Before the founding of the Bank of Venice in 1171, there was hardly any form of institution that could be called a bank.¹ Even the Bank of Venice functioned merely as the city’s “Chamber of Loans” for a few centuries before it started functioning as a proper bank. Similarly, the private banks of Florence, though they had branches in important European cities for money exchange by the 14th century, functioned very arbitrarily and were deeply involved in political and religious affairs.
Before the 12th century, there were:
Coins or specie.
Representative money and paper currency. Leather tokens were used as representative money in many countries, while paper currency circulated for some time in China.
Money exchangers.
Temples in ancient Greece where public money was deposited in the form of gold. In ancient Rome, there were argentarii (singular, argentarius) or bankers, who settled accounts at their houses.
Money lenders who took deposits and lent money at a higher rate.
However, the modern idea of a bank with proper buildings, bank branches, a clear distinction between public and private banks, and many other banking functions were missing in all these modes of financial trade before the modern age.
The Word “Bank”
The word “bank” finds its first mention in the 5th or 6th century AD in Italy, where “banco” referred to a table or board on which the Italian money-changers or brokers displayed their treasure for lending at interest.² When a lender or broker defaulted in his dealings, his table or board was publicly broken up. This practice of publicly breaking their tables was called banco-rotto (rotto, meaning “broken”), from which the English word “bankrupt” is derived.³
Money Exchangers
In ancient times, merchants used gold and silver bullion as currency and measured them by weight. With the introduction of coinage, each nation created its own currency. This evolution meant that merchants often dealt with clipped or poor-quality coins from various nations. The problem was solved by money exchangers, who emerged in different countries at different periods.
Use of Leather Tokens as Money
Animal skins last longer than animals and many other forms of possessions. These skins were earlier stored as money, but as people became rich and skins became a bulky medium of money, small pieces were chipped off as tokens of possession. The entire skin belonged to the person possessing the token chipped off from the skin. In England, notched sticks or tallies were used for a long time as representatives of money. Over time, they lost their representative character by frequent circulations and were later used in a way similar to how we use paper money. Leather money had a long history in Russia and was used till the time of Peter the Great.
Money Deposited in Ancient Greek Temples
In ancient Greece, money was deposited in the form of gold and silver in the temples dedicated to national gods. These gods belonged not to a single state but to the entire nation. This ensured the security of their gold and silver and made the Temple of Apollo in Delphi the greatest bank in Greece. When the Dorians drove the early inhabitants out of Greece, the fugitives who settled in Asia built the Temple of Apollo at Didyma. The wealth of Ionia was deposited at this temple. The Greeks were paid no interest on these deposits.
Jason M Ramos, CC BY 2.0, via Wikimedia Commons
Later, banking became a flourishing trade in Athens and other Greek cities. They lent money for interest and made use of contracts since interest on loaned money was not fixed by the laws. These contracts were deposited either to a banker or to a common friend.
Bankers or Argentarii in Ancient Rome
In Rome, men employed to collect taxes were also engaged in private business. Accounts were settled at the houses of these men with payments through drafts or cheques. These bankers were money-changers and they also lent money on interest. The Romans called them argentarii. In 340 BC, five public bankers were appointed in Rome to adjust debtors’ accounts. There were numerous bankers in Alexandria after the conquest of Egypt.
Bank Notes in China
In about the 2nd century BC, a Chinese emperor raised money for his wars by making tokens from the skins of the white deer. The emperor banned his subjects from possessing any animal of this kind. With this monopoly, he issued white leather at a high rate.
The Chinese invented the bank note in the 9th century AD. These notes remained in circulation for some time. In 960 A.D., a Chinese emperor reinstated the practice of issuing notes for merchants’ deposits, leading to a rapid increase in the circulation of these notes. Later, a company of sixteen wealthy merchants was established with a grant to issue notes payable in three years. However, the company went bankrupt after the end of the three-year period and the Chinese emperor abolished its notes.
Numbers and Accounting
Arabic numerals made their way into southern Europe by the end of the 11th century. The Arabs learned the use of these numerals from India. These numerals involved the use of the decimal system of notation and were introduced in Europe because Latin letters were quite inconvenient for calculations. The introduction of these numerals also led to advances in the theory and practice of bookkeeping in Europe. The Italians are credited with the double-entry’s self-checking system, which involves entering every transaction two times: as a debit and as a credit. As the books are balanced, one can check whether the business entity is making or losing money.
Bills of Exchange
Before bills of exchange, there were certificates of indebtedness or “assignments”, which were commonly used in maritime and commercial towns and cities. These financial instruments were often used by merchants, importers and exporters dealing with traders of other countries. With the help of such “assignments”, traders were not required to transfer or exchange money. They just need to mention that the debtor is required to pay the specified sum to another party within the stipulated date and in the specified form. Bills of exchange emerged from these financial instruments. In his History of Banking (1850), William John Lawson mentions that the present forms of bills of exchange were first issued by London’s goldsmiths, who were ‘the first bankers who circulated paper money’.
The Jews and the Lombards
The Jews, united by their shared religion, played a pivotal role in introducing banking and exchange systems in Europe during the late Middle Ages. However, as their wealth and influence grew, societal prejudices led to their banishment from many states, after which they were largely replaced by the Lombards.
The Lombardy region is located in northern Italy, with Milan as its capital city. By Lombards, the English meant merchants or exchangers from Venice, Genoa, Florence or Lucca, or more generally, Italian merchants. These Italian exchangers, especially those from Florence and Sienna, also served as bankers for the Pope. They collected and transferred religious donations and tributes to the Holy See.
Transition to the Modern Forms of Banking
The business of exchange was later assumed by the governments of large commercial cities such as Venice, Amsterdam, Barcelona, Hamburg, Genoa and Nürnberg. In these cities, banks were established to allow merchants to deposit their coins. Merchants received credit equivalent to the metal’s value in their coins. This enabled transactions through credit transfers on the bank’s books rather than physical currency exchanges. At these banks, debtors arranged for the transfer of funds from their accounts to that of their creditors. This bank money, represented through written orders or book accounts, carried a premium as it gained value over the degraded coins in circulation.
Over time, it became common for people to trust bankers with their money and valuables for safekeeping. This aspect of banking grew to be as significant as money changing, and eventually, it became more important.
Nature and Ideas YouTube video on Early Banking:
References:
The Word “Bank”
Dean, Sidney (Ed.). (1884). History of Banking and Banks. Pelham Studios.
Money Exchangers
Rogers, James, E. Thorold (1889). The Economic Interpretation of History. G. P. Putnam’s Sons.
Use of Leather Tokens as Money
Dean, Sidney (Ed.). (1884). History of Banking and Banks. Pelham Studios.
Jevons, W. Stanley (1875). Money and the Mechanism of Exchange. D. Appleton and Company.
Bankers or Argentarius in Ancient Rome
Gilbart, J. W. (1882). The History, Principles, and Practice of Banking Volume I. George Bell and Sons.
Rogers, James, E. Thorold (1889). The Economic Interpretation of History. G. P. Putnam’s Sons.
Money Deposited in Ancient Greek Temples
Gilbart, J. W. (1882). The History, Principles, and Practice of Banking Volume I. George Bell and Sons.
Numbers and Accounting
Dean, Sidney (Ed.). (1884). History of Banking and Banks. Pelham Studios.
Bills of Exchange
Dean, Sidney (Ed.). (1884). History of Banking and Banks. Pelham Studios.
Lawson, William John (1850). The History of Banking. Richard Bentley.
Bank Notes in China
Chase, Franklin L. and Allen, J. K. (1888). Banking: A Short History. Lanward Publishing Company.
Dean, Sidney (Ed.). (1884). History of Banking and Banks. Pelham Studios.
The Jews and the Lombards
Chase, Franklin L. and Allen, J. K. (1888). Banking: A Short History. Lanward Publishing Company.
Transition to the Modern Form of banking
Scott, William A. (1903). Money and Banking: An Introduction to the Study of Modern Currencies. Henry Holt & Company.
Notes:
1 ^ Rogers, 1889, p. 209
2 ^ Dean, 1884, p. 12
3 ^ Dean, 1884, p. 12
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