Banking and bankers are thought to have originated in ancient Mesopotamia around 3100BC, with modern banks beginning in Italy in the 14th and 15th centuries.
The Medici Bank, founded in Florence in 1397, collapsed in 1494. The institution known today as Banca Monte dei Paschi di Siena, founded in the Tuscan city state of Siena in 1472, is considered the world's oldest surviving bank.
The earliest banks grew organically from trading and commerce. The arrival of literacy, numeracy and accounting undoubtedly helped.
History of money
As James Kelman notes in The History of Banking: A comprehensive reference source and guide, the history of banking is intertwined with the history of money.
Ancient types of money known as grain money and food cattle money were used from around 9000BC, he writes. Wealth was usually deposited in temples and treasuries.
The earliest banks were used exclusively by rulers to fund the more important and larger festivals, and for building expenses.
The three major religions – Judaism, Christianity and Islam – placed various restrictions on the charging of interest, otherwise known as usury.
Medieval Italy: home of modern banking
It is from Italy that what we now regard as modern banking emerged. The very word credit, for example, comes directly from the Latin word 'credere', which means 'believe'. The word 'debit' comes from the Latin 'debitum', meaning 'debt'.
The word ‘bankrupt’ comes from the practice of disgracing a failed banker in Italy in medieval times. These bankers carried out their business at a bench, or banca. If they failed, the banca would be broken (rotta). This gives us the word bancarotta, which translates into modern English as the familiar 'bankrupt'.
Little or nothing is new under the banking sun. Only the scale changes. Readers will be familiar with the global financial crisis that has led so far to nearly a decade of economic recession.
It began to unwind in July 2007 and crashed into the broad public consciousness in September 2008. That was when the US investment bank Lehman Brothers collapsed into oblivion.
The reason was, in essence, that it could not refinance the short-term debt that it used to finance the bulk of its business.
In other words, it lost the confidence of the markets. The markets didn't believe in it any more. It had no credit left.
Bank too big to fail
It would have been followed by many more, if the US and UK governments had not stepped in to rescue banks that were deemed to be too big to fail. Goldman Sachs, Lloyds TSB and Royal Bank of Scotland spring immediately to mind.
Banking was devastated by what quickly became known as the credit crunch. This sounds like a modern phenomenon but it is nothing new.
When in Rome
Rome suffered a credit crunch during the reign of the Emperor Tiberius. Felix Martin, in his excellent and absorbing book Money: The unauthorised biography tells the story.
It was Tiberius himself who caused the shortage of liquidity. He made the mistake of deciding to enforce a law on the ownership of property. Enacted by Julius Caesar, it placed strict limits on the percentage of wealth that aristocrats could lend.
This very modern-sounding capital adequacy requirement had become much more honoured in its breach than its observance. In another development that sounds ultra modern, lenders, including most members of the senate, had found ways to get round the law.
When Tiberius decided that the letter of the law would be enforced, he, in short, unleashed monetary chaos. “All the familiar features of a modern banking crisis followed,” writes Martin:
- A mad scramble to call in loans to comply
- A collapse in the property market as mortgaged land was sold to fund repayments
- The threat of mass bankruptcy
“With Rome in the grip of a credit crunch, the emperor was forced to implement a massive bailout,” Martin explains. The imperial treasury refinanced the overextended lenders with a 100 million sesterces programme of three-year, interest-free loans.
European central banks
If that sounds familiar, it is more or less exactly what the European Central Bank did nearly 2,000 years later with its long-term refinancing operations in the wake of the most recent international financial crisis.
As a side note, Rome experienced inflation of 1,000% in AD274-275. Human behaviour does not change. History does repeat itself. In banking, as in all other walks of life.
Bankers in their ancient form began to disappear from the scene from around 300AD as the Roman Empire began to collapse.
As James Kelman tells the story, banking in the modern sense is traceable to medieval and early Renaissance Italy, to rich cities in the north such as Florence, Venice and Genoa. They gave us the word 'bancarotta' as described above.
Others point to more exotic and esoteric tales. Dan Brown makes no mention of it in The Da Vinci Code, but the Knights Templar proved to be the almost accidental inventors of certain aspects of modern banking.
These include branch banking, the custody and safekeeping of valuables, correspondent banking, documentary credits and loans.
The Templars were founded in Jerusalem in 1118 or 1119 depending on the source, by French nobleman Hugues de Payen. The aim was to provide protection to pilgrims journeying to the Holy Land.
The broadly accepted version of the story is that the order gradually accumulated significant wealth, thanks to gifts from the faithful and other income streams.
A would-be pilgrim could go to the nearest Templar treasury before starting the journey and deposit money there. The treasury would issue a letter of credit for the amount involved.
The pilgrim could then use this document to obtain cash from a Templar treasury in another town or country.
In the absence of a convenient Templar temple (or branch), the document could itself be traded, endorsed and re-endorsed. It was acceptable wherever the Templars were trusted.
Power of credit
Which brings us back to the issue of credit. An astonishing example of the power of credit launches Felix Martin's book on money. The Pacific island of Yap, part of the Federated States of Micronesia, stakes at least one strong claim for the attention of the outside world – its highly unusual coinage.
This comprised a series of large, solid thick stones with a hole in the middle to facilitate transportation by carrying them on a pole.
Known as fei, the stones varied in size. Their value depended principally on their size, but also their age.
The richest family was the family with the biggest stone. Even though that stone lay at the bottom of the sea, unseen for two or three generations, the family was still regarded as the richest and respected accordingly.
Some will call this smoke and mirrors. Some will call it a confidence trick. Some will call it fraud.
Others will call it the core of banking throughout human history: credit.