Evolution of Banking

Evolution of Banking: Overview

The essential functions of banking existed throughout the ancient world.

Modern forms of banking, such as double-entry bookkeeping, began to develop in Italy during the Middle Ages. The Renaissance established several important banks throughout European cities, which became the first financial centers.

The Emergence of Banking

Ancient people used coins for trade and tax collection.

• Temples began to be viewed as safe places for keeping money safe. Romans preferred the basements in their temples to do so. Roman temples and those in ancient Greece, Babylon, and Mesopotamia also performed the money-lending function as an early form of credit. Historians believe this is why temples were often plundered during wars.

Taxes were also significant in ancient Greece and Rome. One common form of taxation was tariffs applied to imported products. Temporary property taxes were also used to raise funds for wars. The tax code became more complex as time passed, and other assets began to be taxed.

Fig. 2 - A Roman coin, bronze, reign of Nero (1st century), showing the completed harbor at Osti. Source: Wikipedia Commons (public domain).

In the Middle Ages, merchants from Italian city-states like Venice and Genoa significantly contributed to the development of banking and commerce. These forms included:

• credit and interest on loans,
• insurance, promissory notes,
• double-entry bookkeeping.

Banking continued growing and developing during the Renaissance, with powerful families like the Medici controlling much of the industry in Italy. Other European countries, like Germany, also had banking centers like Nuremberg. At the same time, European monarchs exerted significant control over the banking industry to finance their exuberant spending and wars.

In the 18th century, some countries, including the United States, developed more complex forms of banking. These forms of banking included treasury securities guaranteed by the state. In England, banks offered other recognizable forms of banking, such as checks and overdraft protection. Uniform national currencies developed at different times.

A truly modern form of the banking industry emerged after the Second World War popularizing such types of operations as mortgage lending to homeowners. Finally, online banking emerged in the early 21st century.

The Development during the Rise of Banking

In the Middle Ages, Genoese, Florentine, and Venetian merchants helped create new techniques in the trade. In turn, these techniques led to the development of modern banking.

The Crusades

The Crusades—the Church-sanctioned military campaigns to conquer parts of the Middle East—contributed to the rise of banking in the Middle Ages. They required substantial financial backing. As a result, certain rulers, such as Henry II of England, issued taxes to fund this cause. Henry also used the knightly crusading orders, including the Hospitallers and the Templars, as his bankers in the Holy Land (Middle East).

At times, essential merchant cities like Genoa and Venice also participated in the Crusades both through direct manpower and by using their fleets. For example, the Genoese were active in the First Crusade (1095-1099), and the Venetians were instrumental in the Fourth Crusade (1204).

Italian Merchants

The Venetian and Genoese merchants used land and maritime trade routes to operate in Europe, Asia, North Africa, and the Middle East. However, they held a prominent position in their industry because they dominated the seas—the Mediterranean, Adriatic, and Black Seas—and had well-established merchant fleets.

Fig. 3 - Crusader Fleet at Constantinople, Sébastien Mamerot and Jean Colombe, 15th century. Source: Wikipedia Commons (public domain).

First, the merchants relied on partnerships because raising sufficient capital for one merchant was difficult. Partnerships allowed merchants to purchase all the necessities: from the ships and paying the crew's wages to the goods they traded and the supplies their journey required. Because merchants dealt with large sums of money, they believed it was safer to leave it with those they trusted.

Another way to solve the issue of insufficient funds was to use credit. Furthermore, the amount of cash in circulation at this time was not enough to develop trade. Using credit and promissory notes, known as bills of exchange, was also safer.

Bills of exchange also helped hide the interest on loans. The interest could also be concealed by misrepresenting it as a transaction in foreign currencies. This was done because the Church looked down upon applying interest.

Third, merchants insured their trips to protect themselves from poor weather or even pirates. Because their journeys often faced multiple types of danger, the insurance rates were often high.

Fig. 4 - The Moneychanger and His Wife, Marinus van Reymerswaele, 1539. Source: Wikipedia Commons (public domain).

The fourth significant development was in accounting. Merchants from Italy relied on double-entry bookkeeping to keep track of their profits and losses.

All of these practices, from charging interest, and using deposits to lending money on credit, contributed to the development of the kind of banking familiar to us today.

Banking during the Renaissance

Banking continued to grow in Europe during the Renaissance. Major banking centers throughout Europe in places like Florence, and influential banking families, like the Medici, controlled the industry for a time.

The Medici Family

The Medici family, also known as the House of Medici, was instrumental in the development of banking during the European Renaissance. The Medici family was not only a wealthy banking family but also enjoyed a considerable degree of political power in the 14th-16th centuries.

Fig. 5 - Portrait of Giovanni di Bicci de' Medici, the founder of the Medici Bank, Cristofano dell'Altissimo, ca. 1560-1565. Source: Wikipedia Commons (public domain).

The Medici family was able to fill the vacuum when another wealthy and well-known Italian banking family, the Bonsignoris, was forced to declare bankruptcy. At this time, the most important banking center in Europe was Siena. As a result of this bankruptcy, Florence became the leading financial center in Italy, where the Medici lived. Gradually, the Medici became the most important family in Florence, and banking played no small part in this rise to power.

Like Italian merchants, this bank used the newest developments of the time in the financial industry, such as double-entry bookkeeping.

Critical European Banking Centers during the Renaissance

The Oldest Banks in Europe

• Medici Bank, Florence (1397-1494)

• Taula de canvi (Table of Change), Barcelona (1400-19th century)

• Bank of Saint George, Genoa (1407-1805)
• Banco di Napoli, Naples (1463-present)
• Fugger Bank, Augsburg (1486 to 1647)

The Impact of Banking Evolution

Over time, banking became complex and global. However, its essential functions remain the same today. These functions include safekeeping and lending money.

Fig. 6 - The Tax Collector, Marinus van Reymerswaele, 1542. Source: Wikipedia Commons (public domain).