A Brief History of Banking

In Britain, the modern age of banking began in 1640 when King Charles I, needing cash to pay the (English) army that he was raising against Scotland (of which he was also king!), seized the gold bullion that many merchants and nobles had placed in the Tower of London for safe-keeping.

The 2nd Bishop’s War (founded on a difference of religious opinion) soon petered out and, with Parliament and its powers of taxation recalled, the bullion was returned to its owners.

in 1642, further warfare broke out with the Great Civil War between the King and Parliament. London was the stronghold of Parliament and was the safest city in the Kingdom. So those who desired not to have their bullion seized by one side or the other placed their gold in the hands of goldsmiths in the city, who naturally had their own methods of safe-keeping.


In exchange for this gold, the depositors received ‘goldsmith’s notes’. These notes, the first bank notes, once their veracity was established proved to be very popular with their recipients, as gold was heavy and cumbersome. Soon, these notes began to be used as currency, with everyone happy to accept that each was backed 100% by a deposit of gold.

Except that once the goldsmiths realised that few people actually wanted to redeem their notes, they began very secretly to issue more than they had gold to back them. This newly-created money was then lent out to people who wished to borrow it at a rate of interest. This was a practice of highly dubious legality, but its practice was never tested in court.


Then in 1694, this practice of creating money out of thin air was effectively legitimised with the founding of the Bank of England. It was not the first bank to be founded (Coutts was founded in 1690), but the nature of its creation was central to the role that banks went on the play in the supply of money.

In 1694, England was still a predominantly rural country. Most people still grew their own food, built their own homes, collected their own firewood for fuel, drew their own water from wells and frequently made their own clothes. Money was not the necessity that it is today for most people, but it was still needed in large amounts when the nation went to war.

The then King (William III) needed money to fight his war against the French. Both the King’s capacity to tax and his authority was limited, so the quickest and easiest way to acquire his needs was to borrow. A consortium of six London goldsmiths, lead by one William Paterson, were given royal authority to the create the first ‘joint- stock’ bank on the condition that they lent the King £1.2 million in gold at 8%. This was the start of the National Debt.

More importantly, however, they were given the authority to create £1.2 million in paper money for private lending. This paper money was theoretically backed by the gold, but as that had been lent to the King, it meant that the same sum of money was lent out twice over! The validity of this practice was never tested in a court of law, as it remained a matter that was hidden from the general public. Even today, the banks like to draw a veil over their activities, ostensibly for the benefit of their customers.


The 18th and 19th century saw the growth and development of the British banking system, which soon spread around the world with Empire. It also saw the decline in the use of precious metals (gold and silver) as currency and the increasing confidence in paper money and base metal coins.

Although the Britannia gold bullion coins were issued as recently as 1987, these never entered common circulation. The last gold coins in common use, £1 gold sovereigns, disappeared during the First World War (1914-18) and Britain abandoned the direct tie of her currency to gold in 1931. The words on Bank of England notes ‘I promise to pay the Bearer on demand the sum of £**’ are now quite meaningless as the paper note itself has become the ultimate means of redemption. It is legal tender, and only it is (together with coins for small sums). The last indirect connection to gold ended in 1971, when the US treasury bond was no longer redeemable in gold.

As new banks sprung up and grew, they each issued their own bank- notes. Unfortunately, problems sometimes occurred if a bank issued too much of its own paper money over its stock of gold and silver coins. The first inkling of problems would cause a mad panic as people rushed to exchange their notes for ‘proper money’, thereby creating the very collapse that they had tried to avoid!

Because of the potential problems with these crises, the Bank of England, although itself a private bank, because of its special relationship with the government became the ‘lender of last resort’. Its notes were almost as good as gold, and it lent to those banks that created a ‘liquidity’ crisis for themselves by lending more money than they had gold to meet the demand.


Throughout the 19th century, the other banks were persuaded to stop creating their own currencies. The last English bank to do so ceased in 1921, although the privately owned banks in Scotland, Northern Ireland and the Isle of Man and the State’s owned banks of the Channel Islands do so to this day. Their currency, although commonly acceptable in England, is not legal tender. (‘Legal tender’ is defined as that money which cannot be refused for the settlement of a debt.)

Although deprived of the means of creating their own bank-notes, the private banks were not stopped the power to create money. Just as Bank of England notes were replacing gold as the ultimate form of redemption, so bank deposits replaced bank-notes as the means of money creation.

To enable people to spend the money that banks created as loans in their accounts, the banks created the cheque system. A cheque was effectively a single use note drawn against an individual’s account for any amount required.

In 1945 the Bank of England was nationalised. It became an agency of the government and so the notes that it created effectively amounted an income to the government that it could spend for the benefit of the nation without need of taxation or borrowing.


Although the nature of money has changed over the past three centuries, making distinctions between different types of money, difficult to compare, it is useful and valid to draw a distinction between publicly created money and privately created money, and by this distinction the growth of privately created money within the economy can be clearly seen.

From its beginnings in 1694, privately created money grew slowly over the next 250 years as a proportion of the total money until in 1946, the year after of the nationalisation of the Bank of England, it amounted to some 54%. In the last 60 years, it has grown rather more rapidly until it now exceeds 97%



The Money Reform Party exists to educate the British people and their politicians about the money system and to campaign against the creation of the money supply by the private banks.

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