Development of Modern Banking

The restriction however paved the way for deposit banks and cheque currency and soon the cheque currency proved to be very suitable. The reduction in stamp duty on personal cheques in 1853 gave further impetus for cheque currency, and they became very popular with the customers who would either pass them from hand to hand when expressed tro be payable to bearer or indorse when expressed to order.

In 1854 the Joint Stock Companies Act opened an ear of corporations and the Limited ?Liability Act 1855 restricted the liability of shareholders of a Limited Company to the amount of the successfully paid-up value of the shares held by them. In the succeeding years Joint Stock Banks became very common either by absorption of private banks or amalgamation amongst Joint Stock Banks themselves. Thus in 1918 came into being eleven Clearing Banks of today.

The effect of this historical development of banking in England has been fairy wide first emergence of a small number of large banks with wide net-work or branches and second increase in the popularity of bank-acccounts and a large scale use of cheques. The development of large and financially strong banks gave a sense of security to the depositors in Britain but at the same time it was felt that if the process of amalgamation was carried on still further there would be a danger of financial monopoly. Therefore in 1918 Treasury and the Board of Trade set up a committee to consider the matter of further amalgamations and absorption among the banks. The committee suggested that "legislation should be passed requiring that the prior approval of the Government must be obtained before any amalgamations are announced or carried into effect". The committee further proposed that the approval must be obtained from the Treasury and the Board of Trade both prior to amalgamation.

The recommendations of the Treasury Committee were approved and as a result only a small number of other banks were absorbed by larger London banks.

In 1946 the Labour Government nationalized the Bank of England and transferred the existing stock to the nominee of the British Treasury and empowered the Crown to appoint its Governor Deputy Governors and Directors. The other shareholders of the bank were given in exchange three per cent long term Government stock, thus keeping the holders content and happy as they were getting the same return as before.

In 1955 the British banks made a departure from traditional banking by undertaking hire-purchase finance for companies buying industrial plants and machinery and took interest on hire-purchase finance. The percentage of interest was so high that a number of companies became subsidiaries of the lending  banks.

Modern Banking Part 2

In 1672,however,British banking faced a great crisis when Charles-II borrowed huge sums of money from the goldsmiths and later refused to pay them back!Therefore,a number of goldsmith-bankers formed themselves into a Corporation in 1695,known was the Bank of England. This bank lent £ 1,2000,000 at 8% interest to William-III,who in return,allowed a number of privileges to the bank,specially the right to issue Notes payable to bearer on demand up to the amount of this loan. This was known as 'fiduciary' issue,not covered by gold. This new bank became a very serious competitor to the comparatively smaller private banks run by the London goldsmiths.

By the year 1700,the Bank of England was not only issuing Notes but also conducting accounts for customers. Being a Joint Stock Bank by Charter, its Directors were conducting the business like that of Limited Companies. The Bank of England was the only Joint Stock Company which was given the monopoly of issuing Bank Notes, though the very successfully outside London and were receiving valuables and money for safe-keeping,and also issued Notes as many instances the business of banking overshadowed the original occupation and became the main one.

This was affecting the position of the Bank of England. Therefore by an Act passed in 1708, the privilege to issue Notes in England was withdrawn from Joint Stock Banks and confound to the private banks with not more than six partners. This compelled the private bankers in London to develop the business of accepting money on deposits repayable by cheques.

In his book 'Lombard Street' Bagehot says:"Upto 1813 or thereabout in England the main profit of Banks was derived from circulation (of notes) and for many years after that deposits were treated as very minor matters"