THE HISTORY OF BANKING & BANKNOTES

BANKS & BANKING
Banking is of ancient origin, although very little is known about it prior to the thirteenth century. Much of the business of many of the early banks was money changing and the supply of foreign and domestic coin. As such they dealt primarily in coin and bullion.

Another important group of early banks was the merchant bankers, who dealt both in goods and in bills of exchange, providing for the remittance of money and payment of accounts at a distance but without shipping actual coin. Their business arose from the fact that many of these merchants traded internationally and held assets at different points along trade routes. For a certain consideration, a merchant was prepared to accept instructions to pay money to a named party through one of his agents elsewhere; the amount of the bill of exchange would be debited by his agent to the account of the merchant banker, who would also hope to make an extra profit by exchanging one currency against another. Because there was, theoretically, a possibility of loss, any profit was not subject to the laws which, in many countries, then banned usury.

Another form of early banking activity was the acceptance of deposits. These might be the deposit of money or valuables for safekeeping, or for transfer to a third party. They could also simply represent the deposit of money in a current account.

By the middle of the seventeenth century, English bankers had begun to develop a deposit banking business. The London goldsmiths kept money and valuables in safe custody for their customers. Additionally, they dealt in bullion and foreign exchange acquiring and sorting coin for profit. In order to attract coin for sorting, they were prepared to pay a rate of interest on deposits. It was seen that when money was deposited by a number of people, deposits and withdrawals tended to balance over a period. This meant that a fund of deposits was maintained at a fairly steady level. This surplus could thus be loaned out to other parties at a rate of interest.

CHEQUES & BANKNOTES
At about the same time, a practice grew up whereby a customer could arrange for the transfer of some of his credit balance to another party by addressing an order to the banker. This was the origin of the modern cheque. A cheque was a claim against the bank, which in turn had a claim against the customer.

Another way in which a bank could create claims against itself was through the issue of banknotes. A banknote is a form of promissory note, which developed from the bill of exchange - an open letter requesting one person to pay a stated sum of money to another on behalf of the person who wrote the letter. A development was to make the notes "payable to bearer", rather than to a named individual. If people had faith in the banks' willingness (and ability) to honour the notes, they were then happy to accept notes being passed on.

THE BANK OF ENGLAND
The Bank of England was incorporated by Act of Parliament in 1694, with the immediate purpose of providing funds for King William III to carry on the war against France in the Low Countries. The bank lent the government £1,200,000 at 8 percent interest. The sum asked for was subscribed in a few days by some forty London traders and thus the "Corporation of the Governor and Company of the Bank of England" came into being. The Bank's royal charter allowed the bank to operate as a joint-stock bank with limited liability and granted the right to issue notes payable on demand. In 1709, the Bank's charter was renewed. The new act stipulated that whilst the bank endured, no corporation or partnership of more than six persons should borrow or take up any sums of money on their bills or notes payable on demand or within six months. This clause effectively gave the bank a monopoly of joint-stock banking in England that lasted for over a century, keeping all other banking activity in the hands of private individuals. When the charter was again renewed in 1826, the act declared that banks with more than six partners were not illegal as long as their place of business was more than 65 miles from London. This was a response to the national bank panic of the previous year and sought to stabilise the banking scene. To help compensate for this removal of the monopoly, the Bank of England was permitted to establish provincial branches. In 1833, joint-stock banks were permitted within the 65 mile limit provided they did not issue notes. Finally the Act of 1844 prevented any new issuers of banknotes; Only banks issuing on 6th May 1844 could issue after that date. This eventually led to the situation we have today, where the Bank of England has a monopoly on banknote issue in England.

ENGLISH PRIVATE BANKS
Until the mid-eighteenth century the majority of private banks were located in the city of London. The politician Edmund Burke, in 1750, stated that 'there were not above a dozen bankers, outside London, in the country' - a London Guide of 1740 listed twenty-eight in the city. By 1798 there were just over 300 country bankers. Until 1826, all private banks were partnership banks which, under common law, meant that the partners were jointly and severally liable for the whole of the partnership debts. This had the effect of restricting the establishment of branches as that implied trusting someone else with one's assets.

Those banks situated outside London were known as 'country' or 'provincial' banks. Nearly all provincial banks would have had a London agent, who would deal with stockbrokers, bill discounters and acceptance houses on their behalf. He would also give advice and act as a "lender of last resort". Around 1770 the London banks ceased issuing their own notes and instead issued Bank of England notes.

Many provincial banks were started by businessmen as a means of generating capital for investment. Agricultural banks were created to generate the required capital for the mechanisation of farming. Anyone who had large sums of money lying unused for a period of time was tempted to start a bank. Brewers for example had perhaps six months grace on paying malt duties to the Government. This money could not easily be invested in their businesses but it could be used to support the issue of banknotes.

The issue of banknotes was equivalent to money borrowed free and lent at interest. Banknotes were payable on demand, it being an act of bankruptcy not to immediately meet such a demand. Banks therefore had to keep enough coin in hand to meet likely calls for redemption of notes. Banknotes would often be exhibited at bankruptcy hearings as evidence of debt. The banker's aim was to confine his notes to the immediate locality, where they would be recognised and trusted, and hopefully remain in circulation for a long time. Once outside the vicinity, the notes would gravitate to his London agent for redemption.

In 1825 a crisis occurred which saw the collapse of many private banks. A major factor was the over-issuing of notes such that they could not be honoured if a number came in for payment together. Other contributory factors included a tighter fiscal policy by the London banks and bad speculation in the booming industries coinciding with a slump in agriculture. The collapse of one or two banks caused a run on the others creating a 'domino effect' and general panic set in. There are numerous stories from this period about the ruses used by the banks in an attempt to allay the panic. Staff would haul large sacks of scrap metal across the bank in full view of the customers, the sacks having a handful of gold coins on the top to make it appear that the bank had large funds. Other banks would employ a number of people who would come into the bank one after the other and 'pay in' amounts of gold coin, which would immediately be taken out the back and brought around for the next 'customer'.

In May 1826, an Act was passed which allowed the establishment of joint-stock banks with more than six partners, provided that they had no place of business within 65 miles of London. Whilst the partners were still liable for their debts the act did provide for the appointment of 'public officers' through which the banks could sue and be sued. The joint-stock banks gradually become established with chains of branches. This had the effect of stabilising the banking scene. It also created very tough competition for the private banks.

The Bank Charter Act of 1844 aimed to eliminate note issue by all except the Bank of England. Only banks issuing on 6th May 1844 could issue after that date. In addition the maximum value of notes that any bank could have in issue after 10th October 1844 was fixed at the average circulation for the 12 weeks previous to 27th April 1844. This had the effect of immediately reducing the number of provincial banknotes in circulation. Somewhat surprisingly, this was the first time that the government, (which had controlled the minting of coins for hundreds of years), had attempted to regulate the production of bank notes. Issuing banks could also choose to relinquish their right to issue notes in return for an agreement allowing them to issue Bank of England notes. The banks were allowed to issue notes up to the value of their previous circulation limit - each year the Bank of England would pay them 1% of the value of notes issued.

Towards the end of the nineteenth century and in the early part of the twentieth century the place of the private banker in the financial organisation of the country was becoming increasingly difficult. This period saw a number of take-overs and amalgamations leading to the situation we see today with just a few large high street banks with many branches. By 1921 the last provincial note issue had ceased.