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How Banking Systems Originally Started
What is a banking strategy? It seems like a very simple question. However, based on where you sit and your own personal perspective there may be a number of different answers.
When I pose this question to participants in my classes I always receive a response that deals exclusively using a computerized process. In the modern jargon the word "system" seems to automatically refer to a computer and a pc just.
However a "system" is bigger 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 the postal system including things such as letters, stamps, parcels, letter boxes, post offices, sorting offices, servers, clerks, mailmen, delivery vans, airlines; just to mention some of its own components. It is how all of this is organised and made to work that makes it worthy of this name "postal system". So, once we speak of a system, we talk of something much bigger and more complicated than the computerized part of that system.
The same 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 honor of being the oldest banking system on earth. This system, together with variations, is used to this very day in most states where the cheque still forms a portion of the federal payment system.
Now in the twenty first century, in most nations where the cheque is still being used, the cheque clearing process is an extremely complicated process utilizing state of the art technologies, readers, sorters, scanners, coded cheques, electronic graphics 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 system is a story that's well worth telling. It's that story of a banking system that's presently in its third century of operation. It's the narrative of a banking system which has evolved and changed and been improved through countless innovations and changes. It is a story of the vital payment instrument that has helped grease the wheels of commerce and industry.
How did the cheque begin? Most likely in ancient times. There's discussion of cheque-like tools from the Roman empire, from India and Persia, dating back two millennia or longer.
The cheque is a written order handled by an account holder, the "drawer", to her or his bank, to cover a specific sum to the payee (also known as the "drawee"). The cheque is a payment tool, meaning that it is the actual vehicle where a payment can be obtained from one account and transferred to some other account. A cheque has a legal character - it's a negotiable instrument governed in most countries by law.
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 real present (the cash that is) you've got two options. You may take yourself off to Aunt Sally's bank and maintain payment in cash by presenting the cheque there yourself, or you could provide the cheque into your own bank and ask them to accumulate the exact amount on your behalf.
Collecting your present in person may be real bind, particularly if Aunt Sally lives in a different city, miles away from where you live. So you deposit your cheque with your bank.
Cheque clearing is the process (or system) that is 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 due back to your own branch. Given that on any one day millions and millions of cheques are processed, sorted, processed, transported; getting payment for and keeping tabs on each of these items is not a simple feat.
A couple of years ago the yearly number of cheques processed in the United Kingdom was just more than five million. Not per year but PER DAY!
However, we're digressing. We will need to get back to our story, today unfolding almost two and a half centuries past. Until about 1770 the collection of cheques in London, which by then had already become the world's premier banking center, was pretty much a everyday, tedious affair. Each afternoon clerks from each one of the dozens of London banks could set out using a leather purse tucked under their arms. From the luggage were the cheques which was deposited with their banks attracted on all the other London banks.
They'd trudge from one bank to another, through rain and through sand, in winter and summer. At every bank they'd present the cheques which was deposited with them for set and would get in exchange cash payment for those items presented. When required they would also take delivery of cheques drawn independently and deposited at these other banks, maintaining a tally of balances between them and the other bank before they settled with every other. This dull exhausting trudge from 1 bank to another would frequently take the best part of every afternoon. On their return the money received in charge of those cheques are balanced up. Life was indeed hard.
And then it occurred! A spark of invention flashed across the mind of one of these weary clerks. Who it was, is not known, but he had a real brainwave, probably driven by ideas of the way to boost his leisure time or settle his nerves with that extra pint of ale.
The logic was simple. When the clerks could all meet at a set time at a single location, they could 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 arranging to meet daily at the Five Bells, a tavern in Lombard Street in the City of London, to swap each of their cheques in one location and settle the balances in cash. In the soul of the efficacy gained they can maximise their leisure and drinking time - that they immediately did, much to the gratification of the local publican. An added advantage was that all this now occurred out of this cold and the wet and the gloom.