History of banking

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Roman sculpture showing moneychanger from 4th century BC
Roman sculpture showing moneychanger from 4th century BC

The history of banking is closely related to the history of money. As monetary payments became important, people looked for ways to safely store their money. As trade grew, merchants looked for ways of borrowing money to fund expeditions.

Contents

[edit] Earliest banks

The first banks were probably the religious temples of the ancient world. In them was stored gold in the form of easy-to-carry compressed plates. Their owners justly felt that temples were the safest places to store their gold as they were constantly attended and well built and were sacred, thus deterring would-be thieves. There are extant records of loans from the 18th century BC in Babylon that were made by temple priests to merchants.

Ancient Greece holds further evidence of banking. Greek temples, as well as private and civic entities, conducted financial transactions such as loans, deposits, currency exchange, and validation of coinage. There is evidence too of credit, whereby in return for a payment from a client, a moneylender in one Greek port would write a credit note for the client who could "cash" the note in another city, saving the client the danger of carting coinage with him on his journey.

Ancient Rome perfected the administrative aspect of banking and saw greater regulation of financial institutions and financial practices. Charging interest on loans and paying interest on deposits became more highly developed and competitive.

[edit] During Late Antiquity and Middle ages

The ascent of Christianity in Rome and its influence restricted banking, as the charging of interest was seen as immoral. Jews were ostracized from most professions by local rulers, the Church and the guilds, were pushed into marginal occupations considered socially inferior, such as tax and rent collecting and moneylending, while the provision of financial services increasingly demanded by the expansion of European trade and commerce.

Most early religious systems in the ancient Near East, and the secular codes arising from them, did not forbid usury. These societies regarded inanimate matter as alive, like plants, animals and people, and capable of reproducing itself. Hence if you lent 'food money', or monetary tokens of any kind, it was legitimate to charge interest.[1] Food money in the shape of olives, dates, seeds or animals was lent out as early as c. 5000 BC, if not earlier. ... Among the Mesopotamians, Hittites, Phoenicians and Egyptians, interest was legal and often fixed by the state. But the Jews took a different view of the matter.[2]

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 allowed to charge interest on transactions with non-Jews, or Gentiles. However, the Hebrew Bible itself gives numerous examples where this provision was evaded.[3] Johnson holds that the Hebrew Bible treats the lending as philanthropy in a poor community whose aim was collective survival, but which is not obliged to be charitable towards outsiders.

Medieval trade fairs, such as the one in Hamburg, contributed to the growth of banking 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, 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 and hiring armed guards to protect the gold from thieves.

Ironically, the papal bankers were the most successful of the Western world. When Pope John XXII (born Jacques d'Euse (1249 - 1334) was crowned in Lyon in 1316, he set up residency in Avignon. 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. Perhaps it was because of these origins that the term Lombard is synonymous with Cahorsin in medieval Europe, and means 'pawnbroker'.

The Templars' wide flung, large land holdings across Europe also emerged in the 1100-1300 time frame as the beginning of Europe-wide banking, as their practice was to take in local currency, for which a demand note would be given that would be good at any of their castles across Europe, allowing movement of money without the usual risk of robbery while traveling.

Following up this Europe-wide Templar banking was the Rothschild family, who organized similar banks across Europe as in Germany and Britain. The Rothschild bank dealt in bills of exchange and made various kinds of loans.

Banca Monte dei Paschi di Siena SPA (MPS) Italy, is the oldest surviving bank in the world.

[edit] Western banking history

Modern Western economic and financial history is usually traced back to the coffee houses of London. The London Royal Exchange was established in 1565. At that time moneychangers were already called bankers, though the term "bank" usually referred to their offices, and did not carry the meaning it does today. There was also a hierarchical order among professionals; at the top were the bankers who did business with heads of state, next were the city exchanges, and at the bottom were the pawn shops or "Lombard"'s. Most European cities today have a Lombard street where the pawn shop was located.

After the siege of Antwerp trade moved to Amsterdam. In 1609 the Amsterdamsche Wisselbank (Amsterdam Exchange Bank) was founded which made Amsterdam the financial centre of the world until the Industrial Revolution.

Banking offices were usually located near centers of trade, and in the late 17th century, the largest centers for commerce were the ports of Amsterdam, London, and Hamburg. Individuals could participate in the lucrative East India trade by purchasing bills of credit from these banks, but the price they received for commodities was dependent on the ships returning (which often didn't happen on time) and on the cargo they carried (which often wasn't according to plan). The commodities market was very volatile for this reason, and also because of the many wars that led to cargo seizures and loss of ships.

[edit] Coffee houses of London

Coffeehouse proprietors overheard many conversations about business and even made modest investments themselves. They came up with the idea of producing lists of share prices or shipping data. The weekly published lists of the London coffee houses (simply pasted to the door) made it possible for the first time to compare the relative success (and liquidity) of bankers and investment opportunities. This was much more efficient than word of mouth. These lists were most notably Jonathan's Coffee-House and Edward Lloyd's. In 1698 John Castaing, began publishing a twice weekly newsletter of share and commodity prices, which he sold at Jonathan's, and which led to the London Stock Exchange. Lloyd's list led to the establishment of the famous insurance exchange Lloyds of London and the Lloyd's Register of Shipping.

[edit] Capitalism

Around the time of Adam Smith (1776) there was a massive growth in the banking industry. Within the new system of ownership and investment, moneyholders were able to reduce the State's intervention in economic affairs, remove barriers to competition, and, in general, allow anyone willing to work hard enough—and who also has access to capital—to become a capitalist. It wasn’t until over 100 years after Adam Smith, however, that US companies began to apply his policies in large scale and shift the financial power from England to America.

[edit] The growth of commercial banking

[edit] US financial market

By the early 1900s New York was beginning to emerge as a world financial centre. Companies and individuals acquired large investments in (other) companies in the US and Europe, resulting in the first true market integration. This comparatively high level of market integration proved especially beneficial when World War I came—both sides in the conflict sought funds from the United States, by issuing new securities and selling existing holdings, though the Allied Powers raised by far the larger amounts. Being a lender to the world resulted in the largest growth of a financial economy to that point.

The stock market crash in 1929 was a global event—markets crashed everywhere, all at the same time, and the volume of foreign selling orders was high. The Great Depression followed, and the banks were blamed for it, although the evidence has never been strong to connect the speculative activities of the banks during the 1920s with either the crash or the subsequent depression of the 1930s. Nonetheless, there were three prominent results from these events that had great effect on American banking. The first was the passage of the Banking Act of 1933 that provided for the Federal Deposit Insurance system and the Glass–Steagall provisions that completely separated commercial banking and securities activities. Second was the depression itself, which led in the end to World War II and a 30-year period in which banking was confined to basic, slow-growing deposit taking and loan making within a limited local market only. And third was the rising importance of the government in deciding financial matters, especially during the post-war recovery period. As a consequence, there was comparatively little for banks or securities firms to do from the early 1930s until the early 1960s.

[edit] Global banking

In the 1970s, a number of smaller crashes tied to the policies put in place following the depression, resulted in deregulation and privatisation of government-owned enterprises in the 1980s, indicating that governments of industrial countries around the world found private-sector solutions to problems of economic growth and development preferable to state-operated, semi-socialist programs. This spurred a trend that was already prevalent in the business sector, large companies becoming global and dealing with customers, suppliers, manufacturing, and information centres all over the world.

Global banking and capital market services proliferated during 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. Such growth rate would have been lower, in the last twenty years, were it not for the profound effects of the internationalization of financial markets especially U.S. Foreign investments, particularly from Japan, who not only provided the funds to corporations in the U.S., but also helped finance the federal government; thus, transforming the U.S. stock market by far into the largest in the world.

Nevertheless, in recent years, the dominance of U.S. financial markets has been disappearing and there has been 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 has enabled them to expand their activities. Thus, American corporations and banks have started seeking investment opportunities abroad, prompting the development in the U.S. of mutual funds specializing in trading in foreign stock markets.

Such growing internationalisation and opportunity in financial services has entirely changed the competitive landscape, as now many banks have demonstrated a preference for the “universal banking” model so 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.

Many such possible alignments could be accomplished only by large acquisitions, and there were many of them. By the end of 2000, a year in which a record level of financial services transactions with a market value of $10.5 trillion occurred, the top ten banks commanded a market share of more than 80% and the top five, 55%. Of the top ten banks ranked by market share, seven were large universal-type banks (three American and four European), and the remaining three were large U.S. investment banks who between them accounted for a 33% market share.

This growth and opportunity also led to an unexpected outcome: entrance into the market of other financial intermediaries: nonbanks. Large corporate players were beginning to find their way into the financial service community, offering competition to established banks. The main services offered included insurances, pension, mutual, money market and hedge funds, loans and credits and securities. Indeed, by the end of 2001 the market capitalisation of the world’s 15 largest financial services providers included four nonbanks.

In recent years, the process of financial innovation has advanced enormously increasing the importance and profitability of nonbank finance. Such profitability priorly restricted to the nonbanking 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 nonbanking industries, the distinction between different financial institutions is gradually vanishing.

A recent innovation in 2005 was the creation of prosper.com, a financial institution based on the idea of a person-to-person (P2P) system. Prosper.com allows individuals and groups to bid on interest rates for loans as either borrowers or lenders, effectively making each individual person a banking institution. The system is protected by credit ratings and identity verification.

[edit] Major events in banking history

[edit] Oldest private banks

For French banking history, read the History of banks in France (in English or in French) on the FBF website.

[edit] Oldest national banks

[edit] References

  1. ^ Johnson cites Fritz E. Heichelcheim: An Ancient Economic History, 2 vols. (trans. Leiden 1965), i.104-566
  2. ^ Johnson, Paul: A History of the Jews (New York: HarperCollins Publishers, 1987) ISBN 0-06-091533-1. pp.172-173
  3. ^ I Samuel 22:2, II Kings 4:1, Isaiah 50:1, Ezekiel 22:12, Nehemiah 5:7 and 12:13

[edit] Further reading

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