Banking in Europe

Banking in Europe emerged later on the back of the shifting tides of power and of trade. After the demise of the Roman Empire (27 BC-476 AD) it is recorded that banking emerged again and that the means of payment in Italy was the bank deposit (in addition to coins). Morgan informs us that ".banking was being practiced again in Italian cities, probably as early as the twelfth century, and transfers of bank deposits were again being used as a means of payment." However, even though bank deposits were by then a means of payments (i.e. money) the system of transferring payments was not efficient. Morgan refers to it as a "clumsy" system, because the payer had to give the banker an oral instruction and the payee had to signify his agreement in the presence of witnesses. This practice was only improved in the later middle ages (approximately fifth century to sixteenth century) when a forerunner to the cheque emerged in the form of an order which was written and signed by the payer (debtor).

It is recorded that the use of bank deposits as a means of payments during the Middle Ages was not confined to Italy. It was practiced in many of the cities of the Mediterranean. The European banks were in general running the business of giro (accepting deposit balances and transferring them from one account to another) and were not permitted to make loans. However, according to Morgan, in ".practice the temptation to indulge also in money-lending was too strong; bankers often made loans and sometimes they lost their depositors' money, and were unable to pay them in coin on demand."

It is important to point out here that the loans made were almost certainly made in the underlying commodities of the deposits (i.e. coins) and not in the creation of new deposits from which borrowers could pay debts. In other words new money creation was not taking place when these loans were made.

The temptation of lending by banks was widespread85 and bad loans caused a number of banks to fail. This led to the call for the establishment of public giro banks, which call was heeded by the authorities. Among the best known of these public giro banks were the Bank of St George of Genoa (1408), the Banco della Piazza di Rialto of Venice (1587), and the Bank of Amsterdam (1609). It is recorded that in time these banks were also tempted to make loans and that the Bank of Amsterdam at one stage ".found itself unable to pay its depositors in coin." (Recall that deposits were convertible into gold.)

According to Morgan, "By this time the merchants of Amsterdam had grown so used to the convenience of making payment through the bank that its deposits continued to circulate and to be accepted at their face value...This is one of the earliest examples of a quality of the means of payment on which most modern monetary systems have come to depend; the essential feature of any medium in which payments are made is not intrinsic value, but general acceptability. The vital thing for anyone receiving a payment is to be sure he can pass on whatever he receives in making payments of his own."

What is the relevance of the above to the creation of money? It is that bank deposits over time became to be generally accepted as the, and later as the main, means of payment: money. And now we know also that bank account deposits were the medium of exchange a long time before the goldsmith-bankers created the current account in London - they thus had a number of long-standing precedents. The current account and an efficient payments system heralded in fine form the creation of money by simple bookkeeping entries.

Rise of deposit banking in England

It will be recalled that once they had created the bank note and it became generally accepted as a means of payment, the bankers were able to create new money by making loans with new issues of their own notes. The next step, bank deposit money, was a logical inevitability. It also took place in the seventeenth century. Harrod88 articulated this significant step (which was already established in many parts of the northern hemisphere) as follows:

"The client of a bank might say: 'Look, I do not want those notes of yours; they will only get stolen. Can't we just leave it that I am in credit with you for so much, and can draw upon you as and when I need to?' A credit of this nature may be called a deposit. Eventually, to meet the requirement of such a client, the cheque book was devised. A cheque book may be thought of as tantamount to a bundle of notes, each divisible by a pair of scissors into small parts of various sizes. Payments could be made by this method otherwise than in round sums only. A claim in this form could not be so easily stolen as a bundle of notes, and it has the additional advantage that the whole amount does not have to be withdrawn from the bank at the outset, and that the bank might possibly allow interest on what was temporarily left on deposit."

It seems reasonable to surmise that this development was customer-driven; whether the customer had the notes of the bank or a current account balance at the bank with a cheque book, s/he is in the same situation. S/he could settle debts, i.e. pay, for goods and services as easily with the one as with the other. In fact, with most payments it was more convenient to pay with a cheque, because the amount of the payment could be precise.

The bank deposit current account started life in the books of the goldsmith-bankers as "running cashes" and later became known as "current accounts". As we have seen, with the current account the cheque emerged, and it quickly became acceptable as an instrument of the new medium of exchange: the bank deposit. The earliest English bank cheque to have survived is dated 1659 and is an order by a Nicholas Davies Vanacker addressed to London goldsmith-bankers, Morris and Clayton, to pay a Mr Delboe "or order" the sum of £400.89

Box 5: example of an early cheque: front (1676)

example of an early cheque: front (1676)

Mr Hoare

pray pay to the bearer hereof Mr Will[iam] Morgan fifty foure pounds ten shillings & ten pence & take his receipt for the same your Loving friend

Will[iam] Hale


For Mr Richard Hoare at the golden bottle in Cheapside

In Box 5 we present the obverse of a cheque issued in 1676, and in Box 6 the reverse of the same cheque is offered. The translations (of the company C Hoare & Co mentioned earlier) accompany the original text.

So, in the middle of seventeenth century England, bank deposits became generally accepted as a means of payment, and the cheque became the principal instrument for the transfer of deposits from one person to another. Money (M) was now comprised of: bank notes and coins (N&C) and bank deposit balances (BD) of the non-bank private sector:

Box 6: example of an early cheque: back (1676)

example of an early cheque: back (1676)

The way was now paved for the next significant step in the history of money and money creation, and this was deposit money creation by the banks through the making of loans to the public (and later government) by simple credits to deposit accounts created for them. This was later refined to the creation of the overdraft facility.

It is unfortunate that data on the relative size of the notes and coins in circulation and the stock of bank deposits are scarce. However, Morgan fills us in for 1914 in England: there were less than GBP 40 million of bank notes and about GBP 160 million coins in circulation, and bank deposits amounted to over GBP 1 000 million.

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