Chapter III: The Early Private Bankers

We have already seen that elementary banking operations in the country were carried on by the Jews, who in course of time were succeeded by the Lombards, and that then the business, such as it was, drifted into the hands of the goldsmiths. During the more settled years of the Commonwealth the need of banking accommodation was keenly felt by merchants and traders to enable them to carry on their business, and as demand creates supply, the goldsmith bankers increased in number—and in wealth.

There was, indeed, at this time a demand made by certain persons for the establishment of joint-stock banks, on the system already in vogue in several parts of the Continent; and we find that an eminent London merchant, named Lamb, presented an address to the Lord Protector with this object in view. After enumerating all the advantages to be derived from the establishment of such institutions, his address concluded in the following quaint form:—

“Lastly, a bank with a certain number of sufficient men
of estate and credit, joined together in a joynt stock,
being as it were the general cashkeepers or treasurers
of the place where they are settled, and divers others,
tending much to the tranquility of your highness and the
welfare of the English nation, which, with your highness’s
favourable encouragement, I shall in all humility be ready
to make known to you, and remove any objections as can be
alledged in the premises, and propound a way how it may
be effected, and the evils remedied and prevented, being
unwilling to bury the talent in a napkin which it hath
pleased the Giver of all blessings in his great goodness
and mercie to bestow upon me, hoping that I shall not
offend by tendering this with my best services to your
highness.”

Although this matter was referred to a Parliamentary Committee, nothing came of the proposal.

In 1667 the gradually developing banking business received a check by what is known as a “run” taking place, and this appears to be the first episode of the kind of which we have any record. This event lessened the credit of the bankers, but the action of Charles II. in closing the Exchequer in 1672 nearly brought their business to an end.

By the time of the establishment of the Bank of England, however, many bankers had again regained a position of credit and wealth, and they continued to carry on and develop their business in spite of the competition of the new bank. About the same time several joint-stock banks were founded and carried on successfully until they were obliged to wind up their affairs in 1708, in consequence of the monopoly granted to the Bank of England in that year. Although the London banks, which continued in existence after the granting of this monopoly, were not prohibited by the Bank Charter from issuing their own notes, yet this part of their business gradually declined in the presence of their all-powerful rival, and it ceased altogether about the year 1750 (though some writers give the date as about 1793).

About the year 1775 the City bankers, finding great inconvenience in settling their mutual transactions, established what is called the “Clearing House,” to facilitate their exchanges with each other; of this we shall have more to say later. It may be noted that the two oldest banking houses in London are those of Messrs. Child and Company and Messrs. Hoare, both of which were established before the Bank of England.

In the early days of which we are now speaking, the personal relations of banker and customer were rather different from those of the present time of keen competition: only the merchants and wholesale dealers were personally known to their banker, who was scarcely acquainted with even the names of the retail dealers favouring him with their patronage.

The following amusing anecdote is related, bearing on the lighter side of banking, of an interview between a certain banker in Lombard Street and one of his customers who was a baker:—The baker having one day paid in £500 to his account, left the bank and stood on the doorstep debating in his mind which way he should turn, when the banker came up, and as there was no room for him to pass in without soiling his clothes against the baker’s working ones, he haughtily said, “Move away, fellow!” The baker, feeling of some importance, was naturally nettled, and replied somewhat rudely, which led to high words, and finally the banker was sent spinning into the gutter. Rising up full of wrath, he loudly called for someone to fetch a constable and arrest the fellow, when the cashier who had just received the baker’s money came forward and, to the banker’s surprise, whispered in his ear that the baker was one of his own customers. Retiring into his private room to recover himself, he soon sent for the baker. Apologies were exchanged, and it is said that the banker and baker were thereafter good friends.

Of the early history of country banks we have no very definite records, but we know that after the passing of the Act in 1708, prohibiting the foundation of banks having more than six partners,[1] a large number of private banks having fewer partners than the prescribed number came into existence to meet the necessities of the time; and after the passing of the Bank Restriction Act in 1797 their number was largely increased. At the time of the passing of this latter Act, it is calculated that there were somewhat under three hundred country banks in existence, but by 1813 we find that the number had increased to nearly one thousand.

[Footnote 1: Under the Companies Act, 1862 (25 & 26 Vict. cap. 89), private banks may now have as many as ten partners. Section 4 provides that “no company, association, or partnership consisting of more than ten persons shall be formed, after the commencement of this Act, for the purpose of carrying on the business of Banking unless it is registered as a company under this Act or is formed in pursuance of some other Act of Parliament or of Letters Patent.” Re-enacted by Companies (Consolidation) Act, 1908, sec. 1 (1).]

In the eighteenth century banking was essentially _free_, in the fullest sense of the word, except for the one prohibition as to the number of partners constituting a bank. Anyone was at liberty to put up the magic word “Bank” over his door and commence business. We cannot say very much as to the solvency of these banks; some were doubtless sound and ably managed, but every wave of distress which swept over the country unfailingly overthrew large numbers of these so-called banks, and occasioned much local suffering.

The gradual evolution of country shopkeepers into country bankers, which was the usual course of the foundation of such institutions in the days of which we are speaking, is well exemplified in the following case, which is related in Lawson’s _History of Banking_:—

“In a borough town of importance in one of the north
midland counties dwelt a respectable draper, possessing a
good connection with the farmers frequenting the market
of the town. Although the name of Robin Hood had long
lost its terrors, those of Turpin and Nevison filled all
men’s minds with fear—and with good reason, for they and
their fraternity exercised their calling with such energy
and success that it was always a matter of doubt with
travellers whether or not they should arrive in safety at
the next inn or their destination, whatever that might
be. With the farmers above alluded to there were more
than ordinary grounds of alarm; the town almost adjoining
the scene of the far-famed exploits of Robin Hood and his
merry men, was admirably situated for a levy by their less
romantic successors of extemporaneous taxes. To avoid
as much as possible the losses thus arising, farmers,
having full confidence in the honesty of the draper
with whom they dealt, made him the depositary of their
ready cash. Ready cash of his friends was to our draper
as valuable as capital of his own, and buying for ready
money was profitable. Still, money remained idle in his
hands, and by degrees he began to grant accommodation
to his neighbours. Our draper now became famous for his
extraordinary command of money, and his correspondence
extended as far as Preston, in Lancashire. The profits
thus arising seemed boundless, and the next step was taken
by our adventurous shopkeeper: he allowed a small interest
to his friends the depositors. The new business flourished
to such an extent that it swallowed up the old one, and
our draper at length became a _banker proper_, and no more
a shopkeeper.

“Such was the origin of the Smiths. First confined to
the town of Nottingham, afterwards extended to Hull and
Lincoln, the business of the firm required a London
correspondent entirely in their interest, and such they
found in the late Mr. Payne.”

And thus was founded the well-known firm of Smith, Payne, and Smith, whose business has recently been amalgamated with that of the Union Bank of London.

Many are the tales told of the wit and shrewdness of the early country bankers, and the following anecdote, related in Mr. Maberley Phillips’s interesting work on _Banks, Bankers, and Banking in Northumberland, Durham, and North Yorkshire_, is on a par with the well-known tale of the private Irish banker, who became so very unpopular, that to show the contempt in which he was held, the inhabitants of his district gathered together all his notes which they could lay hands on, and made a bonfire of them in front of his house; much to the banker’s amusement and gain.

Mr. Phillips’s story is of Jonathan Backhouse, a Quaker, who, though originally a linen and worsted manufacturer in Darlington, founded “Backhouse’s Bank” in 1774, in partnership with his father. This institution only went out of existence in 1896, when it was amalgamated with Messrs. Barclay and Company, Limited.

“Before the time of railways, near the beginning of the
century, the commercial traveller of that day made his
visits to the towns of the county of Durham either by mail
coach or other conveyance, and sojourned for some days in
each town, where he was an important person, especially at
the head hotel or hostelry of the place. It so happened
that one of these gentlemen, after having dined freely
at the ‘King’s Head,’ Barnard Castle, was boasting to
a company present in the commercial room of his own
importance and wealth, and exhibiting in proof a sheaf of
bank-notes taken on his journey.

“Jonathan Backhouse, attired in the usual dress of the
Society of Friends, unknown to the rest of the company,
was in the room quietly reading his newspaper, when he
was attacked by the wealthy commercial, and by a series
of sarcastic remarks held up to ridicule as a man out of
harmony with the spirit of the time and place. Following
up this raillery the commercial, displaying his handful of
notes, offered to bet the Quaker £5, or any sum, that he
could not produce as much money as he was exhibiting. Mr.
Backhouse, after a great deal of banter, said _he did not
bet_, but to show his indifference to money offered to put
a £5 note in the fire if the commercial would do the same.
Suiting the action to the word, Mr. Backhouse took out
a £5 note and put it into the fire. The commercial, not
wishing to be behind, did the same. Mr. Backhouse offered
to repeat the process, but the commercial, considerably
cowed, declined; when Mr. Backhouse quietly thanked him
for having burned one of his (Mr. Backhouse’s) bank-notes
for which he had received £5, while the note he (Mr.
Backhouse) had burned was on his own bank, and only cost
him the paper.”