History of Banking

Banking history is strongly interlinked with the history and development of money and trade. The initial form of banking as we know it, took place around 20th -18th century BC in Egypt and Mesopotamia. Since the days of the early Babylonian, Assyrian and Greek merchants who needed to deposit their gold, take a loan or change their money, banking activity had already started. The primary interest of those traders was to protect their gold and money from being stolen. Thus the banking of the time used to take place inside the Temples which were considered to be safe and sacred. This ancient type of lending especially in Mesopotamia and Persia would also involve physical goods like grains apart from gold. There is also archaeological evidence that a form of lending activity took place in Ancient China and India.

Banking is at its origins an entrepreneurial activity that is strongly affected by the level and sophistication of free-trade and individual ownership inside a society. As a result, the foundations for the development of banking in the ancient world were provided in Ancient Greece which was permitting private proprietorship apart from the state controlled ownership. Ancient Greece was organized in city-states which encouraged private citizenship along with private ownership. Financial transactions were usually undertaken by public entities, private entrepreneurs or temples. Since 600 BC the Greek lenders started developing book financial transactions. With this method, they could facilitate traders of the time in order to avoid the transferring of large amounts of coins, thus making their travels and transportation easier and safer. This could take place by accepting payment in one Greek city and obtaining credit in another. Asia Minor which was also inhabited by Greeks of Mycenaean and Achaean origins and later by Ionian Greeks played a crucial role in the early stages of banking. The numerous Ancient Greek city-states which were established in the western part of Asia Minor, apart from being the birthplaces of many well-known Greek philosophers, were also of high economic and financial importance for the whole region. A good example was the temple of Artemis at Ephesus (an ancient Greek City) which was the largest depository of Asia.

During the years of the Roman Empire, there was a big adoption of the Greek Banking practices and a further systemization at administration and regulatory level took place. By the 2nd AD bank transactions involving debt repayment were also notarized so that this type of transactions to be registered. After the fall of the Roman Empire, there was a decrease in banking activities as with the ascent of Christianity the charging of interest was considered immoral and the banking profession faced restrictions.

Banking was revived during the period of crusades. In the 12th century, the crusades would need to be financed with serious amounts of money. The Templar Knights, an elite of astonishingly trained knights as well as monks, would be of tremendous importance at the time as their power and banking capabilities could finance governments and kings. They became indispensable for international trading activities as money lenders and states’ protectors. Their system was ahead of their time and could provide apart from excellent service a very high level of safety. In order for there to be an able trade, lend and deposit money and goods from Western Europe up to Jerusalem, the Templars invented credit letters, which allowed merchants to travel without the danger of being robbed or to have to transport heavy amounts of metal coins. At the same time on the other end of Europe, the Byzantine Empire had developed a sophisticated monetized economy along with advanced banking practices. Byzantine banks would give to entrepreneurs and business persons the initial capital in order to start their businesses or would bring together private wealthy citizens with other business people in order to lend their money or create a joint venture. Also during that period and mainly in the Western Europe, banking was also held by the Jews who would also be of great importance to wealthy families and monarchs of the time. Particular importance played that Jews were generally banned from owning land and doing certain professions. Moreover, they were not subject to church orders so they would become very good on the professions of traders and bankers.

During the 13th century the Northern Italian bankers were commonly known as Lombards, progressively took the place of the Jews in their role as lenders to those with power and wealth. The skills of the Italian bankers were boosted by their accounting invention of double-entry book-keeping, which would help them avoid “the sin” of interest. Towards the end of the 13th century and the beginning of 14th century, the prominent Italian banking families and thanks to their strong gold currency the Fiorin, lead Florence to become the banking hub of the time, managing also to open and operate branches outside its borders. From Jerusalem and Constantinople to London and Barcelona. They were so well established that they could finance kings and wars and at the same survive their after-war bankruptcies and non-repayment of their debts.

After the well-known families of Florence of the 14th century the Peruzzi and the Bardi, Acciaiuoli, and Mozzi, a new banking house, political dynasty and royal house rises and is that of the Medici. The Medici Bank was one of the most prosperous and respected institutions in Europe. However, the shift to of European power to the Habsburgs by the late 15th century is the main reason that another banking family that of the Fugger dynasty which was a German one, became the leading bankers in the 15th and 16th century. During that period in the Ottoman Empire (previously Byzantine Empire) the leading bankers and financiers were the Greeks and the Jews.

From the 16th century and especially in 1587, the Venetian government established the Bank of Venice as the Banco del Piazza Del Rialto. The Venetian practice of banking on the security of government loans was so important that it has survived into the modern period. The purpose of the Bank of Venice was to perform the important function of holding merchants’ funds on safe deposit, thus enabling financial transactions in Venice and the rest of Europe to be made without transferring physically the money. A related development was that of the cheque, an original method of transferring money without the use of coins. The Evolution continues in Venice and banking becomes more sophisticated with the establishment of the Banco de Giro in 1617 which is heavily involved in state finances and now allows Venice to raise public finance on the basis of guaranteed credit. This concept about banking would transform to that of the national bank which during the 18th century in England would evolve to that of a central bank.

During the 17th and 18th centuries, banking started taking its modern form as new banking practices like discounted business debt and promissory notes (banknotes’ predecessor) took place. These practices supported industrial as well as commercial growth by also being combined with the traditional practices of deposit acceptance, changing of money and money lending. Significant to this development was the London Goldsmiths. The creation of the mutual savings bank and the postal savings system was also responsible for the development of banking practices.

Due to the industrial revolution and the wars of the time, banking had obtained immense importance as the funding needs were also huge. London and Amsterdam were at the epicenter of these financial operations. An important role during that period was also played by the Rothschild Dynasty which was able to conduct very large financial and banking operations from the financing of central banks and governments to other large scale investments. From the end of 19thand early 20th-century banking was interlinked with the economies and the societies of Europe and United States and was affecting and being affected by the geopolitical and macroeconomic events that were taking place. Events like the Great Depression, globalization and deregulation of global banking, along with the development of different types of new financial intermediaries have changed inside the last 120 years the banking landscape. The technological evolution of banking, especially through the internet banking, has offered great conveniences to businesses and the public like global retail, commercial, merchant and investment banking services. However, the financial crisis of 2007–2008 showed us that the entire global banking system could have completely collapsed due to the “creative” side of financial engineering, bank accounting and lack of financial regulation that should properly reflect the needs of the 21st century.