Modern Banking Part 1

Despite the classical origin,banking in its modern form and structure started in Britain when many of Lombardy merchants came to England in the fourteenth century and settled in the parts of the city of London now called Lombard Street. These Lombards were so resourceful that even the kings had to depend on them for loans despite the face that the Church was firmly against usury. They dealt with not only keeping the money in safe custody from general public but also changed money for the travelers or merchants engaged in foreign trade.

By that time maritime transport picked up fast and it provided further expansions to trade to and from London.The Lombards responded to the needs of this expansion and developed the most important banking facility of documentary credits, in additions to other lending products for trade. The links with other countries outside Britain helped them to introduce money-transfer operations as well. All these banking services were however,provided at every high rate of usury. Therefore,it forced King Henry III of Britain to issue an order to ban charging of interest in excess of 43% per anum.

The Business of changing money was so lucrative that Kind Edward-III of Great Britain established the Office of Royal Exchanger for changing foreign money at a profit for the benefit of the Crown.

The discovery of America brought riches to Britain and gave a tremendous boost to foreign trade. The merchants now began to hold part of their riches in cash. These transactions,however,received a big setback in 1640, when King Charles-I seized £ 130,000 and bullion left for custody with the city merchants at the Royal Mint.

This shook the confidence of the merchants in the Royal Exchanger and the Royal Mint. Consequently this business was taken over by the goldsmiths who, up to that time,were dealing only in gold and silver. Since these goldsmiths required strong safes for the purpose of their own business,they introduced necessary facilities of safe-keeping of the valuables and cash of their customers. These goldsmiths issued receipts or notes to their depositors in respect of the cash or articles left with them. These were called Goldsmiths Notes, and carried an undertaking to return the money and articles to the depositors or bearers on demand. There was a considerable number of such Notes in circulation among various classes of merchants;and thus they can be aptly called 'Bank Notes' in their earliest form.

Over a period of time,these goldsmiths discovered that large sums of money were left in their custody for long periods;therefore,they started the use of this cash to advance loans to other persons for a fixed period of time and at a considerably high rate of interest. Moreover,they further encouraged cash deposits by their customers by offering them a part of the profits earned on the money. Thus began the 'issue' and 'deposit' banking of modern times. Some of the enterprising goldsmiths issued 'check books',for the attraction of their customers;and thus another important step in the evolution of banking was taken.