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How Banking Systems Originally Started


What is a banking system? It feels like a simple query. However, depending on where you sit along with your personal perspective there can be several different answers.

When I present this question to individuals in my classes I invariably receive an answer that deals exclusively with a computerized procedure. In today’s jargon the word “system” seems to automatically refer to a computer and a pc just.
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However a “system” is larger than only a computer. A “system” is a group or combination of things or parts forming a complex or unitary whole. An easily recognized example is that the postal system which includes things like stamps, letters, parcels, letter boxes, post offices, sorting offices, servers, clerks, mailmen, delivery vans, airlines; just to mention some of its own components. It’s the way all of this is organised and designed to function that makes it worthy of this name “postal system”. So, when we speak of a system, we talk of something much bigger and more complicated than the computerized part of that system.

The same logic relates to some other “system” and “banking systems” are no different.

The cheque clearing system (or check clearing system into our American cousins) can probably lay claim to the honor of being the oldest banking system in the world. This system, together with variations, is used for the very day in all countries where the cheque still forms a part of the national payment system.

Today in the twenty first century, in the majority of countries in which the cheque is still being used, the cheque clearing system is an extremely sophisticated process utilizing state of the art technologies, readers, sorters, scanners, coded cheques, electronic graphics and lots and lots of computing power.

The cheque is essentially a modest piece of paper, an instruction to a bank to make a payment. The story of the cheque clearing system is a story that is well worth telling. It’s that story of a banking system that’s now in its third century of operation. It is the narrative of a banking system that has evolved and changed and been improved through countless innovations and changes. It’s a narrative of the vital payment instrument that has helped grease the wheels of trade and industry.

How did the cheque start? Most likely in early times. There’s discussion of cheque-like instruments from the Roman empire, from India and Persia, ****** back two millennia or longer.

The cheque is a written order addressed by means of an account holder, the “drawer”, to her or his bank, to cover a specific amount to the payee (also called the “drawee”). The cheque is a payment tool, meaning that it’s the actual vehicle by which a payment can be obtained from one account and moved to another account. A cheque has a legal character – it’s a negotiable instrument regulated in most states by legislation.

To illustrate let’s use an example. Your Aunt Sally gives you a present for your birthday. A cheque for one hundred pounds. To get a hold of your actual present (the cash that is) you have two options. You may take yourself off to Aunt Sally’s bank and claim payment in cash by introducing the cheque on your own, or you might give the cheque into your own bank and ask them to accumulate the amount on your behalf.

Collecting your present in person may be real bind, particularly if Aunt Sally lives in another town, miles away from wherever you live. So you deposit your cheque with your bank.

Cheque clearing is the process (or method) that can be used to find the cheque that Aunt Sally gave you for your birthday, from your bank branch, where you deposited it, to Aunt Sally’s bank division and to get settlement for the amount due back to your own branch. Given that on any one day millions and millions of cheques are processed, sorted, processed, transported; getting payment for and keeping tabs on all of these items is no easy feat.

A couple of years ago the annual amount of cheques processed in the United Kingdom was just more than five million. Not annually but PER DAY!

However, we’re digressing. We need to contact our story, now unfolding almost two and a half centuries ago. Until about 1770 the group of cheques in London, which by then had already become the world’s premier banking centre, was pretty much a informal, dull affair. Each day clerks from each one of the dozens of London banks would set out with a leather bag tucked under their arms. From the bags were the cheques that was deposited using their banks attracted on all of the additional London banks.

They’d trudge from 1 bank to another, through rain and through sand, in summer and winter. At each bank they’d present the cheques which was deposited together for set and would get in trade cash payment for those items presented. When required they would also take delivery of cheques drawn independently and deposited in these other banks, keeping a tally of balances between them and another lender before they settled with each other. This dull exhausting trudge from 1 lender to another would frequently take the best part of each afternoon. In their return the cash received in payment of these cheques would be balanced up. Life was indeed hard.

And then it happened! A spark of innovation flashed across the mind of one of these weary clerks. Who it was, is not known, but he had a true brainwave, likely driven by thoughts of how to improve his leisure time or settle his nerves with that additional pint of ale.

The logic was simple. If the clerks could all meet in a set time in a single place, they could transact their business, each with the other in a portion of the time and without needing to walk miles and miles to dozens of banks. They began doing this by arranging to meet daily at the Five Bells, a tavern in Lombard Street in the City of London, to swap all their cheques at one location and settle the accounts in money. In the soul of the efficiency gained they can maximise their leisure and drinking time – that they immediately did, much to the gratification of the local publican. An added benefit was that all this now happened from this cold and the wet and the gloom.

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