Introduction

The work which I co-authored with Francesca Carnevali at the London School of Economics (where I was her Ph.D. supervisor) in 1995 suggested that British economic sclerosis relative to continental Europe after the Second World War was partly caused by the banking sector. We came to this conclusion independently from complementary directions. Francesca in her Ph.D. thesis compared finance in the British Midlands unfavourably with Piedmont's local banks and my history of Barclays Bank highlighted its successful strategy for gaining UK market share by giving more discretion to local directors. Francesca developed these ideas on banking – and international comparisons supporting them – in her book Europe's Advantage, published in 2005. Most British banks, she argued, were too big, centralised and uncompetitive, while elsewhere in Europe smaller, local and regional banks provided stronger support for SMEs, shaping a different political economy of flexibility and innovation in continental post-war economies. Her approach meshed with the new growth theory's emphasis on banks’ role in the screening and monitoring of projects rather than the traditional functions of money transmission to facilitate trade, pooling of savings and maturity transformation (in which scale might be more of an advantage). British problems derived from a toxic mix of government complaisance in the banking cartel (for misguided macroeconomic policy reasons), from oligopolistic concentration (dominance by the ‘Big Five’ banks) and from bankers’ weak local roots and motivation (as Sir John Hicks said, the best of all monopoly profits is a quiet life). These issues were only partly resolved at the time we were writing with greater competition, modified regulation and hyperactive bankers; the unresolved problems of excessive concentration and flawed centralised lending models arguably contributed to the 2008 global financial crisis and its aftermath. Before and during that crisis bankers had very good lines of communication with (generally supportive) UK politicians. Conservative ministers did refer bank mergers to the Monopolies Commission and were concerned about the quality of services to small business constituents, but critical views such as ours resonated more with the pragmatic left before recently becoming more widely shared.

The present paper focuses on the financial sector in the UK in a very different period: before the First World War. It is hard to see lack of competition as a problem in business finance then, though this has not discouraged many attempts to find it.