4th century BC Greeks really cre-
The History of Banking In the beginning… trade is done via commodities. Wheat, corn, cattle and sheep , foodstuffs, cloth— anything of value—is bartered. A caveman brings his own bison to BBQ at his neighbor’s fire. Later in time, if you make use of the mill, you pay with some of your flour.
12th century Jews, barred in Europe from most forms of employment, and obviously not Christian, keep banking alive. So successfully in fact, they are persecuted for it and replaced by …
13th century Italians known as Lombards after the territory in northern Italy. Funding by the Papacy, and most of the Christian world give phenomenal scope of power to Italian families such as the Medici. The concepts of bank branches, and checks arise during this time. A second near annihilation occurs in 1345 when Kind Edward of England defaults on war debt he’d financed through the Italian Banking system.
15th century Germans under Holy Roman Emperor Maximillian, one of their own, keeps the system afloat. His son makes good use by borrowing a fortune to fund his campaign bid for next shot at emperor. He wins. Interest rates at that time range from 12-45% APR; no wonder banking is no longer considered a sin. Banks eventually begin accepting payment in the form of businesses, mines, and land from kings and governments who find themselves short on gold. This is the origin of collateral.
Early banking begins with the advent of pressed gold coins. People “deposit” their gold coins at the local Temple for safekeeping. Coins are not actually circulated (loaned out), but they’re safer and your pockets weigh less. Sometime around the 18
th
cen-
tury BC, Babylonian Priests begin to make loans and create the first banking “system.”
ate banking as we know it, by taking deposits, making loans, financing business projects, and backing politicians. As the empire grows and trade flourishes, they begin to change currencies and allow for the withdrawal of coin in one country which had been deposited in another.
2nd century BC Romans standardize the system, create a method to charge interest on loans. and form a notary service to ensure payments are collected and discharged as necessary. The very first systemic banking collapse falls fast on the heels of the empire’s fall. The rising sect of Christianity is adamantly opposed to the charging of interest. The practice is known as usury and considered morally offensive. Banking nearly dies an unredeemed death.
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And when money failed in the land of Egypt, and in the land of Canaan, all the Egyptians came unto Joseph, and said, Give us bread: for why should we die in thy presence? for the money faileth. -Gen 47:15 KJV
1617 Venetians create the first central bank (ie: federal reserve-type) in response to catastrophe arising once again from taking on too much unsecure debt. Interestingly, one of the largest debtors is the same Venetian government. Are we beginning to see a pattern? They hatch a plan whereby their creditors must accept payment in the form of credit in an account at the Venetian Club Fed they’d just created. So in other words, if I owe you money and I don’t want to pay you in real cash, I just issue you credits on a piece of paper saying that I paid you. Perfect system, no? So perfect, in fact we still use paper currency today. Government banks create bank notes exchangeable for a set number of silver coins upon presentation at the issuing bank. These are backed by the credit of the issuer, useable as “currency” as long as enough people have confidence in the paper. This, of course, causes the next large banking failure ……. in 1656 Sweden where the Bank of Stockholm issues the first of these notes. All goes swimmingly until more paper is issued than can be redeemed. In a solitary, blinding instance of justice, the responsible party receives a life sentence for fraud.
1719—Paris Banque de Generale (we’ve
heard this name during the current crisis) tries paper money again. In less than a year…the French Government initiates the next crisis by declaring paper money to be worth half of it’s previous value. Eventually, an idea takes form that if the currency is actually backed by government banks instead of individual banks, restrictions could be put on redemption as needed and perhaps no real silver would ever need to leave government coffers. From the year 1797 through 1821, England places a restriction on redeeming notes into silver. The practice of not actually having to return silver is such a hit that England
troduces the Gold Standard in 1821.
in-
Why this history? And why is it not complete? The answer is simple: Since the beginning, there have been bank failures, government bailouts, and questionable business practices and there likely will continue to be. But without these institutions, trade, innovation, and most of the conveniences we know today would not exist. Thousands of loans get made for businesses that fail, but every once-in-awhile, out pops something like a Ford or a GE, a cable TV or a Pfizer, a Microsoft or a Google. When the rest of the world was like, “Who needs that stuff?” A banker would say, “Let’s give it a try.” Looking at the sordid history of banking, even without knowledge of what all came later (and it’s plenty), one has to wonder how the industry survived at all. It survived because we need them. We can get mad at the problems they cause, and we should, but let’s also not forget how they have made our world a better place. I don’t know if the good outweighs the bad. I don’t know if there are more good bankers than bad bankers. But I do know that the vast majority of American homeowners didn’t pay cash, aren’t getting foreclosed on, and have a banker somewhere to thank for a place to call home.
The Iron Crown of Lombardy Bankers were known as “Lombards” and London’s version of Wall Street bears that name. In many major cities today you can find a Lombard Street where, typically, you can find the pawn shops.
Mike Bosso, Financial Advisor—offering securities and investment advisory services through MultiFinancial Securities Corp, member FINRA/SIPC.