The history of banking dates back to Ancient Greece and the Roman Empire. The first prototypes were created by merchants around 2000 BC in Assyria and Sumeria. During the Roman Empire and in Ancient Greece, banks were primarily based in temples. Lenders accepted deposits, issued loans, and changed money. Many historians have argued that the most significant period in the development of banking was Medieval and Renaissance Italy. The cities of Genoa, Florence, and Venice were crucial in the history of banking. The Peruzzi and the Bardi families monopolized the banking industry in Florence. The Medici bank was the most famous bank in Italy, and it was created in 1397 by Giovanni Medici. From Italy, banking spread throughout the Roman Empire and northern Europe. Developments in telecommunications were responsible for further growth and expansion of banking throughout the world in the 20th century. The 2007-2008 financial crisis led to the collapse of major banks and financial institutions. It sparked a debate about the need for bank regulation.
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The history of banking can be traced back to around 1800 BC in Babylon. During those days, moneylenders gave loans to traders and farmers. In Greece and Rome, lenders who operated banks issued loans to people and accepted deposits (Davies 44). In addition, they changed money. A case is related in the Bible where Jesus drove out traders and money changers out of the temple (Davies 44). These banks temporarily disappeared after the collapse of the Roman Empire. However, the idea of banking emerged again in the 12th and 13th centuries in Italy, mainly in the cities of Genoa and Florence.
Earliest Forms of Banking
Historians argue that the earliest forms of banking began during the latter part of the 4th millennium BC. However, little evidence exists to support these claims. In 2000 BC, people in Babylon received loans from lenders operating from temples and palaces (Cassis et al. 54). These loans were given in the form of grains to be repaid after the harvesting season. Agreements between lenders and borrowers were documented on clay tablets and included the amount of interest to be paid (Cassis et al. 54). The culture of depositing and storing wealth in temples was practiced until 209 BC. There is evidence of the ransacking of the Temple of Aine by Antioch of gold and silver (Cassis et al. 56). The financial activities of the house of Egbi took place from around 1000 BC until Darius I ascended to power (Cassis et al. 61).
In Asia Minor, the temple of Artemis was the major depository for historical figures, including Caesar, Plautus, Aristotle, Xenophon, and Plutarch. The Temple to Apollo was a large gold depository that served as a bank in the 6th century (Cassis et al. 68). In ancient India, the history of banking can be traced back to the Vedic period, which commenced around 1750 BC (Davies 49). During the Maurya dynasty, banking expanded. Adesha was a financial instrument used by lenders to authorize individuals to pay a certain amount of money to a third party. The use of Odisha was common during the Buddhist period. In ancient China, the banking system was arguably developed during the Qin Dynasty (Cassis et al. 67).
Banking in Ancient Greece and Rome
In ancient Greece and Rome, banking served three main functions: money exchange, the conduct of financial transactions, and issuance of loans. These services were mainly provided by wealthy merchants and priests. The gradual expansion of the aforementioned financial services led to the development of large banks throughout the Roman Empire and the Greek world (Cassis et al. 79). In Greece, the majority of banking transactions took place in temples because they were considered safe. As Hellenic society progressed, many city-states developed coins to be used as the major form of exchange (Wilson 92). Coins differed from state to state, and so, there was a high demand for professional money changers. The rise of money changers eased trade because they knew the value of the different coins used in various cities (Davies 61). As trade expanded, money changers began to offer loans and accept deposits (Wilson 94). In addition, they transferred money between accounts, and as a result, acted as private bankers. Money changers operated either in marketplaces or in private homes, and by 300 BC, they were operating outside temples.
Like in Ancient Greece, banking in ancient Rome was conducted in temples. Many temples included basements that were used to store the treasure and money of wealthy individuals (Cassis et al. 88). Temples were occupied by priests and were heavily guarded. Therefore, the security of money was guaranteed. Wealthy Romans spread their money across different temples to lower the risk of loss in case a temple was destroyed. The Temple of Saturn, the Temple of Castor and Pollux, and the Juno Moneta Temple were major repositories (Cassis et al. 89). Priests served as bankers and played several roles: they accepted deposits, they issued loans, and they conducted currency exchange and validation. In addition to priests, other types of bankers were active. Money changers exchanged foreign currency for Roman currency. Their services grew in importance and demand as trade and commerce expanded throughout the Mediterranean (Davies 65). The majority of Roman bankers used bills of exchange to conduct business. As the Roman Empire grew, most banking activities were taken over by wealthy merchants and owners of large estates. Banks remained small because they received fewer customers. Around 200 AD, the government created a more organized banking system to regulate trade and commerce. Over time, the government passed laws to regulate banking, which had a great influence on later civilizations.
The adoption of banking was delayed by various restrictions on interest that were recommended by different religions. For example, the Torah and the Hebrew Bible were against the taking of interest from deposits, which was a common practice among lenders (Cassis et al. 61). Jews were forbidden from charging interest on loans issued to other Jews. However, they were obliged to charge interest on loans given to non-Jews. Similarly, Israelites were forbidden from charging interest on loans given to non-Israelites (Cassis et al. 61). Initially, usury was banned by Christianity and several other religions. This delayed the adoption of banking. The rise of Protestantism in the 16th century weakened the religious restrictions on interest and freed up the development of banking in Northern Europe (Cassis et al. 67).
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The Medici, Bardi, and Peruzzi Families
The Medici family were the rulers of Florence during the Renaissance and governed for more than 300 years. They were instrumental in the development of the banking system in the city of Florence through the establishment of the Medici Bank. This was a financial institution created by the family in the 15th century, and it was the largest bank in Europe (Cassis et al. 122). The family made several notable contributions to the profession of banking. For example, they improved the general ledger system that enhanced the tracking of deposits and withdrawals (Davies 70). Their currency, the florin, was once used as a means of exchange throughout Europe. It was the preferred currency for trade, commerce, and business transactions.
The bank collapsed in 1494 owing to depression, French aggression, and internal conflicts (Cassis et al. 127). The bank’s application of newly-developed techniques supported its rapid expansion, and its peak – it had 9 branches in other cities outside Florence. The bank was in competition with the Bardi and the Peruzzi banking houses who had more power (Davies 76). However, it had the greatest international influence. The influence of the Medici bank was evident from its list of clients which included the Papacy. The Vatican deposited its money with the Medici bank, which included tithes and taxes (Cassis et al. 128). The Roman branch of the bank was the most profitable because it accounted for approximately half of the bank’s revenue. The Vatican improved the bank’s reputation, and as a result, aid in the attraction of more clients. The bank gave loans to royal families and financed military campaigns.
The Bardi and Peruzzi families were also influential in the development and growth of banking in Italy and Europe. They were the dominant providers of financial services in Florence in the 14th century. They had several branches in many parts of Europe. The Bardi family developed its banking business becoming one of the most influential families in Europe until its fall around 1295 (Cassis et al. 136). The Peruzzi family was influential too but came second to the Bardi family. Their bankruptcy has been cited as one of the main causes of the economic depression of the late Middle Ages. The Peruzzi and Bardi financial woes began when they issued large loans to Edward III of England (Cassis et al. 138). The loans were granted in exchange for money and the assignment of customs and taxes. As the costs of Edward’s wars increased, both families gave out more money to fund the wars, which led to bankruptcy.
The Emergence of Modern Banking
Modern banking emerged during the end of the 16th century. The banking culture of accepting deposits, lending and changing money, and transferring funds began to gradually disappear. The aforementioned financial practices were combined with the issuance of bank debt instead of gold and silver coins. The development of new banking practices enhanced commercial and industrial growth as they provided safe, fast, and convenient means of payment (Davies 87). The end of the 17th century heralded a period that involved the participation of banks in funding wars between European states. This trend led to the involvement of the government in banking through the creation of regulations and the founding of central banks. The success of the new banking system in Amsterdam and London spread to other European countries.
The Goldsmiths of London
Modern banking practices developed in England during the 17th century. Wealthy merchants deposited their gold with the goldsmiths of London who issued receipts indicating the quantity and purity of the gold deposited (Lannoye 49). The receipts could be used to retrieve the gold only by the original depositor. Goldsmiths owned private vaults and charged a fee for the service of storing gold on behalf of merchants (Davies 92). As the system expanded, people began to use notes to trade instead of coins. Notes were safer and easier to exchange. As a result, goldsmiths took advantage of their large deposits to lend the money to borrowers on behalf of depositors in return for a certain amount of interest (Lannoye 53).
This led to the development of modern banking practices. For example, goldsmiths issued promissory notes to depositors as loans. They encouraged people to store their money with them by offering interest on any amount that was deposited. These lending practices led to the emergence of a new type of financial transaction, which was in the form of debt rather than silver or gold coins (Lannoye 54). As a result, the use of promissory notes in business transactions commenced. Notes were payable on demand by the debt holder who had the ability to legally enforce a right to payment. As deposits grew, governments began to borrow money from goldsmiths, especially during wars. The government paid the money with interest from taxes collected from people. The costs of funding wars continued to rise, and so, the Bank of England was founded in 1694 to provide money to fund a war with France (Lannoye 56).
Banking and the Industrial Revolution
In the 18th century, banks increased their services to include clearing facilities, cheques, and overdraft protection, and security investments. The use of cheques was invented in the 1600s and by the 1800s, it had become an internationally accepted mode of payment. Banking developed significantly during the Industrial revolution because the demands of industries necessitated the expansion of the financial system. Prior to the commencement of the Industrial Revolution, silver and gold were the preferred modes of business transactions. During that period, three tiers of banks existed, namely the Bank of England, private banks, and county banks (Lannoye 65). The Bank of England was founded in 1694 by William of Orange and became the storage for the country’s gold (Orbell and Turton 86). Private banks provided financial services mainly to merchants and industrialists.
County banks operated in local areas and were limited in number. During the Industrial Revolution, entrepreneurship was growing rapidly. It was embraced by capitalists, merchants, financiers, and salesmen who changed the running and ownership of companies (Lannoye 68). Entrepreneurship led to the emergence of shareholders and joint-stock companies, which increased the demand for capital. Infrastructure demands were high and companies needed money to fund their operations. The rapid growth in wealth and business opportunities necessitated the creation of a repository for money and a source of loans for development (Orbell and Turton 89). As a result, special banks emerged to mitigate the situation and make a profit by taking deposits and lending money to gain interest.
Development of Central Banking
The history of central banks dates back to the 17th century during the establishment of the Swedish Riksbank. The bank was founded in 1668 as a joint-stock bank that had two main functions (Orbell and Turton 93). First, it provided loans to the government. Second, it served as a clearinghouse for trade (Ugolini 133). The central Bank of England was founded in 1694 to purchase government debt (Orbell and Turton 98). After its success, many other central banks were established in various parts of Europe. For example, Napoleon established the Banque de France in 1800 to provide money to the government and stabilize the currency. Early central banks used notes as the major currency. They also served as banks for bankers as they facilitated money transfers between banks. During the early years of the 20th century, a new form of central banks emerged. For example, the Federal Reserve System was established to provide financial stability and consolidate the various forms of currency used in commerce (Ugolini 143).
The Rothschild Family
The Rothschild family is historically recognized as the pioneer of international finance in the 19th century (Haze 123). The family served as the major source of loans to the Bank of England (Orbell and Turton 106). In 1804, they began to trade on the London Stock Exchange, and five years later, ventured into the gold business. The Rothschild family played key roles in the development of railway systems around the world. They also provided financing to governments for major projects including the construction of the Suez Canal (Haze 144). The family also funded Japan during the Russo-Japanese War. In the 19th century, they funded both the French Empire and its allies and European coalitions during the Napoleonic wars.
From Promissory Notes to Credit Cards
During the founding periods of modern banking, promissory notes were the main mode of conducting financial transactions. As mentioned earlier, they were popularized by the goldsmiths of London. They gave receipts to depositors denoting the quantity and quality of gold deposited. These receipts morphed into promissory notes that merchants used in their business transactions as money. Credit cards were introduced to reduce cases of mistaken identity and fraud. In 1928, the charge-plate was developed and contained the name, city, and state of the customer. They were given by large merchants and had a small paper card on the back to record transactions. The concept of using credit cards in business transactions was expanded in 1950 by the founders of Diners Club (Frank McNamara and Ralph Schneider) who developed the first charge card. In 1958, Carte Blanche introduced the American Express, which led to the creation of a worldwide credit card network. Initially, American Express was used as a charge card, but it was later improved to contain credit card features.
The history of banking can be traced to ancient Greece and Rome. The most prominent families that played significant roles in the growth of banking include the House of Egbi, the Bardi, Peruzzi, Rothschild, and Medici families. In ancient Greece and during the Roman Empire, farmers and merchants obtained loans from lenders who were based in temples. They changed money and accepted deposits too. The crucial development of banking occurred during the Renaissance in Italy. The Bardi, Peruzzi, and Medici families created banks that took deposits and issued loans. They were responsible for the spread of banking to Europe and other parts of the world. The banking industry grew rapidly during the Industrial Revolution as entrepreneurs needed large amounts of capital for their projects. Central banks emerged to regulate banks and provide funding to governments.
Cassis, Youssef, et al., editors. The Oxford handbook of Banking and Financial History. Oxford University Press, 2016.
Davies, Glyn. A History of Money. 4th ed., University of Wales Press, 2016.
Haze, Xaviant. The Suppressed History of American banking: How Big banks Fought Jackson, Killed Lincoln & Caused the Civil War. Simon and Schuster, 2016.
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Lannoye, Vincent. The History of Money for Understanding Economics. 2nd ed., Vincent Lannoye, 2015.
Orbell, John, and Alison Turton. British Banking: A Guide to Historical Records. 2nd ed., Routledge, 2017.
Ugolini, Stefano. The Evolution of Central banking: Theory and History. Palgrave McMillan, 2017.
Wilson, Nigel. Encyclopedia of Ancient Greece. Routledge, 2013.