The Birth of Banking

When Samuel Pepys entrusted his money to Richard Hoare in 1680, he joined a whole new culture of banking in London. There were bankers in Europe as early as the 14th century, when recognisable banking operations such as foreign exchange and transfer of credit were practised in Venice; this was not, however, a public service. In Tudor times, Antwerp emerged as the continental centre of finance, providing enormous loans to Henry VIII and other European monarchs. But private banking for individuals in England only came about in the 17th century.  

Robert Clayton, a notary and conveyancer, is credited as the first person to use mortgages as security for bank loans. (He furtively used his customers’ deposits to increase his lending capacity.) This can properly be considered the start of banking as we know it today. But when Clayton’s bank declined, the artisan goldsmiths of London began to diversify into what we would now term ‘financial services’.

The new financial function of the goldsmiths was noted at the time by Nicholas Barbon, an early proponent of free trade. He saw their sideline as a temporary measure in an imperfect system. ‘Public Banks are of so great a Concern in Trade that the Merchants of London for want of such a Bank have been forced to carry their cash to Goldsmiths,’ he observed, ‘and have thereby raised such a credit upon Goldsmiths’ Notes that they pass in Payments from one to another like Notes upon the bank.’¹ Barbon didn’t know it, but he was witnessing the first glimmering beginning of London as a global financial centre. In due course – according to Frederick Hoare who wrote about ‘the romance of private banking’ in 1951² – ‘some ingenious goldsmith conceived the epoch-making idea of giving receipt notes not only to those who had deposited gold, but to those who came to borrow it.’ This was the precursor of our modern banknote.

Frederick doesn’t say so, but the ingenious goldsmith he had in mind may have been his ancestor, Richard Hoare. So long as depositors did not all demand their coin at once, Richard Hoare and others like him could lend out the money in their keep, and charge interest on it. This both generated income for the goldsmith-bankers and increased the notional quantity of currency in the system, because the same gold could be lent to one customer and borrowed by another without a single coin leaving the vault. Soon the circulation of credit and debt through the goldsmith-banks became a tidal flow, driving the turbines of trade. 

As for Richard Hoare, he was always a cautious and prudent lender, and he established the principle that his total exposure was only ever a small fraction of the wealth he held at the bank. That meant that in the first decades his profits from banking were less spectacular than they might otherwise have been, but then, as now, there were advantages to being a small bank with a known customer base. A bank with gold in store is like a ship with ballast in the hull: it is far less likely to capsize. Most of the goldsmith-bankers sank without trace before the century was out. Hoare’s stayed afloat and went on to navigate a course through centuries of fiscal squall and storm.






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^{1 Nicholas Barbon, A Discourse of Trade 1690, quoted in RD Richards, The Early History of Banking in England, 1929
2 Alderman FA Hoare, The Romance of Private Banking, a talk published by the Guildhall Historical Association, December 1951}