Ever wondered where the first money and banking system originated
How and why did primitive man come to use invent the system we use to day
Mesopotamia is the cradle of civilisation and this is where our story starts
9000 - 6000 BC Domestication of cattle and cultivation of crops Subsequently both livestock,
particularly cattle, and plant products such as grain, come to be used as money in many different
societies at different periods. Cattle are probably the oldest of all forms of money, as domestication
of animals tended to precede the cultivation of crops, and were still used for that purpose in parts of
Africa in the middle of the 20th century.
3100 BC Writing invented in Mesopotamia The main use, and probable motivation for its
development, is for keeping accounts.
3000 - c. 2000 BC Development of Banking in Mesopotamia Banking originates in Babylonia
out of the activities of temples and palaces which provided safe places for the storage of valuables.
Initially deposits of grain are accepted and later other goods including cattle, agricultural implements,
and precious metals.
Safe in the temple: 18th century BC
Wealth compressed into the convenient form of gold brings one disadvantage.
Unless well hidden or protected, it is easily stolen.
In early civilizations a temple is considered the safest refuge; it is a solid building, constantly attended, with a sacred character which itself may deter thieves.
In Egypt and Mesopotamia gold is deposited in temples for safe-keeping. But it lies idle there, while others in the trading community or in government have desperate need of it.
In Babylon at the time of Hammurabi, in the 18th century BC, there are records of loans made by the priests of the temple. The concept of banking has arrived.
Greek and Roman financiers: from the 4th century BC
Banking activities in Greece are more varied and sophisticated than in any previous society. Private entrepreneurs, as well as temples and public bodies, now undertake financial transactions. They take deposits, make loans, change money from one currency to another and test coins for weight and purity.
They even engage in book transactions. Moneylenders can be found who will accept payment in one Greek city and arrange for credit in another, avoiding the need for the customer to transport or transfer large numbers of coins.
Rome, with its genius for administration, adopts and regularizes the banking practices of Greece. By the 2nd century AD a debt can officially be discharged by paying the appropriate sum into a bank, and public notaries are appointed to register such transactions.
The collapse of trade after the fall of the Roman empire makes bankers less necessary than before, and their demise is hastened by the hostility of the Christian church to the charging of interest. Usury comes to seem morally offensive. One anonymous medieval author declares vividly that 'a usurer is a bawd to his own money bags, taking a fee that they may engender together'.
History of banking timeline
c. 2575 BC Construction of the Great Pyramid at Giza Given the limited range of uses of money in certain ancient civilizations, the completion of large-scale and long-term projects was usually based on detailed state planning, often involving slavery. Similarly, the much later but rigidly hierarchical civilization of the Incas in Peru managed without money at all.
c. 2250- c. 2150 BC Cappadocian rulers guarantee quality of silver ingots The state guarantee, probably of both the weight and the purity of her silver ingots, helps their wider acceptance as money.
c. 1792 - c. 1750 BC Reign of Hammurabi in Babylon The Code of Hammurabi includes laws governing banking operations.
c. 1200 BC Cowries used as money in China The Chinese character for "money" originally represented a cowrie shell. Cowries have been used as money in many different places at different periods. In parts of Africa they were used for this purpose as recently as the middle of the 20th century.
c. 1000-500 BC Tool currencies adopted in China These were metal models of valuable implements that had previously been accepted in commercial exchanges, e.g. spades, hoes and knives.
c. 950 BC Queen of Sheba visits Solomon and they exchange gifts The Biblical account of their encounter is probably the best known example of competitive gift exchange.
687 BC Crude "coins" invented in Lydia (according to Herodotus) Herodotus criticises the gross commercialism of the Lydians who are not only the first people to coin money but also the first to open permanent retail shops.
c. 640 - c. 630 BC The first true coins produced in Lydia The earliest coins made in Lydia, Asia Minor, consisted of electrum, a naturally occurring amalgam of gold and silver.
c. 600 BC Pythius operates as a merchant banker in Asia Minor Pythius, who operates throughout western Asia Minor at the beginning of the 5th century BC, is the first banker in the area of Greece and Asia Minor of whom we have records. Many of the early bankers in Greek city states were Greek city states were "metics" or foreign residents.
c. 600-300 BC Round, base metal coins invented in China The date is uncertain but these were probably at least roughly contemporary with the development of coinage in the West, and possibly much earlier. Being made of base metal the Chinese coins were of relatively low value and therefore inconvenient for expensive purchases.
c. 600 - c. 570 BC Use of coins spreads rapidly from Lydia to Greece Aegina (c. 595 BC), Athens (c. 575 BC), and Corinth (c. 570 BC) start to mint their own coins. Prior to the introduction of coinage the Athenians had used iron spits or elongated nails as money.
c. 550 BC Lydians produce separate gold and silver coins During the reign of Croesus the Lydians began to produce coins of pure metal instead of electrum. This is the world's first bimetallic coinage.
546 BC Croesus King of Lydia is captured by the Persians As a result, use of coins spreads to Persia. Unlike the Greeks the Persians use mainly gold coins in preference to silver.
546 BC Athenian Owls produced These coins are first produced by the tyrant Peisistratus, using silver from the Laurion mines 25 miles south of Athens.
c. 490 BC Discovery of a Rich Seam of Silver in the Laurion Mines Themistocles subsequently persuades the Athenians to use some of the proceeds to build a fleet of warships.
480 BC Battle of Salamis Greek civilization is saved by the victory of the Athenian fleet over the Persians.
407 BC Sparta captures the Laurion Mines Sparta releases 20,000 slaves from the mines and cuts off supplies of silver to Athens.
406 - 405 BC Athens issues bronze coins with a silver coating The Athenian public hoards silver coins which, as a result, quickly disappear from circulation, leaving only the inferior bronze ones.
405 BC Aristophanes' comedy The Frogs is produced In the play Aristophanes refers to how the new, inferior coins have displaced the old superior ones from circulation - probably the world's first statement of Gresham's law, that bad money drives out good.
394 - 371 BC Career of Pasion the Athenian banker Pasion, a slave, becomes the wealthiest and most famous Greek banker and gains his freedom and Athenian citizenship in the process. Greek banking transactions are carried out primarily in cash.
390 BC The Gauls attack Rome The cackling of geese in the capitol, where the city's reserves of money are kept, alerts the defenders. The grateful Romans build a shrine to Moneta, the goddess of warning, and from Moneta the words money and mint are derived.
360 - 336 BC Reign of Philip II of Macedonia Philip unites Greece and Macedonia. During his reign he deliberately mints far more coins than required for the immediate needs of his kingdom, probably to support the campaign against Persia that he was planning before his assassination. Among these coins is the golden stater celebrating his triumph in the chariot race in the Olympics in 356 BC - an early example of the use of coins as propaganda. These staters are widely circulated among the Celts of central and northern Europe whose earliest coins are copies of Philip's.
c. 350 BC Normal rate of interest in Greece is 10% except for risky business According to Demosthenes 10% is the normal rate of interest for run-of-the-mill business. For risky business such as lending for shipping rates of between 20% and 30% are normal.
336 - 323 BC Reign of Alexander the Great During the conquest of Asia Minor the cost of maintaining Alexander's army reaches about 20 talents or half a ton of silver a day but later enormous quantities of Persian bullion are captured. The coining of the previously stagnant Persian gold stocks and payments to Alexander's soldiers, many of whom settle in new towns founded by him, give an enormous stimulus to trade throughout his empire. Alexander also simplifies the exchange rate between silver and gold by fixing it at 10 units of silver equals one of gold.
323 - 30 BC Empire of the Ptolemies in Egypt For long before Egypt came under Greek control grain had been used as a form of money in addition to precious metals, and state granaries functioned as banks. The Ptolemies transform the local warehouse deposit system into a fully integrated giro system with a central bank in Alexandria. Payments are made by transfer from one account to another without money passing.
275 BC The aes signatum or bronze bars are still commonly used as currency in Rome These cumbersome bronze bars are later superseded by coins which are much more convenient.
269 BC Regular issues of silver coins are minted by the Romans and widely circulated Despite the example of the Greek colonies on the southern Italian mainland and Sicily, and of Carthage, the Romans are relatively late in adopting coinage.
218 - 201 BC 2nd Punic War between Rome and Carthage Because of the enormous demand for coins to pay troops the Roman rulers debase their coinage in purity and weight, causing inflation.
c. 200 BC Delos becomes a prominent banking centre Delos, a barren Greek island, capitalises on its magnificent harbour and famous temple of Apollo to become a financial centre. Its rise is aided by the defeat of Carthage, one of its main rivals, by the Romans. Transactions are carried out by giro or credit transfer.
118 BC Leather money issued in China This consists of pieces of white deerskin, about one foot square, with a value of 40,000 cash. (The cash was the name of a base metal coin).
55 & 54 BC Julius Caesar raids Britain In his account of his two raids Caesar notes scornfully that the Britons still used sword blades as currency. However a number of the Celtic tribes had begun to mint their own coins of gold, silver, bronze and potin (alloys of copper and tin).
30 BC - 14 AD Reign of Augustus Caesar Augustus reforms the Roman monetary and taxation systems issuing new, almost pure gold and silver coins, and new brass and copper ones, and also introduces three new taxes: a general sales tax, a land tax, and a flat-rate poll tax.
History of banking
The first banks were the merchants of ancient world that made loans to farmers and traders that carried goods between cities. The first records of such activity dates back to around 2000 BC in Assyria and Babylonia. Later in ancient Greece and during the Roman Empire lender based in temples would make loans but also added two important inovations that of accepted deposits and changing money. During this period there is similar evidence of the independent development of lending of money in ancient China and separately in ancient India.
Banking in the modern sense of the word can be traced to medieval and early Renaissance Italy, to the rich cities in the north like Florence, Venice and Genoa. The Bardi and Peruzzi families dominated banking in 14th century Florence, establishing branches in many other parts of Europe. Perhaps the most famous Italian bank was the Medici bank, set up by Giovanni Medici in 1397.
The development of banking spread through Europe and a number of important inovations took place in Amsterdam during during the Dutch republic in the 16th century and in London in the 17th century. During the 20th century developments in telecommunications and computing resulting in major changes to way banks operated and allowing them dramatically increase in size and geographic spread. The Late-2000s financial crisis saw significant number of bank failures, including some of the worlds largest banks and much debate about bank regulation.
There are records of loans from the 2nd century BC in Babylon that were made by temple priests/monks to merchants. By the time of Hammurabi's Code, dating to ca. 1760 BCE, banking was well enough developed to justify laws governing banking operations.
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 BC, 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 BC, Pasion, a slave, became the wealthiest and most famous Greek banker, gaining his freedom and Athenian citizenship in the process.
The 4th century BC 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 (332-30 BC), the numerous scattered government granaries were transformed into a network of grain banks, centralized 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 3rd century BC, the barren Aegean island of Delos, known for its magnificent harbor 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.
Christ drives the Usurers out of the Temple, a woodcut by Lucas Cranach the Elder in Passionary of Christ and Antichrist.
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 AD), 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 temporarily ended in europe and was not revive until the time of the crusades.
In ancient India during the Maurya dynasty, 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.
In ancient China starting in the Qin Dynasty (221 to 206 BC) the Chinese currency developed with the introduction of standardised coins which allowed the much easier trade across china and led to the development of letters of credit. These letters were issued by merchants that acted in ways that today we would understand as banks.
Religious restrictions on interest
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. Food money in the shape of olives, dates, seeds or animals was lent out as early as c. 5000 BCE, if not earlier. Among the Mesopotamians, Hittites, Phoenicians and Egyptians, interest was legal and often fixed by the state.
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, or Gentiles. 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.
Israelites were forbidden to charge interest on loans made to other Israelites, but allowed to charge interest on transactions with non-Israelites, as the latter were often amongst the Israelites for the purpose of business anyway, but in general, it was seen as advantageous to avoid getting into debt at all to avoid being bound to someone else. Debt was to be avoided and not used to finance consumption, but only when in need. However, the laws against usury were among the many which the prophets condemn the people for breaking.
Islam In Islam it is strictly prohibited to take interest; the Quran strictly prohibits 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).
Riba (usury) is forbidden in Islamic economic jurisprudence fiqh. There are two types of riba discussed by Islamic jurists: an increase in capital without any services provided, which is prohibited by the Qur'an, and that prohibited in the Sunnah which comprises commodity exchanges in unequal quantities.
During the 3rd century AD, banks in Persia and other territories in the Persian Sassanid Empire issued letters of credit known as akks.
Arab traders are known to have used the cheque or akk system since the time of Harun al-Rashid (9th century) of the Arab Abbasid Caliphate. In the 9th century, a Muslim businessman could cash an early form of the cheque in China drawn on sources in Baghdad, a tradition that was significantly strengthened in the 13th and 14th centuries, during the Mongol Empire. Indeed, fragments found in the Cairo Geniza indicate that in the 12th century cheques remarkably similar to our own were in use, only smaller to save costs on the paper. They contain a sum to be paid and then the order "May so and so pay the bearer such and such an amount". The date and name of the issuer are also apparent.
Jews were ostracized from most professions by local rulers, the Church and the guilds and so were pushed into marginal occupations considered socially inferior, such as tax and rent collecting and money lending, while the provision of financial services was increasingly demanded by the expansion of European trade and commerce.
Medieval Europe Banking in the modern sense of the word can be traced to medieval and early Renaissance Italy, to the rich cities in the north such as Florence, Venice and Genoa.
Emergence of merchant banks Main article:
The original banks were "merchant banks" which were first invented in the Middle Ages by Italian grain merchants. As the Lombardy merchants and bankers grew in stature 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 silk routes. Originally intended for the finance of long trading journeys, these methods were applied to finance the production and trading of grain.
The Jews could not hold land in Italy, so they entered the great trading piazzas and halls of Lombardy, alongside the local traders, and set up their benches to trade in crops. They had one great advantage over the locals. Christians were strictly forbidden the sin of usury, defined as lending at interest (Islam makes similar condemnations of usury). The Jewish newcomers, on the other hand, could lend to farmers against crops in the field, a high-risk loan at what would have been considered usurious rates by the Church; but the Jews were not subject to the Church's dictates. In this way they could secure the grain-sale rights against the eventual harvest. They then began to advance payment against the future delivery of grain shipped to distant ports. In both cases they made their 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 underwriting (insurance) functions. Financing took the form of a crop loan at the beginning of the growing season, which allowed a farmer to develop and manufacture (through seeding, growing, weeding, and harvesting) his annual crop. Underwriting in the form of a crop, or commodity, insurance guaranteed the delivery of the crop to its buyer, typically a merchant wholesaler. In addition, traders performed the merchant function by making arrangements to supply the buyer of the crop through alternative sources—grain stores or alternate markets, for instance—in the event of crop failure. He could also keep the farmer (or other commodity producer) in business during a drought or other crop failure, through the issuance of a crop (or commodity) insurance against the hazard of failure of his crop.
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 counter) in the great grain markets became centers for holding money against a bill (billette, a note, a letter of formal exchange, later 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, which is what happened when someone lost his traders' deposits. Being "broke" has the same connotation.
Crusades 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, King Henry the II levied a tax to support the crusades—the first of a series of taxes levied by Henry over the years with the same objective. The Templars and Hospitallers acted as Henry's bankers in the Holy Land. 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.
Discounting of interest A sensible manner of discounting interest to the depositors against what could be earned by employing their money in the trade of the bench soon developed; in short, selling an "interest" to them in a specific trade, thus overcoming the usury objection. Once again this merely developed what was an ancient method of financing long-distance transport of goods. 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.
Foreign exchange contracts In 1156, in Genoa, occurred the earliest known foreign exchange contract. Two brothers borrowed 115 Genoese pounds and agreed to reimburse the bank's agents in Constantinople the sum of 460 bezants one month after their arrival in that city. In the following century the use of such contracts grew rapidly, particularly since profits from time differences were seen as not infringing canon laws against usury.
In the middle of the 13th century, groups of Italian Christians, particularly the Cahorsins and Lombards, invented legal fictions to get around the ban on Christian usury; for example, one method of effecting a loan with interest was to offer money without interest, but also require that the loan is insured against possible loss or injury, and/or delays in repayment (see contractum trinius). The Christians effecting these legal fictions became known as the pope's usurers, and reduced the importance of the Jews to European monarchs; later, in the Middle Ages, a distinction was drawn between things which were consumable (such as food and fuel) and those which were not, with usury being pemitted on loans involving the latter.
The Bardi and Peruzzi families dominated banking in 14th century Florence, establishing branches in many other parts of Europe. Perhaps the most famous Italian bank was the Medici bank, set up by Giovanni Medici in 1397. Banca Monte dei Paschi di Siena SPA (MPS) Italy, is the oldest surviving bank in the world.
Ironically, the Papal bankers were the most successful of the Western world, though often goods taken in pawn were substituted for interest in the institution termed the Monte di Pietà. Civil war in Florence between the rival Guelph and Ghibelline factions resulted in victory for a group of Guelph merchant families in the city. They took over papal banking monopolies from rivals in nearby Siena and became tax collectors for the Pope throughout Europe.
In 1306, Philip IV expelled Jews from France. In 1307 Philip had the Knights Templar arrested and acquired their wealth, which had become to serve as the unofficial treasury of France. In 1311 he expelled Italian bankers and collected their outstanding credit. In 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 Peruzzi (1374) and Bardi (1353). 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.
Of Usury, from Brant's Stultifera Navis (the Ship of Fools); woodcut attributed to Albrecht Dürer
By the later Middle Ages, Christian Merchants who lent money with interest were without opposition, and the Jews lost their privileged position as money-lenders
After 1400, political forces turned against the methods of the Italian free enterprise bankers. In 1401, King Martin I of Aragon expelled them. In 1403, Henry IV of England prohibited them from taking profits in any way in his kingdom. In 1409, Flanders imprisoned and then expelled Genoese bankers. In 1410, all Italian merchants were expelled from Paris. In 1401, the Bank of Barcelona was founded. In 1407, the Bank of Saint George was founded in Genoa. This bank dominated business in the Mediterranean. In 1403 charging interest on loans was ruled legal in Florence despite the traditional Christian prohibition of usury. Italian banks such as the Lombards, who had agents in the main economic centers of Europe, had been making charges for loans. The lawyer and theologian Lorenzo di Antonio Ridolfi won a case which legalized interest payments by the Florentine government. In 1413, Giovanni di Bicci de’Medici was appointed banker to the pope. In 1440, Gutenberg invented the modern printing press although Europe already knew of the use of paper money in China.
By the 1390s silver was in short supply all over Europe, except in Venice. The silver mines at Kutná Hora had begun to decline in the 1370s, and finally closed down after being sacked by King Sigismund in 1422. 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. As currency became scarce, several Venetian banks failed as did the Strozzi bank of Florence, the second largest in the city.
Spread through Europe
The medieval Italian markets were disrupted by wars and and were limited by the fractured nature of the Italian states, so the next developments happened as banking practises spread throughout Europe during the renaissance period. Banking offices were usually located near centers of trade, 9and in the late 17th century, the largest centers for commerce were the ports of Amsterdam, London, and Hamburg.
Expansion to Germany and Poland
The next generation of bankers arose from migrant Jewish merchants in the great wheat-growing areas of Germany and Poland. Many of these merchants were from the same families who had been part of the development of the banking process in Italy. They also had links with family members who had, centuries before, fled Spain for both Italy and England. As non-agricultural wealth expanded, many families of goldsmiths (another business not prohibited to Jews) also gradually moved into banking.
Berenberg Bank is the oldest private bank in Germany, established in 1590 by Dutch brothers, Hans and Paul Berenberg in Hamburg
Spain and the Ottoman Empire
Halil İnalcik suggests that, in the sixteenth century, Marrano Jews fleeing from Iberia introduced the techniques of European capitalism, banking and even the mercantilist concept of state economy to the Ottoman empire. In the sixteenth 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. The most notable of the Jewish banking families in the sixteenth century Ottoman Empire was the Marrano banking house of Mendes which moved to and settled in Istanbul in 1552, under the protection of Sultan Suleyman the Magnificent. When Alvaro Mendes arrived in Istanbul in 1588, he is reported to have brought with him 85,000 gold ducats. The Mendès family soon acquired a dominating position in the state finances of the Ottoman
Empire and in commerce with Europe.
They thrived in Baghdad during the eighteenth and nineteenth centuries under Ottoman rule, performing critical commercial functions such as moneylending and banking. Like the Armenians, the Jews could engage in necessary commercial activities, such as moneylending and banking, that were proscribed for Moslems under Islamic law.
Emergence of the Court Jew Joseph Suss Oppenheimer, who served Karl Alexander, Duke of Württemberg
Court Jews were Jewish bankers or businessmen who lent money and handled the finances of some of the Christian European noble houses, primarily in the seventeenth and eighteenth centuries. Court Jews were precursors to the modern financier or Secretary of the Treasury. Their jobs included raising revenues by tax farming, negotiating loans, master of the mint, creating new sources for revenue, negotiating loans, float ing debentures, devising new taxes. and supplying the military. In addition, the Court Jew acted as personal bankers for nobility: he raised money to cover the noble's personal diplomacy and his extravagances.
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. According to Dimont, virtually every duchy, principality, and palatinate in the Holy Roman Empire had a Court Jew. Examples of what would be later called court Jews emerged when local rulers used services of Jewish bankers for short-term loans. They lent money to nobles and in the process gained social influence. Noble patrons of court Jews employed them as financiers, suppliers, diplomats and trade delegates. Court Jews could use their family connections, and connections between each other, to provision their sponsors with, among other things, food, arms, ammunition and precious metals. In return for their services, court Jews gained social privileges, including up to noble status for themselves, and could live outside the Jewish ghettos. Some nobles wanted to keep their bankers in their own courts. And because they were under noble protection, they were exempted from rabbinical jurisdiction. One of the most notable families engaged in this activity was the Rothschild family that created the a banking empire that had branches all over Europe.
A painting of the old town hall in Amsterdam where the bank was founded in 1609.
In the early 1500s in the Dutch Republic in order to protect their large accumulations of cash, people began to depositing their money with "cashiers". These cashiers held the money for a fee. Competition drove cashiers to offer additional services including paying out money to any person bearing a written order from a depositor to do so, this practise led to the development of cheques.
In the 1600s One of the first measures of the revolutionary Dutch government after breaking away from Spain was "free" or "individual" coinage, where the state would coin any metal delivered to it at no or very small cost. Free coinage was an immediate success. As the seventeenth century began, the Dutch were the driving force behind European commerce. The coins, that had legal tender status were often worn and damaged, so it was not easy to exchange them.
To do so, the Bank of Amsterdam (Amsterdamsche Wisselbank) was founded in 1609. Coins were taken in as deposits based not on the face value, but on the real value of their metal weight, with credits, known as bank money, issued against them. And so was created a perfectly uniform currency. This, along with the convenience and security of the new money - and the guarantee of the city of Amsterdam, caused the bank money to trade at an agio, or premium over coins.
The Bank was at first a strictly deposit bank with 100 percent backing, but secretly allowed some depositors to overdraw their accounts as early as 1657 and later provided large loans to the Dutch East India Company and the Municipality of Amsterdam. By 1790 these loans became public and the premium on the bank money disappeared, by the end of that year the Bank virtually admitted insolvency by issuing a notice that silver would be sold to holders of bank money at a 10 percent discount. The City of Amsterdam took the Bank over, and eventually closed it for good in 1819.
Throughout 17th century, precious metals from the New World, Japan and other locales have been channeled into Europe, with corresponding price increases. Thanks to the free coinage, the Bank of Amsterdam, and the heightened trade and commerce, Netherlands attracted even more coin and bullion. These concepts of Fractional-reserve banking and payment systems went on and spread to England and elsewhere.
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.
19th century In the nineteenth century, spurred at first by financing required for the Napoleonic wars and then by the explosion of railroads in Europe, banks evolved into large commercial entities, lending to the public, and often publicly traded. Jews were founders and leaders of many of the important early European banks, as well as significant banks in the United States. Several Jewish bankers became extremely influential, successfully competing with non-Jewish banking houses in the floating of government loans.
Rothschild family banking businesses pioneered international high finance during the industrialisation of Europe and were instrumental in supporting railway systems across the world and in complex government financing for projects such as the Suez Canal. The family bought up a large proportion of the property in Mayfair, London. Major businesses directly founded by Rothschild family capital include Alliance Assurance (1824) (now Royal & SunAlliance); Chemin de Fer du Nord (1845); 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. From the late 1880s onwards, the family controlled the Rio Tinto mining company.
The Japanese government approached the London and Paris families for funding during theRusso-Japanese War. The London consortium's issue of Japanese war bonds would total £11.5 million (at 1907 currency rates).
In the 19th century, the rise of trade and industry in the US led to powerful new private merchant banks, culminating in J.P. Morgan & Co. During the 20th century, however, the financial world began to outgrow the resources of family-owned and other forms of private-equity banking. Corporations came to dominate the banking business. For the same reasons, merchant banking activities became just one area of interest for modern banks.
Globalisation In the late 18th century there was a massive growth in the banking industry. Banks played a key role in moving from gold and silver based coinage to paper money, redeemable against the bank's holdings. Within the new system of ownership and investment, the state's role as an economic factor grew substantially.
1930s 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 Great Depression, margin requirements were only 10%. Brokerage firms, in other words, would lend $9 for every $1 an investor had deposited. When the market fell, brokers called in these loans, which could not be paid back. Banks began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits en masse, triggering multiple bank runs. Government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective or not used. Bank failures led to the loss of billions of dollars in assets. Outstanding debts became heavier, because prices and incomes fell by 20–50% but the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. By April 1933, around $7 billion in deposits had been frozen in failed banks or those left unlicensed after the March Bank Holiday.
Bank failures snowballed as desperate bankers called in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending. Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A vicious cycle developed and the downward spiral accelerated. In all, 9,000 banks failed during the 1930s.
In response many countries significantly increase financial regulation. In the US the Securities and Exchange Commission was established in 1933 and the Glass–Steagall Act was passed which would separate investment banking and commercial banking. This was to try and avoid the more risky investment banking activities from causing bank failures for commercial banks ever again.
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. 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 of the banks were caught out and became bankrupt due to third world country debt defaults.
In the 1970s, there were a number of bank failures due to defaults by third world states. This particularly effected European banks, with the major UK banks being exposed and suffering significant losses. This was also a time that saw an increasing use of technology to retail banking. In 1959 a standard for machine readable characters (MICR) was agreed and patented in the United States for use with cheques which led to the first automated reader/sorting machines. By the 1970s the payment systems started to be develop that would lead to both Electronic payment systems for domestic and international payments. The SWIFT network was established in 1973 and around the world domestic payment systems and banks embraced information technology and early computers to automate much of the manual processing done in banking.
1980s deregulation and globalisation 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.
This period saw a significant 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 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.
Such growing internationalization and opportunity in financial services changed the competitive landscape, as now many banks would demonstrated 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.
The consolidation was accomplished through acquisitions which grow in size over this period, 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: non-bank financial institution. 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 non-banks.
The process of financial innovation advanced enormously in the first decade of the 21 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.
The first decade of the 21st century also saw the culmination of the technical innovation in banking over the previous 30 years and saw a major shift away from traditional bank branches to internet banking.
Late-2000s financial crisis The Late-2000s financial crisis caused significant stress on banks around the world. The failure of a large number of major banks resulted in government bail-outs. The collapse and fire sale of Bear Stearns to JP Morgan Chase in March 2008 and the collapse of Lehman Brothers in September that same year led to a credit crunch and global banking crisses. In response governments around the world bailed-out, nationalised or arranged fire sales for a large number of major banks. Starting with the Irish government on the 29 September 2008, governments around the world even provide wholesale guarantees underwriting banks to avoid panic and systemic failure the whole banking system. These events spawned the term 'too big to fail' and resulted in a lot of discussion about moral hazard of these actions.Major events in banking history
- Florentine banking - The Medicis and Pittis among others.
- 1100 - 1300 - Knights Templar run earliest Euro wide /Mideast banking.
- 1542 - 1551 - The Great Debasement refers to the English Crown’s policy of coinage debasement during the reigns of Henry VIII and Edward VI.
- 1602 – First joint-stock company, the Dutch East India Company founded.
- 1602 - The Amsterdam Stock Exchange was established by the Dutch East India Company for dealings in its printed stocks and bonds.
- 1609 - The Amsterdamsche Wisselbank (Amsterdam Exchange Bank) was founded.
- 1690s - The Massachusetts Bay Colony was the first of the Thirteen Colonies to issue permanently circulating banknotes.
- 1694 - The Bank of England was set up to supply money to the King.
- 1695 - The Parliament of Scotland creates the Bank of Scotland.
- 1716 - John Law opens Banque Générale
- 1717 - Master of the Royal Mint Sir Isaac Newton established a new mint ratio between silver and gold that had the effect of driving silver out of circulation (bimetalism)and putting Britain on a gold standard.
- 1720 – The South Sea Bubble and John Law's Mississippi Scheme, which caused a European financial crisis and forced many bankers out of business.
- 1775 – The first building society, Ketley's Building Society, was established in Birmingham, England.
- 1781 – The Bank of North America was found by the Continental Congress.
- 1791 - The First Bank of the United States was a bank chartered by the United States Congress. The charter was for 20 years.
- 1800 – Rothschild family founds Euro wide banking.
- 1816 - The Second Bank of the United States was chartered five years after the First Bank of the United States lost its charter. This charter was also for 20 years. The bank was created to finance the country in the aftermath of the War of 1812.
- 1862 - To finance the American Civil War, the federal government under U.S. President Abraham Lincoln issued a legal tender paper money, the "greenbacks".
- 1874 - The Specie Payment Resumption Act provided for the redemption of United States paper currency ("greenbacks"), in gold, beginning in 1879.
- 1913 - The Federal Reserve Act created the Federal Reserve System, the central banking system of the United States of America, and granted it the legal authority to issue legal tender.
- 1930–33 - In the wake of the Wall Street Crash of 1929, 9,000 banks close, wiping out a third of the money supply in the United States.
- 1933 - Executive Order 6102 signed by U.S. President Franklin D. Roosevelt forbid the hoarding of Gold Coin, Gold Bullion, and Gold Certificates by U.S. citizens, except for a small amount. This effectively ended the convertibility of dollars to gold for US citizens.
- 1971 - The Nixon Shock was a series of economic measures taken by U.S. President Richard Nixon which canceled the direct convertibility of the United States dollar to gold by foreign nations. This essentially ended the existing Bretton Woods system of international financial exchange.
- 1986 – The "Big Bang" (deregulation of London financial markets) served as a catalyst to reaffirm London's position as a global centre of world banking.
- 2007 - Start of the Late-2000s financial crisis that saw the a credit crunch that led to the failure and bail-out of a large number of the worlds biggest banks.
- 2008 – Washington Mutual collapses. It was the largest bank failure in history.
What lessons does monetary history offer that are relevant to today's economic, political and social problems
Because of the difficulties of conducting experiments in the ordinary business of economic life, at the centre of which is money, it is most fortunate that history generously provides us with a proxy laboratory, a guidebook of more or less relevant alternatives. Around the next corner there may be lying in wait apparently quite novel monetary problems which in all probability bear a basic similarity to those that have already been tackled with varying degrees of success or failure in other times and places.
Yet despite the antiquity and ubiquity of money its proper management and control have eluded the rulers of most modern states partly because they have ignored the wide-ranging lessons of the past or have taken too blinkered and narrow a view of money. Economists, and especially monetarists, tend to overestimate the purely economic, narrow and technical functions of money and have placed insufficient emphasis on its wider social, institutional and psychological aspects. However, money originated very largely from non-economic causes: from tribute as well as trade, from blood-money and bride-money as well as from barter, from ceremonial and religious rites as well as from commerce, from ostentatious ornamentation as well as from acting as the common drudge between economic men.
Even in modern circumstances money still yields powerfully important psychic returns such as in an individual's social rank and standing, or a nation's position in the GNP league table. Thus money, more than ever in our monetarist era, needs to be widely interpreted to include discussion not only of currency and banking, but also savings banks, building societies, hire purchase finance companies and the fiscal framework on those not infrequent occasions when fiscal policy conflicts with or complements the operation of monetary policy. In this regard, even in medieval and earlier periods these wider aspects were of considerably greater importance than is conventionally believed.
There are therefore many advantages which can only be obtained by tracing monetary and financial history with a broad brush over the whole period of its long and convoluted development, where primitive and modern moneys have overlapped for centuries and where the logical and chronological progressions have rarely followed strictly parallel paths.