banking. A system of trading in money which involved safeguarding deposits and making funds available for borrowers, banking developed in the Middle Ages in response to the growing need for credit in commerce. The lending functions of banks were undertaken in England by money-lenders. Until their expulsion by Edward I in 1291, the most important money-lenders were Jews, since they were not bound by canon law which forbade usury. They were replaced by Italian merchants who had papal dispensations to lend money at interest. In the 13th cent. credit was essential to finance commerce and major projects. The most important was the wool trade but other examples included large buildings such as Edward's castles in north Wales. When Italians had their activities in England curtailed in the early 14th cent., they were replaced by English merchants and goldsmiths, whose rates of interest were sufficiently low to avoid the usury laws. These sources of banking activity were the mainstay of commerce until the later 17th cent.

Monarchs had borrowed from merchants and landowners for centuries. By the late 17th cent., constitutional changes, particularly the growth of parliamentary power over government expenditures, required a more regulated framework. The Bank of England, founded in 1694, gave the government and other users of credit access to English funds. Similar developments occurred in Scotland and Ireland. These banks remained without serious competition until the later 18th cent., when expanding commercial and manufacturing activities gave scope to merchants, brewers, and landowners to establish banks based on their own cash reserves. These commercial banks took deposits, made loans, usually for limited periods, and issued promissory notes whose value was backed by bullion in the vaults combined with a fiduciary issue which depended on the likely scale of withdrawals. Errors of judgement sometimes occurred and ‘runs on the bank’ took place when depositors feared for the security of their money and demanded its return.

Fluctuations in the value of money because of the return to a gold-based currency after the end of the Napoleonic wars (1815) precipitated a series of crises. To stabilize the currency the government eventually introduced the 1844 Bank Charter Act, which gave the Bank of England two functions, that of supervising the note issue as part of the currency and that of monitoring the activities of the banking system. Regulatory powers were put in place in 1845 to control banking in Scotland and Ireland.

From their earliest days, banks required loyal staff who did not accept bribes, steal money, or give information about accounts to unauthorized persons. Literate and numerate staff received high salaries, retirement pensions, and various privileges including holidays and social facilities. Their work required systematic record keeping which grew in volume and complexity during the 19th cent. when cheques replaced banknotes for many business transactions. In 1773 banks established the London Clearing House to process cheques rapidly.

In the 19th cent., overseas trade and the expanding British empire reinforced the place of London as a centre of merchant banking. The probity, knowledge, and skills of these specialist bankers attracted business from foreign firms and governments seeking loans in Britain. Some British firms employed merchant banks to arrange their supply of capital finance. This usually involved share or bond issues which were traded on the stock markets. Such arrangements made possible the rapid development of railways, heavy engineering, mines, and large commercial developments. Many of these merchant banks survive, including Rothschilds, Lazard Brothers, Baring, Kleinwort Benson, and Schroders. Internal commerce and trade were funded mainly by a larger number of separate local banks which, after the middle of the 19th cent., became consolidated into a much smaller number of banks covering much of England. Numbers continued to diminish so that by 1980 banking was dominated by four companies: Barclays, Lloyds, Midland, and National Westminster.

London's dominance as the banking centre, not only of Britain but of the financial world, was not challenged until the 20th cent. with the growth of competing international economies such as the USA and Japan. None the less, London remains a major centre of merchant banking.

Within Britain, banking has been characterized, largely because of technological innovation, by an increasingly sophisticated provision of traditional banking services and an expansion of services associated with consumer credit. The business of safeguarding and lending money is often arranged through machine-readable cards and continuous access by telephone. Since the Financial Services Act of 1986, banks face more competition with many banking services being provided by building societies, trustee savings banks, and the Post Office.

Ian John Ernest Keil