Precious metal deposits with goldsmiths
For centuries, silver coin was the chief means of payments in England. Gold coins did exist alongside silver coins, but remained in the background because of the complications of bimetallism63 (which was related to the relative valuation of the gold and silver coins).
Gold coins were introduced to England on the back of international trade and they were mostly used for large payments initially, and as bank reserves later. The volume of gold coins grew steadily over time and became the basis of the British monetary standard, as we shall see later. This started in the middle of the eighteenth century and persisted until 1931.
Bank notes as we know them today have their origin in the receipts for gold and silver coins deposited with the gold- and silversmiths for safekeeping (for the sake of brevity we call them goldsmiths from now on). They became London's first bankers, and are rightly called goldsmith-bankers by some authors. Their story in respect of the first bank notes and money creation in a new form is particularly interesting.
It began in the seventeenth century London. The business of the goldsmiths was the production and sale of silverware and traffic in silver and gold coin and bullion, including the exchange of foreign coins for local coins and vice versa (= foreign exchange dealers). As they had secure safe-boxes and were well-entrenched with some banking functions, they naturally were chosen by the wealthier public as a depository for the gold and silver coins. The goldsmiths eagerly embraced these banking functions.
The earliest goldsmith-banker receipt for a precious metal deposit is one issued by Lawrence Hoare in 1633 (see Box 265), and this is the year that is generally accepted as the year when banking actually started in London. Before this, banking activities, such as lending, transferring of money, discounting of bills, and so on, did exist and for a long period, but these functions were performed part-time by a variety of traders such as the wool brogger, the corn brogger, the tax farmer, the pawnbroker, the scrivener and the goldsmith.
Box 2: earliest surviving goldsmith-banker receipt (1633)
Undecimo die decembris 1633
Received the day and year above written of William Hale Esquire for a Post Fine charged upon Rowland Hale Esquire upon the Accompt of Henry Coghill Esquire High Sheriff of this County of Hertfordshire] the Sum of Three pounds and five shillings of currant English money I say received as aforesaid.
By me Lawrence Hoare
Although deposits of precious metals were made with goldsmiths as early as 1633, most of the wealthy deposited their coins for safekeeping with the Mint in the Tower of London. However, when King Charles I appropriated 200 000 pounds worth of coins in 1640, the wealthy "...no longer trusting the government...resorted to the practice of depositing their money with goldsmiths..." The goldsmiths' new venture as bankers was born, a significant historical event.
They naturally issued receipts for the deposits. Jevons informs: "As acknowledgement of the possession of such sums of money, the goldsmiths gave receipts, and at first these documents were special promises.. ."
Allow me to present an example, as in Figure 1: Mr A deposited 100 one pound coins with Goldsmithbanker A (by this stage the one pound coin was in existence) who issued a receipt for this amount. So Mr A's total assets did not change; only the composition did. Goldsmith-banker A gained an asset in the form of gold coins and incurred a liability because the receipt he issued was convertible into gold on demand.
Figure 1: deposit of gold coins