History of banking

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The history of banking began with the first prototype

BC in Assyria, India and Sumer. Later, in ancient Greece and during the Roman Empire, lenders based in temples gave loans, while accepting deposits and performing the change of money. Archaeology from this period in ancient China and India also shows evidence of money lending
.

Many scholars trace the historical roots of the modern

oldest bank still in existence is Banca Monte dei Paschi di Siena, headquartered in Siena, Italy, which has been operating continuously since 1472.[3] Until the end of 2002, the oldest bank still in operation was the Banco di Napoli headquartered in Naples
, Italy, which had been operating since 1463.

Development of banking spread from northern Italy throughout the

bank regulation
.

Ancient authority

Further information:
History of economics

The shift from a reliance on hunting and gathering of foods to agricultural practices, starting sometime after 12,000 BCE, resulted in increased stability of economic relations. Such changes in socio-economic conditions began approximately 10,000 years ago in the Fertile Crescent, about 9,500 years ago in northern China, about 5,500 years ago in Mexico, and approximately 4,500 years ago in the eastern parts of the United States.[4][5][6]

Monetary

Ancient types of money known as grain-money and food cattle-money were used from around 9000 BCE as two of the earliest commodities used for purposes of

bartering
.

Anatolian obsidian as a raw material for Stone Age tools was being distributed from as early as about 12,500 BCE, and organized trading of it was occurring during the 9th millennium BCE (Cauvin; Chataigner 1989). Sardinia was one of the four main sites for sourcing the material deposits of obsidian within the Mediterranean; trade using obsidian was replaced during the 3rd millennium BCE by trade of copper and silver.

Record-keeping

Detailed account of raw materials and workdays for a basketry workshop. Clay, c. 2040 BCE (Ur III)
Further information: History of accounting § Ancient history, and History of accounting

Objects used for record keeping, "bulla" and tokens, have been recovered from within Near East excavations, dated to a period beginning 8000 BCE and ending 1500 BCE, as records of the counting of agricultural produce. Commencing in the late fourth millennia mnemonic symbols were in use by members of temples and palaces to record stocks of produce. Types of records accounting for trade exchanges of payments were first being made about 3200 BCE. The Code of Hammurabi, written on a clay tablet around 1700 BCE, describes the regulation of banking activity within the civilization (Armstrong); although still rudimentary, banking was well enough developed to justify laws governing banking operations.[nb 1] Later during the Achaemenid Empire (after 646 BCE),[7] further evidence is found of banking practices in the Mesopotamia region.[8][9][10][11][12][13][14][15]

Structural

By the 5th millennium BCE, the settlements of Sumer, such as Eridu, were formed around a central temple. In the fifth millennium, people began to build and live in the civilization of cities, providing a structure for the construction of institutions and establishments. Tell Brak and Uruk were two early urban settlements.[11][16][17][18][19]

Earliest forms of banking

See also: Banker (ancient)

Asia

Mesopotamia and Persia

Further information: Mesopotamia § Economy and agriculture

Banking as an archaic activity (or quasi-banking[20][21]) is thought to have begun as early as the latter part of the 4th millennium BCE,[22] to the 3rd millennia BCE.[23][24]

Among many other things, the Code of Hammurabi recorded interest-bearing loans.

Prior to the reign of Sargon I of Akkad (2335–2280 BCE[25]) the occurrence of trade was limited to the internal boundaries of each city-state of Babylon and the temple located at the centre of economic activity therein; trade at the time for citizens external to the city was forbidden.[16][26][27]

In Babylonia of 2000 BCE, people depositing gold were required to pay amounts as much as one sixtieth of the total deposited. Both the palaces and temple are known to have provided lending and issuing from the wealth they held—the palaces to a lesser extent. Such loans typically involved issuing seed-grain, with re-payment from the harvest. These basic social agreements were documented in clay tablets, with an agreement on interest

Antiochus III having ransacked or pillaged the temple of Aine in Ecbatana (Media) of gold and silver.[28][29][30][31][32][33][34][35]

More information comes from

liability from a contract of bailment if the notary denied the existence of the contract. Law 124 stipulated that a depositor with a notarized contract of bailment was entitled to redeem the entirety of their deposit, and Law 125 stipulated that a banker was liable for replacement of deposits stolen while in their possession.[39][40][38]

Cuneiform records of the

Darius I. These records suggest a "lending house" (Silver 2002), a family engaging in "professional banking..." (Dandamaev et al. 2004), and economic activities similar to modern deposit banking. Another interpretation is that the family's activities are better described as entrepreneurship rather than banking (Wunsch 2007). The Murashu family apparently took part in providing credit (Moshenskyi 2008).[41][42][43][44][45][46][47][48][49][50]

Asia Minor

Further information:
Asia Minor

From the fourth millennium previously agricultural settlements began administrative activities.[51][52][53][54]

The temple of Artemis at Ephesus was the largest depository of Asia. A pot hoard dated to 600 BCE was found in excavations by The British Museum during 1904. During the time of the cessation of the first Mithridatic war, the entire debt being held at the time was annulled by the council. Mark Anthony is recorded to have stolen from the deposits on occasion. The temple served as a depository for Aristotle, Caesar, Dio Chrysostomus, Plautus, Plutarch, Strabo and Xenophon.[55][56][57][58][59][60][61]

The temple to Apollo in Didyma was constructed sometime in the 6th century. A large sum of gold was deposited within the treasury at the time by king Croesus.[62][63]

India

Main article:
History of banking in India

In ancient India there are evidences of loans from the

Maurya dynasty (321 to 185 BCE), an instrument called adesha was in use, which was an order on a banker desiring him to pay the money of the note to a third person, which corresponds to the definition of a bill of exchange as we understand it today. During the Buddhist period, there was considerable use of these instruments. Merchants in large towns gave letters of credit to one another.[64][65][66]

China

Main: History of banking in China

In ancient China, starting in the

Qin Dynasty (221 to 206 BCE), Chinese currency developed with the introduction of standardized coins that allowed easier trade across China, and led to development of letters of credit. These letters were issued by merchants who acted in ways that today we would understand as banks.[67]

Ancient Egypt

Further information: Egypt § Government and economy

Some scholars suggest that the Egyptian grain-banking system became so well-developed that it was comparable to major modern banks, both in terms of its number of branches and employees, and in terms of the total volume of transactions. During the rule of the Greek Ptolemies, the granaries were transformed into a network of banks centered in Alexandria, where the main accounts from all of the Egyptian regional grain-banks were recorded. This became the site of one of the earliest known government central banks, and may have reached its peak with the assistance of Greek bankers.[68]

According to Muir (2009) there were two types of banks operating within Egypt: royal and private.[69] Documents made to show the banking of taxes were known as peptoken-records.[70]

Greece

Trapezitica is the first source documenting banking (de Soto – p. 41). The speeches of Demosthenes contain numerous references to the issuing of credit (Millett p. 5). Xenophon is credited to have made the first suggestion of the creation of an organisation known in the modern definition as a joint-stock bank in On Revenues written c. 353 BCE[71][72][73][74]

The city-states of Greece after the

Persian Wars produced a government and culture sufficiently organized for the birth of a private citizenship and therefore an embryonic capitalist society, allowing for the separation of wealth from exclusive state ownership to the possibility of ownership by the individual.[75][76]

According to one source (Dandamaev et al.), trapezites were the first to trade using money, during the 5th century BCE, as opposed to earlier trade which occurred using forms of pre-money.[77]

Specific focus of funds

The earliest forms of storage utilized were the rudimentary money-boxes (ΘΗΣΑΥΡΌΣ[78]) which were made similar in form to the construction of a bee-hive, and were found for example in the Mycenae tombs of 1550–1500 BCE.[79][80][81][82][83][84][85]

Private and civic entities within ancient Grecian society, especially Greek temples, performed financial transactions. (Gilbart p. 3) The temples were the places where treasure was deposited for safe-keeping. The three temples thought the most important were the temple to Artemis in Ephesus, and temple of Hera within Samos, and within Delphi, the temple to Apollo. These consisted of deposits, currency exchange, validation of coinage, and loans.[71][73][86][87]

The first treasury to the

Siphnos during the 6th century.[88][89][90]

Before the destruction by Persians during the 480 invasion, the Athenian Acropolis temple dedicated to Athena stored money; Pericles rebuilt a depository afterward contained within the Parthenon.[91]

During the reign of the Ptolemies, state depositories replaced temples as the location of security-deposits. Records exist to show this having occurred by the end of the reign of

Ptolemy I (305–284).[92][93][94][95]

As the need for new buildings to house operations increased, construction of these places within the cities began around the courtyards of the agora (markets).[96]

Geographical focus of banking activities

Athens received the Delian league's treasury during 454.[97]

During the late 3rd and 2nd century BCE, the Aegean island of Delos became a prominent banking center.[98] During the 2nd century, there were for certain three banks and one temple depository within the city.[99]

Thirty-five Hellenistic cities had private banks during the 2nd century (Roberts – p. 130).[99]

Of the settlements of the Greco-Roman world of the 1st century CE, three were of pronounced wealth and centres of banking: Athens, Corinth and Patras.[100][101][102][103]

Loans

Many loans are recorded in writings from the classical age, although a very small proportion were provided by banks. Provision of these were likely an occurrence of Athens, with loans known to have been provided at some time at an annual interest of 12%. Within the boundaries of Athens, bankers' loans are recorded as having been issued on eleven occasions altogether (Bogaert 1968).[72][104][105]

Banks sometimes made loans available confidentially, which is, they provided funds without being publicly and openly known to have done so. In addition, they kept depositors' names confidential as well. This intermediation per se was known as dia tes trapazēs, translated from Latin as "God will trap you".[86]

A loan was made by a Temple of Athens to the state during 433–427 BCE.[106]

Rome

Main article: Banking in ancient Rome
Gold coin produced by the Roman Imperial Mint

Roman banking activities were a crucial presence within temples. For instance the minting of coins occurred within temples, most importantly the Juno Moneta temple, though during the time of the Empire, public deposits gradually ceased to be held in temples, and instead were held in private depositories. Still, the Roman Empire inherited the mercantile practices from Greece (Parker).[75][92][107]

During 352 BCE a rudimentary public bank (known as dēmosía trápeza

Plebeians were required to borrow money, so newly appointed quinqueviri mensarii were commissioned to provide services to those who had security to provide, in exchange for money from the public treasury. Another source (J. Andreau) has the shops of banking of Ancient Rome firstly opening in the public forums during the period 318 to 310 BCE.[109][110][111]

In early Ancient Rome deposit bankers were known as argentarii and at a later time (from the 2nd century CE onward) as nummularii (Andreau 1999 p. 2) or mensarii. The banking-houses were known as Taberae Argentarioe and Mensoe Numularioe. They would set up their stalls in the middle of enclosed courtyards called macella on a long bench called a bancu,[citation needed] from which the words banco and bank are derived.[112] As a money changer, the merchant at the bancu did not so much invest money as merely convert the foreign currency into the only legal tender in Rome—that of the Imperial Mint.[73][110][111][113]

Operations of banking within Roman society were known as officium argentarii. Statutes (125/126 CE) of the Empire described "letter from Caesar to Quietus" show rental monies to be collected from persons using land belonging to a temple and given to the temple treasurer, as decreed by Mettius Modestus, governor of Lycia and Pamphylia. A law, receptum argentarii, obliged a bank to pay its clients debts under guarantee.[114][115][116][117]

Cassius Dio advocated the establishment of a state bank, funded by the sale of all the properties owned at the time by the state.[118]

In the 4th century monopolies existed in Byzantium and in the city of Olbia in Sardinia.[119][120]

The Roman empire at some time formalized the administrative aspect of banking and instituted greater regulation of financial institutions and financial practices. Charging interest on loans and paying interest on deposits became more highly developed and competitive. The development of Roman banks was limited, however, by the Roman preference for cash transactions. During the reign of the Roman emperor Gallienus (260–268 CE), there was a temporary breakdown of the Roman banking system after the banks rejected the flakes of copper produced by his mints. With the ascent of Christianity, banking became subject to additional restrictions, as the charging of interest was seen as immoral. With the decrease in economic activity after the fall of Rome and Islamic invasions, banking likely temporarily ended in Europe and was not revived until Mediterranean trade commenced again in the 12th century.[121]

Religious restrictions on interest

Most early religious systems in the ancient Near East, and the secular codes arising from them, did not forbid

Phoenicians and Egyptians, interest was legal and often fixed by the state.[123]

Judaism

Main articles: Loans and interest in Judaism and Jewish views of poverty, wealth and charity

The Torah and later sections of the Hebrew Bible criticize interest-taking, but interpretations of the Biblical prohibition vary. One common understanding is that Jews are forbidden to charge interest upon loans made to other Jews, but obliged to charge interest on transactions with non-Jews. However, the Hebrew Bible itself gives numerous examples where this provision was evaded.

Deuteronomy
23:19 Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest.
Deuteronomy 23:20 Unto a foreigner thou mayest lend upon interest; but unto thy brother thou shalt not lend upon interest; that the LORD thy God may bless thee in all that thou puttest thy hand unto, in the land whither thou goest in to possess it.[124]

Christ drives the Usurers out of the Temple, a woodcut by Lucas Cranach the Elder in Passionary of Christ and Antichrist[125]

In general, it was seen as advantageous to avoid debt at all, to avoid being bound to someone else. Debt was to be avoided and not used to finance consumption, except when in need. However, laws against usury were among many the prophets condemned the people for breaking.[126]

The interpretation that interest could be charged to non-Israelites would be used in the 14th century for Jews living within Christian societies in Europe to justify lending money for profit. This conveniently side stepped the rules against usury in both Judaism and Christianity, as Christians were not involved in the lending but were still free to take the loans.[citation needed]

Christianity

Main articles: Usury, Christian views on poverty and wealth, and Christian finance

Originally, the charging of interest, known as

Apostolic Chamber
attached directly to the Vatican (money loans, guarantees, issuance of securities, investments, etc.)

The rise of

Calvinism the setting of the stage for the later development of capitalism in northern Europe.[128] In this view, elements of Calvinism represented a revolt against the medieval condemnation of usury and, implicitly, of profit in general. Such a connection was advanced in influential works by R. H. Tawney (1880–1962) and by Max Weber (1864–1920). According to Weber, the Protestant work ethic was a force behind an unplanned and uncoordinated mass action that influenced the development of capitalism
.

Rodney Stark propounds the theory that Christian rationality is the primary driver behind the success of capitalism and the Rise of the West.[129]

Islam

Main article: Riba

The Quran strictly prohibits lending money on Interest."Believers! Have fear of Allah and give up all outstanding interest if you do truly believe. But if you fail to do so then be warned of war from Allah and His Messenger. If you repent even now you have the right of the return of your capital; neither will you do wrong nor will you be wronged."(2:278-279) "O you who have believed, do not consume usury, doubled and multiplied, but fear Allah that you may be successful" (3:130) "and Allah has permitted trade and has forbidden interest" (2:275).

The Quran states that taking interest and making money through unethical means was prohibited for Muslims and in other communities in earlier times as well: "Because of the wrongdoing of the Jews We forbade them good things which were (before) made lawful unto them, and because of their much hindering from Allah's way, And of their taking usury when they were forbidden it, and of their devouring people's wealth by false pretenses, We have prepared for those of them who disbelieve a painful doom." (Al Quran – 4:160–161)

Qur'an prohibits, and commodity exchanges in unequal quantities, which the Sunnah prohibits. Trade in promissory notes (e.g. fiat money and derivatives) is forbidden.[citation needed
]

Despite the prohibition of charging interest, during the 20th century a number of developments took place that would lead to an

leasing
.

Medieval Europe

The roots of modern banking are traceable to medieval and early Renaissance Europe, including Italy's Lombards in the 12th and 13th centuries, France's Cahorsins in the 13th century and in particular the rich Italian cities such as Florence, Venice, and Genoa.[130]

Emergence of merchant banks

Main article: Merchant bank
Map showing the penetration of Sienese bankers in Europe in the 13th century

The original banks were "merchant banks" that Italian grain merchants invented in the Middle Ages. As Lombardy merchants and bankers grew in wealth and credit based on the strength of the Lombard plains cereal crops, many displaced Jews fleeing Spanish persecution were attracted to the trade. They brought with them ancient practices from the Middle and Far East which had financed the trans-Asian silk routes. They applied these methods to finance grain production and distribution.

Barred from owning land in Italy, Jews entered the great trading

piazzas and halls of Lombardy, alongside local traders, and set up their benches to trade in crops. They had one great advantage over the locals: Christians were strictly forbidden from the sin of usury, lending at interest, which was also condemned in the Islamic world, but with less strictness. The Jewish newcomers, on the other hand, could make high-risk loans to farmers against crops in the field without direct jurisdiction by the Church.[citation needed] They then began to advance payment against the future delivery of grain shipped to distant ports. In both cases they made a profit from the present discount against the future price. This two-handed trade was time-consuming and soon there arose a class of merchants who were trading grain debt
instead of grain.

The Jewish trader performed both financing (credit) and

crop failure
, through the issuance of crop (or commodity) insurance against the hazard of crop failure.

Merchant banking progressed from financing trade on one's own behalf to settling trades for others, and then to holding deposits for settlement of "billette" or notes written by the people who were still brokering the actual grain. And so the merchant's "benches" (bank is derived from the Italian for bench, banca, as in a

bill of exchange and later still a cheque
).

These deposited funds were intended to be held for the settlement of grain trades, but often were used for the bench's own trades in the meantime. The term bankrupt is a corruption of the Italian banca rotta, or broken bench, the symbolic ruin of an insolvent trader. The expression of "being broke" has a similar etymology.

Crusades

Adhemar de Monteil in chain mail carrying the Holy Lance in one of the battles of the First Crusade

In the 12th century, the need to transfer large sums of money to finance the Crusades stimulated the re-emergence of banking in western Europe. In 1162, Henry II of England levied the first of a series of taxes to support the crusades. The Templar and Hospitaller Christian knights acted as Henry's bankers in the Holy Land. The Templars' rich land holdings across Europe also emerged during 1100–1300 as the beginning of Europe-wide banking. They took in local currency and issued demand notes redeemable at any of their castles across Europe, allowing movement of money without the usual risk of robbery while traveling. It is unclear if the Templar Knights used any hidden codes or encryptions to protect the notes given from any possible fraud. [131]

Discounting of interest

To circumvent the moral prohibition on usury, directly paying money for the use of money, the practice of discounting developed, in theory giving depositors an interest (part ownership) in the trades performed with their money. Similar methods had long been employed in Islamic banking.

Medieval trade fairs, such as the one in Hamburg, contributed to the growth of banking[when?] in a curious way: moneychangers issued documents redeemable at other fairs, in exchange for hard currency. These documents could be cashed at another fair in a different country or at a future fair in the same location. If redeemable at a future date, they would often be discounted by an amount comparable to a rate of interest. Eventually,[when?] these documents evolved into bills of exchange, which could be redeemed at any office of the issuing banker. These bills made it possible to transfer large sums of money without the complications of hauling large chests of gold protected by armed guards.

Italian bankers

A 14th century manuscript depicting bankers in an Italian counting house

The Republic of Venice, sometimes mistakenly credited with establishing a Bank of Venice in the 12th century, did not formally create a public bank until 1587. However in the 13th and 14th centuries its Grain Office did a banking business that included both deposits and lending.[132] The Republic's system of transferable public debt has also been identified as an important contribution to the development of banking.[133]

In the middle of the 13th century, groups of Christians, particularly the Italian

legal loopholes to get around the ban on Christian usury;[134] for example, one method of effecting a loan with interest was to offer money without interest, but also require that the loan be insured against possible loss or injury, and/or delays in repayment (see contractum trinius).[134] The Christians utilizing these legal loopholes became known as the pope's usurers, and reduced the importance of the Jews to European monarchs.[134] Later in the Middle Ages, a distinction evolved between consumable necessities such as food and fuel versus durable goods, with usury permitted on loans that involved the latter.[134]

Coat of arms for the Medici family

The most powerful banking families came from Florence, including the

Medici bank, set up by Giovanni di Bicci de' Medici in 1397 [2] and continuing until 1494.[136] The oldest banking firm in current operation is Banca Monte dei Paschi di Siena
S.p.A. (BMPS).

By the later Middle Ages, Christian merchants who lent money with interest gained ecclesiastical sanction, and Jews lost their privileged position as money-lenders.[134] Italian bankers would take their place, and by 1327, Avignon had 43 branches of Italian banking houses. In 1347, Edward III of England defaulted on loans. Later there was the bankruptcy of the Bardi (1343[135]) and Peruzzi (1346[135]). The accompanying growth of Italian banking in France was the start of the Lombard moneychangers in Europe, who moved from city to city along the busy pilgrim routes important for trade. Key cities in this period were Cahors, the birthplace of Pope John XXII, and Figeac.

the Ship of Fools); woodcut attributed to Albrecht Dürer

After 1400, the political turned somewhat against the Italian bankers. In 1401 King

Martin I of Aragon had some of them expelled. In 1403, Henry IV of England prohibited them from taking profits in his kingdom. In 1409, Flanders imprisoned and then expelled Genoese bankers. In 1410, all Italian merchants were expelled from Paris. In 1407, the Bank of Saint George,[137] the first state bank of deposit,[98][138] was founded in Genoa and was to dominate business in the Mediterranean.[98]

15th–17th centuries – Expansion

Italy

Between 1527 and 1572 a number of important banking family groups arose from the

Pallavicino families, who were especially influential and wealthy, the Doria, although perhaps less influential, and the Pinelli and the Lomellini.[139][140]

Spain and the Ottoman Empire

In 1401 the magistrates of Barcelona, then the capital of the Principality of Catalonia, established in the city the first replication of the Venetian model of exchange and deposit, the Taula de canvi de Barcelona or Table of Exchange, considered to be the first public bank of Europe.[141][142][143]

Halil Inalcik suggests that, in the 16th century, Marrano Jews (Doña Gracia from the House of Mendes) fleeing from Iberia introduced the techniques of European capitalism, banking and even the mercantilist concept of state economy to the Ottoman Empire.[144] In the 16th century, the leading financiers in Istanbul were Greeks and Jews. Many of the Jewish financiers were Marranos who had fled from Iberia during the period leading up to the expulsion of Jews from Spain. Some of these families brought great fortunes with them.[145] The most notable of the Jewish banking families in the 16th-century Ottoman Empire was the Marrano banking house of Mendes, which moved to Istanbul in 1552, under the protection of Sultan Suleiman the Magnificent. When Alvaro Mendes arrived in Istanbul in 1588, he is reported to have brought with him 85,000 gold ducats.[146] The Mendes family soon acquired a dominating position in the state finances of the Ottoman Empire and in commerce with Europe.[147]

Pompeius Occo (1483–1537) came from a northern German family and grew up in Augsburg. In 1511 he settled in Amsterdam as a representative of the Fugger banking house and business firm of Augsburg.

They thrived in Baghdad during the 18th and 19th centuries under Ottoman rule, performing critical commercial functions such as moneylending and banking.[148] Like the Armenians, the Jews could engage in necessary commercial activities, such as moneylending and banking, that were proscribed for Muslims under Islamic law.

Court Jew

Main article: Court Jew

tax farming, negotiating loans, master of the mint, creating new sources for revenue, floating debentures, devising new taxes, and supplying the military.[149][150] In addition, the court Jews acted as personal bankers for the nobility: They raised money to cover the noble's personal diplomacy and his extravagances.[150]

Court Jews were skilled administrators and businessmen who received privileges in return for their services. They were most commonly found in Germany, Holland, and Austria, but also in Denmark, England, Hungary, Italy, Poland, Lithuania, Portugal, and Spain.[151][152] According to Dimont, virtually every duchy, principality, and palatinate in the Holy Roman Empire had a court Jew.[149]

Berenberg banking dynasty

Germany

In the southern German realm, two great banking families emerged in the 15th century, the

Welsers. They came to control much of the European economy and to dominate international high finance in the 16th century.[153][154][155] The Fuggers built the first German social housing area for the poor in Augsburg, the Fuggerei
. It still exists, but not the original Fugger Bank which lasted from 1487 to 1657.

Dutch bankers played a central role in establishing banking in the northern German city states.

Berenberg dynasty.[156]

Netherlands

Further information: Financial history of the Dutch Republic

In the 16th and 17th century, precious metals from the New World, Gold Coast, Japan and other locales were being imported into Europe, with corresponding price increases. Thanks to the free coinage,[clarification needed] the Bank of Amsterdam, and the heightened trade and commerce, the Netherlands attracted even more coin and bullion to be deposited in their banks. The concepts of fractional-reserve banking and payment systems were further developed and spread to England and elsewhere.[157]

England

Further information: Banking in the United Kingdom

In the City of London there were no banking houses operating in a manner recognized as so today until the 17th century,

Royal Exchange
was established in 1565.

17th–19th centuries – The emergence of modern banking

Pieter Saenredam

By the end of the 16th century and during the 17th, the traditional banking functions of accepting deposits,

money changing, and transferring funds were combined with the issuance of bank debt that served as a substitute for gold and silver
coins.

New banking practices promoted commercial and industrial growth by providing a safe and convenient means of payment and a money supply more responsive to commercial needs, as well as by "discounting" business debt. By the end of the 17th century, banking was also becoming important for the funding requirements of the combative European states. This would lead on to government regulations and the first central banks. The success of the new banking techniques and practices in Amsterdam and London helped spread the concepts and ideas elsewhere in Europe.

Goldsmiths of London

See also: History of Goldsmiths University, London and Goldsmith banker

Modern banking practice, including

fractional reserve banking and the issue of banknotes, emerged in the 17th century. At the time, wealthy merchants began to store their gold with the goldsmiths of London, who possessed private vaults and charged a fee for their service. In exchange for each deposit of precious metal, the goldsmiths issued receipts
certifying the quantity and purity of the metal they held as a bailee; these receipts could not be assigned, only the original depositor could collect the stored goods.

Gradually the goldsmiths began to lend the money out on behalf of the depositor, which led to the development of modern banking practices; promissory notes (which evolved into banknotes) were issued for money deposited as a loan to the goldsmith.[160]

These practices created a new kind of "money" that was actually debt, that is, goldsmiths' debt rather than silver or gold coin, a

fractional reserve normally served this purpose. Acceptance also required that the holders of debt be able to legally enforce an unconditional right to payment; it required that the notes (as well as drafts) be negotiable instruments. The concept of negotiability had emerged in fits and starts in European money markets, but it was well developed by the 17th century. Nevertheless, an Act of Parliament was required in the early 18th century (1704) to overrule court decisions holding that the goldsmiths' notes, despite the "customs of merchants", were not negotiable.[161]

The modern bank

The Louisiana Purchase of 1803 was handled by Francis Baring and Company of London.

In 1695, the Bank of England became one of the first banks to issue banknotes, the first being the short-lived banknotes issued by Stockholms Banco in 1661.[162][163] Initially, these were hand-written and issued on deposit or as a loan, and promised to pay the bearer the value of the note on demand in specie. By 1745, standardized printed notes ranging from £20 to £1,000 were being issued. Fully printed notes that did not require the name of the payee and the cashier's signature first appeared in 1855.[164]

In the 18th century, services offered by banks increased. Clearing facilities, security investments,

bankers' clearing house. The method used by the London clearing house involved each bank paying cash to an inspector and then being paid cash by the inspector at the end of each day. The first overdraft facility was set up in 1728 by the Royal Bank of Scotland.[165]

The number of banks increased during the

loans. These new "merchant banks" facilitated trade growth, profiting from England's emerging dominance in seaborne shipping. Two immigrant families, Rothschild and Baring
, established merchant banking firms in London in the late 18th century and came to dominate world banking in the next century.

A great impetus to country banking came in 1797 when, with England threatened by war, the Bank of England suspended cash payments. A handful of Frenchmen landed in Pembrokeshire, causing a panic. Shortly after this incident, Parliament authorised the Bank of England and country bankers to issue notes of low denomination.

Chinese banking

During the Qing dynasty, the private nationwide financial system in China was first developed by the Shanxi merchants, with the creation of so-called "draft banks". The first draft bank Rishengchang was created around 1823 in Pingyao. Some large draft banks had branches in Russia, Mongolia and Japan to facilitate international trade. Throughout the 19th century, the central Shanxi region became the de facto financial centre of Qing China.

With the fall of the Qing dynasty, the financial centers gradually shifted to Shanghai, with western-style modern banks flourishing. Today, the financial centres in China are Hong Kong, Beijing, Shanghai and Shenzhen.

Japanese banking

In 1868, the Meiji government attempted to formulate a functioning banking system, which continued until some time during 1881. They emulated French models. The Imperial mint began using imported machines from Britain in the early years of the Meiji period.[166][167]

Masayoshi Matsukata was a formative figure of a later banking initiative.[166]

Development of central banking

Main article: Central bank

The Taula de canvi de Barcelona, established in 1401, is the first example of municipal, mostly public banks which pioneered central banking on a limited scale. It was soon emulated by the Bank of Saint George in the Republic of Genoa, first established in 1407, and significantly later by the Banco del Giro in the Republic of Venice and by a network of institutions in Naples that later consolidated into Banco di Napoli. Notable municipal central banks were established in the early 17th century in leading northwestern European commercial centers, namely the Bank of Amsterdam in 1609 and the Hamburger Bank in 1619.[168] These institutions offered a public infrastructure for cashless international payments.[169]

The first national (as opposed to municipal) central bank was the Swedish central bank, known since 1866 as

Jeffersonian Republicans.[174]

Central banks were established in many European countries during the 19th century.

Banque de France in 1800, in order to stabilize and develop the French economy and to improve the financing of his wars.[177] The Bank of France remained the most important Continental European central bank throughout the 19th century.[citation needed] The Bank of Finland was founded in 1812, soon after Finland had been taken over from Sweden by Russia to become a grand duchy.[178] Simultaneously, a quasi-central banking role was played by a small group of powerful family-run banking networks, typified by the House of Rothschild, with branches in major cities across Europe, as well as Hottinguer in Switzerland and Oppenheim in Germany.[179][180]

The 19th and early 20th centuries central banks in most of Europe and

The Federal Reserve Act.[182]

Following

Brussels Conference (1920). The EFO thus directed the creation of the Oesterreichische Nationalbank in Austria, Hungarian National Bank, Bank of Danzig, and Bank of Greece, as well as comprehensive reforms of the Bulgarian National Bank and Bank of Estonia. Similar ideas were emulated in other newly independent European countries, e.g. for the National Bank of Czechoslovakia.[183]

By 1935, the only significant independent nation that did not possess a central bank was Brazil, which subsequently developed a precursor thereto in 1945 and the present Central Bank of Brazil twenty years later. After gaining independence, numerous African and Asian countries also established central banks or monetary unions. The Reserve Bank of India, which had been established during British colonial rule as a private company, was nationalized in 1949 following India's independence. By the early 21st century, most of the world's countries had a national central bank set up as a public sector institution, albeit with widely varying degrees of independence.

Rothschilds

The Frankfurt terminus of the Taunus railroad, financed by the Rothschilds. Opened in 1840, it was one of Germany's first railroads.

The

Napoleon, and later to make subsidy payments to British allies when these organized new troops after Napoleon's disastrous Russian campaign. His four brothers helped co-ordinate activities across the continent, and the family developed a network of agents, shippers and couriers to transport gold—and information—across Europe. This private intelligence service enabled Nathan to receive in London the news of Wellington's victory at the Battle of Waterloo a full day ahead of the government's official messengers.[186]

The Rothschild family were instrumental in supporting railway systems across the world and in complex government financing for projects such as the

Rio Tinto Group (1873); Société Le Nickel (1880) (now Eramet); and Imétal (1962) (now Imerys). The Rothschilds financed the founding of De Beers, as well as Cecil Rhodes on his expeditions in Africa and the creation of the colony of Rhodesia.[187]

The Japanese government approached the London and Paris families for funding during the Russo-Japanese War. The London consortium's issue of Japanese war bonds would total £11.5 million (at 1907 currency rates).[188]

From 1919 to 2004 the Rothschilds' Bank in London played a role as place of the gold fixing.

Napoleonic wars and Paris

Napoleon III had the goal of overtaking London to make Paris the premier financial center of the world, but the war in 1870 reduced the range of Parisian financial influence.[189] Paris had emerged as an international center of finance in the mid-19th century second only to London.[190] It had a strong national bank and numerous aggressive private banks that financed projects all across Europe and the expanding French Empire.

One key development was setting up one of the main branches of the

Comptoir National d'Escompte de Paris
(CNEP) was established during the financial crisis and the republican revolution of 1848. Its innovations included both private and public sources in funding large projects, and the creation of a network of local offices to reach a much larger pool of depositors.

Building societies

Building societies were established as financial institutions owned by their members as mutual organizations. The origins of the building society as an institution lie in late-18th century Birmingham—a town which was undergoing rapid economic and physical expansion driven by a multiplicity of small metalworking firms, whose many highly skilled and prosperous owners readily invested in property.[193]

Many of the early building societies were based in taverns or coffeehouses, which had become the focus for a network of clubs and societies for co-operation and the exchange of ideas among Birmingham's highly active citizenry as part of the movement known as the Midlands Enlightenment.[194] The first building society to be established was Ketley's Building Society, founded by Richard Ketley, the landlord of the Golden Cross inn, in 1775.[195]

Members of Ketley's society paid a monthly subscription to a central pool of funds which was used to finance the building of houses for members, which in turn acted as

English Midlands was established in Leeds in 1785.[198]

Mutual savings bank

A page with a pre-printed table. It has handwritten entries showing amounts of deposits and withdrawals, and the balance. Each entry has a post office date stamp.
A customer's deposit book, for a Post Office Savings Account

Mutual savings banks also emerged at that time, as financial institutions chartered by government, without capital stock, and owned by their members who subscribe to common funds. The institution most frequently identified as the first modern savings bank was the "Savings and Friendly Society" organized by the Reverend Henry Duncan in 1810, in Ruthwell, Scotland. Rev. Duncan established the small bank in order to encourage his working class congregation to develop thrift.

Another precursor to the modern savings bank originated in Germany, with Franz Hermann Schulze-Delitzsch and Friedrich Wilhelm Raiffeisen who developed cooperative banking models that led on to the credit union movement. The traditional banks had viewed poor and rural communities as unbankable because of very small, seasonal flows of cash and very limited human resources. In the history of credit unions the concepts of cooperative banking spread through northern Europe and onto the US at the turn of the 20th century under a wide range of different names.

Postal savings system

Main article: Postal savings system

To provide depositors who did not have access to banks a safe, convenient method to save money and to promote saving among the poor, the postal savings system was introduced in Great Britain in 1861. It was vigorously supported by William Ewart Gladstone, then Chancellor of the Exchequer, who saw it as a cheap way to finance the public debt. At the time, banks were mainly in the cities and largely catered to wealthy customers. Rural citizens and the poor had no choice but to keep their funds at home or on their persons. The original Post Office Savings Bank was limited to deposits of £30 a year with a maximum balance of £150. Interest was paid at the rate of two and one-half percent per year on whole pounds in the account.

Similar institutions were created in a number of different countries in Europe, North America, and Japan. One example was in 1881 the Dutch government created the Rijkspostspaarbank (State post savings bank), a postal savings system to encourage workers to start saving. Four decades later they added the Postcheque and Girodienst services allowing working families to make payments via post offices in the Netherlands.

20th century

The first decade of the 20th century saw the Panic of 1907 in the US, which led to numerous runs on banks and became known as the bankers panic.

Great Depression

Crowd at New York's American Union Bank during a bank run early in the Great Depression

During the Crash of 1929 preceding the

March Bank Holiday.[201]

Senator Carter Glass and Rep. Henry B. Steagall (1933)

Bank failures snowballed as desperate bankers called in loans that borrowers did not have time or money to repay. With future profits looking poor,

vicious cycle
developed and the downward spiral accelerated. In all, over 9,000 banks failed during the 1930s.

In response, many countries significantly increased

commercial banking
. This was to avoid more risky investment banking activities from ever again causing commercial bank failures.

World Bank and the development of payment technology

1967 letter by the Midland Bank to a customer, informing on the introduction of electronic data processing
1969
ATMs
in Sydney. People could only receive $25 at a time and the bank card was sent back to the user at a later date.

During the post

Second World War period and with the introduction of the Bretton Woods system in 1944, two organizations were created: the International Monetary Fund (IMF) and the World Bank.[202] Encouraged by these institutions, commercial banks started to lend to sovereign states in the third world. This was at the same time as inflation started to rise in the west. The gold standard
was eventually abandoned in 1971 and a number of the banks were caught out and became bankrupt due to third world country debt defaults.

This was also a time of increasing use of technology in

electronic payment systems for both international and domestic payments. The international SWIFT payment network was established in 1973 and domestic payment systems were developed around the world by banks working together with governments.[204]

Deregulation and globalization

Bishopsgate in the City of London

Global banking and capital market services proliferated during the 1980s after

Glass–Steagall Act was repealed in 1999 (during the Clinton Administration), this saw US retail banks embark on big rounds of mergers and acquisitions and also engage in investment banking activities.[206]

Financial services continued to grow through the 1980s and 1990s as a result of a great increase in demand from companies, governments, and financial institutions, but also because financial market conditions were buoyant and, on the whole, bullish. Interest rates in the United States declined from about 15% for two-year U.S. Treasury notes to about 5% during the 20-year period, and financial assets grew then at a rate approximately twice the rate of the world economy.

This period saw a significant internationalization of financial markets. The increase of U.S. Foreign investments from Japan not only provided the funds to corporations in the U.S., but also helped finance the federal government.

The dominance of U.S. financial markets was disappearing and there was an increasing interest in foreign stocks. The extraordinary growth of foreign financial markets results from both large increases in the pool of savings in foreign countries, such as Japan, and, especially, the deregulation of foreign financial markets, which enabled them to expand their activities. Thus, American corporations and banks started seeking investment opportunities abroad, prompting the development in the U.S. of mutual funds specializing in trading in foreign stock markets.[citation needed]

Such growing internationalization and opportunity in financial services changed the competitive landscape, as now many banks would demonstrate a preference for the "universal banking" model prevalent in Europe. Universal banks are free to engage in all forms of financial services, make investments in client companies, and function as much as possible as a "one-stop" supplier of both retail and wholesale financial services.[207]

21st century

The early 2000s were marked by consolidation of existing banks and entrance into the market of other financial intermediaries:

credits and securities. Indeed, by the end of 2001 the market capitalisation of the world's 15 largest financial services providers included four non-banks.[citation needed
]

The first decade of the 21st century saw the culmination of the technical innovation in banking over the previous 30 years and saw a major shift away from traditional banking to

internet banking. Starting in 2015 developments such as open banking
made it easier for third parties to access bank transaction data and introduced standard API and security models.

The process of financial innovation also advanced enormously in the first few decades of the 21st century, increasing the importance and profitability of nonbank finance. Such profitability priorly restricted to the non-banking industry, has prompted the Office of the Comptroller of the Currency (OCC) to encourage banks to explore other financial instruments, diversifying banks' business as well as improving banking economic health. Hence, as the distinct financial instruments are being explored and adopted by both the banking and non-banking industries, the distinction between different financial institutions is gradually vanishing. For example, in 2020, the OCC muddled the distinction between traditional banking and the cryptocurrency ecosystem when it published a number of interpretive letters clarifying national banks' ability to custody cryptocurrency and provide banking services to cryptocurrency companies,[208] as well as use blockchain innovations like stablecoins as settlement infrastructure.[209] In addition, in 2021, the OCC granted its first federal banking charter to Anchorage Digital, a digital asset platform for institutions.[210]

2007–2008 financial crisis

2007 bank run on Northern Rock, a UK bank

The

systemic failure to the whole banking system. These events spawned the term 'too big to fail' and resulted in a lot of discussion about the moral hazard
of these actions.

Major events in the history of banking

See also

References

Footnotes

  1. ^ The word "bank" reflects the origins of banking in temples. According to the famous passage from the New Testament, when Christ drove the money changers out of the temple in Jerusalem, he overturned their tables. Matthew 21.12. In Greece, bankers were known as trapezitai, a name derived from the tables where they sat. Similarly, the English word bank comes from the Italian banca, for bench or counter.

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Further reading

  • Andreades, Andreas Michael. History of the Bank of England (Routledge, 2013)
  • Cameron, Rondo. Banking in the Early Stages of Industrialization: A Study in Comparative Economic History (1967)
  • Cameron, Rondo et al. International Banking 1870–1914 (1992)
  • Cassis, Youssef; Grossman, Richard S.; Schenk, Catherine R., eds. (2016). The Oxford Handbook of Banking and Financial History. New York: Oxford University Press.
    ISBN 978-0-19-965862-6
    .
  • Feis, Herbert. Europe the World's Banker, 1870–1914 (1930) online
  • Ferguson, Niall. The Ascent of Money: A Financial History of the World (2008).
  • Ferguson, Niall. The House of Rothschild: Volume 2: The World's Banker: 1849-1999 (2000)
  • Grossman, Richard S. Unsettled Account: The Evolution of Banking in the Industrialized World Since 1800 (Princeton University Press; 2010) 384 pages. Considers how crises, bailouts, mergers, and regulations have shaped the history of banking in Western Europe, the United States, Canada, Japan, and Australia.
  • Hammond, Bray, Banks and Politics in America, from the Revolution to the Civil War (Princeton University Press, 1957)
  • Hudson, Peter James. "On the History and Historiography of Banking in the Caribbean." Small Axe 18.1 43 (2014): 22–37.
  • Jaffe, Steven H., and Jessica Lautin. Capital of Capital: Money, Banking, and Power in New York City (Columbia University Press, 2014)
  • ISBN 0415378672
  • Klebaner, Benjamin J. American commercial banking: A history (Twayne, 1990). online
  • Kobrak, Christopher, and Wilkins, Mira, eds. History and Financial Crisis: Lessons from the 20th Century (Routledge, 2014)
  • Komai, Alejandro, and Gary Richardson. "A history of financial regulation in the USA from the beginning until today: 1789 to 2011." in Handbook of Financial Data and Risk Information I (2014): 385+.
  • Lane, Nicholas. "The Fathers of English Banking." History Today (Mar 1953) 3#3 pp 190–199
  • Meltzer, Allan H. A History of the Federal Reserve (2 vol. U of Chicago Press, 2010) on U.S.
  • Michie, Ranald C. British Banking: Continuity and Change from 1694 to the Present (Oxford UP, 2016) 334 pp. online review
  • Murphy, Sharon Ann. Other People's Money: How Banking Worked in the Early American Republic (2017) online review
  • Neal, Larry. "How it all began: the monetary and financial architecture of Europe during the first global capital markets, 1648–1815." Financial History Review (2000) 7#2 pp: 117–140.
  • History of Money and Banking in the United States. Full text (510 pages) in pdf format
  • Soyeda, Juichi. A history of banking in Japan

External links

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