In an era moving towards electronic payment systems and replacing physical currency, it can be educational to look back at checks and how we arrived here. As Winston Churchill observed, “The longer you can look back, the farther you can look forward.”
In looking at history, it is just as important to study commercial practices as well as government leaders and military conquests.
…In the ten years following 1850, the world production of gold was ten times greater than in the ten preceding years. As is well known, the French had always preferred metal currency, and welcomed the gold with a special enthusiasm; the state struck an impressive quantity of coins, striking five hundred million in 1845, for the world’s gold found its way more readily to France where it fetched the highest price. The circulation of gold increased in other European countries also, and the banks of issue, in particular, filed their vaults. In this gold rush the English were more cautious after their long acquaintance with problems of values, and the upheaval in the gold market brought hardly any changes in the prices of the metal there. It is true England also minted new coins, but took advantage of it chiefly to establish her banking system more firmly. The influx of gold, which was exclusively Australian, had at first little effect on the prices of goods, but it developed credit with a paper currency. The minting of this money increased England’s metallic circulation by almost fifty percent, but the use of the banknote and especially of the cheque increased by a far higher proportion. The use of the cheque became so widespread in England that shopkeepers and farmers adopted it as the only possible way of doing business although it was almost unknown on the continent. Cheques were often used for amounts of less than two pounds. Even if he had an income of only fifty pounds a year, the Englishman immediately opened a bank account. In 1885, payments in metal currency represented only one per cent of the London Bank payments and six per cent of those in Manchester.
The Act of 1826 granted complete freedom of issue, except in an area of twenty-six miles around London, where the privilege of the Bank was absolute. There was a good deal of argument about the exact meaning of this privilege; for example the question arose as to whether provincial banks could open an office in London, the main centre of business, without losing their rights of issue.
When it was ruled that they could not, many banks nevertheless settled in London and forfeited their privilege of printing. Only the Scottish banks put up a firmer resistance to this extension of the privileges of the Bank of England. On the other hand, the right of issue was losing much of its significance, since the remarkable development of payment by cheque meant that there was less resort to the note. Settlements between the great deposit banks were made neither in metal nor in notes, but were transacted in the accounts of a clearing house, which dealt with transactions amounting to several hundreds of thousands of pounds every year.
The London and Westminster Bank, one of the most important of the English private deposit banks, soon became a model for every bank in Europe, for it had a reserve capital of less than three million pounds, and held approximately twenty-two million in deposits. Such influential private banks, established as joint stock companies, had to resort to the Bank of England only rarely, so the latter did not need to be unduly anxious about its insignificant gold reserves which were barely one-third of those held by the Banque de France. The privilege of issuing paper money, a relic of the royal right of minting money, was therefore bypassed to all intents and purposes by the gradual improvement of English banking procedure. At the same time the Bank of England enjoyed a monopoly of issue which it was in process of acquiring without the intervention of the state, since the development of banking led all the provincial banks to settle in London, near the clearing house. It was a masterpiece of liberalism to coordinate the free activity of the English economy in the capital without any pressure from the political power. In this way financial centralization was achieved purely by private initiative once the need for it had become apparent.
French banking evolved on very different lines. In order to meet the credit crisis, the provisional government had recommended the establishment of departmental banks and of trade credit societies when it was reforming the Banque de France. Most of these establishments, whose capital was to be provided partly by the state and the departments, were stillborn, while others lingered on for a month or two before wasting away. On the other hand, the Comptoir d’Escompte de la Seine became a private concern, and flourished under the name of the Comptoir National d’Escompte de Paris. The Banque du Département du Nord, which became the Crédit du Nord, was equally fortunate, as were several trade banks, particularly that of the Entrepreneurs de Travaux Publics. The unusual feature about the composition of the Comptoir National d’Escompte was that the Council of State had allowed it to set up as a joint stock company. Within a few years the Crédit Mobilier, the Crédit Industriel et Commercial, the Société Générale, the Société des Dépôtes et Comptes Courants, and other companies were established to benefit from this new way of accumulating capital.
Not all these new banks were as prudent as their English counterparts by any means and this point is worth dwelling on. After 1848 the Banque de France had the monopoly of issuing notes for the whole of France, because the local issuing banks created by Napoleon I and Louis-Philippe had been absorbed by the Banque de France, whose notes were the only ones in circulation. It was the state which had made this decision and had settled the problem of monetary unity by authoritarian measures. A few bankers, under the Second Empire, protested against the right of monopoly exercised by the Banque de France, which had been imposed on the whole of the country by the state. Very little use was made of payment by cheque, and compensation was meagre. The wide circulation of metal currency was a sign of a restricted paper currency, but this meant that credit was scarce and was based entirely on the Banque de France. The latter, taking no risks, consequently piled up in its coffers considerable reserves of precious metals, proud of the fact that it could now maintain a steady discount rate more easily than England. It also gained great satisfaction from being the gold-controller of Europe. Whenever a sudden drastic rise in the English bank rate sent businessmen, and even the Bank of England itself, as we have seen, hastening to Paris in search of precious metals, it was to the Banque de France that they turned. Although it was attacked by those who accused it of stifling credit, on the other hand it was defended by those who found its caution reassuring. It was a difference of opinion which further enlivened the quarrel between the Pereires and the Rothschilds.
As we know, Jewish bankers played a vital part in the building of the railways. Pereire, a railway enthusiast, and Rothschild, the largest holder of free capital in France, had at first been prepared to undertake the great task in complete agreement. Rothschild, content with holding the Nord and the English connections, was one of the directors whose word carried most weight in the Banque de France, while the Pereire brothers, their heads still full of Saint-Simonist projects, were interested in vast plans covering Austria, Spain and the Mediterranean. They financed the great development of the economy of the south although even so they were obliged to open a credit institution, the well-known Crédit Mobilier. But because they could not use it for the issue of paper notes, and had tied up the funds entrusted to them too quickly, the Pereires embarked on a struggle to deprive the Bank of its privilege of issue. They believed that the mere right of minting money would enable them to possess the wide credit necessary for the bold financial policy on which they were launching out. It so happened that when Savoy was annexed to France, the Banque de Chambéry brought its banknotes and its privileges within French frontiers. The Pereires and their friends seized the shares of this bank and tried to turn its notes into rivals of those of the central bank. The Banque de France then asserted its rights, Chambéry lost its rights of issue, and soon afterwards the Crédit Mobilier went into liquidation.
This incident occasioned a great quarrel between theorists for or against privilege; it was above all a demonstration of the solidity of the rights the Bank had acquired, while no-one doubted the right of the state to confirm its privileges any longer. This situation was all the more paradoxical since the state was in the hands of Napoleon III who was a firm supporter of the Pereires and the Crédit Mobilier. The underlying cause of this paradox lay in French scepticism about cheques, for the development of bank money lagged more than half a century behind England. It was to be chiefly the work of Henri Germain, founder of the Crédit Lyonnais. His patron of 1863 was mainly anxious to attract large deposits by guaranteeing them against theft and fire so that he insisted on the effective help the Bank could give industrialists and merchants by insuring their cash service itself. By making wise use of these deposits and by a cautious policy, the Crédit Lyonnais was able to open branches in Paris and Marseilles, so that it was soon as powerful as the Crédit Industriel et Commercial and then outstripped it. It even surpassed the Comptoir d’Escompte, and soon the Crédit Lyonnais became the leading French deposit bank. From 1860 it was the major bank to introduce cheques.
But there is little reason for surprise in the difficulties encountered by the cheque between 1860 and 1870.
The Banque de France was regarded as the most reliable of all issuing authorities, and French specie reserves as the most powerful stock of gold in the world; between notes and gold as the two methods of payment, there was very little room for the cheque. It is difficult to believe that France’s reserves could not have kept the deposit banks generously supplied, perhaps as much as, and even more than, the English reserves. But it kept a good part of its cash-balance in gold, which held up the full development of French credit institutions until the closing years of the nineteenth century.
In England there was security and in France hesitation, but in Germany there was an irresistible wave of enthusiasm which led to the rapid growth of credit institutions from 1840. There were a great many note-issuing banks in the Germany of the confederation, because each prince had his own currency. Hamburg had one of the soundest banks of issue, whose marc banco was esteemed throughout Europe and served as a standard for the whole of Germany. Nuremberg still had its old seventeenth-century bank and its florin, while a large number of private establishments were also manufacturing notes with a restricted circulation. In this scheme of things the Bank of Prussia held a pre-eminent position which was strengthened by the place Prussia had assumed in the Zollverein, but it still could not contest the superiority of Hamburg. In short, the legal position of the German banks was similar to that of the English, in that there was plurality of issue.
Bank money, and banknotes, increased in competition with each other, and the future of the four great and famous banks which were to dominate the destiny of capitalist Germany after 1880 had already begun to take shape.
The Dresner Bank was connected with the progress of the iron industry in the Rhineland, and particularly of Essen and Krupps. The Deutsche Bank operated in the countries of central Europe. The Darmstädter Bank and the Disconto Gesellschaft carved out a place for themselves; indeed bills on the latter increased from six to forty million marks between 1855 and 1862.
Charles Morazé, The Triumph of the Middle Classes: A Political and Social History of Europe in the Nineteenth Century, Anchor Books, 1968, pages 291-297.
Notice that in the discussion above, events are never monocausal. They are always part of a swirling tornado of change. If you become accustomed to this, the way the world works and the way the world changes will become more accessible to you.
For example, “The use of the cheque became so widespread in England that shopkeepers and farmers adopted it as the only possible way of doing business although it was almost unknown on the continent. Cheques were often used for amounts of less than two pounds.”
Also notice, “…soon the Crédit Lyonnais became the leading French deposit bank. From 1860 it was the major bank to introduce cheques.”
This is an example of poly-awareness, the core of meta-intelligence.
[Max Weber, in his book General Economic History, points out that the words “cheque” and “exchequer” derive from the same root.]