English Banking

ENGLISH BANKING Until the 17th century, there was a lot of indefinable banking carried on elsewhere in Europe, though it is impossible to separate deposit banking from investments in trading ventures, money changing and other commercial transactions of the period. The Fuggers undoubtedly did a lot of general financing, while the North-European exchange banks alluded to above, performed many of the functions of the modern bank, and may be regarded as being the linear ancestors of the great London merchant bank ing and accepting houses of to-day. In England, it is probably true to say that the ground was prepared for modern banking by the influx of gold from America in the Elizabethan age and the simultaneous birth of foreign trade. Land ceased to be the only form of wealth, and the country gentleman and town mer chant began to hold part of their "capital" in cash. The final im petus was given by two political facts. The first was the seizure by Charles I. in 164o of £ 130,00o in bullion deposited by City merchants at the Tower. The second was the outbreak of the Civil War, and the consequent sense of insecurity that spread throughout the country.

To secure safety, owners of money began to deposit it with the London goldsmiths. Against these sums the depositor would receive a note, which originally was nothing more than a receipt, and entitled the depositor to withdraw his cash on presentation. Two developments quickly followed, which were the foundation of "issue" and "deposit" banking, respectively. Firstly, these notes became payable to bearer, and so were transformed from a receipt into a bank-note. Secondly, inasmuch as the cash in ques tion was deposited for a fixed period, the goldsmith rapidly found that it was safe to make loans out of his cash resources, provided such loans were repaid within the fixed period.

The first result was that in place of charging a fee for their services in guarding their client's 'gold, they were able to allow him interest. Secondly, business grew to such a pitch that it soon became clear that a goldsmith could always have a certain proportion of his cash out on loan, regardless of the dates at which his notes fell due. It equally became safe for him to make his notes payable at any time, for so long as his credit remained good, he could calculate on the law of averages the exact amount of gold he needed to retain to meet the daily claims of his note holders and depositors.

The cheque came in at an early date, the first known to the Institute of Bankers being drawn in 167o, or so. Hoare and Co. the only private banking firm left in London, who are directly descended from goldsmiths of that name, have in their possession a cheque dated July 1 1676. It reads:— This, and further interesting documents were published in the Banker's Magazine, Oct. 1927.

Here we have the early elements of both issue banking, which centres round the bank-note, and deposit banking, which centres round the cheque. In the one case, the banker is bound to pay gold against his notes, in the other against his deposits. The amount of gold he had to hold had still to be determined by ex perience, and Bank Acts, fiduciary issues and Treasury minutes were as yet unheard of.

The first shock to English banking came in the days of Charles II., who, several hundred years ahead of his time, borrowed heavily from the goldsmiths and promptly repudiated his loans. This occurred in 1672, and occasioned a general suspension of payment. Despite this incident, and a general (and well-founded) belief that the goldsmiths were guilty of imprudence and usurious practices, public confidence was restored, and it was soon after that date that the goldsmiths found that they could receive money on what is now termed "current account," i.e., money withdraw able without notice. Some 20 years later came the foundation of the Bank of England (q.v.).

The Bank of England.

The Bank of England took its origin partly in the public distrust of the goldsmiths, but mainly in the current impecuniosity of the British Government. In return for a loan of f 1, Zoo,Oo0, the founders of the Bank were granted certain valuable privileges, which were added to as time went on. It kept, and still keeps, the accounts of the Government. It had what was then the unique privilege of being a joint stock company with limited liability. Its notes, though not yet legal tender, were ac cepted without question in payment of taxes. These made it a formidable competitor to the comparatively small private bank ing firms which had grown up from the London goldsmiths and to the country firms, such as Smiths' of Nottingham, which were already coming into existence.

The i8th century was the hey-day of the private banker and of the issue bank: The Bank of England Act of 1708 prohibited any other bank with more than six partners issuing "promissory notes," i.e., bank notes. The cheque, though in existence, was still in its infancy and was not universally accepted as it is in England and the United States to-day. The Act assumed that a bank must have the right to issue notes, or it ceased to have any justification for its existence—in fact "to be a bank." For over a century this assumption remained correct, and so the Act carried into effect its real intention of conferring a monopoly over banking upon the Bank of England.

During all these years, the Bank of England was nothing more than an ordinary bank of issue and deposit. It had certain privi leges which gave it a favoured position, but in return refrained in practice from competing with the private bankers for deposits at interest from the public. It was in no respect a central bank in the modern sense of the term.