Reputation and the Palmer Rule in the Origins of Banking in Spain

Abstract

This paper investigates the reasons why provincial issuing banks in Spain maintained high reserves in the 19th century and the effects this had. The introduction of banknotes into the economy meant that convertibility had to be guaranteed. If convertibility was respected, this gave banks a good reputation and made them reliable. The Palmer Rule was a control mechanism stating that a well-managed bank should keep one-third of its liabilities as cash in hand and two-thirds in securities. In Spain the banking system, constituted in the mid-19th century, was characterised by a plurality of issuing banks. Regulations required reserves only to secure notes, with no mention of reserve requirements for banks’ other types of liabilities. However, Spanish provincial banks of issue adopted the Palmer Rule. The Bank of Spain did not follow the same path.