That part of the business of banking which consists in the borrowing of money, with a view of lending it again at a higher rate of interest, does not appear to have been carried on by bankers until the year 1645, when a new era occurred in the history of banking. The goldsmiths, who were previously only money-changers, now became also money-lenders. They became also money-borrowers, and allowed interest on the sums they borrowed. They were agents for receiving rents. They lent money to the king on the security of the taxes. The receipts they issued for the money lodged at their houses circulated from hand to hand, and were known by the name of "goldsmiths' notes." These may be considered as the first kind of bank notes issued in England. The following account of these banking goldsmiths is taken chiefly from Anderson's "History of Commerce."1
1 Anderson's History of Commerce, vol. ii. page 192.
When our merchants became enriched by commerce, they wished for a place of security in which they might deposit their wealth. Hence they usually sent their money to the mint in the Tower of London, which became a sort of bank. The merchants left their money here when they had no occasion for it, and drew it out as they wanted it. But in 1640, King Charles I. took possession of £200,000 of the merchants' money that had been lodged in the mint,2 and from that period the merchants kept their money in their own houses, under the care of their servants and apprentices. On the breaking out of the civil war between Charles I. and the Parliament, it became very customary for the apprentices to rob their masters, and then run away and join the army. As the merchants could now place no confidence either in the public authorities or in their own servants, they were under the necessity of employing bankers.
These bankers were the goldsmiths. Previous to this period, the business of the goldsmiths was similar to what it is in our own time. They bought and sold plate and foreign coins; they procured gold to be coined at the mint, and supplied refiners, plate-makers, and others with the precious metals. To deal in gold and silver oullion to any large extent, implies the possession of considerable wealth; and as all the money in the country then consisted of gold and silver coin, it was natural enough that the goldsmiths should become the bankers of those who had money for which they had no immediate use.
1 Vol. ii. page 402.
2 This money was in no long time repaid.
An account of the bankers of those days is related in a curious pamphlet, published in the year 1676, and entitled, "The mystery of the new-fashioned Goldsmiths or Bankers discovered." The author observes that: -
"This new banking business soon grew very considerable. It happened," says he, "in those times of civil commotion, that the Parliament, out of plates and old coins brought into the mint, coined seven millions into half-crowns; and there being no mills then in use at the mint, this new money was of a very unequal weight, sometimes twopence and threepence difference in an ounce, and most of it was, it seems, heavier than it ought to have been in proportion to the value in foreign parts. Of this the goldsmiths made naturally the advantage usual in such cases, by picking out or culling the heaviest, and melting them down and exporting them.
"Moreover, such merchants' servants as still kept their masters' running cash, had fallen into a way of clandestinely lending the same to the goldsmiths at fourpence per cent. per diem, who, by these and such-like means, were enabled to lend out great quantities of cash to necessitous merchants and others, weekly or monthly, at high interest, and also began to discount the merchants' bills at the like or higher interest.
"Much about the same time, the goldsmiths (or new-fashioned bankers) began to receive the rents of gentlemen's estates remitted to town, and to allow them and others who put cash in their hands some interest for it, if it remained but a single month in their hands, or even a lesser time. This was a great allurement for people to put money into their hands, which would bear interest till the day they wanted it; and they could also draw it out by one hundred pounds or fifty pounds, etc, at a time, as they wanted it, with infinitely less trouble than if they had lent it out on either real or personal security.
"The consequence was, that it quickly brought a great quantity of cash into their hands, so that the chief or greatest of them were now enabled to supply Cromwell with money in advance, on the revenues, as his occasion required, upon great advantages to themselves.
"After the Restoration, King Charles II. being in want of money, the bankers took ten per cent. of him barefacedly and by private contracts; on many bills, orders, tallies, and debts of that king, they got twenty, sometimes thirty per cent., to the great dishonour of the government.
"This great gain induced the goldsmiths more and more to become lenders to the king, to anticipate all the revenue, to take every grant of Parliament into pawn as soon as it was given; also to outvie each other in buying and taking to pawn bills, orders, and tallies, so that in effect all the revenue passed through their hands."
The "new-fashioned bankers" were also attacked by Sir Josiah Child, in his "New Discourse of Trade," in the following terms: -
"And principally this seeming scarcity of money proceeds from the trade of hankering, which obstructs circulation, advanceth usury, and renders it so easy, that most men, as soon as they can make up a sum of from £50 to £100, send it in to the goldsmith, which doth and will occasion, while it lasts, that fatal pressing necessity for money visible throughout the whole kingdom, both to prince and people.
"A seventh accidental reason why land doth not sell at present at the rate it naturally should in proportion to the legal interest, is that innovated practice of bankers in London, which hath more effects attending it than most I have conversed with have yet observed; but I shall here take notice of that only which is to my present purpose, viz.: -
"The gentlemen that are bankers, having a large interest from his Majesty for what they advance upon his Majesty's revenue, can afford to give the full legal interest to all persons that put money into their hands, though for never so short or long a time, which makes the trade of usury so easy and hitherto safe, that few, after having found the sweetness of this lazy way of improvement (being by continuance and success grown to fancy themselves secure in it), can be led (there being neither ease nor profit to invite them) to lay out their money in land, though at fifteen years' purchase; whereas before this way of private banking came up, men that had money were forced often times to let it lie dead by them until they could meet with securities to their minds, and if the like necessity were now of money lying dead, the loss of use for the dead time being deducted from the profit of six per cent. (communibus annis) would in effect take off £1 per cent. per annum of the profit of usury, and consequently incline men more to purchase lands, because the difference between usury and purchasing would not, in point of profit, be so great as now it is, this new invention of cashiering having, in my opinion, clearly bettered the usurer's trade one or two per cent. per annum. And that this way of leaving money with goldsmiths hath had the aforesaid effect, seems evident to me from the scarcity it makes of money in the country; for the trade of bankers being only in London, doth very much drain the ready money from all other parts of the kingdom." 1
In the year 1667 occurred the first run of which we have any account in the history of banking. The business of the new-fashioned bankers had increased so fast, and they had become so numerous, that their trade was supposed to be at its height in this year; when, during the time that a treaty of peace was under consideration, the Dutch fleet sailed up the Thames, blew up the fort of Sheerness, set fire to Chatham, and burned four ships of the line. This disaster occasioned great alarm in London, particularly among those who had money in their bankers' hands, as it was imagined that the king would not be able to repay the bankers the money they had lent him. To quiet the fears of the people, the king issued a proclamation, declaring that the payments to the bankers should be made at the Exchequer the same as usual.
1 See page 56.
In 1672, five years afterwards, a much greater calamity befell the bankers: for King Charles II. shut up the Exchequer, and would not pay the bankers either the principal or the interest of the money which he had borrowed. The amount then due by the king was £l,328,526, which he had borrowed of the bankers at eight per cent., and which he never repaid.
The mode in which the bankers transacted their loans with the king was this: as soon as the parliament had voted to the king certain sums of money out of particular taxes, the bankers advanced at once the money voted by the parliament, and were repaid in weekly payments at the Exchequer as the taxes were received. The mode of making the repayments and the rate of interest were agreed upon at the time of making the loan.
The shutting up of the Exchequer occasioned great distress among all classes of the people. Persons not in trade had then no way of employing their money with advantage but by placing it out at interest in the hands of a banker. Hence, not merchants only, but widows, orphans, and others, became suddenly deprived of the whole of their property. They came in crowds to the bankers, but could obtain neither the principal nor the interest of the money they had deposited. The clamour became so great, that the king granted a patent to pay six per cent. interest out of his hereditary excise; but he never paid the principal. But, about forty years afterwards, the parliament made arrangements by which the debt was assumed to be discharged.1
The business of banking remained entirely in the hands of the new-fashioned bankers until the establishment of the Bank of England, in the year 1694.
The transmission of money was in ancient times effected by sending a messenger with the coin. During the Middle Ages, it was accomplished by means of bills of exchange, which were purchased by merchants. Ultimately, a class of persons carried on this kind of traffic, and purchased or sold bills to suit the convenience of parties who wished to deal with them. The pecuniary transactions of independent nations are still adjusted in the same way. But the transmission of money from one part of the country to another part, is more frequently effected upon the principle of transfers, without the passing of any bill. I have explained this mode of operation in my "Practical Treatise on Banking."
1 That is, it still forms part of the National Debt. The creditor never received a farthing.