Introduction

This chapter is concerned with the development of the financial sector and the availability of close money substitutes in pre-1914 Britain. The financial sector is important to economic historians for a number of reasons. Firstly it is widely believed that an adequate financial system is a necessary, but not a sufficient, condition for the process of industrialisation and growth. The late Victorian/early Edwardian periods are frequently characterised as years of relative economic decline. It is therefore interesting to examine to what extent this might be explained by the failure of suitable financial instruments to develop. For example, this could be the case if the institutions which were capable of channelling small savings failed to develop, thus reducing the savings rate and lowering capital growth. A second source of interest derives from one of the great policy debates of the early nineteenth century, that between the Currency and Banking schools. Collins (1978) has argued that the central proposition of the Banking school was that expansion of the stock of close money substitutes would frustrate any attempts to enforce strict monetary discipline. Thus the extent to which such substitutes were available is of interest. Finally a number of studies of the macroeconomics of the Victorian era have made use of the demand for money function as a central part of the analysis. The best-known example of this is McCloskey and Zecher's (1976) analysis of the pre-1914 gold standard. It is therefore important to assess to what extent the correct monetary aggregate has been chosen and whether or not the functions used are adequately specified.