Bank notes & promissory notes

I have no education in economics beyond the required high school class. Lately I’ve been wondering about how the heck banks worked in the 18th and 19th centuries. At a time when people were mobile over long distances, but still before telegraphs. Wikipedia is somewhat useful, but leaves me with a lot of questions.

Am I right that a bank note could only be redeemed at a branch of the bank that issued it? Am I right that a promissory note was more widely applicable, and if so, how did a bank decide whether it would cash it or not? Was it a matter of trusting the issuing bank? Of somehow verifying the identity of the person who presented it?

I guess my real question is this: how did wealthy people moving from the Old World to the New World move their wealth? I assume they didn’t literally carry bars of gold with them, so how did all that happen?

Banks would have relationships with other banks, referred to as correspondent banks, that were authorized to accept notes on their behalf. So if you were traveling from New York to Boston, you could carry a note drawn on the Bank of New York, and its correspondent bank in Boston, Massachusetts Bank, would honor it.

Banking in the United States goes back only to the 1780s; the two banks just mentioned are the oldest still in existence in some form and were both founded in 1784 (Bank of New York is now Bank of New York Mellon, of course, and after a series of mergers Massachusetts Bank is now part of Bank of America). I don’t know when American banks first established correspondent bank relationships with European banks, such that you could cross the Atlantic with just bank notes in your pocket.

Going back earlier than the 18th and 19th centuries, it was handled by orders of religious knights; the Templars were the most common. If you were a merchant traveling from Paris to Jerusalem, you would deposit your gold in a Paris branch of the order. They’d give you a receipt and you would bring it with you. When you arrived at Jerusalem, you produce your receipt at a local branch of the same order and they would give you back the amount of gold you had deposited.

Obviously, you weren’t getting back the same gold you had deposited; that gold never left Paris. So in addition to creating international banking, this system also promoted the idea that you could separate the value of wealth from the physical objects that made up that wealth.

The problem with the promissory notes was that they were basically a receipt for a term investment … with the benefit you can withdraw it at any branch, and use it as a form of money. But investments pay interest which put a limit to how long the note had to live… So the promissory note was no good for international use, it would be too long before it returned… also they were of course risky, because if the bank collapsed, they had no value.
How did wealthy people migrate to the colonies and stay wealthy ?
They’d buy land titles and buy jobs. eg you could buy into being a high ranking military officer. Funny enough, the government at the colony was always paying off the high ranking military officials… They weren’t going to be happy if there was no return on investment ! It was some of the corruption that was prevented the british empire actually working as an empire…

While you could buy a commission in the British army, officers’s pay was mostly pretty low. In general, the expenses of living the life an officer was expected to live exceeded the salary for the post, so it cost money to remain in post. Purchasing a commission was not purchasing an income. Rather it bought status, promotion opportunties, etc, provided you had enough private means to stay the course.

There were other government positions which were lucrative, and which could be bought. The position might be legitimately lucrative if, for instance, you were entitled to charge a fee for the service you provided, and you were efficient and diligent in the provision of the service. The harder you worked, the more you could earn, at least potentially. Others were illegitimately lucrative, in that they put you in a good position to solicit bribes, etc.

But I don’t know that there were many positions in the American colonies that were all that lucrative. The American colonies were fairly small beer, economically speaking, and they were governed with a pretty light hand, so opportunities either to earn money or to extort money by discharging government functions would have been more limited than they were back in Britain.

The British Empire still works as an Empire, so I have to question this. I’ll grant that it’s shrunk quite a bit from its glory days, but that’s happened to literally every old-fashioned “paint the map red”-style colonial empire, so I doubt it can be laid at the feet of purchased commissions.

To defend the practice a bit, purchasing commissions provides a tie between the established aristocracy and the leaders of the military, making it less likely that the military is going to depose the king and install a bunch of military officers as the government. Granted, a better check against that is a responsible government chosen by a citizenry with a universal adult franchise and a competent, apolitical civil service, but the system they had kept the Home Counties, and often a bit more, on a fairly even keel for a good, long time.

There were also “Letters of Credit.” Any business that had an outpost where you wanted to go, could give you one. You might buy it or even put up security for it, but when you presented it to the godown in Hong Kong or the Shipping office in Freetown, the locals there would recognise it and give you value for it.

When I lived as a lodger in London, my landlord came from India, where there were restrictions on taking cash abroad. Indian students would come to the house and he would give them money on the understanding that their parents would give his parents the equivalent in Rupees. Of course, he could speak to his parents on the phone, but a letter would have been just as good.

In the Aubrey/Maturin novels, set around 1810, Stephen’s British bank notes were happily accepted by a sophisticated Indonesian banker, whose notes in turn were accepted all over the islands.

Things like that lead me to the next question, which is, how was identity verified at that time? I think I know the answer: it wasn’t. Or rather, being in a possession of a document like a bank or promissory note was as good as being the person it was made out to. I have read that in 18th/19th century England you couldn’t report an item as stolen unless someone had broken a lock to get to it. With no photo IDs, everyone kept everything locked up pretty much all the time.

As to the first point (verification of bank notes abroad), it’s important to keep in mind that at the time we’re talking about, international commerce was more widespread and sophisticated than we sometimes think today. In 1810, Britain was a leading global economy, and British merchants were routinely trading abroad. It’s quite likely that a banker in a major trading port of what is now Indonesia (at the time, the Dutch East Indies) would be familiar with bank notes issued by the big British notes-issuing institutions (above all, of course, the Bank of England) and would gladly accept them. By a similar token, if that Indonesian banker was an important and well-known figure in then Indonesia, it’s not unlikely that his notes would be honoured in other parts of the islands. The 18th and 19th centuries also had means to transfer large amounts cross-border without the use of cash; the letters of credit already mentioned were one tool, bills of exchange another. In fact, much of banking business at the time revolved around bills of exchange, e.g. “discounting” them (in essence, buying IOUs to be payable at a later date, at face value minus a discount that represents the interest rate for the time until redemption) was an important form of bank lending to merchants.

The second item (not being able to report an item as stolen unless it was locked) sounds suspiciously like BS to me. The common law crime of larceny, and other related crimes, do not require that the stolen item was locked away as an element of the offence.

In my current re-reading of The Brothers Karamazov I came across what appears to be the situation you describe, except there’s no cross-border activity going on. Dmitri Karamazov had a five-percent note with face value 5000 roubles. He gave it to Katerina Ivanovna, who only needed 4500 roubles. Katerina converts the note into cash and takes her 4500 roubles, returning 260 roubles to Dmitri. Katerina is applauded for her honesty in this affair, so the remaining 240 roubles represents the “discount” of 5% for the time the note was held before redemption.