The banking industry has experienced significant evolution over the years, with revolutionary changes expected to happen in the next few years. The rise of internet banking as opposed to the traditional brick-and-mortar is one of the developments, but still, the role of the banks remains the same. A look into the history of banking from ancient times will help in determining the changes experienced, what is expected, and the roles played by banks in economic development.
The development of banking is believed to be rooted in early Mesopotamia, where individuals started acting as intermediaries for safe storage and transfer of wealth. Basically, banking was started with the development of currency by the first powerful empires. The rulers were required to develop their empires and tax their subjects and therefore developed the use of gold and silver coins as a form of exchange. The coins replaced the earlier modes of exchange but presented a challenge in that they were bulky and required safekeeping where they could not be stolen. Given that most medieval homes did not have secure steel safes, most people sought the help of the temples where the coins would be stored in the basements. The temples were seen as the safest place to store the money because they were mostly at the center of the cities, were large and had secure basements and on top of being in strategic locations, they were holy places guarded by the gods. The business of banking was anchored on trust and most merchants believed their money was safe because the temple workers were holy, honest, and could be trusted. Most temples would however start lending out the money brought by merchants for keeping, both as a way of earning interest as well as reducing the risk of loss in case the temple was ransacked during an attack.
Major developments in the banking sector were experienced during the Roman Empire. The growth of the empires developed the economic sector then and, in the process, banking was revolutionized as an industry, a move that saw merchants stop keeping their money in the temples. The lending of other people’s money by the temples had presented an opportunity for the merchants and the empire. Julius Caesar made district buildings the center for banking in his empire, where deposits and lending took place. The centralization of banking was the first step to the commercialization of the industry and major directives were developed by the emperor, among them being the transfer of land from a landowner to a lender in the event of default on a loan. The possession of defaulters’ property set the foundation for the practice today where the property is used as collateral and ownership rights are lost in case of defaulting on the loan issued.
The banking sector remained undeveloped for many years which would follow the fall of the Roman Empire because of various factors, among them being instability caused by war. However, the Papal breathed a new life into the sector after the Catholic Church took the void left and gave rise to the Holy Roman Empire. The crusades also saw the rise in banking with the Papal and major bankers such as the powerful Medici family which ruled Florence, Italy. The rise of banking during this time portrays the connection between political stability and the development of the money sector. Banking during the reign of the Holy Roman Empire was however in a way controlled by the authorities and subjected to new regulations brought about by the religious beliefs. For instance, charging interest was not acceptable in many religious groups such as the Jews, Muslims, and even some Christians. The issue of interest was however often bypassed especially during interfaith transactions because the Jews would charge interest to the non-Jews as they believed the law applied only to them and not the gentiles.
The Development of Bank Notes
The growth of banking meant that people had to be creative and, in the process, major innovations were realized. For instance, commerce had grown significantly, and having to move around with boxes full of coins, gold and silver was proving to be tiresome. The need to have a simpler form of exchange prompted the banks to develop bills of exchange. As it were, banking was majorly practiced at merchant fairs where different merchants would meet to offer their services. The issue of bulky coin boxes was solved by issuing documents that would be redeemed for cash at a different merchant fair in another country, and with the documents, the merchants were not required to carry the bulky coins. The bills could also be redeemed at the same fair on a later date, in which case it would be subjected to a cost that would be earned as interest by the issuer. The bills boosted trade in a great way as finance was readily available. The elimination of barriers in terms of business financing meant that the traders and merchants dealing in commerce became very successful. Banking as it is termed was developed then, where the merchants would sit on benches with their money for exchange at the fairs. The name bank is actually coined from banc, banca, banco, banque, which all mean bench, developed from how the merchants operated at the time. They would parade themselves with their money for exchange and lending and in case any one of them became bankrupt, they would literally smash his bench as a way of showing the merchant had become officially insolvent. Just like today, where we have big and small financial institutions, there were big bankers then who dealt with the kings and other rulers, down to those who dealt with the wealthy businessmen and the small lenders for the common traders. Banking then was a preserve for the rich people and common people did not enjoy the services.
The Birth of Modern Bankers
The bankers who dealt with the states and the rulers were very successful, as was witnessed in Italy where the most successful bankers were found. For instance, the Medici family significantly developed the banking sector in the country and influenced other bankers in the neighboring countries of Europe and beyond. While they were creative and innovative, the Medici owes their success to the fact that they were the bank of choice for the Papal. Other bankers emulated them in dealing with the ruling regimes to their advantage. However, it was not all rosy for some as was seen in Spain in 1557, where Phillip II over borrowed to finance a war and led to the collapse of the …