A History of Banking

By Tim Lambert

The Beginning of Banks

The idea of banks began as long ago as 1,800 BC in Babylon. In those days moneylenders made loans to people. In Greece and Rome, banks made loans and accepted deposits. They also changed money. (In the Bible Jesus famously drove the money changers out of the temple in Jerusalem).

However, with the collapse of the Roman Empire trade slumped and banks temporarily vanished. However, banking began to revive again in the 12th and 13th centuries in the Italian towns of Florence and Genoa.

In the 16th century, a German family called the Fuggers from Augsburg became very important bankers.

The Beginning of Banks in England

In England banks developed in the 17th century. Sometimes people deposited their money with goldsmiths for safety. The goldsmiths issued a note promising to pay the bearer a certain sum on demand. In time people began to exchange these notes instead of coins because it was easier and safer. Goldsmiths began to lend the money deposited with them in return for a high rate of interest. They also paid interest to people who deposited money to attract their savings.

However not only individuals borrowed money. Governments also needed to borrow, especially in wartime. The government borrowed money from wealthy individuals and later repaid them with interest from taxation.

However, at the end of the 17th century, the cost of fighting a war with France was colossal. So in 1694, the Bank of England was founded to provide a loan to the government.

A group of financiers joined together to provide the money required to set up the bank and loan the government 1.2 million pounds (a massive sum in those days). In return, the bank received an 8% interest on the loan and the right to issue notes. The Bank of England was also allowed to lend money and buy and sell gold.

The Bank of England is sometimes called the ‘Old Lady of Threadneedle Street’. It moved to Threadneedle Street in 1734. Meanwhile, the Bank of Scotland was founded in 1695.

In 1708 a law forbade banks with more than 6 partners to issue their own notes. (Although small banks could still do so). However, the Bank of England mostly confined its operations to London. In the late 18th century many small banks were founded in the provincial towns. the first traveler’s cheques were issued in England in 1772.

However, banking crises are nothing new. In 1793, in 1814-1816, and 1825 there were ‘runs’ on banks when people lost confidence and tried to withdraw their money. The result each time was a wave of bank failures.

In 1826 the law was changed to allow large banks with many shareholders to form outside London. Many of the small country banks merged with the large banks.

In 1833 banknotes issued by the Bank of England were made legal tender (they must be accepted as payment for a debt).

The first commercial bank in the USA was the Bank of North America, which opened in 1782.

Modern Banks

In Britain, modern banks began with the Bank Charter Act of 1844. The Act split the Bank of England (which was still legally a private bank) into two departments – a banking department and an issuing department. From then on the Bank of England could only issue notes if they were backed up by gold or government securities.

The Bank Charter Act also forbade new banks to issue banknotes. When banks merged they lost the right to issue banknotes. So gradually the Bank of England became the only bank in England that could issue notes.

In Britain in the 19th century, some rich bankers were women. Among them were Sarah Sophia Child-Villiers (1785-1867) and Harriot Beauclerk (c.1777-1837).

At the end of the 19th century and in the 20th century many banks merged until in the late 20th century banking in Britain was dominated by the ‘big four’, Barclays, Lloyds, Midland, and National Westminster.

In the USA Louise Weiser became the first president of a bank in 1875. Maggie Lena Walker became the first woman to charter a bank in 1903.

In 1946 the Bank of England was finally nationalized. Also in 1946, the International Bank for Reconstruction and Development (otherwise known as the World Bank) was formed.

In 1967 Barclays Bank installed the first cash dispensing machine in Britain at a branch in Enfield, London. Internet banking began in Britain in 1997.

Last revised 2024