Private banknotes
In contrast to government paper, private banknotes and deposits, redeemable in specie, had begun in Western Europe in Venice in the 14th century.
Firms granting credit to consumers and businesses had existed in the ancient world and in medieval Europe, but these were, quote, money lenders who loaned out their own savings.
Quote, banking, in the sense of lending out the savings of others, only began in England with the, quote, scriveners of the early 17th century.
The Scriveners were clerks who wrote contracts and bonds and were therefore in a position to learn of mercantile transactions and engage in money lending and borrowing.
There were, however, no banks of deposit in England until the Civil War in the mid-17th century.
Merchants had been in the habit of storing their surplus gold in a king's mint for safekeeping.
That habit proved to be unfortunate, for when Charles I needed money in 1638, shortly before the outbreak of the Civil War,
In the beginning of the Civil War, he confiscated the huge sum of 200,000 pounds of gold, calling it a quote, loan, from the owners.
Although the merchants finally got their gold back, they were understandably shaken by the experience, and forsook the mint, depositing their gold instead in the coffers of private goldsmiths, who, like the mint, were accustomed to storing the valuable metal.
The warehouse receipts of the goldsmiths soon came to be used as a surrogate for the gold itself.
By the end of the Civil War, in the 1660s, the goldsmiths fell prey to the temptation to print pseudo-warehouse receipts not covered by gold and lend them out.
In this way, fractional reserve banking came to England.
Very few private banks existed in colonial America, and they were short-lived.
Most prominent was the Massachusetts Land Bank of 1740, issuing notes and lending them out on real estate.
The Land Bank was launched as an inflationary alternative to government paper, which the
royal governor was attempting to restrict.
The Land Bank issued irredeemable notes, and fear of its unsound issue generated a competing
private silver bank which emitted notes redeemable in silver.
The Land Bank promptly issued over 49,000 pounds in irredeemable notes, which depreciated
very rapidly.
In six months' time, the public was almost universally refusing to accept the bank's
The Final Blow came in 1741 when Parliament, acting at the request of several Massachusetts
merchants and the royal governor, outlawed both the land and the silver banks.
One intriguing aspect of both the Massachusetts Land Bank and other inflationary colonial
schemes is that they were advocated and lobbied for by some of the wealthiest merchants and
land speculators in the respective colonies.
Debtors benefit from inflation and creditors lose. Realizing this fact, older historians
assumed that the debtors were largely poor agrarians and creditors were wealthy merchants,
and that therefore the former were the main sponsors of inflationary nostrums. But, of
course, there are no rigid quote classes of debtors and creditors. Indeed, wealthy merchants
and land speculators are often the heaviest debtors. Later historians have demonstrated
that members of the latter group were the major sponsors of inflationary paper money
in the colonies.