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How Banking Systems Originally Started
What is a banking system? It seems like a very simple query. However, based on where you sit along with your own personal perspective there may be several different answers.
When I pose this question to participants in my classes I invariably get an answer that deals exclusively using a computerized process. In today's jargon the word "system" seems to automatically consult with a computer and a computer only.
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Nevertheless 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 the postal system including things such as 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 is the way all of this is organised and made to function making it worthy of the name "postal system". So, when we talk of a system, we speak of something much bigger and more complex than the computerized portion of that program.
The same logic relates to any 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 honour of being the oldest banking system on earth. This system, together with variations, is used for the very day in all states where the cheque still forms a portion of the federal payment system.
Now in the twenty first century, in the majority of nations where the cheque is still in use, the cheque clearing process is a highly sophisticated process utilizing state of the art technology, readers, sorters, scanners, coded cheques, digital graphics and lots and lots of computing power.
The cheque is basically a humble piece of paper, an instruction to a bank to create a payment. The narrative of the cheque clearing system is a story that's worth telling. It's that story of a banking system that is now in its third century of performance. It's the narrative of a banking system that has evolved and changed and been enhanced through countless innovations and changes. It's a story 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 talk of cheque-like tools from the Roman empire, from India and Persia, dating back two millennia or longer.
The cheque is a written order addressed by an account holder, the "drawer", to his or her bank, to pay a specific sum to the payee (also called the "drawee"). The cheque is a payment tool, meaning that it's the actual vehicle where a payment could be taken from one account and moved to some other account. A cheque has a legal character - it is a negotiable instrument governed in most countries by legislation.
To illustrate let us use an example. Your Aunt Sally provides you a present for the birthday. A cheque for one hundred pounds. To get a hold of your actual present (the cash that is) you've got two choices. You can take yourself off to Aunt Sally's lender and claim payment in cash by introducing the cheque on your own, or you might 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, especially if Aunt Sally lives in another town, miles away from where you live. So you deposit your cheque with your bank.
Cheque clearing is your 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 payoff 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 each of these things is no easy feat.
A year or two ago the annual number of cheques processed in the United Kingdom was just over five million. Not per year but PER DAY!
But, we are digressing. We need to get back to our story, today 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 of the dozens of London banks could set out with a leather bag tucked under their arms. From the luggage were the cheques which was deposited with their banks attracted on all of the other London banks.
They'd trudge from 1 lender to another, through rain and through sand, in winter and summer. At each bank they would present the cheques which was deposited with them for collection and would get in exchange cash payment for the items presented. When required they would also take delivery of cheques drawn on themselves and deposited at these other banks, keeping a tally of accounts between them and the other lender until they settled with each other. This dreary exhausting trudge from one bank to another would frequently take the best part of every afternoon. In their return the money received in payment of those cheques are balanced up. Life was indeed hard.
And then it happened! A spark of invention flashed across the mind of one of those weary clerks. Who it was, isn't known, but he had a true brainwave, probably driven by ideas of how to improve his leisure time or settle his nerves using that additional pint of ale.
The logic was simple. When the clerks could all meet at a set time at a single place, they can transact their business, each with another in a fraction of the time and without needing to walk miles and miles to heaps of banks. They started doing this by organizing to meet daily at the Five Bells, a tavern at Lombard Street in the City of London, to swap each of their cheques in one location and settle the accounts in cash. In the soul of the efficacy gained they could maximise their leisure and drinking time - that they promptly did, much to the gratification of the local publican. An additional benefit was that all this now happened from the cold and the wet and the gloom.
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