The Promissory Notes Act of 1704 officially established promissory notes as negotiable instruments. A promissory note is negotiable when it can be transferred to a third party by an endorsement, usually in the form of a signature of the recipient of the note. Because the banknote is a direct descendant of the
promissory note, the act of 1704 furnished the legal prerequisites for the use of banknotes as a medium of exchange.
In 17th-century England, people deposited gold in the safekeeping of goldsmiths, who in return issued something like a warehouse voucher made out to the owner of the gold. It was a receipt for a deposit of gold. Rather than exchange gold in trade it was much easier to exchange warehouse receipts, giving rise to the custom of making these receipts transferable by endorsement. Promissory notes originated from these receipts. The wording on promissory notes entitled a certain person, or the “bearer,” of the note, to a fixed amount of gold on demand. The custom arose of transferring the ownership of promissory notes with signature endorsements. The ownership of these notes might change over and over as long as there was room
for more endorsements. With promissory notes changing hands through repeated endorsements, invariably disputes came before the courts involving cases in which someone did not want to redeem an endorsed promissory note, or in which the recipients of endorsed promissory notes did not receive the same consideration as the initial recipients of the notes. For promissory notes to circulate as a medium of exchange, it was necessary that the holders of endorsed notes suffer no disadvantages when demanding that notes be paid in gold. That is, the promissory notes had to be negotiable. The courts waffled on the issue of the negotiability of promissory notes, forcing Parliament to take action.
Parliament named the law “An Act for giving like Remedy upon Promissory Notes, as is now used upon Bills of Exchange, and for the better Payment of Inland Bills of Exchange.” The act provided that promissory notes payable to order, or bearer, were legally binding obligations, assignable by endorsement to new holders, and new holders could sue in the courts for enforcement of their rights. Parliament cited the benefits to trade and commerce accruing from the provisions of the act.
The first step toward the evolution of banknotes came when goldsmiths dropped the names of individuals entitled to gold, and instead made the unnamed “bearer” of the note entitled to a fixed amount of gold. The rise of engraved notes completed the transition to banknotes. Indorsed checks also became negotiable instruments by virtue of the act of 1704. With the legal status of notes clarified, banknotes grew in popularity. Adam Smith observed in The Wealth of Nations, published in 1776, that bank money had surpassed metallic
money in quantity of circulation, marking a turning point in monetary history.
Beutel, Frederick K. “The Development of Negotiable Instruments in Early English Law.” Harvard Law Review, vol. 51, no. 5 (1938): 813–845.
Nevin, Edward, and E. W. Davis. 1970. The London Clearing Banks.
Rogers, James S. 1995. The Early History of the Law of Bills and Notes: A Study of the Origins of Anglo-American Commercial Law.