The next 5 years will see an evolution of Banking continuing what has already started, with some hoping for a revolution and a changing of the guard. That banking is changing is not new, it was ever thus and a short history of banking is useful to know how we got here and what remains important despite the changes that are coming.
Banks have been around since the first currencies were minted, perhaps even before that, in some form or another. Currency, particularly the use of coins, grew out of taxation by rulers and as empires expanded, coins of varying sizes and metals that could be exchanged easily served as a way to pay for foreign goods and services. These coins, however, needed to be kept in a safe place. Ancient homes did not have the benefit of a steel safe, therefore, most wealthy people held accounts at their Temples, where priests or Temple workers were trusted as both devout and honest, but over time, records from Greece, Rome, Egypt and Ancient Babylon suggest Temples also loaned deposited money out, in addition to keeping it safe. The fact that most Temples were also in the centres of their cities, is an additional reason why they were ransacked during times of conflict.
The Romans took banking out of the Temples and formalised it within distinct buildings and so began the distinct trade where moneylenders profited from taking in and lending money. Julius Caesar, in one of the edicts changing Roman law after he established himself as Emperor, gives the first example of a major shift in power between lender and landowner allowing moneylenders to confiscate land in lieu of default in loan repayments.
After the fall of Rome, banking was largely abandoned in Western Europe and did not revive until the time of the crusades, in the form of papal and other powerful bankers, that emerged in the Holy Roman Empire. Outside the papal institutions, banking became subject to additional restrictions, as the charging of interest was seen as immoral, equally so on the face of it under Islam and Judaism. Whilst some interpret for example the Jewish Torah as forbidding the charging of interest only by Jews to other Jews and not to non-Jews, or Gentiles, the involvement of Jews in the money lending business is likely much more to do with the fact that by the time of the Middle Ages, Jews were excluded from many professions by local Rulers, the Church and the Guilds and so were pushed into marginal occupations considered socially inferior, such as tax, rent collecting and money lending.
As commerce expanded, innovation played its part and bills of exchange were created as a means to avoid the carrying of coins and large chests of treasure around. Money changers at merchants fairs issued documents redeemable at other fairs, in exchange for hard currency. These documents could be cashed at another fair in a different country or at a future fair in the same location. If redeemable at a future date, they would often be discounted by an amount comparable to a rate of interest, or for an equivalent fee.
With finance available for trade, both local and international, both commerce and those that controlled finance largely prospered. The term moneylenders had already morphed and now those involved became known as bankers, through the term “bank,” – banco, banque, bank each meaning, “ bench” or “counter” where the moneylender sat usually with some of his money in plain sight in fairs to town squares. When a banker was no longer solvent the bench would be smashed or ruptured and the banker declared, “bankrupt”. Amongst bankers, a hierarchical order developed. 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 “Lombards”.
The most advanced bankers in the middle ages were those from Italy seen as the pioneers of modern banking, for example the “Medici” Bankers in Florence, who not only influenced other Italian bankers but also many more in Germany, France, The Netherlands, Switzerland, England, Spain and elsewhere. Whilst some of those at the top of the banking hierarchy did well from dealing with sovereigns, others did not. Some of the royal powers began to take loans to make up for hard times at the Royal Treasury, often on the king’s terms. For example in 1557, Phillip II of Spain borrowed so much to fight war after war, that he caused the world’s first national bankruptcy, as well as the second, third and fourth, in rapid succession. This occurred because 40% of the country’s Gross National Product (GNP) was going toward servicing the debt. Spain never recovered and was quickly surpassed in the late 17th century, by its once fierce rivals whose largest centres for commerce also housed the main centres for banking, being in the ports of Amsterdam, London, and Hamburg.
Banking at this time, largely consisted of private banking for the wealthy and commercial banking for trade. As far as private banking and then personal banking, innovation in Amsterdam in the 16th Century led to the introduction of charges for customers for depositing their wealth for safekeeping, a practice that soon spread to the UK. Competition led these bankers to offer other services, including paying out money to any person bearing a written order from a depositor to do so. Britain became a major innovator in the banking world. According to the Payments Council, which represents UK banks, half of the 10 oldest continuously operating banks in the world are in the UK. British banks invented many of the current account features we now take for granted. Pre–printed cheques appeared in the 18th century, together with a clearing system that involved bank clerks meeting at the Five Bells Tavern in Lombard Street, to exchange all their cheques in one place and settle the balances in cash.
In 1778, the Royal Bank of Scotland invented the overdraft. The bank allowed William Hog, a merchant, to take £1,000 (than the equivalent of £60,000 today) more out of his account than he had in it. In those times, bank accounts were a luxury for the rich, something that didn’t change for more than 200 years. Banking expanded beyond the wealthy to cover also the middle classes and specialised with merchant banks, who used national and international connections, political and financial power and the knowledge and practices of markets to prosper, none more than JP Morgan and Company.
JP Morgan and Company emerged at the head of the merchant banks during the late 1800s, exerting great influence over American industry, creating for example, US Steel and AT&T and creating great oligopolies across American Industry. JP Morgan also almost single-handedly halted the Panic of 1907 by quickly persuading all the major players on Wall Street to work towards stability and back a recovery, just as a central bank would do today. Recognising the need to have an alternative to relying on Commercial Banks, the US Government established its own Central Bank in 1913, the Federal Reserve, some 243 years after Sweden established the worlds first Central Bank, and now housed in its very own temple like building.
With the increasing size of newly formed industrial companies, the amounts needed for growth, could no longer be provided by any one bank, so merchant banks managed IPOs and bond offerings, raising money directly from the public in order to generate sufficient funds. With such offerings, the public in the US, Europe and elsewhere, began to take a greater interest in investments, banks became commonplace and most citizens would open bank accounts for retail services, including taking credit and debit cards. Commerce would still require funding for trade, international payments would increase as would domestic payments, savings and investment products would be taken up by individual customers as well as pension funds and insurance companies, requiring asset management services and merchant banking would transition into investment banking as we see it today.
Banking eventually became available to ordinary households, with many in the developed and developing world gaining access to bank accounts, without which it is becoming increasingly difficult to function. Charge cards were invented in the US in the 1950s quickly followed by credit cards; and the ATM deployed by Barclays Bank in London in 1967. Traditionally, bank customers managed their money using a passbook that they took into their branch every time they wanted to pay in money or take it out. However, most bank customers do not need to go into a branch on a regular basis as they can do most of their banking either online, on the telephone or by using a cash machine. As well as in–branch queuing, personal attention from the bank manager has largely become a thing of the past. Most queries on a bank account are now managed by call centres or branch staff who have little or no information on individual clients other than that held on a computer, or by customers with online access themselves.
Banks have come a long way from the Temples of the ancient world, but their basic business practices and reasons for existence have not changed, namely safety and security via trust and accountability. What is changing rapidly is how customers interact with their Bank, or indeed with a multiplicity of service providers offering bank type services through a multi channels, including via the internet and via mobile phones. Whether Banks themselves will be as omnipresent as they have once been is open to question, but what is not are the services that Banks have provided, which remain important both for individuals and in support of commerce.
What is also clear and unlikely to change is wherever there is money, which includes the various forms it takes, both legitimate and illegitimate actors will be active in using these services, and Banks need to be able to spot the difference and take action, whether they be the traditional Banks we all recognise today or new entities that form a similar purpose.
After all, as Willy (Slick) Sutton, in answer to a journalists question, “Willy – Why do you rob Banks?” he allegedly replied. “Cause thats where the money is!”