The following notes on large (or decorative) initial capital letters are taken from Bruce Rogers, Paragraphs on Printing, 1943, New York. The copyright was not (as far as I can tell) renewed, placing the work out of copyright.
If you are short of time skip to the end; figures g, h and i represent, for Bruce Rogers, “how it should be done”. The opinion in the article on whether to align with small caps on the first line may be disputed in the case that the entire first line is set in small caps. The opinion about complex shapes not being worth the trouble to do right comes from the difficulty of hand-set metal type and no longer applies to computer type. Notes in square brackets are mine.
Usually it is desirable to distinguish the opening of a book, or a chapter, or sometimes even of a paragraph, by inserting an initial letter larger than the type. When individual types [i.e. metal pieces of type - Liam] were more precious than they are now a wise printer would have several founts of what was called ‘titling’ type. These were often the larger letters of one of the standard faces in used in his [printing] office, case without shoulder at the bottom so that they could be easily justified with any body type. A printer, lacking this titling type, would just insert one of the large capital letters of the fount [font], but usually without cutting off th shoulder, which would damage the type for further use with its own lower case. This naturally resulted in an undue amount of white space below the letter, and to balance this he would leave a corresponding space between the side of [p. 113] the letter and the text type in all the lines abutting on the initial, with the exception of the first line which, with the first word usually in capitals, was brought over close against it (a and c, p. 114).
This became such a convention in composition that when rectangular or other shapes of ornamental engraved initials were inserted, the white spacing between the block and the type was still exaggerated, even though the bottom of the letter aligned perfectly with one of the text lines (e).
One of the most common errors occurs when the initial is the beginning of a word which is completed in small capitals instead of capitals. Almost invariable the top of the [page 114: figures, inserted at references] [page 115] letter will be found aligned with the top of the small capitals, instead of being lifted slightly above them to align with the capitals of the fount. (b).
Of course a safe way out of these perplexities is to use an initial only a little larger than the text ans set it so that it aligns at the bottom with the first line of type, extending upward into the blank space left for the chapter heading (j).
If calligraphic or other initials of free and irregular form are employed it is impossible to give any explicit directions for their setting. They should be dealt with according to their various shapes, and your eye alone must be the final arbiter. It is usually better to let them stand above the type page (in the Bodoni manner) rather than to leave a blank rectangle in the type for them to fill. (Illustration 63).
Because of their shapes the letters A and L are especially difficult to fit as initials. If the A is an article [that is, a stand-alone single-letter word “a”], it can have a blank rectangle to itself (g), but if it is the beginning of a word it is usually better to cut into the top of the body to permit fairly close setting of the remainder of the word (h).
The letter L is still more difficult to handle, but it it be large enough to occupy more than two lines of type it should be cut in for the first line (i), as with A (h).
Figure 63 mentioned in the text is a reproduction of a full page, with the dotted lines showing the boundary of the original page: