Banking A bit of History


Origin of Banking. Banks of Venice, Genoa and Barcelona.

In every country which has made any considerable advances in civilization, the necessity that has been felt of a class of persons devoted to the exercise of several of the functions of modern banking, has not failed to produce such a class.
Thus it appears that among the Greeks and Romans there were persons who made it a business to exchange one kind of coin for another, and who were in the habit of receiving money for safe keeping from the great proprietors and traders. Payments at Rome were frequently made by checks on these bankers, or transfers in their books.
With the revival of trade, during the middle ages, this business of banking again revived. The invention of bills of exchange extended the principle of payment by check, or transfer on a banker's books, from the domestic trade of a single city, to the commerce between independent and distant states. The Jews, whose religion formed a bond of connection and intimacy between all the members of that persuasion, however distantly they might be separated, seem first to have introduced the business of exchange and banking into the states of modern Europe. When the prejudices of the times, irritated by their growing wealth and importance, caused the banishment of the Jews from many of those states, they were succeeded as bankers by citizens of the free Italian states and cities, known by the general name of Lombards.
It was about the middle of the twelfth century, at Venice, which in those times stood at the head of European commerce, that the first banking institution was established on a large scale, or which attained any considerable notoriety. In its origin, however, it had nothing to do with the business of banking. It took its rise, like most other institutions of the nature of national banks, not from the necessities of trade, but from the necessities of the government.
The republic being engaged in war, and falling short of funds, had recourse to a forced loan. The contributors to that loan were allowed an annual interest of four per cent on the sums they had been obliged to lend; certain branches of the public revenue were set aside for the payment of that interest; and a corporation, entitled the Chamber Of Loans, was erected for the express purpose of looking after this matter, managing those branches of revenue the income of which had been assigned to the lenders, and attending to the punctual payment of the interest, as it fell due.
So far there was no bank. But the Chamber, in the course of its business, sometimes had occasion to purchase and sell bills of exchange, and as the means of the corporation were undoubted, and its character highly respectable, it was soon seen that its name upon a bill gave additional credit, and, consequently, additional value. The Chamber generally had funds on hand. It was found an advantageous investment to employ these funds in the business of buying and selling exchange; and in process of time, the Chamber became a regular dealer in that branch of business, that is, it adopted, to a certain extent, the business of Discount, or lending money upon mercantile paper, a leading branch of the business of a modern bank.
By degrees the Venetian merchants fell into the habit of placing their money with the Chamber for safe keeping, which thus adopted the business of Deposit, a second branch of modem banking, which is rendered subsidiary to the first, by increasing the amount of the money which a bank is able to lend.
It was presently found that a credit for money deposited in the Chamber was quite equivalent to so much cash in hand; and the custom was introduced of effecting payments by the transfer of these credits from the account of the payer to that of the receiver. In this way the trouble of counting large sums of coin, and of transporting it from one part of the city to another, was wholly saved. So great were the advantages and convenience of this method of doing business, that what at first had been voluntary on the part of the merchants, was afterwards enforced by law. Every merchant was obliged to open an account with the bank, and all payments of bills of exchange, and in wholesale transactions, were required to be made there, and in the manner just described. This method of effecting payments, though it was no new thing, but the mere adoption of a custom which, as we have seen, had been very anciently practised, was plainly a rude approach towards the invention of bank notes, the Issue And Circulation of which constitutes the third and last principal branch of the business of modern banks. The issue of circulating notes, like the business of deposit, has been adopted on account of the increased power of extending its loans thus given to a bank. The invention of bank notes, as we shall see hereafter, was only a new modification of the idea which had been first developed by the invention of bills of exchange.
The bank of Venice long remained without a rival. But about the beginning of the fifteenth century, similar institutions were established at Genoa and Barcelona, cities at that time the pride of Europe, and second only to Venice in extent of trade. The Table Of Exchange at Barcelona, and the Chamber Of St. George at Genoa, were almost exact copies of the bank of Venice, and soon obtained almost equal credit and celebrity. Neither of these banks is any longer in existence. The bank of Venice fell at the same time that the Republic lost its existence as an independent state.


Banks of Amsterdam and Hamburg.

It is not paper currencies alone that are subject to depreciation. Currencies of coin are liable to be affected in the same way. It was formerly a common expedient with states and princes to debase the coin, that they might the easier pay their debts in a depreciated currency; and fluctuations as violent, in prices and in trade, have been thus produced, as were ever caused by depreciations of paper money.
The English pound and the French livre were originally a pound troy of silver; but the pound has depreciated till its value is less than five dollars, while the livre is hardly worth twenty cents.
But there is another cause for the depreciation of a metallic currency, independent of the dishonesty of governments. Coins are worn and wasted by circulation; they are clipped by the avaricious; and by these means their real worth sinks below their nominal value.
At the beginning of the seventeenth century, the Dutch stood at the head of European commerce; and Amsterdam, the capital of Holland, was the central point of trade. The currency of Amsterdam consisted not only of its own coins, but of the coins of all the neighboring countries; and many of the pieces were so worn and mutilated as to fall short several per cent in actual value. As this depreciated coin was commonly received at par, in all small transactions, it was impossible to get any new coin into circulation; foT, as fast as it was furnished by the mint, it was collected, nielied down, exported as bullion, and its place supplied by a fresh importation of light coin. But payment of bills of exchange would only be accepted in the legal money of the city; and great difficulty was often experienced in procuring such coin as would be received; or if the bills were made payable in currency, their value, in consequence, was fluctuating and uncertain.
To remedy these evils, the authorities at Amsterdam; resolved to have recourse to that system of bank payments, which had so long been in use at Venice. This was the origin of the Bank or Amsterdam, established in 1659. The original subscribers to the bank paid into its vaults certain sums in current coin, for which, they received a credit on the books of the bank, equivalent to the intrinsic value of the deposit. These credits were known as bank money; and it was enacted by the legal authorities, that all payments of bills of exchange exceeding six hundred guilders in value, should be made in this bank money, which was equivalent to, and which represented, the standard coin of the city.
Thus was created a perfectly uniform currency for the transactions of commerce; and bank money rose at once to an agio, or premium above the current coin. This premium varied from time to time. It may be looked upon as having been nearly equal to, and generally as representing, the average depreciation of the current coin below its nominal value.
The Bank of Amsterdam, after its first establishment, admitted no new subscribers; but it sold bank money to all who wished to purchase, at a premium varying with the market price. It also sold current coin, when it was needed for exportation, upon receiving an equivalent transfer of bank money. It received coin and bullion upon deposit on the following terms. When the coin or bullion was deposited, a certain sum of bank money was transferred to the account of the depositor, equivalent to the current value of the coin, or the mint price of the bullion, with a small deduction by way of premium to the bank, varying according to circumstances. At the same time a receipt was issued to the depositor, entitling him or any bearer to withdraw the coin or bullion from the bank, at any time within six months from the date of the receipt, first transferring to the bank the same sum of bank money which had been granted to the depositor, and paying a commission for the keeping, of one quarter per cent for coin and silver bullion, and one half per cent for gold bullion. If the deposit was not demanded within six months, it became the property of the bank.
The profits of the bank were made by these commissions, and by the premium it obtained on the sale of coin, bullion, and bank money. It made no loans; and therein differed essentially from our modern banks. It was in fact merely a bank of deposit and issue. It professed to keep in its vaults a sum of coin and bullion, equivalent to the whole amount of bank money. Such was universally believed to be the fact; though, according to that foolish system of secrecy once thought essential to trade, the actual state of its affairs were kept a profound secret from all but the magistrates of the city, who were a sort of self-perpetuating oligarchy, and ex officio managers of the bank. These managers, availing themselves of this shield of secrecy, in the course of fifty years, commencing about the middle of the eighteenth century, privately lent to the Dutch East India Company, the city of Amsterdam, and the states of Holland and Friezland, upwards of ten millions of florins. This procedure, which transpired when Holland was conquered and occupied by the French revolutionary armies in 1795, destroyed the credit and caused the downfall of the Bank of Amsterdam.
This institution, as will be obvious from the above account of it, bore even less resemblance to what we understand by a bank, than the bank of Venice. The principal function of a modern bank is, to lend money. The Bank of Amsterdam, while in discharge of its proper functions, could make no loans, and those it did make were wholly illegal and irregular.
The great accumulation of coin and bullion in the vaults of the bank, equivalent, or which ought to have been equivalent, to the whole amount of bank money in existence, was liable to serious objection, not only as a burying of treasure, which might have been usefully employed, but still more so from its great liability, and the powerful temptation it held out, to peculation and secret misappropriations, such as in fact did finally cause the ruin of this bank.
Banks on the same principle with the Bank of Amsterdam were soon afterwards established at Hamburg and some other of the German free cities. The other banks of this description are all dissolved, but the Bank of Hamburg still exists, and enjoys a high reputation. Its managers are chosen, for short periods only, by the owners of bank money; and its affairs are conducted with the greatest publicity.


Bank of England.

The Bank Of England, first chartered in 1694, is the prototype and grand exemplar of all our modern banks; its history, therefore, will deserve the more particular attention.
The original capital of this bank was £1,200,000 sterling. This capital did not consist of money, but of government stock. The subscribers to the bank had lent the government the above sum of £1,200,000 at an interest of eight per cent, receiving besides an annuity of £4,000 and the privilege of acting as a banking company for the period of twelve years. Thesehard terms are a pretty clear proof how low was the . credit of King William's government in the first years of its establishment.
The business which this new corporation principally intended to do by virtue of its charter, was, the discount of bills of exchange. But as its whole capital was lent to the government, how was it to do any business at all? This difficulty was met by the invention of Bank Notes. Instead of giving coin for the bills which it discounted, the Bank gave its own promissory notes, which, being made payable at the Bank on demand, were received by the merchants, and circulated among them as money. The issue of such notes, to the amount of the capital lent to the government, was authorized by the charter, and in this issue of notes the peculiarity of this institution consisted.
The conveniency of these notes gradually spread their use over the kingdom; and as the capital and credit of the Bank increased, they continued to gain an increasing circulation. Previous to the year 1796, that circulation was generally about equal in amount to the capital of the Bank, for the time being. Since that period it has greatly fluctuated, but of late years has generally amounted to about twenty millions of pounds sterling. The Bank is obliged to keep on hand a large sum of coin to meet the payment of such of its notes as may be presented for that purpose; but as a large portion of these notes are constantly circulating from hand to hand, and not at all likely to be presented for payment, the sum of coin kept in the Bank is always much smaller than the amount of notes in circulation. The interest on the difference between these two sums is evidently so much net gain to the Bank.
The charter of the Bank of England has been renewed from time to time, always on condition of some new loan to the government. But the credit of the government had so much improved that the Bank has of late been obliged to purchase the renewal of its charter, not by loans at eight per cent, but at a very moderate rate of interest; and sometimes without any interest at all, that is, by gifts to the government. Its capital was increased at different times, by calls upon the stockholders, or the creation of new stock, till, in the year 1762, it reached the amount of £11,642,000, or about fifty-six millions of dollars. It remained at this amount till the year 1S16, in which year, out of the reserved profits realized by the Bank, an addition of twenty-jive per cent was made to the stock of the several proprietors, hy which addition the aggregate capital was raised to the sum of £14,552,000, or about seventy millions of dollars, at which amount it still remains.
The whole of this capital is lent to the government, at an average interest of about three per cent. There is beside an additional sum, variable in amount, but generally about three millions of pounds, consisting of reserved and undivided profits, called the rest, which ought to be considered as a part of the capital of the Bank, and indeed is the only part of its capital actively employed in the business of banking.
It is upon the vast amount of its circulation and deposits, generally from twenty-five to thirty millions sterling, that the power and profits of this great corporation mainly depend. The ordinary annual expenses of the Bank are stated at about £500,000, and its ordinary net profits at about £1,200,000. The annual dividend is, at present, eight per cent.
The whole management of the affairs of the Bank of England is in the hands of the Court or Board of Directors, twenty-four in number, to whom are added a governor and deputy governor, chosen by the directors. Eight of these directors go out of office annually, and eight new ones are elected in their places. This choice is nominally made by the court or meeting of the proprietors of bank stock, but in fact by the directors themselves. Whenever a choice is to be made, a list of eight individuals, sanctioned by the directors, and known as the House list, is sent to the court of proprietors, and these eight candidates, thus pointed out, are always elected.
The Court of Proprietors meets half yearly, but the authority it exercises is hardly more than nominal, the whole actual power being in the hands of the Court of Directors, which meets 'weekly. A select committee of three, to which the governor or deputy governor is added, conducts the daily business of the Bank, in the intervals between the sittings of the court. In cases of emergency, the whole court is summoned to meet, by the governor. The labors of the select committee, above mentioned, are shared and relieved by another committee, consisting of nine or ten directors, which, from sitting on Wednesdays, is called the Wednesday committee, and to which are referred all the London bills offered for discount.
Though the Bank of England is closely connected with the government, and is at present rather an institution for the management of the public finances, than a mere commercial establishment, still the ministers possess no legal control over it, of any kind. They have not even any legal claim to any special information concerning the state of its affairs. Such information however is from time to time confidentially communicated, the ministry and the bank directors finding it for their mutual interest to maintain a good understanding.
Formerly the most profound secrecy was observed respecting all the affairs of this Bank. So cautious were the directors in this matter, that it came to be a proverb, that if you asked a bank director "what o'clock it was," he would reply by begging " to be excused from answering." However, at the last renewal of its charter, in 1833, it was required to make certain weekly returns to the chancellor of the exchequer, of the respective amounts of its securities, bullion, deposits, and notes in circulation, which statements being consolidated and averaged, are published monthly in the London Gazette, by which means the public is enabled to gain some little insight into the affairs of the Bank. It is generally agreed, however, that the information to be gleaned from these returns is very scanty and uncertain.
As the whole of the capital of the Bank of England is lent to the government, its mercantile business is carried on by means of the " rest," the circulation, and the deposits. But even these funds are principally employed in the service of the government, the business of the Bank consisting of the following branches, viz.
1st. It receives, keeps, and pays out the public revenue.
2d. It has the management of the public debt, and the payment of the dividends upon it, as they become due, for which service it receives from the government an annual stipend.
3d. It advances money to the government in anticipation of the taxes, which advances are paid off as the revenue comes in, which advances are generally secured by the deposit of exchequer bills, which are treasury notes, bearing interest, and payable at the pleasure of the government.
4th. It circulates and discounts exchequer bills, and by the credit which it thus gives to them, it enables the government to raise money by the issue of these bills, as its exigences demand.
5th. It makes advances to the London bankers and the country banks upon the deposit of bills of exchange and other securities.
6th. It discounts short bills of exchange with three approved names upon them. This branch of the business of the Bank is quite limited, the total amount of bills discounted not generally exceeding at any time two or three millions sterling. Even of this small amount of mercantile loans, a large portion is lent to the London private bankers upon the pledge of paper discounted by them, they paying to the Bank a somewhat smaller rate of interest than they receive from their customers; a circumstance which goes far to explain the disposition of the London bankers to sustain the monopoly of the Bank of England.
At times, with an alleged design to regulate trade or to relieve commercial distress, the Bank has severely restricted its mercantile loans, or greatly enlarged them. It remains however a very serious .question, whether its interference in this way has not been more an evil than a good.
What the advocates of the Bank of England principally rely upon in its defence is, the alleged fact of its furnishing a safe and uniform paper currency, such, it is asserted, as cannot be had in any other way. That however is an open question; this alleged fact being doubted and denied by many.
The paper of the Bank of England is alone receivable in all payments made to the government, and by the last renewal of the bank charter, in 1833, this paper is made a legal tender in all payments whatsoever, except those made by the Bank itself.
The Bank of England was projected and first put into operation by William Patterson, an ingenious Scotsman. After his secret was got at, as often happens in like cases, he was excluded by a faction of the stockholders, more wealthy and influential than himself, from participating in its management. He then returned to Scotland, and set on foot the famous but unfortunate Darien Company, which was brought to premature ruin through the narrow jealousies of the English merchants. He died old, poor, and neglected, too often the case with inventors and projectors, who generally sow seed, of which inferior men reap the harvest.

No comments:

Post a Comment