Of my favorite books is a study of banking in the 1890s The book talks freely of the prominent bankers of the day. They are described variously as men of the highest personal standards, with a reputation for probity unparalleled in the business world, and who ran banks that had sterling reputations for safety and soundness. These descriptions went on and on and in themselves begged the question: why did people care so much about bankers' honesty? The answer lay in the terrible depression in the early 1890s when so many banks failed. Second, a national currency did not fully exist, and banks issued their own currency that traded on something similar to an exchange market. The First National City Bank of New York was well known and highly trusted, so its notes traded in the major cities at 100 cents/dollar. Smaller banks traded at discounts. Third, there was no Federal Reserve or government intervention to help banks. If your bank made too many bad loans, it was wiped out. One of the features of 19th century novels in Britain and the U.S. was the periodic impoverishment of the hero or heroine when all their assets held in a "trusted" bank were brought to zero because the bank failed. This was a very common occurrence and made it incumbent on the individual to research very thoroughly the creditworthiness of a bank which held their deposits. Even back then, the stress on moral and ethical behavior for bankers was a matter of keen self-interest, for the banker in order to attract deposits and business, and for the individual as depositor. We cannot say everything reduces to self-interest; there were probably bank managers who felt a moral obligation to widows and orphans who were depositors and who would faced ruination if the bank was poorly run. Still, self-interest in the business world seems to be the predominant determinant of moral and ethical behavior. What has changed since then is that the government now back-stops the banks and has removed the old-fashioned necessity for bankers to be men of scrupulosity, and depositors to be excessively careful about where they put their money. This back-stop is of wide-spread benefit to the economy as a whole, at a cost of eroding the importance of ethics in the behavior of the bankers. The real argument at the moment is whether the government has gone too far in supporting the banks despite their folly, and whether a system with some serious loss of money and a collapse of poorly-run banks would not redress that imbalance.
The book talks freely of the prominent bankers of the day. They are described variously as men of the highest personal standards, with a reputation for probity unparalleled in the business world, and who ran banks that had sterling reputations for safety and soundness. These descriptions went on and on and in themselves begged the question: why did people care so much about bankers' honesty?
The answer lay in the terrible depression in the early 1890s when so many banks failed. Second, a national currency did not fully exist, and banks issued their own currency that traded on something similar to an exchange market. The First National City Bank of New York was well known and highly trusted, so its notes traded in the major cities at 100 cents/dollar. Smaller banks traded at discounts. Third, there was no Federal Reserve or government intervention to help banks. If your bank made too many bad loans, it was wiped out. One of the features of 19th century novels in Britain and the U.S. was the periodic impoverishment of the hero or heroine when all their assets held in a "trusted" bank were brought to zero because the bank failed. This was a very common occurrence and made it incumbent on the individual to research very thoroughly the creditworthiness of a bank which held their deposits.
Even back then, the stress on moral and ethical behavior for bankers was a matter of keen self-interest, for the banker in order to attract deposits and business, and for the individual as depositor. We cannot say everything reduces to self-interest; there were probably bank managers who felt a moral obligation to widows and orphans who were depositors and who would faced ruination if the bank was poorly run. Still, self-interest in the business world seems to be the predominant determinant of moral and ethical behavior.
What has changed since then is that the government now back-stops the banks and has removed the old-fashioned necessity for bankers to be men of scrupulosity, and depositors to be excessively careful about where they put their money. This back-stop is of wide-spread benefit to the economy as a whole, at a cost of eroding the importance of ethics in the behavior of the bankers. The real argument at the moment is whether the government has gone too far in supporting the banks despite their folly, and whether a system with some serious loss of money and a collapse of poorly-run banks would not redress that imbalance.
