In the early 21st century, the authority to issue banknotes lies with central banks or governments, and banking is a global business whose success or failure has international consequences. However, the major banks in Britain have evolved from more humble origins of small businesses closely tied to their local roots, and issuing their own banknotes for local circulation. From scattered beginnings in the late 17th century, through expansion in the Industrial Revolution, then regulation and amalgamation in the later 19th and early 20th centuries, these banks reflected and influenced Britain’s wider economic development from local loyalties to large-scale national and international interests.
In London and the country, banking developed piecemeal from financial services offered as part of different businesses. Early in the reign of Elizabeth I (1558–1603) the word ‘banker’ was used to refer to an exchange broker. Over the next century, others whose work involved handling valuables or money – for example, merchants, lawyer’s agents, or goldsmiths – began acting as financial middlemen. By the late 17th century, services available included loans, interest-bearing deposits, foreign coin exchange, and the forerunners of modern banknotes. These took the form of receipts given by financial agents for money or valuables placed with them for safekeeping. The receipts were, in effect, personal contracts, their value and validity dependent upon the trust between customer and agent. Where both were known, or at least reputed, to be financially sound, the receipts could be endorsed by being signed and dated and passed on to a third party, so beginning a very limited circulation of paper money. Today’s mass circulation of modern currency may seem far removed from these personal arrangements, but the underlying principles are essentially unchanged. When the Bank of England was founded in 1694, it issued its first banknotes against the value of cash deposits: today the money we withdraw from banks is related to the amount held in our individual accounts, albeit with the leeway of overdraft or credit facilities. And, as was made very clear late in 2008 by the fallout from the credit crunch, banks still depend on reputation and public confidence.
The establishment of the Bank of England stands as a landmark in the history of British banking, but it was initially very much part of the London financial scene rather than the national bank we think of today. Outside London, country banks developed as an integral part of local economic growth and were often of more immediate local importance than the remote Bank of England. Landowners, manufacturers and traders began offering financial services as a by-product of their other interests, helping to meet local needs for payments and, through connections with private banks in London, providing a means of transferring funds across the country. Records suggest that country banking initially grew slowly and sporadically. The earliest known example is Thomas Smith, a cloth merchant in Nottingham, who was making loans to customers in the 1650s ; by 1727 Smith’s banking activities had become a separate enterprise, distinct from the textile business. Only one other bank, in Exeter, is known before 1700 and the philosopher Edmund Burke, travelling in England in 1750, remarked on finding ‘less than a dozen bankers’ shops’ . His observation is highly anecdotal; nonetheless, it indicates that banking was still a fledgling profession outside the capital.