How Banking Systems Originally Started
What’s a banking strategy? It feels like a very simple query. However, depending on where you sit along with your own personal perspective there can be several distinct answers.
When I pose this question to individuals in my classes I always get 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 computer only.
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However a “system” is bigger than just a computer. A “system” is a group or combination of things or parts forming a complex or unitary whole. An easily understood example is the postal system which includes things like letters, stamps, parcels, letter boxes, post offices, sorting offices, computers, clerks, mailmen, delivery vans, airlines; only to mention a few of its own components. It’s how all of this is organised and made to function making it worthy of the title “postal system”. So, once we talk of a system, we speak of something much larger and more complicated than the computerized portion of that system.
The identical logic relates to some other “system” and “banking systems” are not any different.
The cheque clearing system (or check clearing system into our American cousins) can probably lay claim to the honour of being the earliest banking system in the world. This system, with variations, is used for this very day in all states where the cheque still forms a portion of the national payment system.
Now 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 complicated process using state of the art technologies, readers, sorters, scanners, coded cheques, electronic images and lots and lots of computing power.
The cheque is basically a humble piece of paper, an instruction to your bank to make a payment. The story of the cheque clearing process is a narrative that’s well worth telling. It’s that story of a banking system that’s presently in its third century of performance. It is the story of a banking system which has evolved and changed and been enhanced through countless changes and creations. It is a narrative of the vital payment instrument that has helped grease the wheels of trade and industry.
How did the cheque begin? Most likely in ancient times. There is talk of cheque-like instruments from the Roman empire, from India and Persia, dating back two millennia or more.
The cheque is a written order handled by an account holder, the “drawer”, to his or her bank, to pay a specific amount to the payee (also called the “drawee”). The cheque is a payment instrument, meaning that it’s the true vehicle where a payment can be taken from one account and moved to some other account. A cheque has a legal character – it is a negotiable instrument regulated in most states by legislation.
To illustrate let us use an illustration. Your Aunt Sally gives you a gift for your birthday. A cheque for one hundred pounds. To get a hold of your real present (the cash that is) you have two choices. You can take yourself off to Aunt Sally’s lender and claim payment in money by introducing the cheque there yourself, or you could provide the cheque to your own bank and ask them to accumulate the exact amount on your behalf.
Collecting your gift in person may be real bind, particularly if Aunt Sally lives in another city, miles away from where you live. So you deposit your cheque with your bankcard.
Cheque clearing is the process (or system) which is used to get 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 things is no easy feat.
A year or two ago the annual amount of cheques processed in the United Kingdom was just over five million. Not annually but PER DAY!
But, we’re digressing. We will need to get back to our story, now unfolding almost two and a half centuries ago. Until roughly 1770 the group of cheques in London, which by then had already become the world’s premier banking center, was pretty much an informal, tedious affair. Each afternoon clerks from each one of the dozens of London banks would set out using a leather bag tucked under their arms. From the bags were the cheques which had been deposited using their banks attracted on all the additional London banks.
They’d trudge from one lender to the other, through rain and through mud, in winter and summer. At every bank they would present the cheques which was deposited together for set and would receive in trade cash payment for those items presented. When necessary they would also take delivery of cheques drawn independently and deposited in these other banks, maintaining a tally of accounts between them and another bank before they settled with each other. This dull exhausting trudge from one lender to another would frequently take the best aspect of each afternoon. On their return the money received in charge of those cheques would be balanced up. Life was really hard.
And then it occurred! A spark of invention flashed across the mind of one of these weary clerks. Who it was, isn’t known, but he had a true brainwave, probably driven by thoughts of how to boost his leisure time or settle his nerves with that extra pint of ale.
The logic was simple. When the clerks could all meet in a set time in one location, they could transact their business, each with another in a portion of the time and without needing to walk miles and miles to dozens of banks. They began doing this by organizing to meet daily at the Five Bells, a tavern in Lombard Street in the City of London, to exchange each of their cheques at 1 place and settle the balances in cash. In the soul of the efficiency gained they could maximise their leisure and drinking time – that they immediately did, much to the satisfaction of the local publican. An additional advantage was that all this now happened from the cold and the wet and the gloom.
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