“Know where to find the information and how to use it. That’s the secret of success.” – Albert Einstein
(This is a continuation of a series first published in July and August 2014)
Last week, we looked at the US history of banking with extracts sourced from The Office of the Comptroller of the Currency. We shall continue to reflect on more historical and still relevant banking developments that modern bankers need to know in solving today’s problems.
Many Kinds of Money: 1832 to 1864
“When the second Bank of the United States went out of business in 1832, state governments took over the job of supervising banks. This supervision often proved inadequate. In those days banks made loans by issuing their own currency. These bank notes were supposed to be convertible, on demand, to cash—that is, to gold or silver.
It was the job of the bank examiner to visit the bank and certify that it had enough cash on hand to redeem its outstanding currency. Because this was not always done, many bank note holders found themselves stuck with worthless paper. It was sometimes difficult or impossible to detect which notes were sound and which were not, because of their staggering variety.
By 1860 more than 10,000 different bank notes circulated throughout the country. Commerce suffered as a result. Counterfeiting was epidemic. Hundreds of banks failed. Throughout the country there was an insistent demand for a uniform national currency acceptable anywhere without risk.
In response, Congress passed the National Currency Act in 1863. In 1864, President Lincoln signed a revision of that law, the National Bank Act. These laws established a new system of national banks and a new government agency headed by a Comptroller of the Currency. The Comptroller’s job was to organize and supervise the new banking system through regulations and periodic examinations.”
Once again, we can see how the US government had to step in to ensure sanity in the financial system by establishing a centralized body with regulations and periodic examinations.
This is only the beginning of the history of banking. Do we see any familiar risk issues?
THE EMERGING MARKETS – ARE WE LEARNING FROM THE PAST?
In the emerging markets of Africa and the Third World, we have a combination of both the eighteenth and twenty first century banking practices. How can we blend the two sets, to avoid history repeating itself? How can we learn from the mistakes of banks in the western world and not re-engineer the wheel.
History shows that bank crises, bank runs, and financial “melt downs” started a long time ago. Having seen that banking originated both in the US and Europe, we also realized that at every point, there was regulation and supervision in the banking industry, however basic it was.
Look before you leap
Have you noticed that great and transformational leaders, inventors and industrialists are people who have creativity, but bear in mind the risk elements involved in their actions? Why is that? Because they took time to investigate the history of their various disciplines to find out how they can transform the status quo. They learnt the lessons from the past, and avoided the mistakes of their predecessors.
Just take a cursory look at the slogans of many corporate bodies these days. Everyone wants to outsmart the other. It is always about doing things better or improving upon what others did but were not successful in. There is an adage that goes like this “Look before you leap.” Others might have trodden on that same path and fell down, or even broken their legs!
A Brief History of Checking
We cannot continue the history of banking without looking at the almighty cheque. The cheque, (or check) is a powerful document which has gone through a lot of metamorphosis since its creation.
Source: Information Please® Database, © 2007 Pearson Education, Inc
No one is quite sure when the first checks appeared. Some experts think the Romans may have invented the check about 352 B.C. But even if that were true, the idea apparently didn’t catch on. According to most history texts, it probably wasn’t until the early 1500s, in Holland, that the check first got widespread usage. Amsterdam in the sixteenth century was a major international shipping and trading center.
People who had accumulated cash began depositing it with Dutch “cashiers,” for a fee, as a safer alternative to keeping the money at home. Eventually the cashiers agreed to pay their depositors’ debts out of the money in each account, based on the depositor’s written order or “note” to do so.
The concept of writing and depositing checks as a method of arranging payments soon spread to England and elsewhere, but not without resistance. Many people in the sixteenth and seventeenth centuries still had doubts about trusting their hard-earned money to strangers and little pieces of paper. In the United States, checks are said to have first been used in 1681 when cash-strapped businessmen in Boston mortgaged their land to a “fund,” against which they could write checks.
The first printed checks are traced to 1762 and British banker Lawrence Childs. The world “check” also may have originated in England in the 1700s when serial numbers were placed on these pieces of paper as a way to keep track of, or “check” on, them.
As checks became more widely accepted, bankers discovered they had a big problem: how to collect the money due from so many other banks. At first, each bank sent messengers to the other banks to present checks for collection, but that meant a lot of traveling and a lot of cash being hauled around. The solution to this problem was found in the 1700s, according to banking lore, at a British coffee shop.
The story goes that a London bank messenger stopped for coffee and noticed another bank messenger. They got to talking, realized that they each had checks drawn on the other’s bank, and decided to exchange them and save each other the extra trip. The practice evolved into a system of check “clearinghouses”—networks of banks that exchange checks with each other—that still is in use.”
Improvements in the clearing house system
Until about 1770, an informal exchange of cheques took place between London banks. Clerks of each bank visited all the other banks to exchange cheques, whilst keeping a tally of balances between them until they settled with each other. Daily cheque clearing began around 1770 when the bank clerks met at the Five Bells, a tavern in Lombard Street in the City of London, to exchange all their cheques in one place and settle the balances in cash.
In 1811, the Commercial Bank of Scotland, it is thought, was the first bank to personalize its customers’ cheques, by printing the name of the account holder vertically along the left-hand edge. In 1830 the Bank of England introduced books of 50, 100, and 200 forms and counterparts, bound or stitched. These cheque books became a common format for the distribution of cheques to bank customers.
Next week, we shall continue with the origination of the MICR cheques, with machine-readable characters which automated the cheque clearing system. We shall also move to the Ghanaian scene and the various stages our local banking history has metamorphosed into a digitized one, and the lessons we should learn from the mistakes of others. Are we looking before we leap?
To be Continued
ABOUT THE AUTHOR
Alberta Quarcoopome is a Fellow of the Institute of Bankers, and CEO of ALKAN Business Consult Ltd. She is the Author of Three books: “The 21st Century Bank Teller: A Strategic Partner” and “My Front Desk Experience: A Young Banker’s Story” and “The Modern Branch Manager’s Companion”. She uses her experience and practical case studies, training young bankers in operational risk management, sales, customer service, banking operations and fraud.