In this article, we will learn about the history of banking. Banking is how we manage our money with the help of financial institutions like banks and credit unions. Banks are places where we can deposit , withdraw , transfer, borrow , and invest our money. Banks also provide other services like issuing checks, cards, and loans; exchanging currencies; and giving financial advice as well.
Now , let's find out how banking started , and how it evolved.
The Origins of Banking
Banking has been in existence since the first currencies were minted and wealthy people realized that they needed a safe place to store their money. Ancient empires also needed a functioning financial system to facilitate trade, distribute wealth, and collect taxes. Banks played a major role in that, just as they do today.
The earliest banks were not like the banks we know today. They were more like merchants who gave loans to farmers and traders who carried goods between cities. This was around 2000 BCE in Assyria, India and Sumeria. These merchants charged interest on their loans, which is a fee for using their money by someone else. Interest is usually expressed as a percentage of the loan amount per year. For example, if you borrow $100 at 5% interest per year, you have to pay back $105 after one year.
The first banks also accepted deposits of valuable commodities like grain, gold, silver, and jewels. They kept these as deposits in secure places like temples, palaces, or private houses. They also issued receipts or tokens that represented the value of these deposits. The receipts or tokens could be used as a form of money to buy and sell things.
Banking in Ancient Civilizations
As civilizations developed, so did banking. Some of the most advanced banking systems emerged in ancient Greece and Rome. The Greeks and Romans used coins as their main form of money. Coins were made of metals like gold, silver, bronze, or copper. They had different sizes, shapes, and designs that indicated their value and origin.
The Greeks and Romans also had specialized bankers who operated in temples or marketplaces. These bankers offered various services such as:
- Exchanging coins:
They could exchange coins of different types, values, or origins for a small fee. This was useful for travelers or traders who dealt with different currencies.
- Lending money:
They could lend money to individuals or businesses for interest. They could also lend money to governments for public works or wars.
- Taking deposits:
They could take deposits of coins or valuables from customers for safekeeping or interest. They could also issue written documents that proved the ownership of the deposits.
- Transferring money:
They could transfer money from one account to another or from one place to another using letters of credit or bills of exchange. These were written orders that instructed a banker to pay a certain amount of money to a certain person or place.
Banking in ancient Greece and Rome was not regulated by the government. It was based on trust and reputation. Bankers had to be honest and reliable to attract and keep customers. However, there were also cases of fraud, theft, corruption, and bankruptcy that caused losses and problems for customers and bankers alike.
Banking in the Middle Ages
After the fall of the Roman Empire in the 5th century CE, banking declined in Europe for several centuries. Trade and commerce slowed down, money became scarce, and people relied more on bartering or local currencies. However, banking continued to flourish in other parts of the world, such as the Islamic world, China, India, and Africa.
In the Islamic world, banking was influenced by the principles of Islam, which forbade charging or paying interest (riba). Instead of interest, Islamic bankers used other methods such as profit-sharing (mudaraba), leasing (ijara), joint ventures (musharaka), or fees (wadiah). Islamic bankers also followed ethical rules such as avoiding gambling (maysir), uncertainty (gharar), or harmful activities (haram).
In China, banking was influenced by the invention of paper money (jiaozi) in the 10th century CE. Paper money was issued by the government or by private bankers as a substitute for coins. Paper money was easier to carry and use than coins, but it also had some drawbacks such as inflation, counterfeiting, or loss of value.
In India, banking was influenced by the caste system, which divided society into different groups based on birth and occupation. The Vaishya caste was the merchant class that engaged in trade and commerce. Within this caste, there were subgroups such as the Shroffs who dealt with money exchange; the Seths who dealt with credit; and the Mahajans who dealt with lending.
In Africa, banking was influenced by the diversity of cultures and currencies. Different regions and kingdoms used different forms of money, such as cowrie shells, beads, iron bars, copper wires, or gold dust. African bankers had to be skilled in exchanging and valuing these different forms of money. They also had to deal with the risks of theft, robbery, or war.
Banking in the Renaissance
Banking in Europe revived in the 14th and 15th centuries CE, during the period known as the Renaissance. This was a time of cultural, artistic, scientific, and economic rebirth in Europe. Trade and commerce expanded, especially between Europe and Asia. New forms of money and credit emerged, such as bills of exchange, promissory notes, and cheques.
Some of the most influential bankers in this period were from Italy, especially from the cities of Florence, Venice, and Genoa. These bankers were not only financiers but also merchants, diplomats, politicians, and patrons of the arts. Some of the famous Italian banking families were:
- The Bardi and Peruzzi families:
They dominated banking in 14th century Florence. They had branches in many parts of Europe and lent money to kings, popes, and merchants. They also financed the wool trade and the Crusades. However, they suffered huge losses when Edward III of England defaulted on his debts in 1345.
- The Medici family:
They succeeded the Bardi and Peruzzi as the most powerful bankers in Florence. They established the Medici Bank in 1397 and expanded it to several cities in Europe and Asia. They lent money to rulers, nobles, and businessmen. They also supported the arts, sciences, and education. They became one of the richest and most influential families in history.
- The Fugger family:
They were the most prominent bankers in Germany and Europe in the 15th and 16th centuries. They started as textile merchants and later diversified into mining, trade, and finance. They lent money to kings, emperors, popes, and princes for various purposes, such as wars, marriages, and construction projects. They also financed the mining and trade of silver and gold from the Americas. They became very rich and powerful, and some of them were even elevated to nobility.
- The Venetian and Genoese families:
They were the main rivals of the Fugger family in Europe. They also had extensive banking and trading networks across the Mediterranean, the Middle East, and Asia. They specialized in maritime commerce, insurance, and foreign exchange. They also pioneered the use of public debt, joint-stock companies, and stock exchanges.
Banking in the Renaissance was not only a business but also a cultural phenomenon. Many bankers were patrons of the arts and sciences, supporting artists like Leonardo da Vinci, Michelangelo, Raphael, and Galileo. Many bankers were also involved in politics and diplomacy, influencing the affairs of states and churches. Some bankers even became popes, such as Leo X and Clement VII from the Medici family.
Banking in the Renaissance was also subject to risks and challenges. Some of them were internal, such as mismanagement, fraud, corruption, or competition. Some of them were external, such as wars, revolutions, plagues, or changes in laws or policies. Many banks failed or collapsed due to these factors, causing losses and crises for their customers and creditors.
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