21. BANKING. Banking in Great Britain as now carried on is the product of a continu ous process of evolution; it owes very little to external influences, and can only be properly understood in the light of the study of its earlier developments. Its strength is the strength derived from long tradition founded upon experience, and its weakness is the weak ness inherent in a system which has developed with the smallest possible amount of legislative control. This weakness is shown in a lack of logical coherence and in an occasional absence of proper definition.
There are few evidences of banking in the modern sense of the term in England before the 17th century. In the Middle Ages the bank ers were mainly changers and money lenders; they dealt in coin, not in credit. The Italian colony of the Lombards, however, who gave their name to Lombard street, seem to have been well acquainted with the use of bills of exchange, and the banking business of the country was chiefly in their hands after the expulsion of the Jews at the end of the 13th century. During the 16th century, however, the power of the colonies of foreign merchants in London rapidly declined, ending in the break ing up of the German colony in the Steelyard by Queen Elizabeth. In the 17th century it became customary for the wealthier classes to intrust their spare cash to the keeping of the London goldsmiths, a body of men whose occu pation inspired the necessary confidence. The transition from goldsmith to banker was a nat ural and easy one, and the goldsmiths' °cash notes)" gradually acquired a degree of negotia bility. Some of the existing London private bankers find their origin in the goldsmiths of the latter half of the 17th century. Outside London the early type of country bankers was evolved from the class of substantial merchants. Thomas Smith of Nottingham, for instance, who is the earliest country banker of whom we have any record, and who certainly carried on business as early as 1688, originally combined the business of a mercer with that of a banker.
Owing to the unsatisfactory condition of the public finances tinder the Stuarts, there was no opening for a public bank such as existed in Amsterdam and other European centres of in dustry. But the Revolution of 1688 saw the control of the national expenditure pass from the Crown to Parliament. The national credit became, for the first time, an important factor in our economic development, and showed it self in the growth of a national debt. The use of credit spread rapidly and this led to the development of modern banking. To the efforts of William Paterson was due the establishment in 1694 of the Bank of England, founded under the wing of the Chancellor of the Exchequer, Charles Montague, with the object of lending the whole of its capital, #1,200,000, to the state.
The Bank of England.— The Bank of Eng
land is the pivot round which centres the whole of modern banking in the United Kingdom.
In no other country, whether in Europe or America, does a bank occupy quite an analo gous position. It is not a state bank in the strict sense of the term; its capital is held pri vately, and its management is not in any way directly or indirectly controlled by the state. On the other hand, during its whole history, it has been more or less under the protection of the state; its operations have been on occasion dictated by the state; its development has been marked by successive loans of its capital to the state in return for the confirmation or extension of its privileges, and it still continues to exer cise powers and owe responsibilities delegated by the State.
The Bank of England is controlled by a governor, deputy-governor and a court of 24 directors who are elected by the proprietors on the nomination of the directors. The selection is generally made from the members of leading mercantile firms, and the tradition is not to elect a member of a banking firm or a director of another joint-stock bank. The operations of the bank are now regulated by the Bank Charter Act of 1844. This act divides the Bank of England into two departments, the Issue De partment and the Banking Department. The former, as will be seen in a later section, is so strictly regulated by the act that its action is automatic. The latter is for all practical pur poses as free from legal restrictions as any other joint-stock bank. Yet free as it is from special legal obligations, it has, by its action in the past as well as by its present position, assumed peculiar responsibilities, which, though ill defined, are well understood, and which the bank does not attempt to disown. These re sponsibilities are due especially to the bank's position as the government banker, the bankers' banker and the keeper of the country's reserves. The government accounts are kept by the Bank of England, the national debt is managed, ex chequer bonds and treasury bills are issued and paid, and many other incidental services of the kind are rendered by the bank. With regard to the other banks, all the settlements at the Lon don Bankers' Clearing House are made by transfers at the Bank of England, where each clearing bank is bound to keep an account. Those banks which do not possess a seat in the Clearing House find it necessary to appoint one of the clearing bankers as agent and to keep an account with that agent. Practically every banker in England can, therefore, draw either directly or indirectly upon the Bank of England and the reserve of the latter has thus to be re garded both as the banking reserve of the country, and also as the gold reserve, that is to say, the reserve to insure the convertibility of the note issue.