Monday 8 February 2016

Quaker bankers: building trust on the basis of sincerity, reciprocity and charity

This post follows discussions of the norms sincerity, reciprocity and charity in financial markets. It suggests that the success of Quaker finance, that funded the British Industrial Revolution (the Darby's of Coalbrookdale, the Stockton and Darlington Railway) was based on trust built on the norms. A full argument is in a working paper Discourse Ethics for Debt Markets.
Trust is defined as “a firm belief in the reliability, truth or ability of someone”. Accounts of how trust is developed vary, however they involve terms connected to sincerity, such as: honesty, integrity, credibility, predictability, dependability and reliability; terms connected to reciprocity, such as: judgement and fairness; and terms related to charity, such as: benevolence, goodwill and responsibility (Seppänen et al., 2007:255). Essentially, the synthesis of the norms sincerity, reciprocity and charity, can be seen as the basis of trust in commerce and our argument reduces to: finance relies on trust, which is built on the three norms. This might be regarded as naïve and trust a nebulous concept. However Quakerism represented in the names Barclays, Lloyds, Cooper, Waterhouse and Peat in connection with banking and accountancy offer testament to its concrete practicality.
The Quakers emerged as a non-conformist Christian sect during the English Civil War (1642‒1651) and became an important expression of independent (not Anglican/Episcopalian or Presbyterian) faith during the Commonwealth. The sect was ‘comfortably bourgeois in character’ and egalitarian, promoting the rights of women and would lead the Abolitionist movement in the nineteenth century. With the Restoration of Charles II (1660) the Quakers were suppressed and it was during the period of persecution during that the Quakers became the dominant independent church, accounting for around 1% (60,000) of the English population in 1680.
The growth of Quakerism, while other independent sects founded on charismatic leaders disappeared, can be explained by how the sect was organised. Quakerism was distinctive from Anglicanism and Presbyterianism in rejecting a priesthood (appointed or elected) and the particular authority of the Bible. To fill the void of dogma, a system emerged where the central ‘Meeting House’ issued Queries to individual Meetings on a regular basis, enquiring about ‘the state of the society’ and posing specific questions to the congregations. The replies were reviewed and Advices issued defining Quakerism: doctrine, holding the community together, was developed in a discursive manner that was able to react quickly to events (Walvin, 1998:24‒26).
On this basis the “Quaker success story” (Prior and Kirby, 2006; Roberts, 2003) in finance was built. It could be that the financial prominence of the Quakers was a consequence of their ‘Protestant work ethic’ and frugality, which delivered unconsumed surpluses that they were able to re-invest. However, other Protestant sects were equally frugal but did not have the disproportionate influence on finance that the Quakers had.
Being a Quaker meant adhering to the regulations collected in the Advices, in return a Quaker businessmen could rely on the support of the whole community. Quakers were required to account for themselves and to monitor each other, this lead them to rely on written records that testified to individuals’ conformity to the Advices and the development of networks of communities based on letters and libraries (Prior and Kirby (2006:117‒121); Walvin (1998:46‒47)). In business, Quakers were expected to consult with more experienced ‘mentors’ before engaging in activity that required borrowing. Moreover they were scrupulous, like Antonio, in repaying debts during a time characterised by high levels of default (Prior and Kirby (2006:121‒129); Walvin (1998:55‒57)).
The Quaker commitment to the repayment of debts highlights their commitment to reciprocity. Sincerity was a consequence of their doctrine of simplicity. This ranged from simplicity in appearance, which inhibited consumerism, to simplicity ‒ honesty ‒ in speech. Quakers
detested that which is common, to ask for more goods than the market price, or what they may be afforded for; but usually set the price at one word (Walvin, 1998:32)
Quaker’s were renowned for their charity (Cookson (2003); Walvin (1998:81‒90)) and the norms sincerity, reciprocity and charity are captured in their approach to lending, encapsulated in their proverb
“Well, Friend”, said the Quaker Banker, “Tell me the answers to these questions so that I may help you in your projects, for you have opportunities: Firstly, how much do you seek to borrow? For how long? And how will you repay the loan plus its interest?” These are the issues all good bankers must explore.
The Quaker experience suggests that the culture of sincerity (commitment to truthfulness), reciprocity (commitment to fair pricing and repaying debts) and genuine care for others generated a robust financial network that was able to fund the growth of the British economy between 1700 and 1850. Quaker influence waned towards the end of the Industrial Revolution in the mid-nineteenth century. The 1844 Bank Charter Act undermined the network of ‘country’ banks that served local businesses and lead to the merger, and centralisation, of the provincial Quaker institutions. In the aftermath of this centralisation a number of Quakers became associated with financial malfeasance. The most famous example is the failure of Overend, Gurney & Company in 1866. The firm was connected to the Quaker banking dynasty, the Gurneys, and for the first half of the nineteenth century dominated the discounting of Bills and was able to underwrite other banks during the Crisis of 1825. Its failure was a result of speculative investing in the 1850s exposed in the Panic of 1866 and the refusal of the Bank of England to underwrite it. In the distributed financial network before 1844 the stability of the system rested on inter-personal relationships and trust, the Quakers’ doctrine nurtured trust and on it rested their financial success. After 1844 the stability rested on the centralised decision making of the ‘lender of last resort’.
In the pursuit of efficiency, banks, both retail and commercial, have replaced personal relationships with clients by automated systems in the loan approval process. A retail bank will employ dozens of models to convert data on a customer into a loan decision (only a dozen or so models are used in commercial lending). This has seen the emergence of the ‘credit risk modelling’ profession that develops, maintains and interprets the algorithms.
While many models appear to use the same data to make similar decisions they often deliver contradictory results. Lending managers, confronted with a diversity of results, tend to focus on a single model to deliver ‘objective truth’ without investigating why others deliver different answers. Founded on algorithms, the process cannot be sincere (it can be objective/reciprocal) and as a consequence the borrower and lender are alienated. The bank’s task is to optimise the ‘harvesting’ of loans and is devoid of charity.
Financial institutions understand that using data from social media, ‘Big Data’, will enhance the algorithms, but are prevented from doing so by European Union and U.S. legislation. However, ‘the gods punish us by giving what we pray for’ and, in the event that such data could be used it is difficult to see how existing banks would survive in competition with social media platforms that started to offer loans. This suggests that the survival of existing retail banks does not depend on their ability to implement new technologies, but their ability to communicate meaningfully with their clients1.
This account leaves open the problem facing contemporary finance: how to support a financial culture that nurtures trust in a pluralistic society, not centred on Quaker doctrine?


1 Banks cannot employ ‘machine learning’ because they need to justify their lending decisions. Because a machine learning algorithm evolves independent of human interaction, it cannot provide a justification.


   Cookson, G. (2003). Quaker families and business networks in Nineteenth-Century Darlington. Quaker Studies, 8(2):119‒140.
   Prior, A. and Kirby, M. (2006). The Society of Friends and business culture, 1700-1830. In Jeremy, D., editor Religion, Business and Wealth in Modern Britain, pages 115‒136. Routledge.
   Roberts, H. (2003). Friends in business: Researching the history of Quaker involvement in industry and commerce. Quaker Studies, 8(2):172‒193.
   Seppänen, R., Blomqvist, K., and Sundqvist, S. (2007). Measuring inter-organizational trust: a critical review of the empirical research in 1990‒2003. Industrial Marketing Management, 36(2):249 ‒ 265.

    Walvin, J. (1998). The Quakers: Money and Morals. John Murray.