History of Banking

Banking in Ancient World:

The History of Banking begins with the first prototype banks of merchants of the ancient world that made grain loans to farmers and traders carrying goods between cities; recorded as having occurred at about 2000 BC within the areas of Assyria and Babylonia. Later on, in ancient Greece and during the Roman Empire, lenders based in temples made loans and added two important innovations: the accepting of deposits and the changing of money. Archaeology from this period in ancient China and India, shows the existence also of money lending activity.

Banking in Latest Traced era:

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 14^th century Florence, establishing branches in many other parts of Europe. The development of banking spread through Europe also and a number of important innovations took place in Amsterdam during the Dutch Republic in the 16^th century and in London in the 17^th century.

During the 20^th 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.

Earliest forms of Banking:

The history of banking is closely related to the history of money 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. In the times before the establishment of Christianity, the economic lives of the people circulated about the houses of the familiar gala and their priesthood, where security was afforded for storage and distribution principally of crops. Thus the buildings utilized primarily by this elite, the palaces and temples, became the location of the earliest of social exchange bearing some similarity to banking practices of contemporary culture, where-in the safeguarding of the wealth of society was assured. Temples and palaces were the safest places to store also gold, as they were constantly attended and well built.

Merchant Banks in Middle Ages:

The original banks were “merchant banks” 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 grains. The Jews could not hold land in Italy, so they entered the great trading piazzas 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.

Progress in Merchant Banking:

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 bancarotta, or broken bench, which is what happened when someone lost his traders’ deposits. Being “broke” has the same connotation.

Development in Traditional Banking:

By the end of the 16^th century and during the 17^th century, the traditional banking functions of accepting deposits, moneylending, money changing, and transferring funds were combined with the issuance of bank debt 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.

Government Regulations in Banking:

By the end of the 17^th 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 banks. 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.

1980s deregulation and globalization:

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 banks that offered a wide range of banking services.

Merger and Acquisitions:

 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.

Financial Innovation:

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 21stcentury 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.