History of banking
Encyclopedia
The first bank
s were the merchant
s of the ancient world that made loan
s 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
, lenders who were based in temples made loans but also added two important innovations: accepting 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 such as 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, established by Giovanni Medici in 1397.
The development of banking spread through Europe and a number of important innovations took place in Amsterdam 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 the way banks operated and allowed them to dramatically increase in size and geographic spread. The Late-2000s financial crisis
saw significant number of bank failures, including some of the world's largest banks, and much debate about bank regulation
.
but banking transactions probably predate 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.
s from the 2nd millennium 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.The word "bank" reflects the origins of banking in temples. According to the famous passage from the New Testament, when Christ drove the money changers out of the temple in Jerusalem, he overturned their tables. Matthew 21.12. In Greece, bankers were known as trapezitai, a name derived from the tables where they sat. Similarly, the English word bank comes from the Italian banca, for bench or counter.
(221 to 206 BC) the Chinese currency
developed with the introduction of standardized 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.
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 metic
s 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.
moneylenders would set up their stalls in the middle of enclosed courtyards called macella on a long bench called a bancu, from which the words banco and bank are derived. As a moneychanger, the merchant at the bancu did not so much invest money as merely convert the foreign currency into the only legal tender in Rome that of the Imperial Mint.
The Roman empire formalized the administrative aspect of banking and instituted 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 revived until the time of the crusades.
, 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 Mesopotamia
ns, Hittites
, Phoenicians and Egyptians
, interest was legal and often fixed by the state.
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.
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.
was banned by Christian churches meaning the charging of interest at any rate banned. This included charging a fee for the use of money, such as at a bureau de change
. However over time the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law.
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.
, Venice
and Genoa
.
s" 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 piazza
s 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.
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.
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 discount
ed 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.
, 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.
, invented legal fiction
s 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 permitted 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
.
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.
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.
period. 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
.
s (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
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.
s 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 financier
s, suppliers, diplomat
s 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 rabbi
nical jurisdiction. One of the most notable families engaged in this activity was the Rothschild family
that created a banking empire that had branches all over Europe.
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.
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.
that served as a substitute for gold
and silver
coins.
New banking practices promoted commercial and industrial growth by providing a safe and convenient means of payment and a money supply more responsive to commercial needs, as well as by "discounting" business debt. By the end of the 17th century, banking was also becoming important for the funding requirements of the relatively new and combative european states. This would lead on to government regulations and the first central bank
s. The success of the new banking techniques and practices in Amsterdam and also the thriving trade city of Antwerp help spread the concepts and ideas to London and helped the developments elsewhere in Europe.
from the royal mint, in 1640 caused merchants to lose trust in the existing institutions and drive them to find more trusted alternatives such as the goldsmiths.
The goldsmiths soon found themselves with money for which they had no immediate use, and they began to lend the money out at interest to both the merchants and the government. Finding substantial profit in this business, they began to solicit deposits and pay interest on them. The goldsmiths eventually discovered that the deposit receipts they provided were being passed on from one person to another in lieu of payment in coin, which prompted them to begin lending paper receipts rather than coins. By promoting acceptance of the receipts as a means of payment, the goldsmiths discovered they could lend more than the gold and silver coin they had on hand, a practice that became known as fractional-reserve banking
.
Meanwhile, the credit of the British Crown had been diminished by default in 1672. The monarchy's urgent need for funds at rates lower than those charged by the goldsmiths, and the example of the public Bank of Amsterdam, which had been able to make an ample supply of credit available at low interest rates, led in 1694 to the establishment of the Bank of England
. The Bank of England succeeded in raising money for the government at relatively low rates.
.
, freed many European Christians from Rome's dictates against usury. In the late 18th century, protestant merchant families began to move into banking, especially in trading countries such as the United Kingdom (Barings), Germany (Schroders
) and the Netherlands (Hope & Co.
) At the same time, new types of financial activities broadened the scope of banking far beyond its origins. The merchant-banking families dealt in everything from underwriting
bonds
to originating foreign loans. For instance, bullion trading and bond
issuance were two of the specialties of the Rothschilds. In 1803, Barings
teamed with Hope & Co.
to facilitate the Louisiana Purchase
.
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.
. 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 the Russo-Japanese War
. The London consortium's issue of Japanese war bond
s would total £11.5 million (at 1907 currency rates).
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.
in the US, which led to numerous runs on banks
and became known as the bankers panic.
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 run
s. 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, over 9,000 banks failed during the 1930s.
In response many countries significantly increased 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.
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 the banks were caught out and became bankrupt due to third world country debt defaults.
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. In the 1960 the first Automated Teller Machine
s (ATM) or Cash machines were developed and first machines started to appear by the end of the decade. Banks started to become heavy investors in computer technology to automate much of the manual processing, which saw the start of a shift by banks having a large number of clerical staff in favor of new automated systems. By the 1970s the first payment systems started to be develop that would lead to both Electronic payment systems for domestic and international payments. The international SWIFT
network was established in 1973 and domestic payment systems were developed around the world by banks working together with governments.
Global banking and capital market services proliferated during the 1980s after deregulation
of financial markets in a number of countries. The 1986 'Big Bang
' in London allowing banks to access capital markets in new ways, which led to significant changes to the way banks operated and accessed capital. It also started a trend where retail banks started to acquire investment banks and stock brokers creating universal bank
s that offered a wide range of banking services. The trend also spread to the US after much of the Glass–Steagall Act was repealed in the 1980s, this saw US retail banks embark on big rounds of mergers and acquisitions and also engage in investment banking activities.
Financial services continued to grow through 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. The increase of U.S. Foreign investments from Japan not only provided the funds to corporations in the U.S., but also helped finance the federal government.
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 bank
s 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.
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, loan
s and credit
s 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 banking to internet banking.
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 crises. 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.
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s were the merchant
Merchant
A merchant is a businessperson who trades in commodities that were produced by others, in order to earn a profit.Merchants can be one of two types:# A wholesale merchant operates in the chain between producer and retail merchant...
s of the ancient world that made loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
s to farmers and traders that carried goods between cities. The first records of such activity dates back to around 2000 BC in Assyria
Assyria
Assyria was a Semitic Akkadian kingdom, extant as a nation state from the mid–23rd century BC to 608 BC centred on the Upper Tigris river, in northern Mesopotamia , that came to rule regional empires a number of times through history. It was named for its original capital, the ancient city of Assur...
and Babylonia
Babylonia
Babylonia was an ancient cultural region in central-southern Mesopotamia , with Babylon as its capital. Babylonia emerged as a major power when Hammurabi Babylonia was an ancient cultural region in central-southern Mesopotamia (present-day Iraq), with Babylon as its capital. Babylonia emerged as...
. Later, in ancient Greece
Ancient Greece
Ancient Greece is a civilization belonging to a period of Greek history that lasted from the Archaic period of the 8th to 6th centuries BC to the end of antiquity. Immediately following this period was the beginning of the Early Middle Ages and the Byzantine era. Included in Ancient Greece is the...
and during the Roman Empire
Roman Empire
The Roman Empire was the post-Republican period of the ancient Roman civilization, characterised by an autocratic form of government and large territorial holdings in Europe and around the Mediterranean....
, lenders who were based in temples made loans but also added two important innovations: accepting 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
History of India
The history of India begins with evidence of human activity of Homo sapiens as long as 75,000 years ago, or with earlier hominids including Homo erectus from about 500,000 years ago. The Indus Valley Civilization, which spread and flourished in the northwestern part of the Indian subcontinent from...
.
Banking, in the modern sense of the word, can be traced to medieval and early Renaissance
Renaissance
The Renaissance was a cultural movement that spanned roughly the 14th to the 17th century, beginning in Italy in the Late Middle Ages and later spreading to the rest of Europe. The term is also used more loosely to refer to the historical era, but since the changes of the Renaissance were not...
Italy
Italy
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...
, to the rich cities in the north such as Florence
Florence
Florence is the capital city of the Italian region of Tuscany and of the province of Florence. It is the most populous city in Tuscany, with approximately 370,000 inhabitants, expanding to over 1.5 million in the metropolitan area....
, Venice
Venice
Venice is a city in northern Italy which is renowned for the beauty of its setting, its architecture and its artworks. It is the capital of the Veneto region...
and Genoa
Genoa
Genoa |Ligurian]] Zena ; Latin and, archaically, English Genua) is a city and an important seaport in northern Italy, the capital of the Province of Genoa and of the region of Liguria....
. The Bardi
Bardi family
The Bardi family was an influential Florentine family that started the powerful banking company, the Compagnia dei Bardi.Along with the Peruzzi family, the Bardis lent Edward III of England 400,000 Gold Florins, which he never repaid....
and Peruzzi
Peruzzi
The Peruzzi were bankers of Florence, among the leading families of the city in the 14th century, before the rise to prominence of the Medici. Their modest antecedents stretched back to the mid 11th century, according to the family's genealogist Luigi Passerini, but a restructuring of the Peruzzii...
families dominated banking in 14th century Florence, establishing branches in many other parts of Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...
. Perhaps the most famous Italian bank was the Medici
Medici
The House of Medici or Famiglia de' Medici was a political dynasty, banking family and later royal house that first began to gather prominence under Cosimo de' Medici in the Republic of Florence during the late 14th century. The family originated in the Mugello region of the Tuscan countryside,...
bank, established by Giovanni Medici in 1397.
The development of banking spread through Europe and a number of important innovations took place in Amsterdam during the Dutch Republic
Financial history of the Dutch Republic
Financial history of the Dutch Republic describes the history of the interrelated development of financial institutions in the Dutch Republic. The rapid economic development of the country after the Dutch Revolt in the years 1585 - 1620, described in Economic History of the Netherlands ,...
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 the way banks operated and allowed them to dramatically increase in size and geographic spread. The Late-2000s financial crisis
Late-2000s financial crisis
The late-2000s financial crisis is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s...
saw significant number of bank failures, including some of the world's largest banks, and much debate about bank regulation
Bank regulation
Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines. This regulatory structure creates transparency between banking institutions and the individuals and corporations with whom they conduct business, among other things...
.
Earliest forms of banking
The history of banking is closely related to the history of moneyHistory of money
The history of money spans thousands of years. Numismatics is the scientific study of money and its history in all its varied forms.Many items have been used as commodity money such as natural scarce precious metals, cowry shells, barley, beads etc., as well as many other things that are thought of...
but banking transactions probably predate the invention of money. Deposits initially consisted of grain and later other goods including cattle, agricultural implements, and eventually precious metals such as gold
Gold
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...
, 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.
Mesopotamia
There are records of loanLoan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
s from the 2nd millennium BC in Babylon
Babylon
Babylon was an Akkadian city-state of ancient Mesopotamia, the remains of which are found in present-day Al Hillah, Babil Province, Iraq, about 85 kilometers south of Baghdad...
that were made by temple priests/monks to merchants. By the time of Hammurabi's Code
Code of Hammurabi
The Code of Hammurabi is a well-preserved Babylonian law code, dating to ca. 1780 BC . It is one of the oldest deciphered writings of significant length in the world. The sixth Babylonian king, Hammurabi, enacted the code, and partial copies exist on a human-sized stone stele and various clay...
, dating to ca. 1760 BCE, banking was well enough developed to justify laws governing banking operations.The word "bank" reflects the origins of banking in temples. According to the famous passage from the New Testament, when Christ drove the money changers out of the temple in Jerusalem, he overturned their tables. Matthew 21.12. In Greece, bankers were known as trapezitai, a name derived from the tables where they sat. Similarly, the English word bank comes from the Italian banca, for bench or counter.
Egypt
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.India
In ancient India during the Maurya dynasty (321 to 185 BC), 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.China
In ancient China starting in the Qin DynastyQin Dynasty
The Qin Dynasty was the first imperial dynasty of China, lasting from 221 to 207 BC. The Qin state derived its name from its heartland of Qin, in modern-day Shaanxi. The strength of the Qin state was greatly increased by the legalist reforms of Shang Yang in the 4th century BC, during the Warring...
(221 to 206 BC) the Chinese currency
Chinese currency
The Renminbi is the official currency of the People's Republic of China . It is the legal tender in mainland China, but not in Hong Kong and Macau. It is abbreviated as RMB, and the units for the Renminbi are the Yuan , Jiao , and Fen : 1 Yuan = 10 Jiao = 100 Fen. Fen have almost disappeared, so...
developed with the introduction of standardized 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.
Greece
Ancient GreeceAncient Greece
Ancient Greece is a civilization belonging to a period of Greek history that lasted from the Archaic period of the 8th to 6th centuries BC to the end of antiquity. Immediately following this period was the beginning of the Early Middle Ages and the Byzantine era. Included in Ancient Greece is the...
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
Pythius
Pythius is a Lydian mentioned in book VII of Herodotus' Histories, chh. 27-29 and 38-39.Xerxes I of Persia, son of Darius I of Persia, and king of Persia, encounters Pythius on his way to invade Greece c. 480 BC. Pythius entertains him and offers to provide money for the expenses of war...
, 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 metic
Metic
In ancient Greece, the term metic referred to a resident alien, one who did not have citizen rights in his or her Greek city-state of residence....
s or foreign residents. Around 371 BC, Pasion
Pasion
Pasion was an ancient Greek slave from the 4th century BC. He was owned by the bankers Antisthenes and Archestratus, located at Piraeus, the harbor five miles out of Athens. During his slavery, he quickly rose to chief clerk in charge of a money-changing table at the port , and proved so valuable...
, a slave, became the wealthiest and most famous Greek banker, gaining his freedom and Athenian citizenship in the process.
Rome
In Ancient RomeAncient Rome
Ancient Rome was a thriving civilization that grew on the Italian Peninsula as early as the 8th century BC. Located along the Mediterranean Sea and centered on the city of Rome, it expanded to one of the largest empires in the ancient world....
moneylenders would set up their stalls in the middle of enclosed courtyards called macella on a long bench called a bancu, from which the words banco and bank are derived. As a moneychanger, the merchant at the bancu did not so much invest money as merely convert the foreign currency into the only legal tender in Rome that of the Imperial Mint.
The Roman empire formalized the administrative aspect of banking and instituted greater regulation of financial institutions and financial practices. Charging interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
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
Gallienus
Gallienus was Roman Emperor with his father Valerian from 253 to 260, and alone from 260 to 268. He took control of the Empire at a time when it was undergoing great crisis...
(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
Christianity
Christianity is a monotheistic religion based on the life and teachings of Jesus as presented in canonical gospels and other New Testament writings...
, 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 revived until the time of the crusades.
Religious restrictions on interest
Most early religious systems in the ancient Near EastMiddle East
The Middle East is a region that encompasses Western Asia and Northern Africa. It is often used as a synonym for Near East, in opposition to Far East...
, and the secular codes arising from them, did not forbid usury
Usury
Usury Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate . In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law...
. 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 Mesopotamia
Mesopotamia
Mesopotamia is a toponym for the area of the Tigris–Euphrates river system, largely corresponding to modern-day Iraq, northeastern Syria, southeastern Turkey and southwestern Iran.Widely considered to be the cradle of civilization, Bronze Age Mesopotamia included Sumer and the...
ns, Hittites
Hittites
The Hittites were a Bronze Age people of Anatolia.They established a kingdom centered at Hattusa in north-central Anatolia c. the 18th century BC. The Hittite empire reached its height c...
, Phoenicians and Egyptians
Egyptians
Egyptians are nation an ethnic group made up of Mediterranean North Africans, the indigenous people of Egypt.Egyptian identity is closely tied to geography. The population of Egypt is concentrated in the lower Nile Valley, the small strip of cultivable land stretching from the First Cataract to...
, interest was legal and often fixed by the state.
Judaism
The TorahTorah
Torah- A scroll containing the first five books of the BibleThe Torah , is name given by Jews to the first five books of the bible—Genesis , Exodus , Leviticus , Numbers and Deuteronomy Torah- A scroll containing the first five books of the BibleThe Torah , is name given by Jews to the first five...
and later sections of the Hebrew Bible
Hebrew Bible
The Hebrew Bible is a term used by biblical scholars outside of Judaism to refer to the Tanakh , a canonical collection of Jewish texts, and the common textual antecedent of the several canonical editions of the Christian Old Testament...
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.
Christianity
Originally, the charging of interest known as UsuryUsury
Usury Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate . In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law...
was banned by Christian churches meaning the charging of interest at any rate banned. This included charging a fee for the use of money, such as at a bureau de change
Bureau de Change
A bureau de change or currency exchange is a business whose customers exchange one currency for another. Although originally French, the term bureau de change is widely used throughout Europe, and European travellers can usually easily identify these facilities when in other European countries...
. However over time the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law.
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
Riba
Riba means one of the senses of "usury" . Riba is forbidden in Islamic economic jurisprudence fiqh and considered as a major sin...
) is forbidden in Islamic economic jurisprudence fiqh
Fiqh
Fiqh is Islamic jurisprudence. Fiqh is an expansion of the code of conduct expounded in the Quran, often supplemented by tradition and implemented by the rulings and interpretations of Islamic jurists....
. 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
Qur'an
The Quran , also transliterated Qur'an, Koran, Alcoran, Qur’ān, Coran, Kuran, and al-Qur’ān, is the central religious text of Islam, which Muslims consider the verbatim word of God . It is regarded widely as the finest piece of literature in the Arabic language...
, and that prohibited in the Sunnah
Sunnah
The word literally means a clear, well trodden, busy and plain surfaced road. In the discussion of the sources of religion, Sunnah denotes the practice of Prophet Muhammad that he taught and practically instituted as a teacher of the sharī‘ah and the best exemplar...
which comprises commodity exchanges in unequal quantities.
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 FlorenceFlorence
Florence is the capital city of the Italian region of Tuscany and of the province of Florence. It is the most populous city in Tuscany, with approximately 370,000 inhabitants, expanding to over 1.5 million in the metropolitan area....
, Venice
Venice
Venice is a city in northern Italy which is renowned for the beauty of its setting, its architecture and its artworks. It is the capital of the Veneto region...
and Genoa
Genoa
Genoa |Ligurian]] Zena ; Latin and, archaically, English Genua) is a city and an important seaport in northern Italy, the capital of the Province of Genoa and of the region of Liguria....
.
Emergence of merchant banks
The original banks were "merchant bankMerchant bank
A merchant bank is a financial institution which provides capital to companies in the form of share ownership instead of loans. A merchant bank also provides advisory on corporate matters to the firms they lend to....
s" which were first invented in the Middle Ages
Middle Ages
The Middle Ages is a periodization of European history from the 5th century to the 15th century. The Middle Ages follows the fall of the Western Roman Empire in 476 and precedes the Early Modern Era. It is the middle period of a three-period division of Western history: Classic, Medieval and Modern...
by Italian
Italy
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...
grain merchants. As the Lombardy
Lombardy
Lombardy is one of the 20 regions of Italy. The capital is Milan. One-sixth of Italy's population lives in Lombardy and about one fifth of Italy's GDP is produced in this region, making it the most populous and richest region in the country and one of the richest in the whole of Europe...
merchants and bankers grew in stature based on the strength of the Lombard
Lombardy
Lombardy is one of the 20 regions of Italy. The capital is Milan. One-sixth of Italy's population lives in Lombardy and about one fifth of Italy's GDP is produced in this region, making it the most populous and richest region in the country and one of the richest in the whole of Europe...
plains cereal
Cereal
Cereals are grasses cultivated for the edible components of their grain , composed of the endosperm, germ, and bran...
crops, many displaced Jews
Judaism
Judaism ) is the "religion, philosophy, and way of life" of the Jewish people...
fleeing Spanish
Spain
Spain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula...
persecution were attracted to the trade. They brought with them ancient practices from the Middle and Far East silk routes
Silk Road
The Silk Road or Silk Route refers to a historical network of interlinking trade routes across the Afro-Eurasian landmass that connected East, South, and Western Asia with the Mediterranean and European world, as well as parts of North and East Africa...
. 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 piazza
Piazza
A piazza is a city square in Italy, Malta, along the Dalmatian coast and in surrounding regions. The term is roughly equivalent to the Spanish plaza...
s 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
Usury
Usury Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate . In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law...
, defined as lending at interest (Islam
Islam
Islam . The most common are and . : Arabic pronunciation varies regionally. The first vowel ranges from ~~. The second vowel ranges from ~~~...
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
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
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
Drought
A drought is an extended period of months or years when a region notes a deficiency in its water supply. Generally, this occurs when a region receives consistently below average precipitation. It can have a substantial impact on the ecosystem and agriculture of the affected region...
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
Counter
In digital logic and computing, a counter is a device which stores the number of times a particular event or process has occurred, often in relationship to a clock signal.- Electronic counters :...
) 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
Cheque
A cheque is a document/instrument See the negotiable cow—itself a fictional story—for discussions of cheques written on unusual surfaces. that orders a payment of money from a bank account...
).
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 CrusadesCrusades
The Crusades were a series of religious wars, blessed by the Pope and the Catholic Church with the main goal of restoring Christian access to the holy places in and near Jerusalem...
stimulated the re-emergence of banking in western Europe. In 1162, King Henry the II
Henry II of England
Henry II ruled as King of England , Count of Anjou, Count of Maine, Duke of Normandy, Duke of Aquitaine, Duke of Gascony, Count of Nantes, Lord of Ireland and, at various times, controlled parts of Wales, Scotland and western France. Henry, the great-grandson of William the Conqueror, was the...
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
Knights Templar
The Poor Fellow-Soldiers of Christ and of the Temple of Solomon , commonly known as the Knights Templar, the Order of the Temple or simply as Templars, were among the most famous of the Western Christian military orders...
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 usuryUsury
Usury Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate . In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law...
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
Hamburg
-History:The first historic name for the city was, according to Claudius Ptolemy's reports, Treva.But the city takes its modern name, Hamburg, from the first permanent building on the site, a castle whose construction was ordered by the Emperor Charlemagne in AD 808...
, 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 discount
Discounts and allowances
Discounts and allowances are reductions to a basic price of goods or services.They can occur anywhere in the distribution channel, modifying either the manufacturer's list price , the retail price , or the list price Discounts and allowances are reductions to a basic price of goods or services.They...
ed by an amount comparable to a rate of interest. Eventually, these documents evolved into bills of exchange
Negotiable instrument
A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Section 13 of the Negotiable Instruments Act, 1881 in India, a negotiable instrument means a promissory note, bill of exchange or cheque payable either...
, 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 GenoaGenoa
Genoa |Ligurian]] Zena ; Latin and, archaically, English Genua) is a city and an important seaport in northern Italy, the capital of the Province of Genoa and of the region of Liguria....
, occurred the earliest known foreign exchange contract
Foreign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
. 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.
Italian bankers
In the middle of the 13th century, groups of Italian Christians, particularly the Cahorsins and LombardsLombards
The Lombards , also referred to as Longobards, were a Germanic tribe of Scandinavian origin, who from 568 to 774 ruled a Kingdom in Italy...
, invented legal fiction
Legal fiction
A legal fiction is a fact assumed or created by courts which is then used in order to apply a legal rule which was not necessarily designed to be used in that way...
s 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
Contractum trinius
A contractum trinius was a set of contracts devised by European bankers and merchants in the Middle Ages as a method of circumventing canon law edicts prohibiting usury...
). 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 permitted on loans involving the latter.
The Bardi
Bardi
Bardi can refer to:*Bardi, Emilia-Romagna, a city in the province of Parma, northern Italy*Bardi, Western Australia, a town in Australia*Bardi bush, an Australian plant, Acacia victoriae...
and Peruzzi
Peruzzi
The Peruzzi were bankers of Florence, among the leading families of the city in the 14th century, before the rise to prominence of the Medici. Their modest antecedents stretched back to the mid 11th century, according to the family's genealogist Luigi Passerini, but a restructuring of the Peruzzii...
families dominated banking in 14th century Florence, establishing branches in many other parts of Europe. Perhaps the most famous Italian bank was the Medici
Medici
The House of Medici or Famiglia de' Medici was a political dynasty, banking family and later royal house that first began to gather prominence under Cosimo de' Medici in the Republic of Florence during the late 14th century. The family originated in the Mugello region of the Tuscan countryside,...
bank, set up by Giovanni Medici in 1397. Banca Monte dei Paschi di Siena
Monte dei Paschi di Siena
Banca Monte dei Paschi di Siena S.p.A. is the oldest surviving bank in the world. Founded in 1472 by the Magistrate of the city state of Siena, Italy, as a mount of piety, it has been operating ever since. Today it consists of approximately 3,000 branches, 33,000 employees and 4.5 million...
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
Knights Templar
The Poor Fellow-Soldiers of Christ and of the Temple of Solomon , commonly known as the Knights Templar, the Order of the Temple or simply as Templars, were among the most famous of the Western Christian military orders...
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
Lombard banking
Lombard banking refers to the historical use of the term 'Lombard' for a pawn shop in the Middle Ages, a type of banking that originated with the prosperous northern Italian region of Lombardy. The term was sometimes used in a derogatory sense and some were accused of usury.-History:A Christian...
moneychangers in Europe, who moved from city to city along the busy pilgrim routes important for trade. Key cities in this period were Cahors
Cahors
Cahors is the capital of the Lot department in south-western France.Its site is dramatic being contained on three sides within an udder shaped twist in the river Lot known as a 'presqu'île' or peninsula...
, the birthplace of Pope John XXII, and Figeac
Figeac
Figeac is a commune in the Lot department in south-western France.Figeac is a sub-prefecture of the department.-History:Figeac is on the via Podiensis, a major hiking medieval pilgrimage trail which is part of the Way of St. James...
.
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
Henry IV of England
Henry IV was King of England and Lord of Ireland . He was the ninth King of England of the House of Plantagenet and also asserted his grandfather's claim to the title King of France. He was born at Bolingbroke Castle in Lincolnshire, hence his other name, Henry Bolingbroke...
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.
Silver crisis
By the 1390s silver was in short supply all over Europe, except in Venice. The silver mines at Kutná HoraKutná Hora
Kutná Hora is a city in Bohemia, now the Czech Republic in the Central Bohemian Region.-History:The town began in 1142 with the settlement of the first Cistercian Monastery in Bohemia, Kloster Sedlitz, brought from the Imperial immediate Cistercian Waldsassen Abbey...
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 were limited by the fractured nature of the Italian states, so the next developments happened as banking practises spread throughout Europe during the renaissanceRenaissance
The Renaissance was a cultural movement that spanned roughly the 14th to the 17th century, beginning in Italy in the Late Middle Ages and later spreading to the rest of Europe. The term is also used more loosely to refer to the historical era, but since the changes of the Renaissance were not...
period. 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
Amsterdam
Amsterdam is the largest city and the capital of the Netherlands. The current position of Amsterdam as capital city of the Kingdom of the Netherlands is governed by the constitution of August 24, 1815 and its successors. Amsterdam has a population of 783,364 within city limits, an urban population...
, London, and Hamburg
Hamburg
-History:The first historic name for the city was, according to Claudius Ptolemy's reports, Treva.But the city takes its modern name, Hamburg, from the first permanent building on the site, a castle whose construction was ordered by the Emperor Charlemagne in AD 808...
.
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 goldsmithGoldsmith
A goldsmith is a metalworker who specializes in working with gold and other precious metals. Since ancient times the techniques of a goldsmith have evolved very little in order to produce items of jewelry of quality standards. In modern times actual goldsmiths are rare...
s (another business not prohibited to Jews) also gradually moved into banking.
Berenberg Bank
Berenberg Bank
Joh. Berenberg, Gossler & Co. KG, Berenberg Bank for short, is a German financial institution set up under the legal form of a limited partnership and based in Hamburg.- History :...
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, MarranoMarrano
Marranos were Jews living in the Iberian peninsula who converted to Christianity rather than be expelled but continued to observe rabbinic Judaism in secret...
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
Alhambra decree
The Alhambra Decree was an edict issued on 31 March 1492 by the joint Catholic Monarchs of Spain ordering the expulsion of Jews from the Kingdom of Spain and its territories and possessions by 31 July of that year.The edict was formally revoked on 16 December 1968, following the Second...
. 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
Marrano
Marranos were Jews living in the Iberian peninsula who converted to Christianity rather than be expelled but continued to observe rabbinic Judaism in secret...
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
Armenians
Armenian people or Armenians are a nation and ethnic group native to the Armenian Highland.The largest concentration is in Armenia having a nearly-homogeneous population with 97.9% or 3,145,354 being ethnic Armenian....
, 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
Court JewCourt Jew
Court Jew is a term, typically applied to the Early Modern period, for historical Jewish bankers who handled the finances of, or lent money to, European royalty and nobility....
s were Jewish bankers or businessmen who lent money and handled the finances of some of the Christian European noble houses
Nobility
Nobility is a social class which possesses more acknowledged privileges or eminence than members of most other classes in a society, membership therein typically being hereditary. The privileges associated with nobility may constitute substantial advantages over or relative to non-nobles, or may be...
, primarily in the seventeenth and eighteenth centuries. Court Jews were precursors to the modern financier
Financier
Financier is a term for a person who handles typically large sums of money, usually involving money lending, financing projects, large-scale investing, or large-scale money management. The term is French, and derives from finance or payment...
or Secretary of the Treasury. Their jobs included raising revenues by tax farming
Tax farming
Farming is a technique of financial management, namely the process of commuting , by its assignment by legal contract to a third party, a future uncertain revenue stream into fixed and certain periodic rents, in consideration for which commutation a discount in value received is suffered...
, 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
Holy Roman Empire
The Holy Roman Empire was a realm that existed from 962 to 1806 in Central Europe.It was ruled by the Holy Roman Emperor. Its character changed during the Middle Ages and the Early Modern period, when the power of the emperor gradually weakened in favour of the princes...
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 financier
Financier
Financier is a term for a person who handles typically large sums of money, usually involving money lending, financing projects, large-scale investing, or large-scale money management. The term is French, and derives from finance or payment...
s, suppliers, diplomat
Diplomat
A diplomat is a person appointed by a state to conduct diplomacy with another state or international organization. The main functions of diplomats revolve around the representation and protection of the interests and nationals of the sending state, as well as the promotion of information and...
s 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 rabbi
Rabbi
In Judaism, a rabbi is a teacher of Torah. This title derives from the Hebrew word רבי , meaning "My Master" , which is the way a student would address a master of Torah...
nical jurisdiction. One of the most notable families engaged in this activity was the Rothschild family
Rothschild family
The Rothschild family , known as The House of Rothschild, or more simply as the Rothschilds, is a Jewish-German family that established European banking and finance houses starting in the late 18th century...
that created a banking empire that had branches all over Europe.
Netherlands
Financial history of the Dutch Republic
Financial history of the Dutch Republic describes the history of the interrelated development of financial institutions in the Dutch Republic. The rapid economic development of the country after the Dutch Revolt in the years 1585 - 1620, described in Economic History of the Netherlands ,...
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
Dutch Republic
The Dutch Republic — officially known as the Republic of the Seven United Netherlands , the Republic of the United Netherlands, or the Republic of the Seven United Provinces — was a republic in Europe existing from 1581 to 1795, preceding the Batavian Republic and ultimately...
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
Dutch East India Company
The Dutch East India Company was a chartered company established in 1602, when the States-General of the Netherlands granted it a 21-year monopoly to carry out colonial activities in Asia...
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
New World
The New World is one of the names used for the Western Hemisphere, specifically America and sometimes Oceania . The term originated in the late 15th century, when America had been recently discovered by European explorers, expanding the geographical horizon of the people of the European middle...
, 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
Fractional-reserve banking
Fractional-reserve banking is a form of banking where banks maintain reserves that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction of the quantity of deposits as reserves...
and payment systems went on and spread to England and elsewhere.
England
The London Royal ExchangeRoyal Exchange (London)
The Royal Exchange in the City of London was founded in 1565 by Sir Thomas Gresham to act as a centre of commerce for the city. The site was provided by the City of London Corporation and the Worshipful Company of Mercers, and is trapezoidal, flanked by the converging streets of Cornhill and...
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
Lombard banking
Lombard banking refers to the historical use of the term 'Lombard' for a pawn shop in the Middle Ages, a type of banking that originated with the prosperous northern Italian region of Lombardy. The term was sometimes used in a derogatory sense and some were accused of usury.-History:A Christian...
"'s. Some European cities today have a Lombard street where the pawn shop was located.
Advances in the 17th and 18th century
By the end of the 16th century and during the 17th, the traditional banking functions of accepting deposits, moneylending, money changing, and transferring funds were combined with the issuance of bank debtDebt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
that served as a substitute for gold
Gold as an investment
Of all the precious metals, gold is the most popular as an investment. Investors generally buy gold as a hedge or harbor against economic, political, or social fiat currency crises...
and silver
Silver as an investment
Silver, like other precious metals, may be used as an investment. For more than four thousand years, silver has been regarded as a form of money and store of value. However, since the end of the silver standard, silver has lost its role as legal tender in many developed countries such as the...
coins.
New banking practices promoted commercial and industrial growth by providing a safe and convenient means of payment and a money supply more responsive to commercial needs, as well as by "discounting" business debt. By the end of the 17th century, banking was also becoming important for the funding requirements of the relatively new and combative european states. This would lead on to government regulations and the first central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
s. The success of the new banking techniques and practices in Amsterdam and also the thriving trade city of Antwerp help spread the concepts and ideas to London and helped the developments elsewhere in Europe.
Goldsmiths of London
The main developers of banking in London were the goldsmiths, who transformed from simple artisans to becoming depositories of gold and silver holdings. Events such at the appropriation of £200,000 of private money by King Charles ICharles I of England
Charles I was King of England, King of Scotland, and King of Ireland from 27 March 1625 until his execution in 1649. Charles engaged in a struggle for power with the Parliament of England, attempting to obtain royal revenue whilst Parliament sought to curb his Royal prerogative which Charles...
from the royal mint, in 1640 caused merchants to lose trust in the existing institutions and drive them to find more trusted alternatives such as the goldsmiths.
The goldsmiths soon found themselves with money for which they had no immediate use, and they began to lend the money out at interest to both the merchants and the government. Finding substantial profit in this business, they began to solicit deposits and pay interest on them. The goldsmiths eventually discovered that the deposit receipts they provided were being passed on from one person to another in lieu of payment in coin, which prompted them to begin lending paper receipts rather than coins. By promoting acceptance of the receipts as a means of payment, the goldsmiths discovered they could lend more than the gold and silver coin they had on hand, a practice that became known as fractional-reserve banking
Fractional-reserve banking
Fractional-reserve banking is a form of banking where banks maintain reserves that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction of the quantity of deposits as reserves...
.
Debt as a new kind of money
These practices created a new kind of "money" that was actually debt, that is, goldsmiths' debt rather than silver or gold coin, a commodity that had been regulated and controlled by the monarchy. This development required the acceptance in trade of the goldsmiths' promissory notes, payable on demand. Acceptance in turn required a general belief that coin would be available; and a fractional reserve normally served this purpose. Acceptance also required that the holders of debt be able legally to enforce an unconditional right to payment; it required that the notes (as well as drafts) be negotiable instruments. The concept of negotiability had emerged in fits and starts in European money markets, but it was well developed by the 17th century. Nevertheless, an act of Parliament was required in the early 18th century (1704) to overrule court decisions holding that the gold smiths notes, despite the "customs of "merchants, were not negotiable.Meanwhile, the credit of the British Crown had been diminished by default in 1672. The monarchy's urgent need for funds at rates lower than those charged by the goldsmiths, and the example of the public Bank of Amsterdam, which had been able to make an ample supply of credit available at low interest rates, led in 1694 to the establishment of the Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
. The Bank of England succeeded in raising money for the government at relatively low rates.
Development of central banking
In 18th-century London the Bank of England had a monopoly over corporate banking, and even large partnerships were prohibited. But private banks, though relatively small, personal enterprises, continued to find profitable business in discounting merchants' bills. In the latter half of the century small banks in country towns grew rapidly in number and needed "correspondent" banks in London with which they could deposit and invest funds. The London banks in turn settled accounts in Bank of England notes, and by the end of the century many kept their own deposit accounts with the Bank of England. A structure that led to the development of the concept of a central bankCentral bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
.
Removal of religious restrictions on earning interest
The rise of ProtestantismProtestantism
Protestantism is one of the three major groupings within Christianity. It is a movement that began in Germany in the early 16th century as a reaction against medieval Roman Catholic doctrines and practices, especially in regards to salvation, justification, and ecclesiology.The doctrines of the...
, freed many European Christians from Rome's dictates against usury. In the late 18th century, protestant merchant families began to move into banking, especially in trading countries such as the United Kingdom (Barings), Germany (Schroders
Schroders
Schroders plc is a British multinational asset management company with over 200 years of experience in the world's financial markets. The company employs 2,905 people worldwide who are operating from 32 offices in 25 different countries around Europe, America, Asia and the Middle East...
) and the Netherlands (Hope & Co.
Hope & Co.
Hope & Co. is the name of a famous Dutch bank that spanned two and a half centuries. Though the founders were Scotsmen, the bank was located in Amsterdam, and at the close of the 18th century it had offices in London as well.-Early days:...
) At the same time, new types of financial activities broadened the scope of banking far beyond its origins. The merchant-banking families dealt in everything from underwriting
Underwriting
Underwriting refers to the process that a large financial service provider uses to assess the eligibility of a customer to receive their products . The name derives from the Lloyd's of London insurance market...
bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
to originating foreign loans. For instance, bullion trading and bond
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
issuance were two of the specialties of the Rothschilds. In 1803, Barings
Barings Bank
Barings Bank was the oldest merchant bank in London until its collapse in 1995 after one of the bank's employees, Nick Leeson, lost £827 million due to speculative investing, primarily in futures contracts, at the bank's Singapore office.-History:-1762–1890:Barings Bank was founded in 1762 as the...
teamed with Hope & Co.
Hope & Co.
Hope & Co. is the name of a famous Dutch bank that spanned two and a half centuries. Though the founders were Scotsmen, the bank was located in Amsterdam, and at the close of the 18th century it had offices in London as well.-Early days:...
to facilitate the Louisiana Purchase
Louisiana Purchase
The Louisiana Purchase was the acquisition by the United States of America of of France's claim to the territory of Louisiana in 1803. The U.S...
.
19th century
In the nineteenth century, spurred at first by financing required for the Napoleonic warsNapoleonic Wars
The Napoleonic Wars were a series of wars declared against Napoleon's French Empire by opposing coalitions that ran from 1803 to 1815. As a continuation of the wars sparked by the French Revolution of 1789, they revolutionised European armies and played out on an unprecedented scale, mainly due to...
and then by the explosion of railroads
History of rail transport
The history of rail transport dates back nearly 500 years and includes systems with man or horse power and rails of wood or stone. Modern rail transport systems first appeared in England in the 1820s...
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.
Europe
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 CanalSuez Canal
The Suez Canal , also known by the nickname "The Highway to India", is an artificial sea-level waterway in Egypt, connecting the Mediterranean Sea and the Red Sea. Opened in November 1869 after 10 years of construction work, it allows water transportation between Europe and Asia without navigation...
. The family bought up a large proportion of the property in Mayfair
Mayfair
Mayfair is an area of central London, within the City of Westminster.-History:Mayfair is named after the annual fortnight-long May Fair that took place on the site that is Shepherd Market today...
, London. Major businesses directly founded by Rothschild family capital include Alliance Assurance (1824) (now Royal & SunAlliance
Royal & SunAlliance
RSA Insurance Group plc , commonly known as RSA, is a global general insurance company headquartered in London, United Kingdom. It has over 20 million customers in 36 countries across Asia, Europe, North America and South America....
); Chemin de Fer du Nord
Chemin de Fer du Nord
Chemin de Fer du Nord , often referred to simply as the Nord company, was a rail transport company created in September 1845, in Paris, France. It was owned by among others de Rothschild Frères of France, N M Rothschild & Sons of London, England, Hottinger, Laffitte and Blount...
(1845); Rio Tinto Group
Rio Tinto Group
The Rio Tinto Group is a diversified, British-Australian, multinational mining and resources group with headquarters in London and Melbourne. The company was founded in 1873, when a multinational consortium of investors purchased a mine complex on the Rio Tinto river, in Huelva, Spain from the...
(1873); Société Le Nickel (1880) (now Eramet
Eramet
Eramet is a French multinational mining and metallurgy company, listed on the Euronext Paris exchange under the symbol ERA.The company produces non-ferrous metals and derivatives, nickel alloys and superalloys, and high-performance special steels....
); and Imétal (1962) (now Imerys
Imerys
Imerys is a French multinational company. It is a constituent of the CAC Mid 60 index.-History:The Company was founded in 1880 and for many years was known as Imetal....
). The Rothschilds financed the founding of De Beers
De Beers
De Beers is a family of companies that dominate the diamond, diamond mining, diamond trading and industrial diamond manufacturing sectors. De Beers is active in every category of industrial diamond mining: open-pit, underground, large-scale alluvial, coastal and deep sea...
, as well as Cecil Rhodes on his expeditions in Africa and the creation of the colony of Rhodesia
Southern Rhodesia
Southern Rhodesia was the name of the British colony situated north of the Limpopo River and the Union of South Africa. From its independence in 1965 until its extinction in 1980, it was known as 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 the Russo-Japanese War
Russo-Japanese War
The Russo-Japanese War was "the first great war of the 20th century." It grew out of rival imperial ambitions of the Russian Empire and Japanese Empire over Manchuria and Korea...
. The London consortium's issue of Japanese war bond
War bond
War bonds are debt securities issued by a government for the purpose of financing military operations during times of war. War bonds generate capital for the government and make civilians feel involved in their national militaries...
s would total £11.5 million (at 1907 currency rates).
United States
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.J.P. Morgan & Co.
J.P. Morgan & Co. was a commercial and investment banking institution based in the United States founded by J. Pierpont Morgan and commonly known as the House of Morgan or simply Morgan. Today, J.P...
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.20th century
The first decade of the 20th century saw the Panic of 1907Panic of 1907
The Panic of 1907, also known as the 1907 Bankers' Panic, was a financial crisis that occurred in the United States when the New York Stock Exchange fell almost 50% from its peak the previous year. Panic occurred, as this was during a time of economic recession, and there were numerous runs on...
in the US, which led to numerous runs on banks
Bank run
A bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...
and became known as the bankers panic.
1930s Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
, 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 run
Bank run
A bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...
s. 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
Emergency Banking Act
The Emergency Banking Act was an act of the United States Congress spearheaded by President Franklin D. Roosevelt during the Great Depression. It was passed on March 9, 1933...
.
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
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
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
Virtuous circle and vicious circle
A virtuous circle and a vicious circle are economic terms. They refer to a complex of events that reinforces itself through a feedback loop. A virtuous circle has favorable results, while a vicious circle has detrimental results...
developed and the downward spiral accelerated. In all, over 9,000 banks failed during the 1930s.
In response many countries significantly increased financial regulation
Financial regulation
Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system...
. In the US the Securities and Exchange Commission was established in 1933 and the Glass–Steagall Act was passed which would separate investment banking
Investment banking
An investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities...
and commercial banking. This was to try and avoid the more risky investment banking activities from causing bank failures for commercial banks ever again.
World Bank and the development of payment technology
During the post second world war period and with the introduction of the Bretton Woods systemBretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...
in 1944, two organizations were created: the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
(IMF) and the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
. 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
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
was eventually abandoned in 1971 and a number of the banks were caught out and became bankrupt due to third world country debt defaults.
This was also a time that saw an increasing use of technology to retail banking
Retail banking
Retail banking is banking in which banking institutions execute transactions directly with consumers, rather than corporations or other banks. Services offered include: savings and transactional accounts, mortgages, personal loans, debit cards, credit cards, and so forth.-Types of...
. 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. In the 1960 the first Automated Teller Machine
Automated teller machine
An automated teller machine or automatic teller machine, also known as a Cashpoint , cash machine or sometimes a hole in the wall in British English, is a computerised telecommunications device that provides the clients of a financial institution with access to financial transactions in a public...
s (ATM) or Cash machines were developed and first machines started to appear by the end of the decade. Banks started to become heavy investors in computer technology to automate much of the manual processing, which saw the start of a shift by banks having a large number of clerical staff in favor of new automated systems. By the 1970s the first payment systems started to be develop that would lead to both Electronic payment systems for domestic and international payments. The international SWIFT
Swift
The swifts are a family, Apodidae, of highly aerial birds. They are superficially similar to swallows, but are actually not closely related to passerine species at all; swifts are in the separate order Apodiformes, which they share with hummingbirds...
network was established in 1973 and domestic payment systems were developed around the world by banks working together with governments.
1980s deregulation and globalisation
Deregulation
Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.Deregulation is the removal or...
of financial markets in a number of countries. The 1986 'Big Bang
Big Bang (financial markets)
The phrase Big Bang, used in reference to the sudden deregulation of financial markets, was coined to describe measures, including abolition of fixed commission charges and of the distinction between stockjobbers and stockbrokers on the London Stock Exchange and change from open-outcry to...
' in London allowing banks to access capital markets in new ways, which led to significant changes to the way banks operated and accessed capital. It also started a trend where retail banks started to acquire investment banks and stock brokers creating universal bank
Universal bank
A universal bank participates in many kinds of banking activities and is both a commercial bank and an investment bank.The concept is most relevant in the United Kingdom and the United States, where historically there was a distinction drawn between pure investment banks and commercial banks. In...
s that offered a wide range of banking services. The trend also spread to the US after much of the Glass–Steagall Act was repealed in the 1980s, this saw US retail banks embark on big rounds of mergers and acquisitions and also engage in investment banking activities.
Financial services continued to grow through 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. The increase of U.S. Foreign investments from Japan not only provided the funds to corporations in the U.S., but also helped finance the federal government.
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 bank
Universal bank
A universal bank participates in many kinds of banking activities and is both a commercial bank and an investment bank.The concept is most relevant in the United Kingdom and the United States, where historically there was a distinction drawn between pure investment banks and commercial banks. In...
s 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.
21st century
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
Non-bank financial institution
A non-bank financial institution is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFIs facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market...
. 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
Pension
In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
, mutual, money market
Money market
The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit,...
and hedge funds, loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
s and credit
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
s and securities
Security
Security is the degree of protection against danger, damage, loss, and crime. Security as a form of protection are structures and processes that provide or improve security as a condition. The Institute for Security and Open Methodologies in the OSSTMM 3 defines security as "a form of protection...
. 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
Office of the Comptroller of the Currency
The Office of the Comptroller of the Currency is a US federal agency established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States...
(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 banking to internet banking.
Late-2000s financial crisis
Late-2000s financial crisis
The late-2000s financial crisis is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s...
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
Bear Stearns
The Bear Stearns Companies, Inc. based in New York City, was a global investment bank and securities trading and brokerage, until its sale to JPMorgan Chase in 2008 during the global financial crisis and recession...
to JP Morgan Chase in March 2008 and the collapse of Lehman Brothers
Lehman Brothers
Lehman Brothers Holdings Inc. was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth largest investment bank in the USA , doing business in investment banking, equity and fixed-income sales and trading Lehman Brothers Holdings Inc. (former NYSE ticker...
in September that same year led to a credit crunch and global banking crises. 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
Too Big to Fail
Too Big to Fail is a television drama film in the United States broadcast on HBO on May 23, 2011. It is based on the non-fiction book Too Big to Fail by Andrew Ross Sorkin. The TV film was directed by Curtis Hanson...
' and resulted in a lot of discussion about moral hazard
Moral hazard
In economic theory, moral hazard refers to a situation in which a party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party insulated from risk behaves differently from how it would if it were fully exposed to the risk.Moral hazard...
of these actions.
Major events in banking history
- Florentine banking - The MediciMediciThe House of Medici or Famiglia de' Medici was a political dynasty, banking family and later royal house that first began to gather prominence under Cosimo de' Medici in the Republic of Florence during the late 14th century. The family originated in the Mugello region of the Tuscan countryside,...
s and PittiLuca PittiLuca Pitti was a Florentine banker during the period of the republic presided over by Cosimo de' Medici. He was a loyal friend and servant to the Medici and the republic...
s among others. - 1100 - 1300 - Knights TemplarKnights TemplarThe Poor Fellow-Soldiers of Christ and of the Temple of Solomon , commonly known as the Knights Templar, the Order of the Temple or simply as Templars, were among the most famous of the Western Christian military orders...
run earliest Euro wide /Mideast banking. - 1542 - 1551 - The Great Debasement refers to the English Crown’s policy of coement during the reigns of Henry VIII and Edward VI.
- 1602 – First joint-stock company, the Dutch East India CompanyDutch East India CompanyThe Dutch East India Company was a chartered company established in 1602, when the States-General of the Netherlands granted it a 21-year monopoly to carry out colonial activities in Asia...
founded. - 1602 - The Amsterdam Stock ExchangeAmsterdam Stock ExchangeThe Amsterdam Stock Exchange is the former name for the stock exchange based in Amsterdam. It merged on 22 September 2000 with the Brussels Stock Exchange and the Paris Stock Exchange to form Euronext, and is now known as Euronext Amsterdam.-History:...
was established by the Dutch East India Company for dealings in its printed stocks and bonds. - 1609 - The Amsterdamsche WisselbankAmsterdamsche WisselbankThe Bank of Amsterdam was an early bank, vouched for by the city of Amsterdam, established in 1609, the precursor to, if not the first true central bank.-Bank money:...
(Amsterdam Exchange Bank) was founded. - 1690s - The Massachusetts Bay ColonyMassachusetts Bay ColonyThe Massachusetts Bay Colony was an English settlement on the east coast of North America in the 17th century, in New England, situated around the present-day cities of Salem and Boston. The territory administered by the colony included much of present-day central New England, including portions...
was the first of the Thirteen ColoniesThirteen ColoniesThe Thirteen Colonies were English and later British colonies established on the Atlantic coast of North America between 1607 and 1733. They declared their independence in the American Revolution and formed the United States of America...
to issue permanently circulating banknoteBanknoteA banknote is a kind of negotiable instrument, a promissory note made by a bank payable to the bearer on demand, used as money, and in many jurisdictions is legal tender. In addition to coins, banknotes make up the cash or bearer forms of all modern fiat money...
s. - 1694 - The Bank of EnglandBank of EnglandThe Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
was set up to supply money to the King. - 1695 - The Parliament of Scotland creates the Bank of ScotlandBank of ScotlandThe Bank of Scotland plc is a commercial and clearing bank based in Edinburgh, Scotland. With a history dating to the 17th century, it is the second oldest surviving bank in what is now the United Kingdom, and is the only commercial institution created by the Parliament of Scotland to...
. - 1716 - John LawJohn LawJohn Law may refer to:*John Law *John Law DD was an English mathematician*John Law *John Law , Hong Kong film director...
opens Banque Générale - 1717 - Master of the Royal MintRoyal MintThe Royal Mint is the body permitted to manufacture, or mint, coins in the United Kingdom. The Mint originated over 1,100 years ago, but since 2009 it operates as Royal Mint Ltd, a company which has an exclusive contract with HM Treasury to supply all coinage for the UK...
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 standardGold standardThe gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
. - 1720 – The South Sea Bubble and John LawJohn Law (economist)John Law was a Scottish economist who believed that money was only a means of exchange that did not constitute wealth in itself and that national wealth depended on trade...
's Mississippi Scheme, which caused a European financial crisis and forced many bankers out of business. - 1775 – The first building societyBuilding societyA building society is a financial institution owned by its members as a mutual organization. Building societies offer banking and related financial services, especially mortgage lending. These institutions are found in the United Kingdom and several other countries.The term "building society"...
, Ketley's Building SocietyKetley's Building SocietyKetley's Building Society, founded in Birmingham, England in 1775, was the world's first building society.The society was formed by Richard Ketley, the landlord at the "Golden Cross" inn at 60 Snow Hill...
, was established in BirminghamBirminghamBirmingham is a city and metropolitan borough in the West Midlands of England. It is the most populous British city outside the capital London, with a population of 1,036,900 , and lies at the heart of the West Midlands conurbation, the second most populous urban area in the United Kingdom with a...
, England. - 1781 – The Bank of North AmericaBank of North AmericaThe Bank of North America was a private business chartered on December 31, 1781 by the Congress of the Confederation and opened on January 7, 1782, at the prodding of Superintendent of Finance Robert Morris. This was thus the nation's first de facto central bank. It was succeeded in its role as...
was found by the Continental CongressContinental CongressThe Continental Congress was a convention of delegates called together from the Thirteen Colonies that became the governing body of the United States during the American Revolution....
. - 1791 - The First Bank of the United StatesFirst Bank of the United StatesThe First Bank of the United States is a National Historic Landmark located in Philadelphia, Pennsylvania within Independence National Historical Park.-Banking History:...
was a bank chartered by the United States Congress. The charter was for 20 years. - 1800 – Rothschild familyRothschild familyThe Rothschild family , known as The House of Rothschild, or more simply as the Rothschilds, is a Jewish-German family that established European banking and finance houses starting in the late 18th century...
founds Euro wide banking. - 1816 - The Second Bank of the United StatesSecond Bank of the United StatesThe Second Bank of the United States was chartered in 1816, five years after the First Bank of the United States lost its own charter. The Second Bank of the United States was initially headquartered in Carpenters' Hall, Philadelphia, the same as the First Bank, and had branches throughout the...
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 1812War of 1812The War of 1812 was a military conflict fought between the forces of the United States of America and those of the British Empire. The Americans declared war in 1812 for several reasons, including trade restrictions because of Britain's ongoing war with France, impressment of American merchant...
. - 1862 - To finance the American Civil WarAmerican Civil WarThe American Civil War was a civil war fought in the United States of America. In response to the election of Abraham Lincoln as President of the United States, 11 southern slave states declared their secession from the United States and formed the Confederate States of America ; the other 25...
, the federal government under U.S. President Abraham LincolnAbraham LincolnAbraham Lincoln was the 16th President of the United States, serving from March 1861 until his assassination in April 1865. He successfully led his country through a great constitutional, military and moral crisis – the American Civil War – preserving the Union, while ending slavery, and...
issued a legal tenderLegal tenderLegal tender is a medium of payment allowed by law or recognized by a legal system to be valid for meeting a financial obligation. Paper currency is a common form of legal tender in many countries....
paper money, the "greenbackUnited States NoteA United States Note, also known as a Legal Tender Note, is a type of paper money that was issued from 1862 to 1971 in the U.S. Having been current for over 100 years, they were issued for longer than any other form of U.S. paper money. They were known popularly as "greenbacks" in their heyday, a...
s". - 1874 - The Specie Payment Resumption ActSpecie Payment Resumption ActLate in 1861, the United States federal government suspended specie payments, seeking to raise revenue for the American Civil War effort without exhausting its reserves of gold and silver. Early in 1862, the United States issued legal-tender notes, called greenbacks...
provided for the redemption of United States paper currency ("greenbacks"), in gold, beginning in 1879. - 1913 - The Federal Reserve ActFederal Reserve ActThe Federal Reserve Act is an Act of Congress that created and set up the Federal Reserve System, the central banking system of the United States of America, and granted it the legal authority to issue Federal Reserve Notes and Federal Reserve Bank Notes as legal tender...
created the Federal Reserve SystemFederal Reserve SystemThe Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
, 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 1929Wall Street Crash of 1929The Wall Street Crash of 1929 , also known as the Great Crash, and the Stock Market Crash of 1929, was the most devastating stock market crash in the history of the United States, taking into consideration the full extent and duration of its fallout...
, 9,000 banks close, wiping out a third of the money supply in the United States. - 1933 - Executive Order 6102Executive Order 6102Executive Order 6102 is an Executive Order signed on April 5, 1933, by U.S. President Franklin D. Roosevelt "forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates within the continental United States"...
signed by U.S. President Franklin D. RooseveltFranklin D. RooseveltFranklin Delano Roosevelt , also known by his initials, FDR, was the 32nd President of the United States and a central figure in world events during the mid-20th century, leading the United States during a time of worldwide economic crisis and world war...
forbade ownership of Gold Coin, Gold Bullion, and Gold Certificates by U.S. citizens beyond a certain amount, effectively ending the convertibility of US dollars into gold. - 1971 - The Nixon ShockNixon ShockThe Nixon Shock was a series of economic measures taken by U.S. President Richard Nixon in 1971 including unilaterally cancelling the direct convertibility of the United States dollar to gold that essentially ended the existing Bretton Woods system of international financial exchange.-Background:By...
was a series of economic measures taken by U.S. President Richard NixonRichard NixonRichard Milhous Nixon was the 37th President of the United States, serving from 1969 to 1974. The only president to resign the office, Nixon had previously served as a US representative and senator from California and as the 36th Vice President of the United States from 1953 to 1961 under...
which canceled the direct convertibility of the United States dollar to gold by foreign nations. This essentially ended the existing Bretton Woods systemBretton Woods systemThe Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...
of international financial exchange. - 1986 – The "Big Bang"Big Bang (financial markets)The phrase Big Bang, used in reference to the sudden deregulation of financial markets, was coined to describe measures, including abolition of fixed commission charges and of the distinction between stockjobbers and stockbrokers on the London Stock Exchange and change from open-outcry to...
(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 crisisLate-2000s financial crisisThe late-2000s financial crisis is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s...
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 MutualWashington MutualWashington Mutual, Inc. , abbreviated to WaMu, was a savings bank holding company and the former owner of Washington Mutual Bank, which was the United States' largest savings and loan association until its collapse in 2008....
collapses. It was the largest bank failure in history.
See also
- History of moneyHistory of moneyThe history of money spans thousands of years. Numismatics is the scientific study of money and its history in all its varied forms.Many items have been used as commodity money such as natural scarce precious metals, cowry shells, barley, beads etc., as well as many other things that are thought of...
- History of banking in ChinaHistory of banking in ChinaThe history of banking in China includes the business of dealing with money and credit transactions in China.- Early Chinese banks :Chinese financial institutions were conducting all major banking functions, including the acceptance of deposits, the making of loans, issuing notes, money exchange,...
- History of banking in the United StatesHistory of banking in the United States-Antebellum history:In the first half of the 19th century, many of the smaller commercial banks within New England were easily chartered as laws allowed to do so...
- History of banking in Australia
- History of banking in India
- Online bankingOnline bankingOnline banking allows customers to conduct financial transactions on a secure website operated by their retail or virtual bank, credit union or building society.-Features:...
- Subprime mortgage crisisSubprime mortgage crisisThe U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
Further reading
- Cameron, Rondo. Banking in the Early Stages of Industrialization: A Study in Comparative Economic History (1967)
- Cameron, Rondo et al. International Banking 1870–1914 (1992) excerpt and text search
- Grossman, Richard S. Unsettled Account: The Evolution of Banking in the Industrialized World Since 1800 (Princeton University Press; 2010) 384 pages. Considers how crises, bailouts, mergers, and regulations have shaped the history of banking in Western Europe, the United States, Canada, Japan, and Australia.
- Hammond, BrayBray HammondBray Hammond was an American author and assistant secretary of Board of Governors of the Federal Reserve System between the years of 1944 and 1950.-Authored books:* Sovereignty and an Empty Purse: Banks and Politics in the Civil War...
, Banks and Politics in America, from the Revolution to the Civil WarBanks and Politics in AmericaBanks and Politics in America is a 1957-published book written by Bray Hammond. The book describes the differences in banking and politics in the United States between the American Revolution and the Civil War period. The book was awarded the Pulitzer Prize....
, Princeton : Princeton University Press, 1957. - Rothbard, Murray N., History of Money and Banking in the United States. Full text (510 pages) in pdf format
- For French banking history, read the History of banks in France (in English or in French) on the FBF website.
- Giuseppe Felloni and Guido Laura, Genoa and the history of finance: A series of firsts? 9 November 2004, ISBN 88-87822-16-6