Banking in the modern sense of the term can be said to have originated in England in the foundation of the Bank of England in 1694. Previously to this the goldsmiths had exercised some of the functions of a banker, and some of the oldest existing private banks are the direct descendants of these goldsmiths, notably Messrs. Child & Co. and Messrs. Hoare. At the time of the Great Rebellion men had found it convenient to lodge their money for security with the goldsmiths, who for the purposes of their own trade usually possessed ample accommodation for storing plate and jewellery. The depositors received a receipt, and when they wished to withdraw a portion of the money, the amount so withdrawn was often written across the face of the receipt. These receipts were the parents of the bank note, the transition from an acknowledgment of money received, to a promise to pay, being an easy one. But the development of banking on a large scale had been hindered by the weakness of public credit. Before the Revolution of 1689, public credit had depended upon the good faith of the individual monarch, and both Charles I. and Charles II. had shown how little reliance was to be placed on this by confiscating for their own purposes money lodged by the public in the Exchequer. The accession of William III. introduced the system of parliamentary responsibility and parliamentary control over the national finances, and when once confidence was established in the integrity of the State, a system of credit based upon mutual confidence between man and man became possible. Without absolute good faith in monetary matters on the part of the State, a proper system of banking cannot be developed, hence the importance of the foundation of the Bank of England.

Bishop Burnet writing at the time said: "I had heard the Dutch often reckon up the great advantages they had from their banks, and they concluded that as long as England continued jealous of the Government, a bank could never be settled among us, nor gain credit enough to support itself; and upon that, they judged that the superiority in trade must still lie on their side." The Bank of England is, needless to say, not a State Bank; it is a corporation with exceptional privileges, but it owed its inception and continued career to its position as Government creditor and Government banker.

The Bank was not established, as might be supposed, with the idea of developing English commerce by the creation of a powerful bank; it was simply an expedient for gaining money for William III.'s continental wars against Louis XIV. The Bank was to lend the Government the amount of its capital in return for certain privileges. The idea was suggested by a Scotchman named Paterson and taken up by Montague, the Chancellor of the Exchequer, with immediate success, the capital of £1,200,000 being at once subscribed. The whole of this amount was lent to the State at 8 per cent. per annum, plus £4,000 a year for the expenses of management. The Bank was empowered to issue notes to the same amount, £1,200,000, but not beyond.

The success of the Bank of England, which was a Whig scheme, induced the Tories to try a similar experiment, and they introduced and passed a measure for establishing a land bank. The scheme was a total failure, but to prevent its recurrence, the Whigs in 1708 passed an Act which forbade any other bank consisting of more than six persons, to "borrow owe or take up any sum or sums of money on their bills or notes, payable at demand, or at a less time than six months from the borrowing thereof."

This Act had a very great influence on the development of banking in this country. It did not forbid the establishment of joint stock or corporate banks, but it forbade such banks to issue notes, and such was the importance attached to this function, that no attempt was made for a century or more to found any serious rival to the Bank of England. It established the predominance of the latter, and this predominance has been the factor which has coloured the whole of the history of banking in this country. No restrictions whatever were placed upon small private bankers, and as a consequence the type of country bank in England was much less powerful and less reputable than it otherwise would have been. In Scotland and Ireland, where no such monopoly existed, a group of more or less equally powerful banks has been evolved and the small banker has disappeared. The tendency is at work now in England, and a type of bank has been developed rivalling the Bank of England in many respects; but in the past, the English system has undoubtedly compared unfavourably with that which has long prevailed in Scotland, a result due in great measure to the influence of the Act of 1708 and similar enactments confirming it from time to time. During the eighteenth century this influence was especially noticeable, and notwithstanding many honourable exceptions which have survived to the present day, widespread ruin and distress resulted from the frequent convulsions which involved whole groups of country banks.

English banking during the eighteenth century developed in three directions:

First, the Bank of England, owing to the prestige derived from its position as the banker and agent of the State, constantly increased in influence and reputation as compared with the private banks, and gradually assumed an attitude of responsibility for the financial well-being of the country. No legal responsibility was attached to their position, but owing to the vast discrepancy between their resources and those of the majority of the private banks, men grew to regard the Bank of England as the pivot of the banking system, and to look to the Bank for such assistance as it could afford in times of stress; and the Bank did not disavow this responsibility. The issue of notes was regarded as the principal function of the Bank, but at first these were not issued for small amounts, and it was not until 1759 that £15 and £10 notes were circulated, while £5 notes were not issued by the Bank of England until 1793.