The cheque republic: money in a modern economy with no banks.

Ben Norman and Peter Zimmerman.

What happens when a country’s banking system shuts down?  Just how damaging is it to the economy?  During the 20th century, the Republic of Ireland’s banking system suffered industrial disputes, some of which caused the main banks to close for several months.  When Greek banks closed temporarily last year, some commentators (e.g. Independent (2015), FT (2015)) recalled how, previously, the Irish public ingeniously circumvented the banking system and kept economic activity going.  Using material in the Bank of England’s Archive relating to the 1970 dispute, we shed light on how halcyon those days really were.

The industrial dispute closed most of the Irish banking system in May 1970 (Figure 1).  It was not the first time the Irish banks had closed: there had been strikes in 1950-51 and 1966.  Nor was it the last: there was a further significant strike in 1976.  But the 1970 “lock‑out” of bank staff was notable for being the longest.  Formally, it lasted around six months.

Figure 1: Announcement of the Irish banks’ closure, 1970


(Source: Bank of England Archive)

As per the Irish Banks’ Standing Committee notice, even before complete closure of the banks, their staff had been working short hours, and a backlog in cheque clearing had built up throughout April.  Furthermore, although the banks reopened their doors in mid‑November, it was early 1971 before banking business was back to normal.  In short, banking in Ireland was disrupted for nearly a full year.

Despite this, the Irish economy did not implode (see Chart).  So when banks in Greece were closed for three weeks last summer, some commentators pointed to Ireland in 1970 to show that a modern economy can function without banks.  By contrast, Ashcraft (2005) shows that the economic costs of closing even healthy banks can be high.  We wondered how valid the Irish comparison is.  In addition to material in the Bank’s Archive, there is a limited yet rich set of near‑contemporary sources that give further insights: the Irish government-commissioned inquiry into the dispute (Fogarty (1971)); the Central Bank of Ireland’s survey of its economic effects (CBI (1971)); contemporary newspaper articles; and an academic study (Murphy (1978)).


With all the main Irish banks closed, interbank payments ground to a halt.  Cash already circulating continued to be used for payments.  Without the main banks open to channel it to where it was needed, though, shortages emerged.  And there was no practical means for the Central Bank of Ireland to get more notes into the economy.

Denied access to a functioning banking system, Irish people continued writing each other cheques.  Cheques were generally accepted as payment because the cheque’s recipient (payee) expected it would clear and settle within days of presenting it at a bank.  Until a cheque settles, the payee faces counterparty risk, should the signatory to the cheque (payer) not honour it.  During the Irish dispute, people accepted cheques in lieu of payment as IOUs.  By doing so, they were shouldering the risk until the banks reopened.  It was unclear, for a long time, when the dispute would end.

How did payees manage this risk for such a prolonged period?  Notoriously, local publicans were well-placed to judge the creditworthiness of payers.  (They had an informed view of whether the liquid resources of would-be payers were stout or ailing!)  For example, John Dempsey, a publican in Balbriggan, near Dublin, was “…holding cheques for thousands of pounds, but I’m not worried.  The last bank strike went on for 12 weeks and I didn’t have a single ‘bouncer’. … I deal only with my regulars … I refuse strangers.  I suppose I’ve been able to keep a few local factories going.”

Retailers played a similar role, also accepting cheques to recycle cash back into the economy.  Already during May, “…at Dunnes, one of Ireland’s biggest chain stores…up three flights of steps to the Accounts Dept. ventures a steady stream of people hoping to cash cheques.  They range from a school teacher timidly producing his monthly salary cheque for £45 to the cashier of a manufacturing firm presenting a cheque for hundreds of pounds to change into cash for wage packets.  ‘They are mostly strangers to us, and we just have to play it by ear in deciding whether to accept a cheque’, said an official.

Murphy (1978) finds no evidence that the lack of official money had a detrimental effect on Ireland’s retail sales in 1970.  This is not to say the dispute had no real economy effects.  One Irish building contractor commented: “I employ only 10 people.  If it hadn’t been for the bank strike I’d be hiring 30.  I’d say I’ve lost up to £20,000 over it. … One of my problems is finding the money to pay the wages.  I run round from Wednesday to Friday to scrape them up, and in that time I can do no other work.”  60% of firms reported having to divert staff to maintain alternative financial arrangements (CBI (1971)).

Some of the credit risk – inherent in the estimated ten million cheques to the cumulative value of over £3,000 million that changed hands without clearing and settling during the dispute – did crystallise.  It was not on such a scale as to be systemic, although – in a pre-Herstatt world – the potential for contagious financial instability was almost certainly not properly appreciated.  Come the bank strike in 1976, memories of bouncing cheques in 1970 were still in people’s minds.  Symptomatic of a more cautious mood, one publican’s banner then read: “When the banks start serving booze, we will start cashing cheques”!

By focusing on retail sales, Murphy (1978) may have missed the dispute’s impact on Ireland’s importers and exporters.  This was a key concern from the start.  Already at end-April 1970, the Bank of Ireland, a commercial bank, sought the Bank of England’s assistance to help “…five or six customers in Dublin who export to the U.K. … [by allowing] drafts drawn on the Bank of Ireland’s account here [at the Bank of England] to enable Irish exporters to continue to meet the cost of U.K. import deposits.”  The Bank of England agreed to this, on the proviso that “this would only be a temporary arrangement”.

Obviously this helped only select firms.  One alternative was for Irish businesses to turn to the few banks still open.  On a visit to the Bank of Ireland in Dublin in May 1970, Bank of England staff reported that “…foreign banks[’]…business is booming; many public and private undertakings opened accounts with them in the previous bank closure.”  This did not provide a sufficient solution, though, and by September, reports were emerging of “an emergency banking service, designed to facilitate import/export business during the present bank dispute”.  An Irish Export Board spokesman admitted in October that “the government’s scheme to provide the means of purchasing essential imports has helped, but a prolongation of the dispute could have deleterious effects on the economy.”  The official government inquiry was more scathing: “In a withering comment relayed…from contacts abroad by the head of an export firm, Ireland once again showed itself to have all the marks of a banana republic except the bananas” (Fogarty (1971))!

Other difficulties emerged from the (non-)payment of some UK government bond dividends whose registers of ownership were inaccessibly held in the Bank of Ireland’s vaults.  Stockholders who had not received their dividend payments sought government assistance: in a letter to HM Treasury in mid-August, one wrote: “…I am facing the threat of a summons for non‑payment of rates on my house for which I was dependant [sic] on the dividends of British and Irish funds due…”

By autumn 1970, pressure was building from insurers and pension funds.  The Treasury Solicitor’s Office advised that HM Treasury was “in breach of our contractual obligations to the holders of British government stock in the Republic of Ireland.”  HM Treasury, Foreign & Commonwealth Office and Bank of England staff considered contingency plans: “to put the Embassy in Dublin in funds to make payments to any stockholders who produce their certificates.  [But]…without the Register we cannot be certain…[of] proof of ownership…  The method of payment would probably need to be in cash or by postal order and this would raise problems of security…  A possible alternative would be to bring the Register to this country and get the Bank of England to operate it.

Obviously the circumstances of Ireland (1970) were different to Greece (2015): in Ireland there was no doubt over banks’ solvency, whereas the Greek banks closed to prevent a large-scale depositor run.  It is difficult to imagine cheques – in any case nowadays a payment method in decline – being widely accepted in a country on the brink of a financial crisis.  Our Irish case study suggests that the economic effects of the dispute were not benign, even though there were no doubts about the solvency of the banks.  Such major disruptions to the banking system cannot easily be overcome at low cost.  If true in 1970, this is likely to be even truer in today’s more complex, interconnected financial systems.

Additional references

Bank of England Archive – files C79/88, 7A356/3, AC13/953, C12/162

Central Bank of Ireland (1971),  Survey of Economic Effects of Bank Dispute 1970

Fogarty, M P (1971),  Report of Banks Inquiry: Report on Dispute of 1970 between the Associated Banks and the Irish Bank Officials’ Association and Recommendations as to what action might be taken to avoid the risk of closures through industrial action in the future

Ben Norman works in the Bank’s Major UK Retail Deposit Takers Division and Peter Zimmerman is on study leave from the Bank’s Global Spillovers and Interconnections Division.

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Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.

4 thoughts on “The cheque republic: money in a modern economy with no banks.

  1. “Such major disruptions to the banking system cannot easily be overcome at low cost. If true in 1970, this is likely to be even truer in today’s more complex, interconnected financial systems.”

    surely an argument for decoupling the payment system from the banking system? believe Adair Turner’s report had something to say about this?

  2. An excellent piece. When cheque books ran out, it was said that some people resorted to inscribing a cheque-like payment instruction on the cream at the top of a glass of Guinness. The ultimate liquid asset!

  3. Great piece. Do you have any idea of the relative size of checks bouncing after the banks reopened?

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