30 October 2007

The History of Banks

I've often wondered how the first banks got started.

How or why would you trust someone else with your money? Back in the days before the FDIC and all that. Back during Late Antiquity and the Middle Ages, how did you build trust like that?

Wouldn't the concept have seemed totally insane? Why would you trust anyone besides yourself or your family with your gold? "Let me get this straight, YOU want to hold MY GOLD and you say you will keep it safe? And while you're holding my gold you might lend it to someone else?!"

Naturally, these days we think nothing of it. We dump our money into banks because we know it'll be safe; safer than keeping it stuffed under our mattress. We have time on our side and the history of the past to trust. We have hindsight. But what about in the days before there were giant banks on every corner? How did the concept ever get off the ground in the frontier days?

Well, I learned 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 and just as trade grew, merchants looked for ways of borrowing money to fund expeditions.

The first banks were probably the religious temples of the ancient world, and were probably established sometime back in the 3rd millennium B.C.

Some say banks may have predated the invention of money. Deposits initially consisted of grain and later other goods including cattle, agricultural implements, and eventually precious metals such as gold, in the form of easy-to-carry compressed plates.

Temples and palaces were the safest places to store gold as they were constantly attended and well built. As sacred places, temples presented an extra deterrent to would-be thieves.

There are extant records of loans from the 18th century BC in Babylon that were made by temple priests to merchants. And by the time of Hammurabi's Code, banking was well enough developed to justify the promulgation of laws governing banking operations.

Hammurabi's Code was created in 1760 BC by the sixth Babylonian King, Hammurabi. It is one of the earliest extant sets of laws, and one of the best preserved examples of this type of document from ancient Babylon.

The text contains a list of crimes and their various punishments, as well as settlements for common disputes and guidelines for citizens' conduct. The Code does not provide opportunity for explanation or excuses, though it does imply one's right to present evidence. The stele was openly displayed for all to see; thus, no man could plead ignorance of the law as an excuse. Scholars, however, presume that few people could read in that era, as literacy was primarily the domain of scribes.

Hammurabi's Code is often pointed to as the first example of the legal concept that some laws are so basic as to be beyond the ability of even a king to change. Thus, your boy Hammurabi had the laws inscribed in stone, so they were immutable. It covered nearly everything Tribal influences from classes to property law to hired labour to debt and trade to family law, marriage, divorce, childbearing, adoption, Heirs, Adultery... to punishments for breaking these codes.

Ye Ol' 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.

Pythius, who operated as a merchant banker throughout Asia Minor at the beginning of the 5th century B.C., is the first individual banker of whom we have records. Many of the early bankers in Greek city-states were “metics” or foreign residents. Around 371 B.C., Pasion, a slave, became the wealthiest and most famous Greek banker, gaining his freedom and Athenian citizenship in the process.

The fourth century B.C. saw increased use of credit-based banking in the Mediterranean world. In Egypt, from early times, grain had been used as a form of money in addition to precious metals, and state granaries functioned as banks. When Egypt fell under the rule of a Greek dynasty, the Ptolemies (330-323 B.C.), the numerous scattered government granaries were transformed into a network of grain banks, centralised in Alexandria where the main accounts from all the state granary banks were recorded. This banking network functioned as a trade credit system in which payments were effected by transfer from one account to another without money passing.

In the late third century B.C., the barren Aegean island of Delos, known for its magnificent harbour and famous temple of Apollo, became a prominent banking center. As in Egypt, cash transactions were replaced by real credit receipts and payments were made based on simple instructions with accounts kept for each client. With the defeat of its main rivals, Carthage and Corinth, by the Romans, the importance of Delos increased. Consequently it was natural that the bank of Delos should become the model most closely imitated by the banks of Rome.

Naturally, 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. 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. After the fall of Rome, banking was abandoned in western Europe and did not revive until the time of the crusades.

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

"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.

The Torah and later sections of the Hebrew Bible criticise 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. 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.

By 1200 there was a large and growing volume of long-distance and international trade in a number of agricultural commodities and manufactured goods in western Europe, including corn, wool, finished cloth, wine, salt, wax and tallow, leather and leather goods, and weapons and armour.

By the 1390's silver was short all over Europe, except in Venice.

By 1450 almost all of the mints of northwest Europe had closed down for lack of silver. The last money-changer in the major French port of Dieppe went out of business in 1446.

In 1455 the Turks overran the Serbian silver mines, and in 1460 captured the last Bosnian mine. The last Venetian silver grosso was minted in 1462. Several Venetian banks failed, and so did the Strozzi bank of Florence, the second largest in the city. Even the smallest of small change became scarce

OK, lets skip a few hundred years because I'm getting bored...

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. Some 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.

Around the time of your boy Adam Smith (circa 1776) there was a massive growth in the banking industry. Within the new system of ownership and investment, the State's intervention in economic affairs was reduced and barriers to competition were removed. Smith was a Scottish moral philosopher and a pioneering political economist. He is a major contributor to the modern perception of free market economics.

Fast forward about 200 years...

In the 1970's, 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 1980's, 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 1980's and 1990's 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.

"The Moneymasters": documentary on central banking and the history of banking

Major events in banking history
Florentine banking — The Medicis and Pittis among others
Knights Templar- earliest Euro wide /Mideast banking 1100-1300.
Banknotes — Introduction of paper money
1602 - First joint-stock company, the Dutch East India Company founded
1720 - The South Sea Bubble and John Law's Mississippi Scheme, which caused a European financial crisis and forced many bankers out of business
1781 - The Bank of North America was found by the Continental Congress
1800 - Rothschild family founds Euro wide banking.
1803 - The Louisiana Purchase was the largest land deal in history
1929 - Stock market crash
1989 - junk bond scandal and charges against Michael Milken resulted in new legislation for investment banks
2001 - Enron bankruptcy, causing new legislation for annual reporting

Oldest private banks
Monte dei Paschi di Siena 1472 - present.
Barclays which was founded by John Freame and Thomas Gould in 1690. The bank was renamed to Barclays by Freame's son-in-law, James Barclay, in 1736.
Hope & Co., founded in 1762.
Barings Bank founded in 1806.
Rothschild family 1700 - present.
For French banking history, read the History of banks in France (in English or in French) on the FBF website.

Oldest national banks
Bank of Sweden — The rise of the national banks
Bank of England — The evolution of modern central banking policies
Bank of America — The invention of centralised check and payment processing technology
Swiss banking
United States Banking
The Pennsylvannia Land Bank, founded in 1723 and receiving the support of Benjamin Franklin who wrote "Modest Enquiry into the Nature and Necessity of a Paper Currency" in 1729.
Imperial Bank of Persia (Iran) — History of banking in the Middle-East

No comments: