Although banking as we know it has its roots in the seventeenth century, many of its features can be traced back to ancient times.
Before the introduction of a monetary system there were many instances of transactions involving credit in primitive communities. Early Pacific civilisations used strings of beads as a means of recording debts, even before they were a means of exchange. The Chinese dynasties are full of instances of note issues recorded back as far as 14BC under the Emperor Wu-Ti, who used a form of paper money made from stag skin.
In Greece, Babylon and the Roman Empire an extensive international trade demanded banking facilities, such as the lending of money, its exchange in foreign trade and travel, and the safe keeping of deposits. The Greek system was adopted by Egypt and also influenced Rome. The break up of the Roman Empire led to a decline in banking, and, at the same time, usury laws imposed by the Church put restraints on lending.
However, banking did not cease completely as the Lombard merchants developed banking in Venice and Genoa in the 12th century.
The Middle Ages
In medieval times an English village community had no need for 'banking', but for the merchants in the growing towns, trading at home and abroad, a knowledge of money became essential.
Since the Christian Church forbade the lending of money for interest, Jewish immigrants to England, who were barred from ordinary trade, living frugally and no bound by the laws of the Church, filled the need for money lenders.
Jews, like many foreigners, had come to England at the time of William the Conqueror. Saxon England had required few money lenders but the Roman and Anglican kings employed Jews to supply them with ready cash in anticipation of their revenue. The Jews became the King's 'sponges' and his Exchequers, collecting his revenue and lending their own money on usury. The Jews became a hated race but survived due to their protection by the King's troops. Many became rich, like Aron of Lincoln in the reign of King Henry II.
In 1290 to appease popular feeling the King withdrew his protection from the Jews, who were subsequently treated cruelly by their Christian neighbours and driven out of England, not to return until Stuart and Hanoverian times.
After the Jews were banished in the thirteenth century, a vacuum was left to be filled by Italian merchants from the great trading ports of Northern Italy. Lombard Street, which is still today the heart of London's financial quarter, takes its name from Lombardy in Italy. Their vocabulary has left us with the words cash, debtor, creditor and ledger; the cryptic letters £.S.D. have only partly been discarded by decimalisation. Perhaps the most significant is the fact that these merchants conducted their business on benches or 'bancos' and it is from that work that our 'bank' is said to be derived.
The Italian merchants arrived at a time when England was changing from a feudal community, with virtually all its wealth in land, to a commercial society in which surplus money needed to be stored and used for profit. This happened in the sixteenth century after a long and stable government under the Tudors, which saw an age of discovery and the beginnings of colonisation; a time of expansion of trade at home and abroad. Moreover, as the Reformation spread throughout Europe, King Henry VIII, at the end of his reign in 1546, repealed the usury laws. Before this the Church disallowed the lending of money with interest; now money could be lent "upon interest according to the King's Majesty's Statute at 10 per cent".
This Act was carried further by his daughter, Queen Elizabeth I, and so the foundation of the modern banking system was laid.
Englishmen of business followed the example of the Italian merchants. In particular, Sir Thomas Gresham, who as a pioneer of lending and borrowing money in the country, became the greatest of the London merchants and is now looked upon as the "Father of English Banking". He served Henry VIII; Edward VI; Mary I and Elizabeth I and founded the Royal Exchange in Cornhill, London, as a meeting place for merchants to conduct their business.
Goldsmith to Banker
In the early days the goldsmith had exchanged foreign currency, keeping some in hand to supply travellers abroad and melting down the rest in the course of their basic trade. They had also become recognisable and reliable keepers of money and values for people without their own safe custody facilities.
This function was to become more important when, in 1640, Charles I destroyed the reputation of the Royal Mint as the best place for safe custody by seizing the gold. The Royal Mint, originally known as the "Mynte" from the Latin "moneta" meaning money, stood on Tower Hill in London and was the centre for English coinage.
Even though Charles I later repaid the money the damage had been done and the confidence lay with the goldsmiths, who paid interest and gave receipts. In 1640 Oliver Cromwell borrowed money from the goldsmiths to help his army in the Civil War, and in 1663, Charles II borrowed £1,300,000 to build a sailing fleet; this he was unable to repay and the Exchequer suspended the repayment. Anxiety naturally arose about the lender policies of the goldsmiths, since, as a side line, it was becoming a risk business, and so they were to develop 'banks' as separate entities from their usual business.
The new men were bankers but they were still goldsmiths. Samuel Pepys gives us some examples. In 1667 Alderman Edward Blackwell changed Dutch money for him and "discoursed with him about remitting of this £6,000 to Tangier, which he promised to do by the first post." The goldsmiths retained their previous business in dealing with plate; as Pepys "called at Alderman Blackwell's and there changed Mr Falconer's state cup, that he did give us this day, for a tankard, which came to £6. 10s. 0d at 5s. 7d. an ounce, and 3s. 0d. in money, and with great content thence away to my brothers."
Goldsmith bankers, as they were known, had developed into an efficient system of private banking in London and were to develop into the famous banking firms, of which some still exist today. Coutts & Company, now affiliated to the National Westminster Bank, dates from 1692. The firm of Duncombe and Kent at the Grasshopper in Lombard Street, is now part of Barclays (formerly Martins). Barclays itself was incorporated in 1896 by the amalgamation of twenty private banks, among which was Gosling & Sharpe, descended from the famous goldsmith shop of "Ye Three Squirrels" in Lombard Street, which flourished under Major Henry Pinckney in Cromwell's time.
The receipts given by goldsmiths for deposits have been compared to modern day cheques. However, it would seem that their similarities, as with Bills of Exchange, was their negotiable nature. Drawn notes only became known as cheques a century later.
The cheque could be compared with a drawn note, by which a depositor addressed a letter to his goldsmith authorising the payment to his creditor of the sum owed. The creditor would then take this 'note' to the depositor's goldsmith and there receive the sum in cash.
The earliest known cheque - 1659
Morris and Clayton were scriveners, bankers and estate agents in Cornhill. Scriveners do not play an important part in the development of banking since they were originally a clerical intermediary of Tudor and Jacobean times, specialising in drawing up banks (sealed undertakings to repay), and in this position they 'dabbled' in other business. However, scriveners suffered as a result of the Act for the Restraining of Excessive Usury in 1660, and by 1750 they had all disappeared as a result of bankruptcies.
One example of the most human of the early drawn notes is this example of a customer of Sir Francis Child from the young son of the Duke of Beaufort. Addressed to his father's banker and dated Chelsey, 23rd September 1686:-
In the history of British banking the goldsmiths development of the promissory note and cheque, demand and time deposits, balance sheets and cash reserves provided the primitive but nevertheless essential elements of a modern banking system.
The Bank of England
The Bank of England was founded in 1694, primarily to raise money for the war with France. Its founders were to provide the Government with a loan of £1,200,000 and the interest was to be £100,000 per year. In exchange the bank was to have a Royal Charter and the loan was not to be repaid before 1706.
The founders intended to do no more than the kind of business goldsmiths were doing already. Like the pioneer goldsmiths the Bank of England was a bank of issue, printing their own notes and lending money of their own creation. The power granted to the Bank of England in respect of note issue drove others out of circulation until they remained the only bank of note issue. However, other English bankers found that it was possible for deposit banking to be profitable with the right of note issue.
In 1708 the Charter was renewed for further finance for the Government. The most far-reaching consequence of the Charter was the clause prohibiting note issue to any group of people exceeding six in number. This "monopoly" did not hinder the goldsmith bankers, who worked as individuals, but prevented the establishment of joint-stock banking in England for more than one hundred years. The Bank of England became the Government's bank and also the bankers' bank, due to the convenience of depositing their surplus balances. During the eighteenth century as private banks developed, the Bank of England continued to dominate the scene, although not knowing it would become the central bank as we know it today.
As the Industrial Revolution enlarged the scope of enterprise, there was a need for banks with more than six partners, so that larger resources could be mustered. In 1825 a severe crisis occurred when seventy-three of the country's banks stopped payment. Scotland, with joint-stock banks avoided such a crisis. In 1826 advocates for joint-stock banking achieved a limited victory, being allowed to establish joint-stock banks outside a radius of sixty-five miles of the City of London. This was the area dominated by the Bank of England note issue.
In 1883, the Bank of England sought to have their full monopoly confirmed and failed. Joint-stock banking became permissible throughout the United Kingdom. The rest of the century saw a long struggle for survival; the private bankers with the Bank of England on their side against the new joint-stock bankers. Private bankers enjoyed a comfortable living and saw the new joint-stock banks threatening their own business, for it was these men who had fought against joint-stock banking in the Parliament of the early 1880s. In 1854, the new bankers were admitted to the Clearing House, a bankers institution in London for exchanging bills and cheques and settling balances, which was to give them greater strength.
In 1890 the Bank of England organised joint action to save the bankrupt Barings Bank. This showed the Bank of England had accepted responsibility for the financial well-being of the country and had emerged into its adult status as one of the world's central banks. Throughout the century its importance as a pivot of the banking system had been growing, and by 1900 it had moved a long way from the earlier years of bigoted opposition to the joint-stock banks.
The private goldsmith bankers and the Bank of England were confined to London but, running parallel in development, in the eighteenth century a separate system of banking was developing in the provinces.
The London goldsmiths had made no attempt to expand outside London since trade was flourishing and comfortable compared to midland and northern regions, where transport and communications were virtually non-existent.
However, outside London the beginnings of the Industrial Revolution were taking place, which created the need for monetary services. Traders in the north and midlands needed capital, both fixed and working, for expansion and since in the absence of its supply by London private bankers or the Bank of England, it was left to business men to meet their own needs. The bankers of the country were industrialists, traders, and local revenue collectors; men already experienced in financial transactions.
Mr William Blow Collins, a mercer and draper of Worcester, in 1762 started issuing notes and coin at the time of a Bank of England shortage, for it was the failure of the Mint and the Bank of England to supply a means of payment that left industrialists to fulfil his role.
A great impetus for country banking came in 1797, when the Bank of England suspended cash payments; England being threatened by war. A handful of Frenchmen landed in Pembrokeshire, setting the country in panic. Shortly after this incident Parliament authorised the Bank of England and country bankers to issue notes of low denomination.
The industrialist turned banker could assist his own industry since he did not only provide a local means of payment but accepted deposits. Here we have a parallel with the early goldsmith banking.
In the iron and steel industry, Messrs Taylors and Lloyds, bankers at Dale End in Birmingham, were proper bankers in 1765, paying 2% on deposit accounts. Samuel Galton, gunsmith, formed a partnership with his son and Joseph Gibbons as a Banking House to the gun trade in Steelhouse Lane, Birmingham. Other examples occurred during the great expansion of industry and trade in the second half of the eighteenth century.
Finches of Dudley were long established as nail ironmongers and merchants and had issued tokens as early as 1648, and had entered banking in 1791.
In mining, tokens were first issued as wages, which in many cases led to full banking being undertaken. Notable examples are Miner's Bank of Truro established in 1759, and Praeds Cornish Bank, established in 1774. In the textile industry, the famous family of Gurney established themselves as the East Anglian Gurney Company in 1775, although long before this they had been advancing money to their employees in the woollen trade and to entrepreneurs in other trades.
For the country banks to give an efficient service there was a need for direct links with London to effect payment and avoid the transporting of coin as well as the remitting of Crown revenue. London held great importance for the country bankers as a money market and an investment centre for their surplus income. All bills of exchange and bank drafts were drawn on London, so too were the "London Bill", a form of paper credit, effecting payment between the counties and London.
Important country bankers all had their agents in London: Stephen Harris and Stephens at Reading banked with William Percival and Company in Lombard Street. The famous bankers William Deacon and Company were the London agents for Fromes Bank in Somerset.
Figures taken from Baileys British Directory showed remarkable expansion of the banking scene:-
In the early 1800's Abingdon with only 4,500 people had three banks; Boston with 7,000 people had six banks and Exeter with a population of 18,000 had seven banks.
The aftermath of the Napoleonic wars at the turn of the century caused uncertainty and depression in the industry, leading to the failure of many banks and rationalisation of the system, leaving on the large and more prosperous ones in business.
Joint stock banking
Reference has already been made to joint-stock banking in the section dealing with the Bank of England. The development of this important branch of banking deserves more detailed consideration.
Joint-stock was the name given to companies which are owned by several people who each possessed a certain number of shares in the capital. Their liability for the company's debts would be limited to that amount. That is why most of the major banks of London were established after 1826, as they were able to start with more capital.
Before Elizabethan times, the advantages of joint-stock enterprises were widely appreciated for risk undertakings. However, after the South Sea Bubble, the "Bubble" Act of 1719 was passed to the effect that the formation of joint-stock banks could only occur by Royal Charter.
Parliament resented such monopolies which were exclusively sold by the Stuarts, and therefore a subject of much debate. Unlike Scotland, whose separate legal system allowed the development joint-stock banks and industries, the Bank of England charter 1709-1825 established that private joint-stock banks would be illegal:
Pressure was brought to bear in Parliament by the economist, Ricardo, and by Thomas Joplin, a Newcastle timber merchant with local experience of banking disasters. Joplin knew that with the increased size of financial undertakings it was desirable that greater resources were needed and risks shared. However, Parliament was full of private, metropolitan and provincial bankers who fiercely opposed any inauguration of joint-stock banking threatening their own business.
A business crisis in 1825 led to a new act in May 1826 "for the better regulation and co-partnership of certain bankers in England", which permitted the establishment of co-partnerships with any number of shareholders and a right of note issue outside a radius of sixty-five miles from the City of London, within which the new banks were not allowed to open offices. The last section of this Act still showed the private bankers and the Bank of England attempting to retain an element of control in the London area.
The first joint-stock bank was opened in Lancaster in 1826, followed by others in Norwich, Huddersfield, Bradford, Workington and at Manchester. Stuckey's Bank in Somerset was the first existing private bank to take advantage of the act.
The private banks were absorbed by the joint-stock banks, making larger and larger concerns. This process was to reach its culmination at the end of the first world war, when the Big Five took shape. By 1866, there were 154 joint-stock banks with 850 branches against 246 private banks with 376 branches. In 1900, 77 joint-stock banks had 3,757 branches, and there were only nineteen private banks left. Now there are five clearing banks, all of them joint-stock. The last private bank was Gunner's of Bishop Waltham, which was absorbed by Barclays in 1953.
1854 saw the entrance of the joint-stock banks to the Clearing House which was to revolutionise the cheque. The achieve this the major banks had to take over London banks. In 1884, Lloyds Bank, previously confined to the midlands, took over two famous London banks whilst the Birmingham Banking Company entered London, by absorbing the Royal Exchange Bank.
The pattern of amalgamation continued and by 1936 had emerged as eleven banks, holding a total of over £2,000,000,000 of which the Big Five accounted for 87%. The twentieth century showed services in foreign exchange, and trustee and executor business were beginning to replace competition in price and size.
The beginnings of branch banking
Joint-stock banks began to open more branches, a system which seemed likely to provide a more stable structure and one more suited to the needs of the now advanced Industrial Revolution. However, the branches needed to be controlled from Head Office, which was to prove difficult with poor communications and lack of skilled men.
The problem was best described by Mr Robert Paul in 1826, when addressing Parliament: "that branches were accompanied with so much hazard, required such constant watching and inspection, and involved us altogether in such a degree of superintendence that, upon the whole, my general impression is that the branches are not the most advantageous part of our business."
In 1833, an Act of Parliament permitted joint-stock banks in London, and confirmed the legality of cheques drawn on them. The use of cheques made for more rapid commercial transactions. Where cheques were drawn and paid at different branches of the same bank, they could be cleared through Head Office, a system of internal debiting and crediting, which took several days. Access to the London Bankers Clearing House was still denied to joint-stock banks until 1854.
Further restrictions were imposed in September of 1844 by an Act "to Regulate The Joint-Stock Banks in England". This applied to the establishment of new joint-stock banks, which now needed Charters, and were given a maximum term of twenty years and a minimum nominal capital of £100,000. Although the Act was unnecessarily irksome the existing banks were exempt from the restrictions and their competitive position was strengthened. As a result of the Act only three joint-stock banks were established after 1844, and even when the Act was repealed in 1857 very few joint-stock banks were attempted.
The second half of the nineteenth century was an age of British industrial and commercial supremacy, which called for an expansion of the services provided by the established banks. For example, the London and Manchester Bank had four branches in 1850, and seven by 1865.
Limited liability now enjoyed by other business companies had not yet become a recognised attribute of banking companies. The final solution was found in the Act of 1879, which provided new legislative principle of "Reserved Liability". This was the difference between the nominal and paid-up values of shares, this being callable only in event of the company being wound-up. One result of this change was to make obligatory the annual publication of bank balance sheets. This furthered the amalgamation process by revealing the financial position of provincial banks.
In 1826, Lord Liverpool declared that "the solid and more extensive banks could not fail in time to expel the smaller and weaker" This was to become true as many of the old private and small joint-stock banks were unable to meet the demands of the growing industrial nation; since they were lacking in a branch network to bring in deposits to meet demand, and so were forced to sell out. The reason for the improvement of the branch system was the removal of legislative obstacles, the growing dominance of the cheque, the completion of the railways and the development of the telegraph.
Present day banking
Two world wars had little effect of the banking structure of the country. The amalgamations at the end of the first world war were the culmination of the long process of structural development. A massive branch banking system had grown out of the piecemeal development of the past.
In 1918 there were five large banks and six smaller survivors, which caused widespread fear that competition would be restricted if the process was carried further. However, this view changed when it was seen that five or six banks in the same High Street could operate at maximum efficiency. In 1967 the National Board for Prices and Incomes put forward the case for further amalgamation and rationalisation, and the linking of District, National Provincial and Westminster in 1968 was the first move in this direction. Since then other mergers have followed, leaving the Big Four and two smaller banks in England and Wales.
Like their predecessors of hundred years ago, today's bankers seek to extend their business in every possible aspect, developing expertise in foreign exchange, finance of foreign trade and trustee and executor work. Within their own system a very high degree of mechanisation has occurred; all branches now having a computer linked to a vast network for time saving, greater efficiency and speed.
Diversification has occurred either directly or indirectly or through subsidiaries into new business. For example, the ownership of hire purchase companies, such as Barclays buying United Dominions Trust at the bottom market price, and building it up and selling it at the top market price, and then purchasing Mercantile Credit at the bottom of the market. Leasing and the business of raising capital for companies, a business previously associated with merchant bankers, and the acquisition of a substantial stake in the unit trust movement.
The credit card system, first introduced in 1966 from a well-established American tradition, has now been undertaken by all the major banks and may prove to be an innovation with far reaching effects. Cash dispensers, cheque cards and budget accounts are other recent services offered to aid the convenience of the customer, while the more recent Euro-cheque system enables a traveller in Europe to cash his down British cheque in the currency of the country where he is staying.
The banks are showing no signs of standing still, canvassing fresh ideas of diversification, discussing an all electronic future and, unlike their predecessors, are willing to their the public of their intentions through advertising and public relations.
The goldsmiths who set up as bankers three hundred or more years ago would recognise the essentials of today's banking, but they would be surprised by its ramifications.
This essay has traced the development of British banking from its origins to the present day. Looking ahead it is interesting to speculate on the future changes of banking, as a service industry, to meet the requirements of society.
Further amalgamation between the four major clearing banks remains a possibility, although the establishment of a monopoly would reduce incentive to change. Probably the greatest influence for change is the suggestions of the possible nationalisation of the banking system. This, however, has to be equated with the successful background of high profit and competition, which compares favourably with other nationalised industries and services. It would be indeed ironic if the rigidity of official policy changed what is said to be the most sophisticated and efficient system of banking in the world.
Perhaps the salient point to emerge from this review is the close relationship between industry and commerce on the one hand and banking on the other; a relationship of partners rather than that of master and servant, depending as it always has done on confidence.
The position of the government in directing and controlling this relationship is complex, but if we accept that industry, commerce and the government are the forces in society producing, controlling and distributing raw materials and wealth of all types, then the banks' function is that of a catalyst towards achieving a prosperous and balanced company.
D G H Thorpe, ACIB
Copyright 2010 BBHS