
Speaker 5: back and forth on the books without actually netting out,
Speaker 5: if that makes sense. So that was how they dealt
Speaker 5: with this very cumbersome, large process of settlement was by
Speaker 5: slowly recreating all of these individual transactions that took place
Speaker 5: on the floor once every two weeks.
Speaker 1: So John, you know we were talking about the actual
Speaker 1: design of the Bank of England. Talk to us about
Speaker 1: the design of the London Stock Exchange, because of course,
Speaker 1: you know that was also a building that was built
Speaker 1: for a specific purpose.
Speaker 2: Sort of.
Speaker 5: So one of the financial journalists in the early nineteen
Speaker 5: hundreds calls the London Stock Exchange a monument to the
Speaker 5: Middle Ages in the middle of the city.
Speaker 1: I love how people were like complaining about infrastructure even
Speaker 1: back then.
Speaker 5: Right, this is from the Middle Ages and the London
Speaker 5: Stock Exchange is opposed to, say, the Bank of England
Speaker 5: was very There's a sociologist, one Pablo Pardo Guera, who
Speaker 5: calls it opportunistic bricklage, which is it was just sort
Speaker 5: of thrown together based on what they needed at a
Speaker 5: particular moment, and so it becomes this sort of strange
Speaker 5: agglomeration of buildings. For most of the eighteen hundreds, it's
Speaker 5: just one wooden building, but they slowly add other buildings
Speaker 5: around to it. It's not until the eighteen eighties that
Speaker 5: they finally enclose it. It's marbled and it's like actually
Speaker 5: looks like something more real and steady, and has one
Speaker 5: continuous trading floor that doesn't happen till quite late in
Speaker 5: the nineteenth century. The one part that is quite consciously designed, however,
Speaker 5: is the settlement room in the basement and its connection
Speaker 5: to the big safe room that they have. So one
Speaker 5: of the problems with settlements in the eighteen hundreds and
Speaker 5: the seventeen hundreds in Ann's period is that if you
Speaker 5: were walking around to settle up your deals, you had
Speaker 5: to carry a lot of especially if you were a
Speaker 5: stockbroker that was doing a large amount of business, you
Speaker 5: had to carry a lot of share certificates, a lot
Speaker 5: of cash, and money with you, and it was very
Speaker 5: easy to lose it in the traffic of city life,
Speaker 5: let alone the bustle of an extremely crowded stock exchange.
Speaker 5: So what the London Stock Exchange did was that they
Speaker 5: connected their settlement room where deals were actually netted and
Speaker 5: cleared and settled out, and right next door in the
Speaker 5: basement they had a safe room where brokers could rent
Speaker 5: essentially small lockers and safes and store their securities money
Speaker 5: in the basement so that they didn't have to transport
Speaker 5: it out in the street of the city. The one
Speaker 5: complication to this was that one of these waiters, these
Speaker 5: living servants that I talked about earlier, one of them
Speaker 5: was in charge of the safe room, and it was
Speaker 5: very common for them. This happened on a couple of occasions.
Speaker 5: It was a very cool room, and so they would
Speaker 5: show their friends the safe room. And these are lower
Speaker 5: class guys who would sneak their friends in after hours
Speaker 5: at the London Stock Exchange and show them the safe rooms,
Speaker 5: show them all the cool aspects of the building. And
Speaker 5: this really irked the brokers, and so there was a
Speaker 5: lot of tension between these sort of lower class workers
Speaker 5: who were responsible for maintaining a lot of the exchange's
Speaker 5: critical infrastructure, and the brokers who depended on, you know,
Speaker 5: safely storing their securities money in the exchange.
Speaker 1: So we've been talking a lot about how finance used
Speaker 1: to operate in the seventeen hundreds eighteen hundreds, and we've
Speaker 1: been mostly focusing on how it was supposed to work.
Speaker 1: Were there any famous or interesting examples of things going wrong? So,
Speaker 1: you know, a ledger gets lost, or a certificate that's
Speaker 1: supposed to go from one place to another doesn't show up,
Speaker 1: settlement doesn't work, any examples.
Speaker 4: So one of my favorite stories is the story of
Speaker 4: Francis Fonton, and he's a very ordinary clerk in the
Speaker 4: late eighteenth century, but sooner or later his marriage seems
Speaker 4: to break down and he finds himself a lady friend
Speaker 4: who has Antiinomian tendencies. So the Antiinomians believed that they
Speaker 4: were saved by grace, so it didn't really matter how
Speaker 4: they behaved because they were saved anyway. So that this
Speaker 4: lady convinced Francis that they could sin all day, and
Speaker 4: they could sin all night as long as they rose
Speaker 4: early in the morning and went to the chapel run
Speaker 4: by a kind of itinerant preacher who is a friend
Speaker 4: of this lady. So Francis clearly enjoys this opportunity, but
Speaker 4: his new lifestyle costs him quite a bit of money.
Speaker 4: So he uses his position as a transfer clerk in
Speaker 4: the Bank of England to transfer shares from people he
Speaker 4: knows who are dead to himself, and so he makes
Speaker 4: a fair bit of money out of that, until, of course,
Speaker 4: inevitably he gets caught. And the Bank of England at
Speaker 4: this point is exacting the ultimate penalty from its clerks
Speaker 4: who it catches transgressing in this way. So poor old
Speaker 4: Francis Fontan is condemned to death and is hung for
Speaker 4: his crimes. And there were several other incidents like this,
Speaker 4: and the Bank of England, no matter how well the
Speaker 4: clerk had behaved up until that point, it always extracts
Speaker 4: the ultimate penalty, so it always seeks the death penalty
Speaker 4: against them as an example to the others.
Speaker 3: Penalties for financial crimes in general were really more severe
Speaker 3: back then, weren't they.
Speaker 4: Yeah, And there's some really interesting work, particularly by a
Speaker 4: scholar called Carl Wennelund, who really equates that sort of
Speaker 4: the gallows as monetary policy in eighteenth century Britain that
Speaker 4: Britain is a commercial nation, and a commercial nation needs
Speaker 4: to be able to trust paper and trust the integrity
Speaker 4: of paper, and therefore the death penalty becomes part of
Speaker 4: that process of protecting the integrity of paper and making
Speaker 4: sure that fraud is limited.
Speaker 1: And John, what about in the eighteen hundreds.
Speaker 5: Oh man, there are a ton I could choose from,
Speaker 5: I'll choose I'll stay with two on this theme of
Speaker 5: the waiters. So one of the main points that I
Speaker 5: think is important to understand is that as financial markets
Speaker 5: became more complicated and larger, as things like the telegraph
Speaker 5: and the ticker tape were introduced to financial markets, this
Speaker 5: actually made the brokers the principles more dependent on an
Speaker 5: army of secondary laborers to execute trades profitably and quickly,
Speaker 5: whether it was telegraph operators, whether it was their clerks,
Speaker 5: whether it was telegraph messenger boys or waiters who delivered
Speaker 5: the messages. And so the London Stock Exchange is this
Speaker 5: really massive place. By the end of the nineteenth century,
Speaker 5: there are twenty five hundred member brokers and that's not
Speaker 5: including any of their clerks. So it was very hard
Speaker 5: to keep track of where messages needed to be delivered
Speaker 5: into whom often. One of the ways that this was
Speaker 5: organized was there would be waiters stationed at the different
Speaker 5: doors at the London Stock Exchange, and if you entered
Speaker 5: in exited one door each day, you sort of had
Speaker 5: your waiter who knew you, who knew your schedule, who
Speaker 5: knew where he could find you if he needed to
Speaker 5: get you a message. But oftentimes there was one. There
Speaker 5: was one order that was sent and a messenger boy ran,
Speaker 5: ran it to the wrong door, delivered it to the
Speaker 5: wrong waiter, and the waiter looked at the message and said,
Speaker 5: I don't know this guy, he's not here, and sent
Speaker 5: it back and the broker never got his order for
Speaker 5: days after the fact, and then dragged this waiter in
Speaker 5: front of the managers of the London Stock Exchange and
Speaker 5: complained that he should have just directed it to another door.
Speaker 5: But again, there were twenty five hundred brokers in the exchange,
Speaker 5: and so they let the waiter off the hook because
Speaker 5: they excused his ignorance of this random broker who operated
Speaker 5: on the other side of the exchange.
Speaker 1: They didn't send him to the gallows.
Speaker 5: No, they did not it was very nice. The only
Speaker 5: other thing I'd add to this as well is that
Speaker 5: there was still a prevalence for these These waiters needed
Speaker 5: to have a lot of dependence in order to do
Speaker 5: their job well. So one of the waiters was always
Speaker 5: responsible for going and collecting the mail from the General
Speaker 5: Post Office early in the morning and then making sure
Speaker 5: it was distributed to brokers in a timely manner before
Speaker 5: the market opened, so that they could place any orders
Speaker 5: they'd received in the mail. One of the waiters tended
Speaker 5: to abuse this privilege and he was gone for long
Speaker 5: periods of time. He claimed that he was delayed at
Speaker 5: the Dead Letter Office, where they would ask for the
Speaker 5: names of letters that hadn't been delayed or delivered at
Speaker 5: the Stock Exchange, but really he was out drinking and
Speaker 5: visiting pubs, and he finally gets caught when they find
Speaker 5: him passed out in the London Stock Exchange's bathroom with
Speaker 5: letters spewn everywhere.
Speaker 3: So, and you know you talked about the scene at
Speaker 3: the Bank of England with the bustling lobby and the
Speaker 3: clerks in twenty four to seven, can you talk a
Speaker 3: little bit more about like was that scene replicated at
Speaker 3: other banks? Around the country, whether it was private banks
Speaker 3: or regional banks, and how much was that sort of
Speaker 3: like ai is that seen at the Bank of England
Speaker 3: reflective of what other banks were like at that time.
Speaker 4: So the Bank of England has a monopoly at this time,
Speaker 4: so and it deliberately seeks this monopoly in order to
Speaker 4: keep other banks small. So banks in London are allowed
Speaker 4: to have no more than six partners, so you know,
Speaker 4: they are very small, very discrete, very discrete, an elite
Speaker 4: set of customers. Very often. You get many more provincial
Speaker 4: banks emerging from the seventeen eighties onwards, but often they're
Speaker 4: quite small as well, and relatively unstable because they're very
Speaker 4: reliant on the regional economy. And if the regional economy
Speaker 4: becomes problematic in some way or goes into recession, then
Speaker 4: the banks are immediately affected. So you get a lot
Speaker 4: of growth of banks and then a decline of banks.
Speaker 4: You do see banks represented in the banker's lobby though,
Speaker 4: and you do see a lot of their work being
Speaker 4: done there, but they are they're not a huge force
Speaker 4: to be reckoned with. So the Bank of England is
Speaker 4: dominant throughout this period, and it exercises that dominance as
Speaker 4: far as I can see. Also, the Bank of England's
Speaker 4: clerks are not taking their skills out to other banking environments,
Speaker 4: so they come into the Bank of England and they
Speaker 4: pretty much stay there until they die.
Speaker 1: So let me ask a big picture question now, which
Speaker 1: is you know, we started this discussion talking about the
Speaker 1: episode we did with Stuart Butterfield that was a conversation
Speaker 1: largely about technological revolution, the introduction of artificial intelligence and
Speaker 1: what it might mean for technology in particular. But as
Speaker 1: both of you look in the past, through your work
Speaker 1: at previous technological developments or revolutions in the world of
Speaker 1: finance and banking, what can history tell us about these
Speaker 1: sort of developmental arcs. What should our takeaway be as
Speaker 1: we look at how things worked in the seventeen hundreds
Speaker 1: and eighteen hundreds to how they might work in the future.
Speaker 5: I think my big takeaway is that most technological revolutions
Speaker 5: never really replace human labor, They just transform the relationships
Speaker 5: of it. So what I mean by that again I
Speaker 5: mentioned like the introduction of something like the telegraph or
Speaker 5: the ticker tape didn't actually replace a lot of the
Speaker 5: functions of people in the stock Exchange, the paper price
Speaker 5: list was still a really important check that was sent
Speaker 5: out to investors at the end of each day, and
Speaker 5: it created this influx of new laborers into financial markets
Speaker 5: to help operate the telegraph and the ticker tape. And
Speaker 5: then you see this sort of similar thing happen in
Speaker 5: the twentieth century with the move to automated systems as well.
Speaker 5: Even though the waiters of the London Stock Exchange are
Speaker 5: essentially put out of business by the automation of stock trading,
Speaker 5: you no longer need these guys to deliver messages. In
Speaker 5: a world of computers and telephones, you get an influx
Speaker 5: of compute your coders and electrical engineers into exchanges in
Speaker 5: the nineteen sixties through the eighties to begin implementing technological systems.
Speaker 5: So the relationship between human work and technology shifts around.
Speaker 5: It ends up the crucial locus of that changes, but
Speaker 5: there's always a human element that emerges, and there is
Speaker 5: critical human labor in maintaining and implementing these technological systems whenever.
Speaker 1: They are Indeed, so Joe, you know, I love Financial
Speaker 1: history episodes. That was like the ultimate Finance History episodes.
Speaker 2: It was so much in there that I really liked, and.
Speaker 3: All these light bulbs go off about like, Okay, what
Speaker 3: is the connection between like T plus two and the
Speaker 3: fact that like they had T minus one, well they
Speaker 3: had T minus one, and like people think like why
Speaker 3: do we have two plus zero? And as John explained,
Speaker 3: like well you have to keep more money and there's
Speaker 3: like a financial inefficiency aspect of that, like all of
Speaker 3: the every time we talk finance history, like all of
Speaker 3: these things like just suddenly make more.
Speaker 1: Sense, right. And also it feels like we often talk
Speaker 1: about things and we think the restraints are technological, h well,
Speaker 1: why don't we settle things faster? But so often they're
Speaker 1: actually about you know, preferences, habits, incentives that people have
Speaker 1: built up over time, and not the actual underlying technology.
Speaker 2: Yeah.
Speaker 3: And you know, even like we talked about like we
Speaker 3: framed this as like before computers, but we remember, like
Speaker 3: both of us like remember floor trading, right, yes, and
Speaker 3: that seems crazy and I wonder how that worked and
Speaker 3: why would they weren't losing? How could you trust that
Speaker 3: person you were talking to? Like even that sort of
Speaker 3: like blows in my mind, and you know, it's interesting,
Speaker 3: I've never really thought about this before but I remember
Speaker 3: reading in history about how like the death penalty was
Speaker 3: often applied.
Speaker 2: And finally, oh yeah, and it kind of makes sense, like.
Speaker 3: Not to be an apologist for you know, hanging clerks.
Speaker 1: Hanging white collar criminals in the seven gen.
Speaker 3: You know, hanging in the seventeen hundreds. But like, okay,
Speaker 3: like this is like that you have to have some
Speaker 3: sort of like you know, this is everyone trust the
Speaker 3: Bank of England.
Speaker 2: Well this is right, and this right, Yeah.
Speaker 1: AD's whole point is that like so much of what
Speaker 1: the Bank of England does is mixed in with Britain's
Speaker 1: reputation trust as an empire, trust in the financial system,
Speaker 1: and like ultimately all that political power is built on
Speaker 1: that foundation.
Speaker 3: Right, And so you could imagine if you have like
Speaker 3: any sort of like lenients and you're a little slipping
Speaker 3: and you know, too many pages lost or too and
Speaker 3: you could see how easy it was. Also the part
Speaker 3: about architecture and clearing the space around the Bank of
Speaker 3: England so that no fires could come in. Yeah, duplicates
Speaker 3: like sending someone home with records, you know, again, like
Speaker 3: they do the same thing today with like storing things
Speaker 3: in multiple data centers.
Speaker 1: So yeah, Also the dead letter office. That's fascinating.
Speaker 2: Nothing ever changes.
Speaker 1: All right, Well, we could go on, but shall we
Speaker 1: leave it there?
Speaker 2: Let's leave it there?
Speaker 1: All right? This has been another episode of the All
Speaker 1: Thoughts podcast. I'm Tracy Alloway. You can follow me on
Speaker 1: Twitter at Tracy Alloway.
Speaker 3: And I'm Joe Wisenthal. You can follow me on Twitter
Speaker 3: at the Stalwart. Follow our guests on Twitter. Professor Ann Murphy,
Speaker 3: She's at eighteenth c Underscore Finance, John Handel, He's at
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Speaker 3: Thanks for listening and thanks for watching it
Speaker 5: In