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The history of banking is closely related to the history of money. As a society became more civilized, the need for more efficient methods for barter were developed organically. Most origins of money can be traced back to the building of large structures such as temples, or large undertakings by leaders, such as wars. The concept of an "I owe you" (IOU) preceded the idea of a paper check by several thousand years. The word "bank" just means bench, because a lender or borrower needs to display wares on a flat surface in order to determine value. A moneychanger is a person who either changes currencies or changes goods into coins, like a pawn shop. Considering the biblical story of Christ driving the moneychangers from the temple, they have been around a long time.

With the concept of banking and money, comes the question of dependability. Banking as we know it today is a fairly low risk business for an investor of a savings account. From ancient times, the value of money was determined by its weight in gold, up to the invention of the paper check, or paper money, in the early 1600's. Although much lighter to transport, paper money was much less dependable for the carrier. The paper was only worth the reputation of the moneychanger that signed it. Paper money was not only easier to carry, it was easier to steal. For this reason, professional moneychangers did all they could to ensure the appearance of liquidity and dependability. This "keeping up of appearances" caused many early banks to keep offices in well-guarded patrician areas of major cities, and later to build palace-like fortresses in order to appear dependable.

Earliest Banks

The very first banks were probably the religious temples of the ancient world. In them were stored gold in the form of easy to carry compressed plates. Their owners justly felt that temples were the safest places to store their gold as they were constantly attended, well built and were sacred, thus deterring would-be thieves. There are extant records of loans from the 18th Century BC in Babylon that were made by temple priests to merchants.

Ancient Greece 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. Interestingly, there is evidence too of credit, whereby in return for a payment from a client, a money Lender 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.

Ancient Rome perfected the administrative aspect of banking and saw greater regulation of financial institutions and financial practices. Charging interest on loans and paying interest on deposits became more highly developed and competitive.

Christian scruples

The ascent of Christianity in Rome and its influence restricted banking, as the charging of interest and usury were seen as immoral. Jewish entrepreneurs, free of Christian taboos about money, established themselves in the provision of financial services increasingly demanded by the expansion of European trade and commerce. Ironically, the papal bankers were the most successful of the Western world. When Pope John XII (born Jacques d'Euse ( 1249 - 1334) was crowned in Lyon in 1316, he set up residency in Avignon. During this papal schism which lasted until 1378, the central Vatican cities were in the area surrounding Avignon. 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 XII, and Figeac. Perhaps it was because of these origins that the term Lombard is synonymous with Cahorsin in medieval Europe, and means 'pawnbroker'.

Western Banking History

Modern Western economic and financial history is usually traced back to the coffee houses of London. The London Royal Exchange 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. Most European cities today have a Lombard street where the pawn shop was located.

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. This explains why most banks have their roots in shipping investments. Individuals could participate in the lucrative East India trade by purchasing bills of credit from these banks, but the price they received for commodities was dependant on the ships returning (which often didn't happen on time) and on the cargo they carried (which often wasn't according to plan). The commodities market was very volatile for this reason, and also because of the many wars that led to cargo seizures and loss of ships.

Coffee houses of London

Coffeehouse proprietors overheard many conversations about business and even made modest investments themselves. They came up with the idea of producing lists of share prices or shipping data. The weekly published lists of the London coffee houses (simply pasted to the door) made it possible for the first time to compare the relative success (and liquidity) of bankers and investment opportunuities. This was much more efficient than word of mouth. These lists were most notably Jonathan's Coffee-House and Edward Lloyd's. In 1698 John Castaing, began publishing a twice weekly newsletter of share and commodity prices, which he sold at Jonathan's, and which led to the London Stock Exchange. Lloyd's list led to the establishment of the famous insurance company Lloyds of London.

Capitalism

Around the time of Adam Smith (1776) there was a massive growth in the banking industry. Within the new system of ownership and investment, moneyholders were able to reduce the State's intervention in economic affairs, remove barriers to competition, and, in general, allow anyone willing to work hard enough—and who also has access to capital—to become a capitalist. It wasn’t until over 100 years after Adam Smith, however, that US companies began to apply his policies in large scale and shift the financial power from England to America.

US financial market

By the early 1900s New York was beginning to emerge as the world’s leading financial center. Companies and individuals acquired large investments in (other) companies in the US and Europe, resulting in the first true market integration. This comparatively high level of market integration proved especially beneficial when World War I came—both sides in the conflict sought funds from the United States, by issuing new securities and selling existing holdings, though the Allied Powers raised by far the larger amounts. Being a lender to the world resulted in the largest growth of a financial economy to that point.

The stock market crash in 1929 was a global event—markets crashed everywhere, all at the same time, and the volume of foreign selling orders was high. The Great Depression followed, and the banks were blamed for it, although the evidence has never been strong to connect the speculative activities of the banks during the 1920s with either the crash or the subsequent depression of the 1930s. Nonetheless, there were three prominent results from these events that had great effect on American banking. The first was the passage of the Banking Act of 1933 that provided for the Federal Deposit Insurance system and the Glass–Steagall provisions that completely separated commercial banking and securities activities. Second was the depression itself, which led in the end to World War II and a 30-year period in which banking was confined to basic, slow-growing deposit taking and loan making within a limited local market only. And third was the rising importance of the government in deciding financial matters, especially during the post-war recovery period. As a consequence, there was comparatively little for banks or securities firms to do from the early 1930s until the early 1960s.

Global banking

In the 1970s, a number of smaller crashes tied to the policies put in place following the depression, resulted in deregulation and privatization of government-owned enterprises in the 1980s, indicating that governments of industrial countries around the world found private-sector solutions to problems of economic growth and development preferable to state-operated, semisocialist programs. This spurred a trend that was already prevalent in the business sector, large companies becoming global and dealing with customers, suppliers, manufacturing, and information centers all over the world.

Global banking and capital market services proliferated during 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. Such growth rate would have been lower, in the last twenty years, were not it for the profound effects the internationalization of financial markets had on the U.S. Foreign investments, particularly from Japan, not only provided the funds to corporations in the U.S., but also helped finance the federal government; thus, transforming the U.S. stock market by far into the largest in the world.

Nevertheless, in recent years, the dominance of U.S. financial markets has been disappearing and there has been 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 has enabled them to expand their activities. Thus, American corporations and banks have 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 has entirely changed the competitive landscape, as now many banks have demonstrated a preference for the “universal banking” model so prevalent in Europe. Universal banks 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.

Many such possible alignments could be accomplished only by large acquisitions, 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: nonbanks. 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, loans and credits and securities. Indeed, by the end of 2001 the market capitalization of the world’s 15 largest financial services providers included four nonbanks.

In recent years, the process of financial innovation has advanced enormously increasing the importance and profitability of nonbank finance. Such profitability priorly restricted to the nonbanking 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 nonbanking industries, the distinction between different financial institutions is gradually vanishing.

Major events in Banking History

Oldest Private banks

For French banking history, read the History of banks in France (in English or in French) on the FBF website.

Oldest National Banks

Banking | History of banking

 

This article is licensed under the GNU Free Documentation License. It uses material from the "History of banking".

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