By Roger Outing

The Bank of England was established, on joint stock principles, in 1694. By an Act of 1708 all other banks were prohibited from having more than 6 partners.  This legal restriction, designed to protect the Bank of England, shaped the development of English banking until 1826 when the restriction was finally removed.  Throughout the 18^th Century English private banking was shaped just as much by vested interest and political expediency as by economic forces or the requirements of commerce and trade.   However, the Bank of England had no monopoly or privilege concerning the issue of banknotes.  Other banks in London and the Provinces, all of 6 partners or less, could and did issue their own notes.

Private banks developed initially in London. They built upon the expertise and services that had first been developed by the ‘Goldsmith Bankers’ in the thirty years preceding the establishment of the Bank of England. 

Child’s Bank in London was a famous example being established by Francis Child in the 1680’s.  By the 1720’s Child’s Bank was regularly issuing printed banknotes with the value of each note being handwritten at the time of issue.  Banknotes from Childs bank were held in the highest repute and at one period circulated at par whilst the Bank of England notes circulated only at a discount off their face value.   A range of standard values for Child’s notes are known from £5 to £100 as well as more unusual values such as £27-10-0 and £87-10-0.  These latter values indicate the personal service that the bank was prepared to provide to customers.

There was some initial competition, sometimes quite bitter, between the Bank of England and the London private Banks.  Each tried to embarrass the other by accumulating quantities of banknotes and then suddenly presenting them for payment, in the hope that the other did not have sufficient funds to pay.  On one occasion the Bank of England allegedly resorted to paying out their notes in sixpenny pieces. This served to slow down the drain on limited cash reserves.  Sometimes Bank staff would join the queue to take up more time in receiving the payments, which were of course promptly returned.

By the mid-18^th Century relationships between the Bank of England and the London private banks became more harmonious and mutually supportive.  The Bank of England developed close links with the Government and had access to investment opportunities, which were valuable to the private banks.  London private banks established accounts with the Bank of England and something approaching a coherent banking system was beginning slowly to develop.

By 1765 there were at least 34 private banks in London.  Seventeen of these banks were situated in Lombard Street or the immediate vicinity.  Such a geographic concentration of banking facilities was quite unparalleled anywhere else in the world at this time.  This could well be considered the birth of the City of London as a world financial centre.

Fig. 1 (click to enlarge) shows an unissued note of the firm of Lemon, Buller, Furly, Lubbock & Co. of 14, Abchurch Lane, and partially dated 177-.   This is a printed form, which required the customer’s name, the value (or denomination), the date and the serial number all to be handwritten before being signed by an officer of the Bank.  To the modern eye items such as this may not look exactly like a banknote.  This is because today we expect a banknote to have a clear printed denomination and also we tend to equate handwritten values with cheques.  However, whilst the Banknote of England notes had fixed and printed values (or denominations) many of the London private banks still used handwritten values. 

This example reminds us that in viewing documents over 200 years old care has to be taken not to assume modern cultural norms but to view the item within the context of the times in which it was issued.

This 1770’s example from Lemon, Buller, Furly, Lubbock & Co. is a fairly late example of a London banknote as the London private bankers slowly began to relinquish their own personal banknote issues.  By 1790 virtually all the London private banks had ceased to use their own notes and circulated Bank of England notes.  A £20 of Childs Bank dated, 7^th May 1787, is known to exist and is believed to be amongst the last banknote issues of the London private banks. 

One factor which allowed the London Banks to relinquish their own banknote issue was the use of cheques which had developed to a level of sophistication that was previously unknown.  It is possible that the development of cheques was enhanced and encouraged by the very fact that London private banks did not have their own banknote issue.  In any event this increased use of cheques led in turn to the establishment of the ‘London Clearing’.

When cheques first came into use bank messengers were employed to visit other banks in order to present the their cheques, receive payment in cash, and return to their home bank to safely deposit the cash.  All the banks did this.  Bank messengers were literally passing each other in the street either with bundles of cheques for payment or cash for deposit. An informal system of cheque exchange then began to develop where messengers began to exchange cheques on their respective banks and only settle the difference in total values with cash.  Sometime in the 1770’s more formal arrangements developed with premises being rented where bank representatives would meet twice a day for a common pooling and settlement of all cheques in hand at that time.  Each bank either received or paid out only the balance that was outstanding between any cheques after all mutual exchanges were made. 

This was London Clearing and made cheque handling more efficient by reducing the amount of cash reserves a bank had to hold to cover cheque repayment.  It also provided very quick settlement of cheques.  Membership of London Clearing was very advantageous and the London private banks that established the system took care to exclude other banks – including the Bank of England in the early years.    

The creation of London Clearing was greatly enhanced and supported by the close geographic proximity of the Lombard Street banks.  Indeed, initial qualification for involvement in this system was a requirement to be within easy walking distance.  This effectively meant that banks in the West End did not become members of London Clearing.

Fig 2 (click to enlarge) shows a cheque from the firm of Sir James Esdaile, Esdaile, Hammet, Esdaile and Hammett of 21, Lombard Street, dated “Sept. 14^th 1799”” for a value of “£52-11-0 on account of Margate Bank”. The cheque is payable to “bearer” and is very simply printed on plain unwatermarked paper.  The cheque is not personalised and could have been used by anybody.  Later cheques from London private banks would become more sophisticated in order to combat misuse and forgery.   

It is interesting that this cheque refers to the “account of the Margate Bank” which is almost certain to be the firm of Francis Cobb & Son, Margate, established in 1783.   This illustrates that fact that by the end of the 18^th Century the London Banks were operating as London agents for the provincial banks that were establishing themselves in some numbers by this period.  

One of the London private bankers listed in 1765 was “James Coutts, near Durham Yard, Strand.”  This became the famous Coutts & Co of 59, Strand, London, which has continued in business up to the present day.   

Fig. 3 (click to enlarge) shows an unissued cheque of the 1860’s from Coutts and Co.  This is printed on distinctive blue security paper to deter any alterations to entered values and there is a watermark that reads “Coutts & Co.”  Both the cheque and the counterfoil bear the serial number of “P/T 03167” as a further security measure.   To the modern eye the lack of any personalisation, e.g. name of account holder etc. is quite strange, but personalised cheques are still quite unusual at this time.  Such early cheques, issued and unissued, are still available to collectors today.

Neither the Bank of England nor the London private banks made any steps to establish branches outside London.  During the 18^th Century banking, in London and the Provinces, was perceived and operated as a single site business.  The relevant modern term to describe this is a ‘unit banking system’ although such a description would have been unknown to the bankers of the time.  Banking was very much a personal service between business people who, for the larger part, would be well known to each other.  

It should be remembered that the legal concept of a banking partnership was quite onerous to those involved and involved serious personal risks.  Each member of a banking partnership was liable for all debts of the business to full extent of all their personal assets.   If the bank lost money through bad loans or poor investments the partners had to make good those losses from their personal assets.  The richer you were the more money you could loose. This induced an understandable element of caution into the banking business.  

It was common for at least one of the named partners and other bank staff to live on the premises.  One of the partners would certainly be present during all normal business hours to supervise the effective management of the business.   These conditions applied to both London and Provincial banks and meant that the development of a branch structure was always more difficult for private banks. 

This limitation of the partnership function did not apply to the Bank of England.  There appears to have been some doubt as to whether the Bank of England was legally enabled to open branches at all. Legislation in 1820’s resolved this legal dispute and a few Bank of England branches were opened after that date.  It should be stated that, notwithstanding the legal position, the Bank of England never displayed any real commitment to developing a branch banking structure.  The Bank of England was really a “Bank of London” and had little interest in the development of provincial banking.  The failure of the Bank of England to follow the model of joint stock banking as practised so effectively in Scotland at this time is one of the great-unanswered questions of history. 

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