The goldsmiths of seventeenth-century London developed banking in its modern form. The goldsmiths united into one business activity functions such as: maintaining safe storage of gold, silver, and deposits of money; loaning out deposits of money (as well as their own money); transferring money holdings from town to town or person to person; trading in foreign exchange and bullion; and discounting bills of exchange. Before the goldsmith bankers these activities were scattered, often as sidelines or by-products of other trading activities. Around 1633 goldsmith banking arose as an indigenous form of banking in England. Before the goldsmiths banking in London was the province of Italians, Germans, and particularly the Dutch.
The first step in the goldsmith evolution toward banking began when some goldsmiths became dealers in foreign and domestic coins. Goldsmiths who specialized as coin dealers became known as exchanging goldsmiths as opposed to working goldsmiths. The seizure of the mint in 1640 and the outbreak of civil war in 1642 sent people to goldsmiths in search of safety for jewelry, gold, silver, and coins. The civil war interrupted the normal goldsmith business of forging objects from gold and silver. Instead, goldsmiths developed facilities to store gold and silver deposits in safety. The goldsmiths maintained a running account of each depositor’s holdings. They also conducted a profitable business loaning out depositors’ gold, silver, and coins to government and private customers. To meet the demands from borrowers, goldsmiths turned to paying interest on deposits and offering time deposits.
The paperwork and record keeping of these activities laid the foundation for important innovations in banking. The bank note (paper money) evolved out of receipts for deposits at goldsmiths. The depositor got a receipt with the depositor’s name and the amount of the deposit. These receipts soon became negotiable like endorsed bills of exchange. Modern banking began when these receipts were issued not just to those who had deposited money but also to those who borrowed money. Instead of bearing the name of a particular depositor or borrower, soon the receipts were issued to the “bearer.” Thus the modern bank note came to life. The Promissory Notes Act of 1704 ratified the practice of accepting notes in exchange.
The goldsmiths were thus the first to develop checks. The British word “cheque” came from exchequer, the British term for “treasury.” The cheques were named after the Exchequer orders to pay. The first cheques evolved out of bills of exchange and were called notes or bills. The courts confirmed the negotiability of endorsed bills and notes in 1697.
The paper records of credit transactions and transfers of funds evolved into a considerable supplement of the metallic money supply. By the time Adam Smith’s The Wealth of Nations was published in 1776, bank notes in circulation exceeded metallic coins. The money supply of the capitalist economic system was no longer limited to the supply of precious metals.
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