The History of Banking Throughout the Ages
When you think of banking, you probably think of the money you’re storing in a savings or checking account. But there is so much more to this story. Banks not only manage our personal finances but handle governmental and corporate dealings on the local, national and global level.
Banking is such a dynamic concept that it can’t simply be summed up by just writing a check. To understanding how banking has evolved, we have to look at its origins. So get ready to take an in-depth look at the history of banking.
Egyptian and Greek Origins: Temples Protect Precious Metals
As long as there has been some form of currency, there has been a need to store it for safe-keeping. Records show that in both Ancient Greece and Egypt, banking systems were discovered as far back as the 18th century B.C.
Egyptians use temples as banks to protect riches from thieves.
While the banking system that we know today did not get its start for thousands of years, it has been proven that in the 18th century B.C., banking of another form did exist, getting its start from a strong need to protect wealth, which at the time was gold.
Ancient Egyptian temple, Luxor (B.C. 1400)
Because wealth came in the form of a precious metal, it was easily stolen and difficult to protect unless well hidden. As a result, early civilizations decided that building a temple could create a safe refuge, especially when decorated with a sacred character that could deter thieves.
In both Egypt and Mesopotamia, gold was deposited in these temples for safe-keeping.
Ancient Greeks also use temples for protection.
According to The History of Greece, written by William Mitford, Ancient Greeks used temples as a way to protect their wealth like the Egyptians.
Having amassed gold and silver, precious metals had become signs of wealth in their culture, leaving those who acquired them feeling the need to store them.
Greece and Rome Advance Banking Systems
Around 4th century B.C., banking activities began to pick up considerably in Greece. While Rome’s advancements came years later, its contributions were also significant.
Greek bankers develop guidelines for financial transactions.
As far as banking systems go, Greece at the time had developed more varied and sophisticated banking than any other society.
Temples, as well as private entrepreneurs and public bodies all began to see the value in undertaking financial transactions. As a result, they began conducting financial transactions such as loans, deposits, validation and coinage, and currency exchanges.
Ancient Greek temple, Argigento (B.C. 480-406)
Credit notes similar to checks were also issued for clients to “cash” in other cities. This was to help them avoid the danger associated with carting their coins along during their travels.
Rome begins to regulate banking practices.
Fast forward to 2nd century A.D. when Ancient Rome had all but perfected the administrative aspect of the banking system that it adopted from Ancient Greece.
By this time, greater advancements had been made. Discharging a debt, for example, had become a simple process that allowed debtors to pay the appropriate sum into a bank. Public notaries were being appointed to register such transactions.
About a century later, Romans began to see the need to implement greater regulation of financial institutions and practices. During this time, charging interest on loans and paying interest on deposits became highly developed and even competitive among institutions.
Roman coins, 3rd-4th century A.D.
However, Roman banks found difficulty in advancing as desired because citizens preferred to work with coins. Challenges continued as the banking system rejected the flakes of copper produced by the mints of Roman emperor Gallienus (260-268 A.D.).
After the fall of Ancient Rome, banking at large was abandoned in Western Europe. It would not find major success again until the time of the Crusades.
Religion Influences Banking Systems
Before the downfall of Ancient Rome, usury (the practice of lending money and charging the borrower interest, often times at an illegally high rate) had become a common practice among banking institutions. However, this changed dramatically as various religions began to influence banking.
Interest prohibited in Islam.
According to the Quran, Islamic bankers were strictly prohibited from lending money on interest. “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 Jewish forbid interest but gives special privileges.
There is proof that later sections of the Hebrew Bible viewed interest-taking in a similar fashion. In fact, it was a common understanding that Jews were forbidden to charge interest upon loans made to other Jews.
However, if loans were made to non-Jews, bankers could charge interest.
This rule, while followed on the whole, was left up to banker interpretation. If a lender wanted to avoid interest in some situations or charge it in others, it was usually left up to him.
Banking transfers from Jews to Christians.
As seen in Ancient Rome, Christianity had a major influence on the early banking systems, so when they too place a prohibition on usury, it negatively affected many bankers.
However, it did help Jewish bankers by the 12th and 13th centuries. Since European prosperity was in dire need of finance and bankers had been largely disabled, the Jewish were able to pick up the slack.
Their major problem was that they were disliked, making business a difficult prospect–so much so that the threat of persecution resulted in banking practices ultimately being transferred out of the hands of the Jewish and into the hands of Christians.
Crusade Period: Re-emergence of Banking in Western Europe
The re-emergence of banking in Western Europe came about in a large way with the onset of the Crusade period.
Financing the Crusades jumpstarts banking.
The Crusades (a series of military campaigns sanctioned religiously) were prominent in Roman Catholic Europe between 1095 and 1291. These campaigns were meant to help restore Christian control of the Holy Land and needed large sums of money for financing.
This is where banking came into play.
March of the Crusaders
In 1156, in Genoa, Italy, two brothers borrowed 115 Genoese pounds that they agreed to reimburse to Constantinople bank agents one month after arriving in that city. They did as they agreed, prompting others to take on similar contracts.
In fact, by 1162 this type of contract became so popular that King Henry the II of England levied a tax to support the Crusades with the Templars and Hospitallers acting as his bankers in the Holy Land.
Banking specialties emerge.
By the year 1200, with long-distance and international trade growing for goods like wool, finished cloth, wine, salt, wax and tallow, leather, armour and weapons, businesses saw the need to begin specializing their market—and it was up to banks to keep up with this need.
Big firms were able to specialize by getting in on the manufacturing field, producing different types of cloth. Papal (Pope-related) bankers also got in on manufacturing, as well as pawning goods.
Philip IV takes over Papal banking.
During that period, Papal bankers were the most successful of the Western world because of their multifaceted banking style. However, after a civil war ensued between Florence and rival Guelph and Ghibelline factions, a win by a group of Guelph merchant families resulted in a Papal banking takeover.
Philip IV expelled Jews from France, arrested the Knights Templar while acquiring their wealth and became the unofficial treasury of France.
King Philip IV of France
He also expelled Italian bankers and collected their outstanding credit, helping Avignon, France gain power over 43 branches of Italian banking houses.
Florentine Families Prevail as Banking Dynasties
As the Crusades slowed to a halt, family dynasties began to prevail in Florence, solidifying Italy’s place in banking history.
Florence becomes new banking powerhouse.
In the 13th century, the Italian cities of Siena, Lucca, Milan and Genoa were all known for their prevalence in the banking industry, but above all, Florence was best known for its ability to handle international finance as well as its famous gold coin, the florin.
Back side of Florence’s gold florin
The gold florin was first minted in 1252 and was widely recognized and trusted, being considered the hard currency of its day.
Bardi and Peruzzi family banks flourish.
They successfully facilitated trade by providing merchants with bills of exchange (bills that allowed money paid in by a debtor in one town to be paid out by a creditor in another town) and were able to grow branches outside of Italy.
Offices were built in Seville, Majorca, Barcelona, London, Bruges, Constantinople, Paris, Avignon, Nice, Marseilles, Cypress and Jerusalem.
War bankrupts bankers causing short-term downfall.
Florence held on to its power for some time, even lending huge amounts of florin to national leaders to aid in their war efforts. However, this ability to lend contributed to, in the short-term at least, Florence’s banking downfall.
Records show that in the 1340s, Edward III of England was engaged in an expensive war with France at the start of the Hundred Years’ War. He’d borrowed 600,000 gold florins from the Peruzzi family and 900,000 from the Bardi family to finance the war.
King Edward III of England
Unable to repay his debts, he defaulted on both loans, which resulted in both Florentine houses bankrupting. However, this downfall didn’t last long as new families rose to prominence by the 15th century.
Usury ruled a legal practice.
After 1400, a number of political battles ensued, resulting in all Italian merchants being expelled from Paris and the Bank of Saint George being founded in Genoa.
But while problems ensued, one major breakthrough in banking occurred in 1403 when the act of charging interest on loans (usury) was ruled legal in Florence despite the previous Christian prohibition.
Medici family dynasty rules Florence.
Just before usury was made legal and a few decades after major Florentine banking houses bankrupted, the Medici family came into power. Founded by Giovanni di Bicci de’ Medici, the family ran the Medici Bank in Italy from 1397 to 1494.
It was the largest and most respected bank in Europe and the family was estimated to be the wealthiest on the continent. The family also made major contributions to Europe, including advancing the double-entry booking system, which allowed for two columns representing credits and debits.
By 1434, the Medici had become the unofficial head of the state of the Florentine republic.
Pazzi family conspiracy against Lorenzo the Magnificent and Medici family.
Lorenzo de’Medici (also known as Lorenzo the Magnificent), was the 17-year-old heir to the Medici dynasty. He was deemed the most brilliant of the Medici family and ruled with his younger brother, Giuliano, from 1469 to 1478.
On April 26, 1478, another Florentine family known as Pazzi plotted a conspiracy against the Lorenzo and the Medici family with the purpose of gaining political control of the city.
The Pazzi, much like the Medici, were extremely wealthy bankers and had high-level support, in their case, from the Pope Sisto IV, a papal banker. To show his support, the pope rewarded Pazzi bank with lucrative rights to manage Papal revenues.
The pope was interested in demolishing the dominion of Medici and helped the Pazzi family (which had already replaced the Medici in the office of bankers) to attack Giuliano and Lorenzo during a mass in the Duomo (Florence Cathedral). Giuliano died but Lorenzo did not.
The Pazzi were ultimately unsuccessful in their takeover. As a result of their attempt, some were killed and the family as a whole was stripped of their possessions in Florence by Lorenzo.
The family crest and all references to the Pazzi name were banned until 1494 when, after the next Medici heir, Piero, was overthrown, the family was able to return to Florence to participate in government activities.
Fugger Dynasty Becomes New Powerhouse
At the beginning of the 15th century, the Medici was still Europe’s greatest banking dynasty, but by the end of the century, the power began to shift to a German-Italian dynasty known as the Fugger family.
Fuggers take over as top European bankers.
The Fuggers, descended from Johannes Fugger, an Augsburg weaver, and later led by brothers Raimund and Anton Fugger, made their fortune in the textile field.
Their first loan was made to a Habsburg archduke in 1487 after they took an interest in silver and copper mines. This began their involvement in mining and precious metals.
But the largest project undertaken by the family was in 1519 on behalf of Maximilian’s grandson Charles who wanted to succeed his grandfather as German king and Holy Roman emperor and needed election funding to beat his rival candidate, the French king, Francis I.
Portrait of Anton Fugger
The Fugger family gave Charles 544,000 florins, which totaled more than two-thirds of his total funding. The money helped him win the election and granted the Fuggers banking favor.
Emperor’s warfare becomes profitable for Fuggers.
As the new power, Charles allowed for banking interest rates that were no less than 12 percent per annum and as high as 45 percent, making banking very profitable.
However, as much money as he earned, he spent on continuous warfare. These constant expenditures left him in a position to borrow from the Fuggers.
He borrowed so much, in fact, that the Fuggers got repaid by leases on sources of royal income, including revenues from the Spanish orders of knighthood and profits from mercury and silver mines.
This helped the family become both revenue collectors and managers of state assets.
Fuggers settle into conventional banking techniques.
While the Fuggers first supported continuous warfare, they realized that it could mean their own demise as seen by the Peruzzi and Bardi families. As a result, they withdrew from financial risk-taking by the end of the 16th century and settled into a more conventional aristocratic existence.
This meant banking, for the most part, shifted to a commercial business for customers rather than a personal financial service for kings.
Venice Lays Foundation for Modern Banking
Prior to the 16th century, with the exception of a few Mediterranean trading centres (in Barcelona and Genoa), only money-lenders allowed for financial transactions without the physical transfer of coins.
Venice banks were responsible for changing this process.
Banco della Piazza di Rialto changes financial transactions.
In 1587, the Banco della Piazza di Rialto opened in Venice with the purpose of carrying out the function of holding merchants’ funds on safe deposit while enabling financial transactions in Venice and elsewhere to be made without the physical transfer of coins.
This new initiative was an attempt to provide security in the risky business of trade and expanded to northern cities, including Amsterdam in 1609, Hamburg in 1619 and Nuremberg in 1621.
The cheque replaces the bill of exchange.
During the same period, the cheque slowly became a replacement for the bill of exchange, which was the original method of transferring money without the use of coins. This switch occurred partly because the bill of exchange was a complex contract between private parties and one or more lenders.
The cheque, on the other hand, was exchangeable between banks and payable by them to whoever held and presented the cheque, simplifying the process.
Bank deposits gain popularity.
Banks in Venice also realized that allowing customers to deposit money into banks rather than borrowing from a family’s own funds left plenty of money available since only a fraction of it was usually required for withdrawals.
Since interest was legal at this time, banks found that they could make loans with other customers’ money while charging interest, bringing a profit to the bank.
Money-lenders slowly transform into private banks.
By the late 1600s and early 1700s, money-lenders slowly began to transition into private banks. This was achieved by various families of goldsmiths in England who had first accepted money on deposit for safekeeping.
Over time, they began to lend money out and saw the profit of this business. And by the 18th century, most goldsmiths had abandoned their original craft and became bankers, leading the way for the next stage in banking, which was the national bank.
17th-19th Centuries: National Banks and Paper Currency Emerge
Venice was known for making two major contributions to banking as we know it: keeping money on safe deposit and introducing the concept of banks holding state finances.
Banco Giro established to make unsecured loans.
In 1617, the Banco Giro was established as a way to solve the problems that Banco della Piazza di Rialto suffered when trying to make unsecured loans.
One of the new bank’s major debtors was the Venetian government. Banco Giro was to have the government’s creditors accept payment in the form of credit. This allowed Venice to raise public finance on the basis of guaranteed credit while creating the next extension: the national bank.
Bank of Sweden is established as first national bank.
The first national bank to be established, however, was not in Venice. Instead, it was the Bank of Sweden (also known as Riksbank), founded in 1668 in a partnership with the state.
Bank of Sweden (Riksbank)
This bank is still in existence today and is the world’s oldest surviving bank.
Bank of England expands role as national bank.
The Bank of England opened shortly after Riksbank in 1694 after arranging a loan of £1,200,000 to the government.
By the 18th century, it began to undertake many of the tasks associated with current central banks, including organizing the sale of government bonds, acting as a clearing bank for government departments and facilitating and processing their daily transactions.
The bank also became the banker to other London banks, creating a much wider banking community. It acted as an agent in the capital for smaller private banks and even became a source of credit in crisis times.
In order to accomplish its goal correctly, however, it needed a large reserve of gold and other precious metals. It accumulated almost the entire hoard of the nation’s metal quite successfully, which it stored in its vaults.
Palmstruch’s and Law’s unsuccessful attempts to issue paper currency.
Aside from cheques that made their way around parts of Asia and the Near East between the 9th and 12th centuries, and bills of exchange that circulated through Medieval trade fairs in the through the 14th century that could be redeemed at banks, paper had not become a strong consideration for currency.
But in 1656, Johan Palmstruch established the Stockholm Banco, which was a private bank that had strong enough ties with state to give it national recognition. One of its major contributions was credit notes that could be exchanged for a stated number of silver coins.
The notes were said to impressive-looking pieces of printed paper that offered eight hand-written signatures on each. The notes created trust in citizens, eventually resulting in it becoming a genuine form of currency that could be used to purchase goods in the market place.
Palmstruch first bank note
The only problem was the Palmstruch issued more notes than his bank could afford to redeem with silver. His misstep resulted in fraud charges, eventual imprisonment and the fall of printed currency.
About a half-century later, John Law, founder of the Banque Générale in Paris made his own attempt at paper currency. In 1719, he issued bank notes to the public, but ran into problems when a government decree in May 1720 cut the value of his paper currency in half.
National banks successfully issue paper currency with government backing.
Many years pass with more unsuccessful attempts at issuing paper currency. It isn’t until the end of the 18th century—and only when a significant number of national banks received the backing of their governments’ reserves–that the public gained confidence in these pieces of paper.
Since the government was now responsible for issuing the notes, rather than individual banks, the danger of bankruptcy diminished.
However, because inflation had become an issue, along with the fear that the government could impose a ban on the right of the holder of a note to exchange it for silver, the Britain government tried to protect the currency by introducing the Gold Standard.
This commitment by participating countries was an attempt to fix the prices of their domestic currencies in terms of a specified amount of gold.
Wildcat banks result in uniform design of bank notes.
As the Gold Standard was being tested through the world, the United States was battling an issue of fraud among so-called “Wildcat banks.”
Wildcat banks existed from 1816-1863 and were said to be headquartered “out among the wildcats.” These banks issued nearly worthless currency that was backed by a questionable securities (mortgages and bonds) that were later considered fraudulent.
Wildcat banks dissolved with the passage of the National Bank Act, which offered federal chapters to banks and required them to create a uniform design and get the backing of substantial reserves invested in federal bonds.
Rothschilds Mark Last of Family Banking Dynasties
Of the numerous families that influenced banking in its history, one of the largest was the Rothschild family, which helped make significant strides in developing modern banking.
Mayer Rothschild advises William IX and other European princes.
William IX, who was the ruler of the German state of Hesse-Kappel, often received advice from his friend Mayer Amschel Rothschild, a Jewish banker and merchant of Frankfurt.
Mayer Amschel Rothschild
In 1801, he formally appointed Rothschild as his court agent and asked him to offer his financial skills to other European princes as they all worked to fight against Napoleon, who was unsettling the continent at the time.
Rothschild family becomes most powerful bankers in Europe.
By 1803, Rothschild energetically begins lending to various governments around Europe.
He lent 20 million francs to the Danish government along with more money to other governments. This quickly established the Rothschild family as one of Europe’s most powerful banking institutions, similar to that of the Medici and Fugger dynasties in earlier centuries.
The Rothschild family spread out over the continent, opening bank branches in Vienna, London, Naples and Paris. They lent money to Napoleon’s enemies, hoping for his eventual defeat.
By the end of the Peninsular War, the family had a huge reputation among allies and became closely involved with the government finances of many nations. Their good fortune helped them build a trustworthy reputation.
Rothschild dynasty introduces banking techniques still relevant today.
After Mayer Rothschild died in 1812, his sons took over the operations of his banking system, which continued successfully for many years and arguably maintained the largest private fortune in the world during the 19th century.
In addition to introducing concepts such as diversification, rapid communication, high volume and confidentiality, which are all still relevant in modern banking, the family is still known for its many donations to charity.
19th and 20th Centuries: The Gold Standard and Bretton Woods System Tested
As the influence of the Rothschild family began to die down and governments claimed their power in national banking, the Gold Standard became even more prevalent, extending to the United States, along with other types of banking systems.
The Classic Gold Standard marks economic growth.
While the Gold Standard had become a de facto form of banking operation in England in 1717 as a way to protect the value of paper currency, it wasn’t formally adopted until 1819.
In the United States, a de facto Gold Standard was adopted in 1834 with Congress’ formal passage of the Gold Standard Act in 1900. Prior to the act’s passage, the U.S. had determined a fixed gold price of $20.67 per ounce that remained intact until 1933.
Other countries followed a similar gold standard, marking 1880 to 1917 as the Classical Gold Standard—a period of unprecedented economic growth with relatively free trade in goods, labor and capital.
Gold Standard temporarily becomes Gold Exchange Standard.
During World War I, the Gold Standard temporarily broke down as major belligerents resorted to inflationary finance. During this time, a period between 1925 and 1931, the Gold Exchange Standard was established.
Under the new standard, countries were allowed to hold gold or dollars (or pounds) as reserves. In the United States and United Kingdom, the rules were different, however, in that reserves could only be held in gold.
This temporary version broke down in 1931 after Britain departed from gold in the face of massive gold and capital outflows. This breakdown is often considered one of the contributing factors of the Wall Street Crash of 1929 and the Great Depression.
Soup line during the Great Depression
In 1933, President Franklin D. Roosevelt nationalized gold owned by private citizens in which payment was specified in gold.
Countries operate under Bretton Woods System.
Between 1946 and 1971, the banking system shifted once again, operating under what was known as the Bretton Woods System.
This system allowed most countries to settle their international balances in U.S. dollars with the promise from the U.S. government that other central banks’ holdings of dollars for gold at the fixed rate of $35 per ounce could be redeemed.
Gold fully abandoned by United States in 1971.
Problems ensued with the Bretton Woods System when persistent U.S. balance-of-payments deficits reduced U.S. gold reserves and confidence that the country had the ability to redeem its currency in gold decreased.
Finally, on August 15, 1971, President Richard Nixon announced that the United States would no longer redeem currency for gold, marking the final step in abandoning the Gold Standard.
Modern-Day Global Banking: Growth, Crisis and Recovery
By the 1970s and 1980s, deregulation and privatization of government-owned enterprises came as a result of crashes tied to policies put in place following the depression. This spurred what we know today as global banking.