A frequently alluded to fallacy when discussing the state of the economy in this era is the primacy of physical items whether it is a precious metal such as gold or agricultural products such as cotton or wool. Logistics constraints are only considered when they are an extreme impediment to the smooth flow of these physical items. However, seldom mentioned is the centrality of banks and banking practices which oils that process. Without all of the components of the process operating like the proverbial well-oiled machine, economic progress is not possible.
As previous blogs have focussed upon the both the hazards, horrors and cost of wagon transport from the hinterland and the stupendous surge in wool production over two decades, neither will feature as the dramatis personae but rather they will be assigned a cameo role in this article.
Remarkably, the Eastern Cape and Port Elizabeth led the charge in establishing banks. By the 1870s, the Eastern Cape sported 24 banks whereas the rest of the Cape Colony had one; lIkewise Natal and the Orange Free State and the Transvaal none.
Main picture: 1866 painting of Port Elizabeth by Thomas Bowler
Why did wool attain economic primacy?
Given the fact that labour as a factor of production instead of being in abundance was scarce and in reality, represented only the family unit and such persons in the settler party who were contracted to work for the Party Leader, did not lend itself to the labour intensive production of cereals such as wheat, barley, rye et al.
Hardly had the settlers planted their first crop than drought struck, liquidating many of the farmers who, in many cases, were artisans of some form back in England. The reality struck that the only feasible form of farming suitable in the Cape due to the paucity of labour would be wool farming.
In short order, the realisation of the necessity of finding customers to purchase their wool and the difficulty of transporting the wool to the coast with rickety slow moving ox wagons over excretable roads dawned on the settlers.
A State Bank
In short, money serves several critical purposes amongst which are the following: a store of value, a unit of account, and a medium of exchange. Lacking in the Cape was a banking system to give effect to these attributes. Apart from the Lombard or Loan Bank which had been established by the Dutch East India Company in Cape Town on 23 April 1793, there was no other banking institution in the Colony. This institution was not a private bank but was owned directly by the DEIC. When the Cape was occupied by the British and later by the Batavian Republic, this bank would fall under their purview.
The Lombard Bank did not provide any financing of commercial transactions which in that era were financed in the form of discounting Bills of Exchange. Finally recognising this as a major weakness, in 1807 the Lombard Discount Bank, which would form part of the Lombard Bank, was launched. This activity was funded by means of interest-bearing deposits. Without any understanding of commercial practices, in 1814 the Governor of the Cape, Sir Lord Charles Somerset, issued an inane decree that no interest would be charged on these deposits. This proclamation had the immediate effect of starving the Bank of funds thereby curtailing their ability to discount Bills. To prevent a collapse of economic activity, private individuals became lenders in their own right.
The colonial paper rix-dollar of the Cape, first issued by the Dutch East India Company in 1781, was declared to be equal to forty-eight full weighed pennies of Holland, (about 4s sterling), and which, despite all of its fluctuations, had generally been considered to be its nominal value. According to The Dictionary of South African English,” the Rixdollar was a unit of currency introduced at the Cape by the Dutch East India Company. Initially it was a silver coin and later (from 1781) a paper note.” The local authorities had long sought a mechanism to introduce a paper currency as there was a perpetual coin shortage. Unlike modern paper currencies which are no longer underpinned by a physical item, the paper currencies until fairly recently were in most circumstances able to be converted into its underlying physical item which was its store of wealth. Under the DEIC, Rixdollars were issued against security of mortgages of fixed property or the deposit of movable property. By 1795, RD 659 755 had been issued. Apart from the fact that liquidity of the Cape was vastly improved, the interest generated formed part of the revenue of the Cape Government.
In 1825 British currency was introduced. Despite this, Rixdollars continued to operate in tandem with Sterling until Rixdollars were phased out. In the interim, the Rixdollar was devalued vis-à-vis sterling.
Application for a Branch of Lombard Bank
According to the chapter entitled Frontiersmen in the book entitled The First 150 Years: First National bank of Southern Africa 1988, the application made to establish a private bank in the Eastern Cape, which would be the first in South Africa, unfolded as follows: The hackney coach drew up outside the Houses of Parliament. Theophilus Phillipps from the District of Albany got out, caught a brief glimpse of the Thames River on his left then hurried through the drab November afternoon into the historic buildings. In his bag was a petition from the ‘landowners, merchants, traders and other inhabitants of Grahamstown, Port Elizabeth and their vicinities in the Colony of the Cape of Good Hope’ asking the British government to establish a branch of the government bank in Grahamstown. The year was 1834.
Phillipps was met with a cordial response. He told them about life in the frontier districts, about the continued wars with the Xhosa, the droughts, the Boer farmers dissatisfaction with the British government, and the roving bands of vagrants. He explained to the men from the treasury that the town of Port Elizabeth, Grahamstown, Cradock and Graaff Reinet were developing, thanks to the wool industry and the influx of people. But, he said, farmers, businessmen and merchants were finding it difficult to do business because there was no bank and very little currency in the area. Most transactions were done through barter and traders and shopkeepers were frustrated and inconvenienced.
It was dark when Phillipps left the warm offices of the government. He came away with little cheer yet, throughout the winter, he continued to badger for his cause. His deputations received sage and sympathetic nods. But that was all. No moves were made to open a Grahamstown branch of the Lombard and Discount Bank, and the colony’s only bank which had been controlled by the various governments at the Cape since 1793. Eventually Phillipps came home disappointed.
First private bank
During the tenure of Sir Benjamin D’Urban as Governor of the Cape, he ratified a Cape Ordinance which enabled private banks to be established in the Colony. Almost immediately The Cape of Good Hope Bank, the first private bank, opened its doors at 28 Herrengracht, Cape Town on Tuesday 1st August 1837 at 9 o’clock. Barely had the bank opened its doors when the Governor received a Directive in which His Majesty averred his “displeasure” at the Governor’s ratification of the Ordinance. In effect the King had disapproved of its enactment. This missive was politely ignored as the age of the private bank had already dawned. The opportunity was accepted with alacrity as the South African Bank was opened a little over a year later.
Goaded by this turn of the cards, the residents of the eastern cape set to work immediately to start their own bank. The Cape of Good Hope Bank beat them to the draw as barely a year later on the 1st September 1838, they opened a branch in Grahamstown. This was followed in the waning months of 1838 with the issue of the proposed prospectus of the Eastern Province Bank. With Grahamstown being the largest town in the province at that stage, that town became its location, opening on the 1st January 1839. It was this bank through a tapestry of amalgamations that would much later become the future FNB.
Lack of a medium of exchange
Without a banking system, merchants stepped into the breach by assisting the farmers with financing of their purchases. In effect this meant that the merchants supplied two commodities: physical goods as well as its financing. Nevertheless, the main financial difficulty was the lack of an adequate medium of exchange due to the shortage of coins and notes in circulation resulting in the farmers and artisans having to barter with one another. This impediment was circumvented by the issue of IOUs, known as “good fors”, Promissory Notes and Bills of Exchange. Almost in a bid to derail the surge in economic activity in the Eastern Cape, a Proclamation dated 22nd May 1822 prohibited the issue of promissory notes, drafts and Bills of Exchange of less than 50 Rixdollars. In a subsequent proclamation in 1825, the exchange rate between the Rixdollar and sterling was fixed as 1s 6d. Hence the smallest bill that a merchant could issue was for the equivalent of £3 15s.
The Colonial Authorities then exacerbated the problem by withdrawing the paper Rixdollars from circulation in 1832. Between May 1832 and the end of 1835, notes valued at £176 289 out of a total of a circulation of £200 097 was destroyed. In lieu of this the government issued promissory notes totalling £174 933. The minimum value of the new issue was £1 as opposed to the Rix-Dollar notes which ranged in value to as low as one-eight of a Rixdollar. This step was taken to bring the local currency in line with that in Britain where notes of less than £1 were made illegal in 1829 in the belief that such notes were a cause of currency instability. It was anticipated that smaller transactions would be conducted in coin for which purpose an additional £60 000 of silver and copper money was imported.
It was difficult to keep the coins in the colony as discount rates on Bills in Britain were set high due to the unfavourable balance of trade. As a consequence, it was considered less expensive to conduct overseas transactions in coin. It was estimated that the amount of coin in circulation between 1837 and 1838 was between £225 000 and £300 000 of which £100 000 was out of circulation in the military chest. Given the comparative isolation of the frontier region, the shortage of coin in this region was more serious and pressing than elsewhere in the colony. This situation was considerably relieved by the increased military presence during the Sixth Frontier was [1834-1835] during which coins from the military chest were utilised to acquire supplies from the local inhabitants.
The shortage of currency in the eastern regions led there to be a higher discount rate in these districts than in Cape Town. The Separatist Movement in the Eastern Cape latched onto this discrepancy and attributed the variance in the rates due to manipulation by western Cape authorities rather than the underlying exogenous factors such as the rapidly expanding trade in the east.
Economy in the mid-1830s
After their disastrous introduction to the Albany area, the newly arrived settlers had to endure a drought coupled with an adaptation to the farming potential of the area. By 1830 most had constructed sturdy accommodation and those of them that were unable to make the conversion from artisan to farmer had long since relocated to the nascent towns in the region. Nevertheless, the 1830s was a troubled decade. As the Xhosa were not allowed to reside in settler areas, the farmers lacked labour to till their lands. All of these factors drove the farmers to increasing adopt wool farming as a profitable alternative for of generating an income
Other issues such the sale of wool crop now became an issue of discussion and contention. In this regard, higher interest and discount charges imposed by Cape Town’s merchant establishment caused local resentment in the East. Between 1836 & 1839, the merchant community suffered a setback when their hopes for opening up the territory of Queen Adelaide were dashed. Compounding this loss, the rapid withdrawal of the British garrison curtailed the military purchases of their merchandise. As well as these issues, the commencement of the Great Trek gave rise to the abandonment of the eastern towns by a substantial part of the Dutch population. All of these events shook the confidence of the suppliers of credit to the Eastern Province
The bright light midst all the negativity was wool exports. These continued what can only be viewed as stellar growth, rising from 90 000kgs in 1832 to 5.5m kg in 1855.
Foundation of the Eastern Province Bank
With a desperate need for a bank in the region, the directors of the Cape of Good Hope Bank stepped into the breach and established a branch in Grahamstown which opened for business on the 1st September 1838. Amongst their services they advised their clients that approved Bills of Exchange would be discounted at a rate of 6% per annum to be payable in the bank’s own paper which was redeemable by drafts on the Head Office at 21 days sight
The merchants in Grahamstown immediately bemoaned the fact that the discount rate applied in the Eastern Cape was steeper than that charged in Cape Town. The merchants were aggrieved and vented their frustration to the Bank, but they never took the hint to adjust their rate to that of Cape Town.
In order to publicly manifest their displeasure, the merchants bound together and established the Eastern Province Bank, in Grahamstown. As a mark of this displeasure, only 200 shares were allocated for sale to Cape Town merchants. In line with the norms of the era, the Bank undertook only three functions: discounting trade bills, issuing its own bank notes and accepting deposits. In accordance with the banking philosophies of the era, overdrafts were not offered nor was asset financing willingly or freely offered. The main function of the bank was the financing of trade by discounting trade bills. Swiftly thereafter, the Bank opened a branch in Port Elizabeth to forestall other banks setting up there.
Drivers of economic activity
Driving the growth of the banks were government and commissariat expenditure as well as the military contingent of 830 men stationed in the area. Of the estimated population in the area of 24 500, 10% were involved in some form of commerce or manufacturing. In addition, an increasing number of Xhosas were becoming accustomed to the use of money during the 1830s.
Over the following decade, the increase in wool production was both rapid and uninterrupted. Even though cereal production was remarkable, the sale of surplus production was problematic further hastening the conversion from cereal production to wooled sheep farming.
With the stationing of troops along the frontier during the Seventh Frontier War, there was a disproportionate expansion of business resulted in an automatic drain in the coin availability with the military requiring cash to pay for supplies from frontier farmers as they insisted on being paid in hard cash and not notes.
What ultimately became a hardy annual was the fact that the persons appointed as Directors of the banks were in most cases themselves merchants who utilised the fact that they were directors to discount their business’ bills before those of the other merchants and local residents. Naturally this raised the ire of the non-director merchants.
With more than three quarters of the population engaged in agriculture, the province was underdeveloped as it was overwhelmingly a rural society. It depended upon military expenditure of the Home Government. In 1858, for instance, it disbursed more than £1m in this regard.
Emergence of the Port Elizabeth Bank
Prior to the 1840s, Port Elizabeth was little more than a forwarding depot for Grahamstown. That is why Grahamstown took precedence in the opening of a bank in the Eastern Cape. Rising prosperity in the Eastern Cape was reflected in the rapidly expanding wool exports through Port Elizabeth which rose from £70 337 in 1840 to £193 794 in 1849. The locus of the economy in the interior in the Midlands shifted inexorably to wool farming creating a rise in prominence of towns such as Cradock & Graaff-Reinet. From Grahamstown’s perspective this resulted in an unintended consequence. Instead of channelling the wool via Grahamstown, more direct routes to the harbour in Port Elizabeth were utilised. The effect of bypassing Grahamstown negatively impacted on the economy there. For example, it also affected the partnership of Maynard, Higgins & Co which fractured into Maynard of Grahamstown and William Higgins [my second great uncle] [1812-1860] of Port Elizabeth.
By 1847 Port Elizabeth could boast twenty wholesale or merchant houses. The Seventh Frontier War disrupted trade with Grahamstown thus once again buoying Port Elizabeth’s fortunes vis-à-vis Grahamstown. Given the fact that the Port Elizabeth Bank was unable to meet the demands of local businesses as regards discounting bill, local frustrations were directed at it. Acquiescing to local pressure, in November 1845, the Bank commenced accepting deposits which would in turn allow for the expansion of their discounting business. It was a case of too little and too late. Sentiment against the Bank was vehement and at fever pitch resulting in a meeting on the 23 January 1846 at which merchants concurred to establish their own bank, the Port Elizabeth Bank. The Committee of Management included William Fleming [a 2nd great uncle] who was a leading merchant in the town.
Ascendancy over Grahamstown
In 1849 Port Elizabeth’s population was 3,382 and the value of property assessed for road taxes amounted to £125 780. By 1859, the Grahamstown Directory listed 27 merchants and traders whereas Port Elizabeth listed 47. In the case of shopkeepers, the numbers were 47 and 69 respectively. From these figures, it is clearly evident that Port Elizabeth had gained commercial ascendancy over Grahamstown. Even though the assets and liabilities of the Port Elizabeth Bank in comparison with the Eastern Province Bank in Grahamstown offers a good indication of the relative position of the two banks and hence the financial position of the respective towns, it absolute terms their financial position is obscured by the operation of competing banks.
By the 1850s, both banks accepted deposits thereby mobilising the savings of the community at large and not just that of the merchants. A presumption that the bulk of the capital for development was raised aboard, can be rebutted by the close correlation between the growth of bank deposits and the expansion of trade. This suggests that the region was generating a substantial part of its own capital requirements.
The wool boom of the 1850s witnessed the growth in exports from 1 961 175 kgs valued at £212 166 in 1850 to 8 817 185 kgs worth £1 213 410 in 1860. The dynamic growth of the Eastern Cape encouraged normally skittish depositors to place their trust in the eastern banks, their security and safeguard being the vibrant growth of the region vis-à-vis the rest of the Cape. The shares of these banks were also eagerly sought after given the fact that dividends of up to 20% was being paid. In tandem with this income, there was also a significant capital appreciation of their share value.
The future of banking and finance
In 1865 there were 28 banks in the Eastern Cape of which 24 were single branch establishments, two including the Eastern Province Bank, had two branches while the two so-called Imperial Banks had a rudimentary branch structure. The 28 Colonial Banks, as the locally owned and managed banks were called, were all characterised by certain traits: they were owned by the major merchants of the town in which they were located, the majority of the commercial activity in which they engaged was done with the shareholders themselves, systems were rudimentary and not standardised and more importantly, they were undercapitalised.
The arrival of the Imperial Banks in the form of Standard Bank and the Oriental Bank, both of which possessed a vast “war chest” due to their substantial capital, could weather economic downturns and occasional large write-offs. Both ushered in the era of the titan banks and were bound to disrupt the staid, complacent and extremely “incestuous” Colonial Banks.
The Roots of the Tree, A Study in Early South African Banking: The Predecessors of the First National Bank 1838-1926 by A.C.M. Webb (1992, Rustica Press, Cape Town)
Hoisting the Standard: 150 Years of Standard Bank by Richard Steyn & Francis Antonie (2012, The Standard Bank Group, Johannesburg)
The First 150 Years: The First National Bank of Southern Africa 1988 (1988, A Leadership Publication)
Building Bank City by Stephen Higgins (1996, Struik Publications, Cape Town)
Barclays National Bank: A Leadership Corporate Profile