The history of banking

Is banking a phenomenon of the present day? Certainly not. Banking in one form or another is as old as civilization itself. The earliest banks go back to biblical days, about 4, 000 years ago. We also know from early records that the ancient civilizations of Rome, Greece, Babylon, China and Egypt all made use of banks.

How can the banks of antiquity be related to the modern computerized banks of today? It should be remembered that for all the sophistication of modern-day banking, the most basic service of all banks, no matter where or when they were in existence, is the safe-keeping of customers' funds. In early times most men and women were unable to read or write. Most did not need money - they worked for a master who provided them with food, clothing and shelter sufficient for their needs. The rich, the rulers, merchants and landowners had money in the form of gold and silver, so it was they who needed banks to look after their funds and valuables.

The literate men of the community were priests, and conse­quently they, with their ability to keep records, were the first bankers. Additionally, because they were priests they were considered honest and trustworthy. Not only could valuables confidently be left in their charge, but also temples, churches and other sites of worship were seen as places of safe-keep­ing. They were well guarded and it was a serious criminal offence to desecrate holy ground; for example, no one would dare break down the door of a church and destroy any part of its interior - the punishment would probably be death.

As communities grew and prospered and began to trade with other communities, so the need for banking increased. On the other hand, as the early civilizations each fell into decline and were invaded by other tribes, so their need for bankers de­creased, alongside the falling prosperity of the community.

Very gradually, business of banking was withdrawn from the hands of priests and became part of normal trade and commerce. Indeed, one of the most successful periods for banks was in Italy during the eleventh and twelfth centuries, particularly in the states of Venice, Lombardy and Genoa; there banking prospered and grew to a considerable degree. Merchants in these states not only maintained the accounts of customers and looked after their funds, but were agents for collection, inasmuch as they originated the bill of exchange, which was used to facilitate the movement of funds and assist in the settlement of international trade within the Mediterranean area.

These days banks consider the latter function - to act as an agent for collection — to be a most vital service. Each working day, cashiers at every branch at every bank are taking in cheques in favour of their customers, crediting the account and sending these cheques to the clearing house for collection and final payment.

In Britain banking records could go back to the time of the Norman Conquest, when the chief bankers were Jews who both looked after their clients' funds and were lenders of money. These loans were not for the purpose of trade as we would understand it today, but often requested by the nobles in order to equip their private armies or prepare for a crusade. The possibility of obtaining repayment of the loan was slight, so that the interest charged was, for those days, quite high. Because the interest rates were so high, the money-lenders were unpopular. Thus in 1290 Edward I expelled the Jews from England; they did not return until the seventeenth century. Between these dates, over a period of four centuries, villages and towns still had usurers who obtained large profits by their scandalous interest charges. While the government legally prohibited this trade, their efforts were without practical success. During the fifteenth and sixteenth centuries Britain saw the beginning of industrial development, particularly in cloth-weaving, coal-mining and iron production. Large sums of money were thus required to finance these undertakings, and in response to this need the charging of interest on loans was controlled.

With the disappearance of the Jews from England in 1290, the Lombards and Causines established themselves as bankers. So great was their influence that a street in the centre of Lon­don - Lombard Street - was named after them. It was their custom to sit on a " banca" or bench and transact their business. When the business failed, the bench was smashed and from this the word " bankrupt" is derived. The Lombards carried out the business of money changing and lending to the merchants of London and anybody else who needed finance. Furthermore, they brought with them their skills in international trade, ex­tending the methods of settlement between this country and the Continent by the use of bills of exchange.

It becomes clear that wealth was no longer only in the form of land held by country gentlemen and titled persons. Merchants and trades people held their wealth either in goods or cash. London was the trading centre of the country and the rich and powerful London merchants for a short time used the Tower of London as a refuge for their wealth. However, the monarchs of England - ever short of money - found it necessary from time to time to seize whatever funds were stored there. So the mer­chants, not wanting their wealth to be in constant threat of con­fiscation, looked for other places of safe-keeping.

Naturally enough it was the goldsmiths who provided the answer. They were accustomed to holding valuables on their premises. Like all basic bankers, their prime function was to look after the deposits of their customers and in exchange give them receipts for the money deposited. Very soon it was real­ized that instead of going to the goldsmith to withdraw funds, then handing it over to a creditor who would, in a short space of time, place the funds in the vaults of his own goldsmith, it was quicker and easier for a debtor to hand his creditor the receipt for funds deposited. These receipts began to be passed from hand to hand, rather like money. To avoid continuous alteration to the document, the custom grew of drawing these receipts payable to " bearer". These, as you will realize, are the origins of banknotes.

The goldsmiths very quickly understood that, with the passing of receipts between a debtor and a creditor, it was unlikely that the whole amount of the funds deposited with them would be withdrawn at the same time, so that it was fairly safe for them to lend a proportion of the deposits to other people. These loans were repaid with interest, and goldsmiths soon began competing with each other to obtain deposits: thus, instead of charging customers for depositing funds with them, they tried to attract funds by offering interest on deposits.

As well as receipts being passed from person to person, rather •like banknotes, a further development grew in the form of a letter drawn by the customer of a goldsmith, requesting to pay a certain sum of money to a named individual. This, then, was the forerunner of a cheque.

Eventually, some goldsmiths became small bankers, con­centrating only on the business of banking. Sometimes they were very successful; at other times they failed, ruining their customers with them. Remember, these bankers in the fifteenth, sixteenth and seventeenth centuries were merely sole traders or small partnerships. When there was a recession in a particular part of the country they, like the farmers or industrialists, suffered the same fate. There was no such principle as limited liability.

However, in 1694 an important event occurred: the estab­lishment of the Bank of England. This was not a result of any desire on the part of the government to regulate the banking system. Rather, it was due to the fact that the sovereign needed funds to finance the wars of the Grand Alliance, and having cleaned up all other sources, decided to ask the merchants of the City of London to raise funds to pay the army. The mer­chants, being true to the Crown, raised by public subscription the sum of £ 1.2 million, but made this loan conditional.

By these conditions the Bank of England was from the outset the foremost bank in England and has retained that position ever since. First, it should be noted that in those days £ 1.2 million was a vast sum of money, therefore it was financially stronger than any other bank in England. Second, unlike any other bank, its members had limited liability. Third, because it had the back­ing of the government, no other bank could really compete with it. Lastly, while all banks at that time were able to issue notes, but only against the gold and silver it had in its deposits, the Bank of England was able to issue notes to the amount of its capital, which in modern terms means that it was able to have a fiduciary issue.

Over a period of time the Bank of England very gradually withdrew from commercial banking and specialized in the func­tion of being the central bank for the United Kingdom. Today the vast majority of its work is in this area. True, it has a few customers, usually large organizations, but it is not now possible for individuals to open an account with them, nor does the Bank wish to extend its commercial banking activities. Since 1946, when the Bank of England Nationalization Act was passed, the Bank has been totally owned by the government.