This Is How Finance and Banking Worked Before Computers

0:00You're being sold an AI future where you're obsolete or irrelevant. That vision is wrong. At Palantir, they're building AI that helps workers and unlocks their full potential. American workers are our nation's greatest strength. AI shouldn't eliminate them. It should elevate them. Palantir is here to tell their stories. From factories to hospitals, AI is freeing people from drudgery, letting them do what humans do best. Create. Solve. Build.

0:36So, let me get this straight. Your company has data here, there, and everywhere. But your AI can't use the data because it's here, there, and everywhere? Seems like something's missing. Every business has unique data. IBM helps your AI access your data wherever it lives to change how you do business. Let's create smarter business, IBM.

1:15Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. Joe, do you remember the episode we did with Stuart Butterfield, the founder of Slack? I do. Great episode. Software, tech. I like when we have tech and software episodes that aren't about just like the markets, but like how technology actually works. How it actually functions. Yes. All right. Well, that's a good jumping off point because there was a moment in that episode where I think it was Stuart asked a very interesting question, which is he basically said he had no idea how banking worked before the advent of computers.

1:52I'm glad he said that because I have no idea either. And when I think about money, by this point, we all sort of know like, oh, like money is just a database entry, right? Well, that makes a lot of sense to me in a world of Excel. But how did like databases work? How did money as a database creation work before databases? Well, that's exactly it. Because nowadays, I think money is almost synonymous with an electronic database. Like that's basically what it is at this point. But of course, for hundreds and hundreds of years, we did not have things like Excel spreadsheets. So how did banking and finance and trade actually work in those conditions?

2:29Yeah. And like, I just don't understand how like people traded stocks or people went into a bank and said, I want to get my money or without like, how are they not just like always losing track of how much money people had? How are they always not just like forgetting, oh, you bought that stock? Like on pen and paper, like type, like in my mind, they must have been losing track of stuff all the time. Well, I think I said this in the Stewart episode, but there were a lot of bank failures. There were a lot of trading blowups. So maybe the lack of technology was actually bad. But we do actually have the perfect guest to discuss this topic.

3:02We are going to be speaking with Anne Murphy. She is a professor of history and executive dean over at the University of Portsmouth. She just wrote a new book. It's called Virtuous Bankers, A Day in the Life of the 18th Century Bank of England. So the perfect person to talk about pre-computerized banking. We're also going to be speaking. This is a double feature. We're going to be speaking with John Handel, postdoctoral fellow at the McIntyre School of Commerce at the University of Virginia. He's written a lot about trade and technology in the 1800s, early 1900s. So we're going to take a journey through the history of finance.

3:40I can't wait. I'm really excited about this. I have so many questions. All right. Anne and John, thank you so much for coming on All Thoughts. Well, thank you for inviting me. It's lovely to be here. As they say in sports talk radio, long time listener, first time caller. So great to be here. Nice. So maybe I should start in sort of, I'm going to attempt chronological order here. But why don't we start with you, Anne? I mean, you know, the clue is in the title of your book. What was it actually like, a day in the life of the Bank of England in the 1700s? So it was a very busy place. And the time I'm writing about is the 1780s.

4:19So it's just after the War of American Independence. And the British are having a moment of real introspection about their finances and trying to figure out whether everything is working well, which is one of the reasons that the Bank of England kind of looks inward at itself at this time and really tries to figure out what it's doing and how it's doing it and whether it's doing it well or not. But the bank at this time, it's a 24 hour a day place. It opens at dawn. You've got customers kind of milling around from about nine o 'clock onwards. And it's doing everything you would expect a bank to do.

4:58but without those Excel spread sheets. It's doing them all with ledgers and quill and ink. And it's my view that it does it well and it doesn't lose its customers' money. It has a pretty good grasp of where everybody is and whether there's money to trade and how it does all this stuff. You said it was 24 hours. Even the Fed, I don't think, is 24 hours or at least some of its operations have a certain window or the closes or certain things don't happen on weekends. So were there certain aspects of banking that from a 24-hour standpoint were more advanced, I don't know, a few hundred years ago than there are today?

5:40So it's not necessarily operating 24 hours a day. So it's standard business day is around about nine to five. But because it can't just press an update button at the end of the day to make sure all of the accounts are updated for the start of the next working day. The process of updating accounts takes place in the evening. So from about four o 'clock all the way through sometimes to kind of 10, 11 o 'clock in the evening, there are clerks updating the physical ledgers so that next day when the brokers walk in or when those business owners who are there regularly walk in, their account is up to date and they're ready to go for the new business day.

6:24But the other reason it's 24 hours is because it's a vulnerable place. So it's at risk of fire. It's at risk of riot. It's at risk of people sort of wanting to break in. So it has night watchmen who are there and active throughout the night to make sure that the bank is safe. I have a really basic question, which is what are people doing at the Bank of England in 1780? You mentioned customers sort of milling outside of the building. What are they waiting to actually do? So one thing they're not doing so much is borrowing money from the bank. So the bank's private lending is not very well advanced.

7:09They have their little bit of private lending early in the late 1600s, early 1700s, but it doesn't really take off. What a lot of people there are doing is discounting bills of exchange. So they're borrowing money in that way and facilitating trade also in that way. They are managing notes. So they're coming to the bank to exchange ready money for banknotes, other banknotes for Bank of England notes, or their banknotes that they have back to ready money again. And the note business is huge and occupies a lot of everybody's time. But they're also there to buy and sell government debt. So you could buy and sell government debt at the bank.

7:55It's probably the main place where you could do that throughout most of the 18th century. So that's one of the things that they're there to do. So I want to get more into the sort of like pen and paper and the actual physical operations. But John, why don't you come in? And talk to us a little bit about your area of focus and just sort of you're a little bit more on the trading and financial activities side. Why don't you talk a little bit about your specific years and area of focus in this sort of like finance and trading pre-computers? So my work is essentially the sequel to Anne's work I pick up in the early 1800s around when her book on the Bank of England finishes.

8:33And what's happening, I focus primarily on the London Stock Exchange. And what's happening in this period is a lot of the trading that had gone on during the 1700s went on in dispersed, often open locations. The lobby of the Bank of England, in alleyways, in coffee shops, in taverns even. But beginning in the early 1800s, there's this move to enclose financial markets and make them their own discrete spaces that would be governed by the association of brokers who were members of those exchanges. And so the London Stock Exchange adopts a new set of rules and begins to build its own premises starting in 1801 and essentially stops allowing members of the public, clients, investors, whomever, to enter the exchange.

9:20The exchange becomes solely the province of brokers. But much like what Anne was saying, the London Stock Exchange is also a 24-7 institution. It's not just the brokers who are there on the trading floor from 11 to 4, but there are armies of clerks who are responsible for settling and clearing trades after hours. Because the London Stock Exchange is global and it's trading with markets in North America, in Australia and Asia during the 19th century, members are there working at telegraph offices basically late into the night, as late as 8 or 9 p.m. And then one of the other things that's often overlooked is that there is a whole army of household servants, basically live-in servants who actually lived at the London Stock Exchange.

10:07They brought their families. They were called waiters, but they were essentially the equivalent of porters. And they worked to guard the entrances of the exchange, deliver telegrams and letters to the brokers, keep the exchange clean. And they lived there 24-7 for most of the 19th century. So the London Stock Exchange, too, was a 24-7 institution with a very complex human ecosystem. Tracy, do you think – you know what I really want to say? I want a Netflix show that takes place in the lobby of the Bank of England. I think like a big series of like over the years. I just like now I really want that show to exist.

10:40I think that would be perfect for like a Sorkin treatment. Yes. All right. But actually, this reminds me. I was having lunch just last week with a couple of traders who were active in the 80s and the 90s. and they were talking about board boys. So they used to have board boys who would write down trades on a blackboard or a whiteboard. I don't know, you know, who owes what to whom when there was active trading activity on the floor. But this leads nicely into my next question, which is, it sounds like a lot of the record keeping or the distribution of money, the movement of money was just being done by people in the 1700s and the 1800s as well.

11:21That's absolutely right. And one of the things we don't really know is how those individual stockbrokers were keeping their ledgers. So if you look at images of the bank's lobby, the kind of brokers exchange, you don't see much evidence of people writing things down. So it probably looks like a lot of people were keeping a sense of what they were doing in their head until such time as they went and registered with the Bank of England's clerks. The other really interesting thing is the Bank of England is operating a inscribed stock ledger system in which they keep the only legally binding record of stock ownership.

12:10so individuals didn't have a receipt that they would take away with them that would be legally binding. In fact, the receipt that they were given was worthless. And thus, they had to completely trust that the Bank of England could keep their ledgers straight and that could keep the sense of ownership within those ledgers, you know, completely trustworthy. I'm so glad you brought that up because I was going to go to this question of the receipt, We place a trade online or do some transaction. Usually these days we'll get some email that comes from the financial entity, might have some string of 11 numbers and letters or something that we don't really care about unless there's something that we need to go back and dispute whether something has happened.

12:54But talk to us a little bit more if like there's just these one entities in the background and they're working overnight and they're humans and they're writing things down, possibly making mistakes. Maybe both of you could talk about this a little bit, like that role of trust in the institution and what happens if, you know, there's a dispute. So it's trust, but with checks and balances. So when a transaction happens, there's a buyer and there's a seller. Both the buyer and the seller are supposed to be there to sign off on the trade. So to one to sell and one to accept. It's also signed off by a clerk.

13:31There's a whole process of checking between the stock transfer books and the stock ledgers. And also any individual could go into the Bank of England, either them or their representatives, And they could look at the stock ledgers to check that their account stood as they understood it. So there are, trust happens, but there's with checks and balances also. So I would say in the 19th century, again, this begins to change this process of how you establish trust in a financial market. So it was actually quite difficult to create something like a receipt for a stock transaction, especially if you were far away from London.

14:14So if you, for instance, lived in the provinces of England, you sent an order down by mail to your broker in London, finding a broker would be its own problem, but let's say you find one. How do you know that he got you a good market price? One of the big issues was that the rule for marking prices, for putting a price on the blackboard that would then be included in the daily price list, It was by agreement of the brokers doing the deal. So you had to actually agree with the person that you either bought or sold stock for that you would mark the price officially. You could often not mark the price.

14:51So often the financial press calls the price list that the London Stock Exchange produce a record of bad bargains because it was essentially brokers who would be covering themselves if they got something outside of a market price for their client. They would rush to have it marked on the board so that it would show up in the newspapers or show up in a price list the next day And they could go back to their clients say look I got you the market price It's here in the newspaper. It's here in the price list Even though for most of the people that were immediate in the market that were in the vicinity of the market that day It was oftentimes not actually the real price or the fair price that was predominant

15:43Silicon Valley is selling you a future where you're obsolete, or worse, identical. At Palantir, they're witnessing something different and revolutionary. From re-industrializing the nation's defense base, to shipyard workers building faster, and frontline workers boosting productivity, AI is transforming work across the nation. AI is not replacing American workers or flattening them into conformity. It's unleashing what makes each one irreplaceable, their judgment, their craft, their creativity. When American workers become more powerfully themselves, they own the future. Palantir, making Americans irreplaceable.

16:25Hi, this is Shirley Strawberry from the Steve Harvey Morning Show. Toyota-thon is on, so stop by your local Toyota dealer for incredible year-end deals on the cars, trucks, and SUVs known for their legendary reliability. Like the stylish and efficient Camry, the ready-for-anything RAV4, or check out a rough-and-rugged Tacoma or Tundra, all with great financing and lease options available to qualified customers. Visit BuyAToyota.com to find out more. Toyota, let's go places. So this actually sounds like the ultimate opportunity for arbitrage, right? Because you have different sources of information operating at different latencies, really slow latencies where, you know, someone is running from one location to the other location.

17:15Literally mailing your broker in London a trade request. Sending your servant to get the latest price of something. I mean, how did that feed into trading activity? Were there a lot of people trying to take advantage of that? Yeah, so the 19th century sees the emergence of the first specialty arbitrage firms that are closing pricing gaps in dual listed securities between different markets. But then there was also just a lot of taking advantage of sort of slow retail orders that showed up in the market. So one of the things that happened, there's a recent paper on this, is that the introduction of something like the ticker tape, rather than making stock trading more efficient, it actually exacerbated irrational sort of trend chasing in numbers.

18:05Because the ticker tape numbers that were sent out to investors far away were on a slight delay, it took some time to even via a ticker tape send out numbers. But then if you think about it, the order has to be routed back towards the initial exchange after you see a number on the ticker tape. And so oftentimes, the people who are trading on ticker tape prices are smaller investors. They send their order back to their broker. And per the name of the show, the broker would not want to place these small lots. They would wait until they had aggregated a number of orders from smaller investors that were trading off the ticker tape and only then go back into the stock exchange and place a larger block order.

18:49And so there were all of these complaints that the prices on the ticker tape were never actually accurate. You couldn't execute a price on a ticker tape. And so there was all of these issues with matching up the time and the latency of when information was produced, whether it was the price list after the fact, whether it was the ticker tape during the day, it was very hard to get those to actually match what an accurate market price was. So the firms that tended to do better were ones that used the telegraph and the telephone and were more professional arbitrage traders that took advantage of these prices, again, rather than retail traders that had to rely on things like the price list or the ticker tape.

19:26Anne? So in the late 1700s, I guess it was a somewhat different environment. There was less, I think, obvious room for arbitrage. But there were a few people who dominated in the market, And therefore, the number of transactions that they could command gave them a pretty good return on the investment of their time. So they're spending a lot of time in the Bank of England's lobby, in various different coffee houses. They're picking up business with a lot of people and therefore sort of having a lot of turnover. There's not enough, I think, movement very often for arbitrage to be particularly easy for them.

20:08But their dominance in the market certainly gives them a real kind of command of information, a real command of the market as a whole. And just that sort of turnover definitely yields them profits. The other thing they're really picking up profits from is the initial issues from the government. So what the government is doing is issuing to trusted contractors and prominent businessmen. So they're getting that initial issue at very easy prices, which they're then selling into a much wider market. So there's a real profit to be had there. And the government's very conscious of that expense. But really, up until the early 19th century, can't figure out how to do that, how to make that operation work better.

20:57It's so interesting. Once again, like all of these things that are like, what's the term in the US for like the bevy or like the 10 banks that get to bid on the treasury? Oh, primary dealers. Yeah, the primary dealers. Like all of these things. And a new issue premium as well. The new issue premium, exactly the same. And then the idea of like the ticker tape exacerbating trend following as opposed to making the market more efficient. Like all these things just like we talk about all the time, they come up over and over again. You know, since both of you talked about this and the need for 24-7 trade or transaction reconciliation.

21:30So the market or the banking day closes at some time and then all the clerks get to work and make sure all the books are settled. Can you talk a little bit more about what happened overnight, maybe both of you and starting first, in terms of like are we talking about handwriting down pieces of paper, erasing pens? Can you talk a little bit more about what the overnight clerks and all these different institutions did overnight to get ready for the next day? Sure. So the Bank of England's records actually preserve this in a great amount of detail. So we kind of know precisely what they're doing.

22:03So there are books that are worked in the banking hall. So the environment where most of the customers would be. And there are books that are worked in the accounts department as well. So the evening clerks, they're kind of taking the books that are worked in the banking hall and they are transferring those records against customers' accounts so that the customers' accounts are updated. Not only are they transferring them, but they're also checking them. So it goes through a process of making sure that the books that are worked in the banking hall are adding up in the same way as the books that are worked in the accounts department.

22:47And then the customers' ledgers are adding up in the same way as the books that are worked in the accounts department. Then somebody else checks it. The other thing that they're doing is making sure that their really regular customers are kept on a separate account. So they would work up particular accounts for certain customers because they knew that they would be in early the next morning and they knew that they would come and trade very often. So, they knew that those accounts had to be updated early and they really needed to make sure that they understood where those customers' accounts sat.

23:25Protection of the records is another thing that's really interesting. We can go on to talk about that as well, if that would be interesting. Yeah. Actually, why don't you just talk about that? Because you mentioned the fire aspect. I imagine that if it all caught on fire, it would be absolutely disastrous for everyone to be able little like. So talk a little bit about that aspect, just preserving the physical records. So the bank is doing a variety of things to make sure that it's not at risk of fire. It's really worried about fire throughout most of its existence through the sort of 18th century and into the 19th century.

23:58So it's a really aggressive landlord. It kind of does a slum clearance operation, particularly to create a fire break around its buildings. It sort of pushes out resident population. It pushes out all the old wooden buildings. It makes duplicates of a lot of its accounts and sends them out of the bank every night to the house of one of its directors so that they know that if records are lost by fire, there is a duplicate sitting out in another office. They have kind of technological solutions. So they have wheeled trucks in which they put the most important ledgers so that they can wheel them out overnight.

24:39They keep their own fire engines and they train the watchmen to operate those fire engines. And from the 1760s or so, they create a kind of archive building. They call it a library. And they attempt to fireproof that library by lining the building with copper. So that, you know, there's a really elaborate set of protection against attack and fire. Yeah, I remember when I was living in London, actually working at Bloomberg way back in the day, I used to walk past the Bank of England building every day on my way to work. And it's just this enormous, imposing building with these famously thick walls.

25:19Was that for fire prevention or was that for fear of theft? So probably not so much for fear of theft, but it was for fear of unrest and rioting. Mobs in 18th century London would very often, even if they weren't interested in attacking a building, they would go into the building and sort of pull things apart, particularly buildings that hadn't lit their windows. So, you know, putting lights in your window indicated to the mob that you were supportive of whatever they were protesting against or what they were rioting against. If you didn't put lights in your windows, then your property was at risk.

26:05So one of the things that the bank does very early on is has these sort of windowless walls at the ground floor level. So it doesn't have to light its windows, but also it protects itself against that possibility of people sort of coming in through the windows or breaking the windows. The other thing it does, so there's a church next door to the bank, which during the Gordon riots in 1780, the rioters try to get into the bank through the church. So almost the next day, the Bank of England's directors take the decision that the church has to go. And they eventually manage to buy up the church and they buy up the church yard.

26:42But if you ever go into the Bank of England today, you'll see one of the first things you see as you walk through the door is that there's a nice garden, which the governor's office looks out onto this garden. That garden is the graveyard of the old St. Christopher-Lostock's Church. So when the governor is looking out onto his garden, he's actually looking out onto a graveyard. John, why don't you come in and talk to us about the overnight clerks and the trade reconciliation and how it advanced at the point of your research? Yeah, so in the 19th century, the brokers start to be more organized than they were in Anne's period.