Early Beginnings (Ancient Banking Activities)
The roots of banking go back thousands of years, with some of the earliest forms of banking-like activities beginning as far back as the 4th millennium BCE. In these times, banking wasn’t formal or organized as it is today. Instead, it involved people or temples acting as money-holders, keeping safe the valuables of others.
Banking in the Medieval Era
Modern banking practices began taking shape in medieval and early Renaissance Italy, especially in wealthy northern cities like Florence, Siena, Venice, and Genoa. During this period:
- Prominent Italian banking families, such as the Bardis and Peruzzis, established extensive networks across Europe, connecting various economic regions.
- In 1397, Giovanni di Bicci de’ Medici founded the Medici Bank, which became one of the most famous and influential banks of the time.
- In 1407, Genoa established one of the earliest state-run banks, called the Banco di San Giorgio (Bank of St. George). This was among the first banks to handle state deposits and offer banking services in an organized fashion.
Early Modern Era (17th and 18th Centuries)
The 17th and 18th centuries saw important innovations that moved banking closer to its modern form, such as fractional-reserve banking and the use of banknotes:
- Fractional-Reserve Banking: In London, goldsmiths with private vaults began offering storage for merchants’ gold, providing receipts as proof of deposit. Over time, these goldsmiths started lending out deposited gold to others and charging interest. This system became known as fractional-reserve banking because goldsmiths only kept a small portion of deposited gold on hand while lending the rest.
- Promissory Notes: These receipts from goldsmiths could be exchanged as a type of money because they promised that the goldsmith would pay the bearer on demand. These promissory notes eventually evolved into the first forms of banknotes—paper money that could circulate among the public as a safe form of currency.
Key Innovations and the Growth of Banks
Banks introduced several major changes to the financial world during the 17th through 19th centuries:
- The Bank of England (1695) started the permanent issuance of banknotes, making it easier for people to trade without carrying heavy gold or silver.
- The Royal Bank of Scotland created the first overdraft facility in 1728, allowing customers to borrow more than they had in their accounts, a practice still in use today.
- Bank Clearing House: By the 19th century, Lubbock’s Bank helped establish a clearinghouse in London, where multiple banks could settle transactions with one another in a centralized place, simplifying and speeding up transactions.
- International Finance: In the 19th century, the Rothschild family developed global banking operations on a massive scale. Notably, they helped the British government purchase shares in the Suez Canal in 1875, an important international transaction that showcased the power of banks to influence global affairs.
These innovations set the foundation for the modern banking system, leading to the development of banks as we know them today, with their extensive international reach, wide range of services, and central role in economies.