(An Introduction to Banknotes & Currency)

(From an anonymous contributor)

The idea for a universally accepted money currency, written onto a piece of paper, began in a world that had for many hundreds of years only known payment in the precious metal value of gold and silver (and bronze and copper), either in coin or bullion. The fact that the accepted medium of exchange throughout the western world, and beyond, could be transacted at a value regardless of its assigned denomination highlights the use and immediate acceptance of precious metal in transactions. But also highlights the resistance to a replacement money, without any intrinsic value. Eventually it was decided that if money could be written or printed onto paper and passed as a medium of exchange and payment, the opportunity suddenly existed to create money out of almost nothing at short notice and in almost any quantity. In order to accept a banknote however a member of the public must at any time be satisfied on two main counts. He must have confidence that the issuer will always pay out on its value, or in modern terms will always be worth its stated exchange value, and that it has not been forged.

And since a national currency cannot ordinarily or legally be used to pay for debts overseas, not only will it have a lesser value internationally than local currency, it will have a lesser value in comparison to more universally accepted medium like gold or silver, unless of course it is payable in either gold or silver. The march towards the universal legal tender paper currency of today was a gradual one that was held back by convention but progressed under accident and opportunity, as well as by more fundamental reasons.

In the India example, a good deal of merchant activity and other trade, was transacted through the use of the Hundi. Noted from early Buddhist texts these were literally bills of exchange, that were used as far back in time as the Vedic era, around 600 BC. The Hundi are again known to have been used in the 10^th Century AD through various contemporary sources. Dr.Gupta in his book Indian Paper Money, further states that “In the basic concept, paper currency is a simplified mode of transfer of money from one place to another through a written document...the transport of money in coin was risky”.

A New Beginning

By the time of the Glorious Revolution in 1688 (accession of Mary daughter of Charles II and wife of the Dutch Prince, William of Orange), in regular periods of business, paper notes began to be used in commercial trades, temporarily, in the place of gold. These 'notes' were traded in for precious metal often after just a single transaction. “A scheme was proposed to make a further loan to the Goldsmiths in addition to the still pending loan of 1672, but they did not like the idea of having there debt permanently funded and were staunchly hostile to the new Bank.” Instead a “scheme was proposed by William Paterson, a Scot who had been in America (The Darien Company) and was now a large dealer in colonial produce. He suggested the government borrow £1m in perpetuity at 6% and give the lenders the right to establish a bank. Parliament, hard pressed for financial support to enable it to continue its war, liked the idea of a loan which would never have to be repaid. In 1694 a law was passed providing that the ‘Recompenses and Advantages’ of any group that provided £1,200,000 should be 8%, and permission to incorporate itself as Governor and Company of the Bank of England. The Act of 1694 also provided for certain duties, and these included duties on ship’s tonnage (thus popularly known as the Tunnage Bank). Besides interest on their capital, subscribers obtained other privileges and responsibilities. Under a charter of incorporation, they were empowered to borrow money on parliamentary security. And to deal in Bullion and bills of exchange, and act as pawnbrokers. The Bank’s powers in regard to the note issue were left strangely obscure.” (Mr.Cole, Seaby Bulletin, December 1969). The £1.2m was subscribed in 12 days, and having quickly parted with most of its capital established the business by issuing bank notes, which were secured by tallies received from the Exchequer. Their situation was at times precarious.

“It was already indispensable to the government, not only as a source of credit, but as a channel through which remittances were made to the armed forces overseas. And it attracted the support not only of English investors but of foreigners too. Dutch investors, those resident in London not least, had been in the habit of leaving their surplus capital on deposit with goldsmiths bankers. The presence of men like the great Houblons and Gilbert Heathcote in the direction of the Bank had encouraged them from the start to buy Bank shares.” (Mr.Cole Seaby Bulletin December 1969). And indeed the Dutch were to remain supporters of the Bank for many years. The bank secured and laid claim to a bright and glorious future. By 1781 the Prime Minister described it as 'a part of the constitution'.

Banknote production during this early period was relatively limited. In 1723 the Bank of England's note circulation stood at just £3,323,000. By 1781 it was £6,701,000. Parallel to events was the intermittent use throughout history of paper money as an emergency replacement for scarce coinage during times of upheaval or war. Early examples of ‘stuivers’ issued under the Siege of Leyden in 1574 very, very occasionally turn-up on the market. Examples of paper ‘Livres’ from the Siege of Mainz in 1793 are much more likely to be available. Traditionally since the earliest times the lowest denomination of note form printed by the Bank of England was the £20 note (equivalent to a £2000 bank-note). The Bank of England's £10 note was issued for the first time during a shortage in the money supply during the Nine Years War. At the end of the war, in 1759, there were few arguments against its use and it continued to circulate. A little later in 1793 during the Napoleonic Wars the £5 note was first introduced (and by now something like a £250 or £200 bank-note). Since then this denomination was also retained and successively right through to the present day. (The £10 note was not issued from 1943 (to 1964) because of almost perfect wartime German forgeries).

England and Europe existed essentially as a rural and agricultural economy. Even by the late 1600s and early 1700s England was still living in a medieval era more or less at least in economic terms. After about 1740 “a cumulative, structural change occurred, and invention, mechanisms, and industrialisation of manufacture began to appear across the country”. These fantastic advances all required financial support. It was into this world of innovation and progress at the very beginning of what may be called a modern economy, that the currency note began to be issued and used as a nationwide money currency.

Moreover London had a population of just over a million in 1801. By 1901 it was 6 million. Birmingham had a population of 71,000 in 1801, but 700,000 in 1901. “To compare 1800 with 1900 is to compare two different worlds. During the course of the century Britain passed from a mainly agricultural society to a mainly industrial one, from a country in which four-fifths of the people lived on farms and in villages, to one in which four-fifths inhabited towns” (a monetary historian?).

The early note issues of these companies were designed to look similar to the bill of exchange and promissory note 'widely used by industrialists and others for raising short-term capital' (Pressnell). Notable expansion occurred in the numbers of banks around 1790 when canal building was at its height. Some of the newly established banks were founded solely to finance these revolutionary undertakings. And these firms also issued their own bank notes. Indeed there were exceptions to the rule but the majority of banks were note-issuing concerns, and who consequently considered themselves of higher status in being so. 'For larger payments the notes of the rapidly multiplying country banks were widely used...' (Pressnell). Smaller notes however and relatively small payments were also quite common-place at this time. 'For their part, many country bankers attached considerable importance to small notes (£1 notes) less because of their volume than because they were regarded as an essential element in the general provision of credit' (Pressnell). In many places right across the country, workman's wages were paid in £1 notes (equivalent to about £50 today). And in £5 notes or £10 notes perhaps fortnightly to groups of men, when there was a scarcity in small change, which did sometimes occur. The use made of the 'bank note' was also spread fairly evenly over most of the counties of England. Only in Yorkshire, Devon and Cornwall whose counties had a higher concentration of industrial firms (and mining companies and ports) than elsewhere, did the number of note issues increase dramatically.

It is perhaps no surprise to find that for many years now the currency of the nation was divided into distinctive parts. The notes of the Bank of England had exclusive right of circulation in London and the London area. The 'provincial' bank note generally provided for the nations currency throughout the rest of the country. Gilbert wrote in 1827 that the private note issue was the 'The grand source of profit' (Pressnell p157). 'So sound a banker as Vincent Stuckey...told the 1841 committee that the loss of his note-issue would reduce his profits by 'at least one-half' (Pressnell p157). Using the example of the Banbury Bank – in their early years of business in the late 1820s and early 1830s, while their deposits gradually increased, the value of advances made to the public was only a little more than the value of notes newly issued, during each six month period of time. By the 1840s that ratio had increased, so that notes newly issued now added up to roughly half the value of advances. Meanwhile total numbers of notes in circulation was constantly added too. The Banbury Bank issued approximately £50,000 worth of notes every six months. Sometimes the total value of notes out circulating fell during this time but generally fewer notes were redeemed than were issued, in random and varying quantities.

The Bank of England did not have a branch outside London until 1826. However, despite making their note issue payable in eleven different city branches by 1829 the overall Bank of England note circulation does not show any significant increases at this time, and moreover the circulation of the private issues were not decreased by any margin either. The inauguration however of the joint-stock company in 1826, did begin to marginalise the private note issues, by the circulation of their own notes. The joint-stock companies, instituted as a response to the failures of 1825, had increased their share of the private note issue to more than half by 1837, when the private note issue stood at £6.7mn and the joint-stock issue was valued at £3.7mn. After a brisk beginning this last figure was to remain fairly even for many years and the joint-stock note circulation had fallen back to £3.1mn by 1857. The Bank of England's note circulation remained unerringly even throughout these years. The private bank note circulation however had by 1857 fallen to £3.7mn. This decline when it occurred, took place in just three particular years – 1842, 1843 and in 1848. The numbers of private notes in circulation throughout all the other years from 1834 right through to 1857 remained at the same level. The numbers of private companies in existence had also begun to decline. This occurred fairly gradually over the years. Some years there were no failures, in others there were ten, but the overall trend was always decline. There was also the disastrous year of 1836, when a further 56 banks fell. The number of failures over the decades as far back as the 1780s had however always been about five to ten a year. When there was a failure now the opening left in the market was filled by the branches of the note-issuing joint-stock companies, (or by the non-note issuing joint-stock companies).  By the end of 1836 there were now some 350 banks in business, which was about the same number in existence in 1790 (and about one-half of the number of banks that were trading in 1810 at the very height of the restriction period).

Any bank can loan to approximately nine times the value of its deposits and available cash and reserves. A successful note issue enjoyed a good reputation under sound public confidence. Behind closed doors however, a note issue might actually only be backed by a proportion of the maximum gold reserve. Since the early banker was more often than not a shopkeeper of some sort, and was able to extend his business to looking after deposits of coin and bullion, for a small fee, the early banker inevitably found that he could issue more notes in value, than the value of deposits left with him. In the late 1700s and early years of the 1800s, men of commerce and the general public were often persuaded either that gold was available to cover the entire note issue, or that reserves would always be available even if it had to be sent for from London. Inevitably some of the private note issues found throughout England, were founded on individual reputation alone. Norfolk banking families of the 19th Century however operated under sound Quaker principles, and became well remembered patrician elders. In fact Quaker principles 'forbade him to participate in business competition...passing of shoddy goods to the public'.

Although the very first currency notes in Germany appeared around the mid-1700s, by the early 1800s banknotes were still not very popular and it was reported in a popular publication that notes were ‘detested’ by the local populace. Banknote circulation began in New Zealand in 1850. This was at a time when the population of the largest city, Dunedin, was just 18,000. In Wellington commercial trading notes were popular, in Auckland they were unpopular. There were also very few local banks in Lancashire during the 19^th Century. In that county as opposed to Yorkshire, Bank of England notes (and bills of exchange) predominated. The uniqueness of individual circumstance whether city to city, or region to region typically created individual stories, but particularly so in the momentous era of nation building and urbanisation.

The American experience was born out of the difficulties of building up a nation from scratch which inevitably meant dangerous levels of borrowing and debt. Banknotes could take the place of debt, particularly government foreign debt. The U.S. Government could sell a note issue to the public for cash, in order to pay off a debt, and pay back the public in full by a transfer of the public revenues, usually with interest, but over a convenient period of time. When this was successfully managed in the later part of the 19th Century, word soon got around and created a favourable reputation for government currency notes.

During the unique events of the Napoleonic War, and the Restriction Period, and despite decisive competition the Bank of England maintained its pre-eminence. And thrived in the ever advancing years of the Industrial Revolution. “the Bank acted with the motivations and policy of a central bank after 1847...and with a very special relationship to the public authorities.” (Mathias-The First Industrial Nation...). “The London bankers practice of keeping part of their cash on deposit at the Bank had been finely encouraged by the clearing banks in 1854 to keep accounts at the Bank of England and to settle clearing differences by cheque”. The numbers of clearing transactions stood at £1m, but by the 1870s had rose to £30m. Real wages increased from an index level of 128 in 1873 to 176 in 1896. Britain had since 1860 prospered under a sustained rise in the standard of living. Moreover international markets accelerated sharply from 1870, partly because of decisive improved means of communication. Now the Bank had to establish itself, almost overnight, as the lead central banker of the international financial  market. “For a time in the 1870s and 1880s it looked as though The Bank might prove unequal to the task”. Open-market operations and reputations were developed, and after securing a moral leadership, fought for and convinced the markets to co-operate.

The great gold rush of America began in 1848. Soon after in Australia. The quantities of gold found between 1848 and 1876 were at a new and unprecedented level. The new discoveries matched again the entire stock of gold that had already been found in the world. Europe, America, and Australia all received an unprecedented increase of gold and also silver for their treasuries, and therefore for their coinages. This eruption of gold over the world therefore decisively increased the money supply of each nation, whose coinages had previously been constrained by a market scarcity of the precious metals, particularly gold. The money supply of the entire world economy was therefore collectively increased. There are many records held by government departments that offer reliable statistics for the mining, production and discovery of gold and silver going back well into the Middle Ages. Without any precedent the effects that this new situation would bring, could not be predicted with any certainty. This subject area is central to the thinking of most economic theorists. The effects would be watched very closely. In the course of analysis it was realised by economists and governments that when an increase in the money supply of the world occurred a disproportionately increased amount of business began to take place. Therefore under strict supervision and management it was thought that the use of currency notes could bring about a similar increase in the wealth of a nation. To start with the new supplies of gold might work well as a reserve for a paper currency. After these new discoveries (and the expedition of the Industrial Revolution), the major governments and economies of the world began the mass production of paper currency.

During the 1860s “different from the days of paper-printing and coin clipping of the ancient régime...Central banks were established to govern the currency...” (N.Stone Europe Transformed 1878-1919). Indeed whether there had been a sort of state sponsored note issue in the past, or none at all, most, if not all countries throughout all of Europe, had by the 1870s, produced their first national currency notes. From a Bank of England perspective this new era is known as the Classical Gold Standard period. It lasted from 1880 through to 1914, during which time the Bank of England maintained a level of note circulation that was unswerving, as indeed it had done throughout the 19^th Century. Although the number of exchanges made by the use of cheques rose enormously over the course of the 19^th Century, and was truly massive in comparison to the value of exchanges made in notes (and there were 2½ times more transaction in notes compared to coin), cheques do not contribute to the money supply. This was indeed an age when people were very sure of value. And by 1897 all the countries of Europe had agreed to adhere to the gold standard. Notes circulated alongside metallic coin as the nations money currency based on their convertibility to precious metal. There were other views and theories however that supposed that progress must inevitably lead towards an inconvertible paper currency.

The views of the advocates of an inconvertible paper currency, contained in a U.S. Senatorial Report of 1876, included the following  “…whose value should be made extrinsic and derived from the useful functions with which the Government invested it, and whose each unit should be kept steady in value through legal limitations and regulations of the number of such units issued.” And that “…money…becomes entirely useless unless its quantity be limited.”  “They maintain that when the money function is conferred upon gold and silver, while the requirements of portability, divisibility, distinguishibility, and difficulty of imitation are tolerably met, the requirements of constant attainability and inexpensiveness are not met at all, and that the superlatively essential requirement of steadiness in value is so imperfectly met as to render them unfit for money. Moreover the silver coin, as used by the Latin Union (1861-1920) was a full-tender coinage that held a bullion value below the designated money value of the coin. This prevented the metal in the coin being sold off or used for any other purpose. However, the advocates said that the coinage therefore merely imitated the legal tender function, as conferred by the issuing authority, and verified by its stamp. “This stamp of authority would be as efficient and valuable if impressed on paper, and that this had been shown in the experience of the fractional currency” (which arose out of the emergencies of the American Civil War).

Forgeries & Counterfeits

Since the earliest times of banknote circulation, various levels of forgers have constantly tried to pass their work off in place of the real thing. Much of the innovation in note design is channelled towards keeping ahead of these forgeries. The degree of difficulty and level of sophistication in production has undergone change throughout its history. Early note issues were often somewhat primitive, incorporating basic text and perhaps an emblem or initials. Other refinements like the paper, vignettes and portraits were added later. £1 notes and to a lesser extent £2 notes were issued by the Bank of England from 1797 to 1825 under the emergency of the Napoleonic Wars in quite large quantities. By 1817 there were over 30,000 forged notes in circulation in England. It is perhaps surprising that note design had not advanced beyond this simplistic level – and since many of the forgeries were to be found amongst the illiterate and semi-illiterate classes. Elsewhere in the world advances were incorporated but at the Bank of England the intrinsic substance of the paper alone was thought to have been of the first importance. By about 1850 the company of Portals who had gained the sole right to supply Bank of England paper, had developed a special and more enduring form of note to serve the currency.

Technological improvements utilised by other countries of the world were also embraced in the unique Scottish note issue. The National Bank of Scotland's new issue of 1893 is perhaps the most renowned and recognisable example of the engravers art, some say at its apex. This era which was begun in 1810, when the Commercial Bank of Scotland was founded, (the only other Edinburgh bank formed in the 19th Century), finally came to a close towards the end of the 1920s. By 1972 Mr.Kenneth Lake one of a number of leading notaphilists of his day, wrote in his excellent book ‘Investing in Paper Money’ that “Certainly it is far more difficult to prepare adequate forgeries of modern banknotes; the general public is much more aware of what a note ought to look like and feel like, and modern multicolour printing, especially the use of under prints in a different colour so that photographic separation is rendered more difficult, has led to the virtual disappearance of forgeries in every civilised country”.

The Banknote Goes Abroad

Fledgling currency note issues all around the world including the US, Germany, and China were often begun and maintained by private banking companies. In the case of the developing self-governing British Colonies and Dominions found throughout the world, private banking companies also almost always issued the very first currency notes in each area. They were started up, first in Australia in 1817 as the Bank of New South Wales, in South Africa, in 1837 as the Cape of Good Hope Bank, and in Canada as the Quebec Bank, Montreal Bank and Bank of Upper Canada after the War of 1812. These banking companies and those that followed pioneered the first systems of agencies and branches throughout their respective countries, bringing banking to the farthest and sometimes most inhospitable parts of the globe.

South Africa throughout much of the 19th Century was a nation that was going through a period of immense change. Similar to the rest of the world, roads and buildings and trains and institutions were established and administered, much of it at least in the Cape watched over by a distant British Parliament. By the time of the Basuto War, begun in 1866, corrugated iron roofing was still the staple building material used over much of the country, the only exception being a few public or government buildings, probably found at the capital. There was also, still not very much silver or gold coinage available for use as currency. Much of the trade, particularly in the break-away Boer Republics of the Free State and the Transvaal, was conducted by barter. When war fell over the land of the Free State in 1866 there was the usual hoarding of precious metal leaving the markets critically short of any kind of medium of exchange. The idea of banknotes was imported as a replacement to make up the short-fall, and now doubly needed to help pay for the ever crushing expense of war. This was achieved not just by a guarantee of 6% payable at the end of the war (that consequently brought out into the open those quantities of hoarded precious metals), but also by using the notes to make generous and liberal loans specifically to the farmers, thus securing the supply of essential goods to the marketplace. Just as in the case of certain U.S. note issues, the Free State war issue was readily accepted in a thriving marketplace (the provisions market was typically trading at record levels) under emergency, but also based on the government guarantee. The extra injection of cash into the money supply, via loans, steadied prices and crucially helped the country out of an impending disaster. By 1877 however the Treasury of the Orange Free State had paid off most of the value of its wartime note issue, but was left with a total of just twelve silver shillings to account.

In 1846 Britain threw the market gates of the world wide-open to competition when they enacted laws stipulating free trade over all the world. This situation persisted for some decades and at some expense, before Britain was finally nudged off-course, by newer German and American tariffs towards the end of the century. By the time England abandoned the gold standard in 1931, London was still financing ‘such a high proportion of the world’s trade…’ that it was the ‘only great free market in the world of any consequence’, (and consequently provided much of the machinery for making transfers between the U.K. and the various British overseas dominions and territories). When the British Government decided that it was necessary to issue public or Government currency notes in these territories, a Board of Currency Commissioners was established. In some territories, some of the boards immediately issued notes alongside company note issues that were allowed to remain, whilst others were given sole responsibility for the currency of a territory. A good example of this is the Straits Settlements (which had previously authorised the notes of The Hong Kong & Shanghai Banking Corporation, The Chartered Bank of India, Australia & China, The Chartered Mercantile Bank of India, London & China, and The Yokohama Specie Bank). Government notes of the Straits Settlements were first issued in 1898. Most territories, whether it was by the time of WWI or WWII, had their currencies managed by currency boards. These boards were always based in London, and who backed up their note issues by holding Government securities in London. They then dealt almost exclusively with the now non-issuing banks. The Currency Boards were also always individual or separate operations, that held responsibility for their own respective area. There was one for East Africa, set up in 1905, and another separate board for West Africa which was eventually established during WWI. Southern Rhodesia did not have a note issuing Currency Board until 1939.

It wasn't until 1926 before Barclays Bank brought a small team of officials together to seek out possible ways of forming a successful global banking division. This was finally accomplished by bringing together the Anglo-Egyptian Bank, in north Africa, the National Bank of South Africa, in southern Africa, and the Colonial Bank, based in the Caribbean. This new organisation was called the Dominion, Colonial & Overseas Bank, and was given general self-autonomy from Head Office in order to conduct business. The D.C.O. then quickly built up a small note issue in several different territories around the Caribbean. Up to 1937 the D.C.O. note circulation over the entire region stood at £750,000. The various Governments had already taken over responsibility for the more staple public denominations, and often issued $1 and $2 currency notes, (the $1 was something like our £10 note, the $2 similar to our £20 note), or shilling denominations such as in Jamaica. And they continued their policy of authorising the Chartered Banks and now the D.C.O. to respond to the market and issue, if and when required, the higher more commercial denominations. The D.C.O. issues dramatically increased throughout the area, towards the end of the 1930s, when the U.S.A. signalled their intention to begin construction of a number of military bases throughout the region. This brought in vastly increased amounts of cash to a relatively insular region of the world, which therefore demanded an increase in its supply of currency. The D.C.O. immediately responded and in 1937 increased its maximum note issue to £1,750,000. By the early to mid 1940s however, much of the now substantial D.C.O. note issues of British Guiana, Trinidad and Jamaica had been replaced by newly issued higher denomination Government notes. Furthermore as well as issuing for much of the Caribbean during this period of time the D.C.O. also became one of four staple note issuers of South West Africa, now Namibia, and also supplemented the well established and diverse Canadian note issue. The eastern and southern Caribbean currency issue is underpinned a little later by the British Caribbean Territories (newly formed) King George VI issue of 1950. The issue was continued when Queen Elizabeth II came to the throne shortly afterwards. By 1964 the union was altered to take account of the ever changing affairs of the world. Some island countries went there own way and produced independent currencies, some countries did so as independent countries, whilst the rest renamed their union the East Caribbean States, and the East Caribbean Currency Authority was formed – which consisted of the islands of Antigua, Dominica, Grenada, St.Kitts, St.Lucia, Montserrat, Anguilla and St.Vincent.

Summary

The progress from only barter economies and examples that included a system of exchange and payments by the use of gold and precious metals, that existed many hundreds of years ago now, towards a full monetary one, occurred by degrees and in identifiable periods of time. Although there have been various levels of monetisation since the first use of coins by the Greeks in 600 BC, it has been stated that a pure monetary economy did not exist in the world, until the 20^th Century. “Until around 1870, many peasants bought only iron and salt, paid for all else in kind, and were paid in the same way, [and] husbanded their money for taxes or hoarded it to acquire land.” (Weber, 1976, 33). Duncan-Jones states in his book 'Money and Government in the Roman Empire' that the reason for the disappearance of barter trade in western society, was the massive increase in the circulation of paper money, which rose 10 fold between 1880 and 1913. England was fairly well an exception. Throughout the world, it is indeed evidently the case, that the different states did begin to issue currency notes for the first time, during this era, (and the Bank of England did very nearly introduce a regular £1 note for the first time in 1890). Moreover the general volume of coinage and the significance of their use in England steadied around 1900. The ever increasing levels of monetary requirement were provided for by the use of banknotes.

In certain cases governments took over responsibility for producing national currencies, and withdrew the option previously held by both private and public companies. In England the last banknote ever issued by a private banking company was in 1921, (by the Wellington Somerset, which was taken over by Lloyds Bank in that year). National Governments now issued for the higher, medium, and sometimes minor denominations. The advance of years, of economies, and of cultures gave rise to its invention and circulation. Throughout the world their stories are individual and interrelated.

© Reproduction of this work is strictly prohibited, unless express permission is obtained from the author who can be contacted via www.banknotes4u.co.uk.

Back To Top