From Goldsmiths to Bankers

A History of English Clearing Banks

Publisher’ Note: Today’s post contains a look at a fragment of Merchant Banking history and is brought to you courtesy of the Museum of Merchant Banking and International Trade (MoMBIT.org)

Introduction
Although banking as we know it has its roots in the seventeenth century, many of its features can be traced back to ancient times.

Before the introduction of a monetary system there were many instances of transactions involving credit in primitive communities. Early Pacific civilisations used strings of beads as a means of recording debts, even before they were a means of exchange. The Chinese dynasties are full of instances of note issues recorded back as far as 14BC under the Emperor Wu-Ti, who used a form of paper money made from stag skin.

In Greece, Babylon and the Roman Empire an extensive international trade demanded banking facilities, such as the lending of money, its exchange in foreign trade and travel, and the safe keeping of deposits. The Greek system was adopted by Egypt and also influenced Rome. The break up of the Roman Empire led to a decline in banking, and, at the same time, usury laws imposed by the Church put restraints on lending.

However, banking did not cease completely as the Lombard merchants developed banking in Venice and Genoa in the 12th century.

The Middle Ages
In medieval times an English village community had no need for ‘banking’, but for the merchants in the growing towns, trading at home and abroad, a knowledge of money became essential.

Since the Christian Church forbade the lending of money for interest, Jewish immigrants to England, who were barred from ordinary trade, living frugally and no bound by the laws of the Church, filled the need for money lenders.

Jews, like many foreigners, had come to England at the time of William the Conqueror. Saxon England had required few money lenders but the Roman and Anglican kings employed Jews to supply them with ready cash in anticipation of their revenue. The Jews became the King’s ‘sponges’ and his Exchequers, collecting his revenue and lending their own money on usury. The Jews became a hated race but survived due to their protection by the King’s troops. Many became rich, like Aron of Lincoln in the reign of King Henry II.

In 1290 to appease popular feeling the King withdrew his protection from the Jews, who were subsequently treated cruelly by their Christian neighbours and driven out of England, not to return until Stuart and Hanoverian times.

Italian influences
After the Jews were banished in the thirteenth century, a vacuum was left to be filled by Italian merchants from the great trading ports of Northern Italy. Lombard Street, which is still today the heart of London’s financial quarter, takes its name from Lombardy in Italy. Their vocabulary has left us with the words cash, debtor, creditor and ledger; the cryptic letters �.S.D. have only partly been discarded by decimalisation. Perhaps the most significant is the fact that these merchants conducted their business on benches or ‘bancos’ and it is from that work that our ‘bank’ is said to be derived.

The Italian merchants arrived at a time when England was changing from a feudal community, with virtually all its wealth in land, to a commercial society in which surplus money needed to be stored and used for profit. This happened in the sixteenth century after a long and stable government under the Tudors, which saw an age of discovery and the beginnings of colonisation; a time of expansion of trade at home and abroad. Moreover, as the Reformation spread throughout Europe, King Henry VIII, at the end of his reign in 1546, repealed the usury laws. Before this the Church disallowed the lending of money with interest; now money could be lent “upon interest according to the King’s Majesty’s Statute at 10 per cent”.

This Act was carried further by his daughter, Queen Elizabeth I, and so the foundation of the modern banking system was laid.

Englishmen of business followed the example of the Italian merchants. In particular, Sir Thomas Gresham, who as a pioneer of lending and borrowing money in the country, became the greatest of the London merchants and is now looked upon as the “Father of English Banking”. He served Henry VIII; Edward VI; Mary I and Elizabeth I and founded the Royal Exchange in Cornhill, London, as a meeting place for merchants to conduct their business.

Goldsmith to Banker
In the early days the goldsmith had exchanged foreign currency, keeping some in hand to supply travellers abroad and melting down the rest in the course of their basic trade. They had also become recognisable and reliable keepers of money and values for people without their own safe custody facilities.

This function was to become more important when, in 1640, Charles I destroyed the reputation of the Royal Mint as the best place for safe custody by seizing the gold. The Royal Mint, originally known as the “Mynte” from the Latin “moneta” meaning money, stood on Tower Hill in London and was the centre for English coinage.

Even though Charles I later repaid the money the damage had been done and the confidence lay with the goldsmiths, who paid interest and gave receipts. In 1640 Oliver Cromwell borrowed money from the goldsmiths to help his army in the Civil War, and in 1663, Charles II borrowed �1,300,000 to build a sailing fleet; this he was unable to repay and the Exchequer suspended the repayment. Anxiety naturally arose about the lender policies of the goldsmiths, since, as a side line, it was becoming a risk business, and so they were to develop ‘banks’ as separate entities from their usual business.

The new men were bankers but they were still goldsmiths. Samuel Pepys gives us some examples. In 1667 Alderman Edward Blackwell changed Dutch money for him and “discoursed with him about remitting of this �6,000 to Tangier, which he promised to do by the first post.” The goldsmiths retained their previous business in dealing with plate; as Pepys “called at Alderman Blackwell’s and there changed Mr Falconer’s state cup, that he did give us this day, for a tankard, which came to �6. 10s. 0d at 5s. 7d. an ounce, and 3s. 0d. in money, and with great content thence away to my brothers.”

Goldsmith bankers, as they were known, had developed into an efficient system of private banking in London and were to develop into the famous banking firms, of which some still exist today. Coutts & Company, now affiliated to the National Westminster Bank, dates from 1692. The firm of Duncombe and Kent at the Grasshopper in Lombard Street, is now part of Barclays (formerly Martins). Barclays itself was incorporated in 1896 by the amalgamation of twenty private banks, among which was Gosling & Sharpe, descended from the famous goldsmith shop of “Ye Three Squirrels” in Lombard Street, which flourished under Major Henry Pinckney in Cromwell’s time.

The receipts given by goldsmiths for deposits have been compared to modern day cheques. However, it would seem that their similarities, as with Bills of Exchange, was their negotiable nature. Drawn notes only became known as cheques a century later.

The cheque could be compared with a drawn note, by which a depositor addressed a letter to his goldsmith authorising the payment to his creditor of the sum owed. The creditor would then take this ‘note’ to the depositor’s goldsmith and there receive the sum in cash.  READ MORE

WHEN LOOKING FOR OVERSEAS INVESTORS, NOT ALL THAT GLITTERS IS GOLD

When it looks like a rose and smells like a rose, is it really a rose?

One of the biggest time wasters in international business is pursuing what I call the Potemkin village opportunities (after Grigori Aleksandrovich Potemkin who erected ornate fake villages to impress Catherine the Great when she toured Ukraine and Crimea). So many things appear glamorous and outsized. But talk of fast money in the air is usually plagued with scams, promoters, crooks, gangsters, dreamers and time wasters. Common characteristics of a booming market, they are no different from the fast talking stock promoters of the Gold Rush, the railroad boom in England, or the Internet bubble.

So here are some proven tactics, which will help you avoid time wasters.

Be many times more skeptical towards any project abroad than you would be evaluating a similar project at home.  Do not be dazzled by official looking letters with seals and wink-wink promises that the promoters have “everything under control.” Demand the due diligence upfront. If it is not available to your satisfaction, walk away. If it sounds even remotely too good to be true, run, don’t walk, because it definitely is.

Develop a broad in-country network of contacts and run any potential projects by them. You will be surprised how small most of emerging markets really are and how well-informed the people in them are.

Scour the Internet and poll your contacts that do business abroad about the typical scams prevalent in your target country. Learn about them, how they work and avoid them like the plague.  (Excerpted from the Fluent In Foreign Business Ch 17 ) The article below is a very good illustration on the importance of doing one’s due diligence when seeking to attract a foreign investor who “glitters” on the surface.

Confidence Ebbs in Chinese Tycoon’s Ambitious Deals

(READ MORE)