How Banking Systems Originally Started

What's a banking system? It feels like a simple question. However, depending on where you sit and your own personal perspective there may be several distinct answers.

When I pose this question to individuals on my courses I always get a response that deals exclusively with a computerized procedure. In today's jargon the word "system" appears to automatically consult with a computer and a computer just.
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However a "system" is larger than just a computer. A "system" is a grouping or combination of things or parts forming a complex or unitary whole. An easily understood example is that the postal system which includes things such as letters, stamps, parcels, letter boxes, post offices, sorting offices, computers, clerks, mailmen, delivery vans, airlines; just to mention a few of its components. It is how all this is organised and designed to work that makes it worthy of the title "postal system". So, when we speak of a system, we speak of something much bigger and more complicated than the computerized part of that program.

The identical logic relates to any other "system" and "banking systems" are no different.

The cheque clearing system (or check clearing system to our American cousins) can probably lay claim to the honour of being the oldest banking system on earth. This system, with variations, is used for the very day in most states where the cheque still forms a portion of the national payment system.

Now in the twenty first century, in most nations where the cheque is still in use, the cheque clearing process is an extremely complicated process utilizing state of the art technologies, readers, sorters, scanners, coded cheques, digital images and lots and lots of computing power.

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

How did the cheque begin? Most probably in early times. There's discussion of cheque-like instruments from the Roman empire, from India and Persia, dating back two millennia or more.

The cheque is a written order addressed by an account holder, the "drawer", to his or her bank, to pay a particular sum to the payee (also known as the "drawee"). The cheque is a payment instrument, meaning that it is the actual vehicle where a payment could be taken from 1 account and transferred to another account. A cheque has a legal personality - it is a negotiable instrument governed in most countries by law.

To illustrate let us use an illustration. Your Aunt Sally provides you a present for your birthday. A cheque for one hundred pounds. To get a hold of your real present (the money that is) you've got two choices. You may take yourself off to Aunt Sally's lender and maintain payment in money by introducing the cheque there yourself, or you might give the cheque into your own bank and ask them to collect the amount on your behalf.

Collecting your present in person can be a real bind, especially if Aunt Sally lives in a different city, miles away from wherever you live. So that you deposit your cheque with your bank.

Cheque clearing is the process (or system) which can be used to find the cheque that Aunt Sally gave you for your birthday, out of your bank branch, in which you deposited it, to Aunt Sally's bank branch and to find settlement for the amount return to your own branch. Given that on any one day millions and millions of cheques are processed, sorted, processed, transported; obtaining payment for and keeping tabs on all of these items is no easy feat.

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

However, we are digressing. We need to contact our story, now unfolding nearly 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 centre, was pretty much a informal, dull affair. Each day clerks from each one of the dozens of London banks would set out using a leather purse tucked under their arms. In the bags were the cheques which was deposited using their banks drawn on all of the other London banks.

They'd trudge from 1 bank to another, through rain and through mud, in summer and winter. At each bank they would present the cheques which was deposited with them for set and would get in trade cash payment for those items presented. When necessary they would also take delivery of cheques drawn independently and deposited at these other banks, keeping a tally of balances between them and the other bank until they settled with each other. This dull exhausting trudge from 1 lender to another would frequently take the best aspect of each afternoon. On their return the cash received in charge of those cheques are balanced up. Life was really hard.

And then it happened! A spark of innovation flashed across the mind of one of those weary clerks. Who it was, is not known, but he had a real brainwave, likely driven by thoughts of the way to improve his leisure time or settle his nerves using this extra pint of ale.

The logic was simple. When the clerks could all meet in a set time in a single location, they could transact their business, each with the other in a fraction of the time and without the need to walk miles and miles to heaps of banks. They began doing this by organizing to meet daily in the Five Bells, a tavern at Lombard Street in the City of London, to swap each of their cheques at 1 location and settle the accounts in cash. In the soul of the efficacy gained they could maximise their leisure and drinking time - which they promptly did, much to the satisfaction of the local publican. An added benefit was that all this now occurred out of this cold and the wet and the gloom.

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