When it is the question of money, everybody is of the same religion. – Voltaire
In the last part, we looked at the rise of civilization and the emergence of writing as the contributing factors towards the growth of banking. In this part, we will look at two other major factors that drove banking in the early parts of human history.
As communities grew larger, people of different types began to stay together. In these communities, barter was not practical. What if two people could not agree on the value of the items to be exchanged? What if we could not find a person who required what we had to give in return?
Humans solved this problem through the idea of standardized money. The earliest forms of standardized money that were used by humans were salt, tobacco, bitumen, seeds or even cattle. But cattle can die, grain can rot, and stone can be reduced to dust.
By 1,100 BC, in China, these old forms of currency were replaced by miniature replicas of the things the people used in their day to day life. But it was not easy to handle such miniature tools. These miniature replicas gave way to square coins, but they were also not easy to handle. Imagine cutting your hands handling the square coins with sharp edges9. Those times, vaccinations to prevent further infection were also not available.
However, it was not too far away that the first minted coins came into existence. The place was Lydia (now western Turkey). Around 600 BC, Lydia’s King Alyattes minted the first coins. These coins were made from electrum, a naturally occurring mix of silver and gold.
Some argue that kings liked their pictures or the pictures of their kingdom’s symbols in the hands of everybody and hence coins were minted. But coins helped the trade to flourish. In fact, the Lydian kings became very wealthy after the introduction of coins. Coins also helped money to be stored in a more convenient way. This led to the growth of banking.
Ancient India also is known to have had coins in circulation around the 6th century BC. China also has records of using money during these times. Since that time, coins have been the most universal embodiment of money.
Most coins are circular, but some were rectangular. Also, a lot of coins, especially in China had a hole through the center so they could be tied on to a string.
Coins and all such money reflected the period in which it was used. But, apart from that, coins also helped translate the intrinsic value of an object in a simpler way. Knowingly or unknowingly, coins helped speed up and ease larger transactions – a necessity for banks. Coins, in addition to being a propaganda item, also helped the rulers of the earlier times control the flow of money through the economy helping banks achieve better control over the economy.
Along with politics and money, one of the three most important things that have driven the history of our human race and continues to shape its future has been religion. Many nations have flourished, some have been decimated, many people became leaders, several more lost their lives – all in the name of religion.
While the interlinkage between the three is strong even now, we can safely assume that it was needed for keeping money safe that drove people to temples.
Ancient houses did not have the benefit of the most secure locks; hence they deposited their money at the temples. Temples had the continuous presence of priests and saints and hence there was an added sense of security. Temples were also chosen for one more reason – they were near the city center as cities grew around temples. Temples, like banks, stored hordes of money and this was also the reason why temples were ransacked during a war. As the money supply grew, temples not only acted as places of storage but also lend out money and probably charged interest for that.
As religions grew, they realized the need to play a key role in the economic landscape. Interest was the cornerstone of banking these days and hence religions decided to create rules for interest.
In Christianity, usury, or interest was banned by churches, which were under Roman influence. It is interesting to note that once the economic benefits of banking were well understood, the definition of usury was relooked at. In fact, In the middle of the 13th century, groups of Italian Christians, invented legal workarounds to nullify the ban on Christian usury; for example, one interesting method of effecting a loan with interest was to offer money without interest, but also require that the loan is insured against possible loss or injury, and/or delays in repayment. The Christians effecting these legal fictions became known as the pope’s usurers and reduced the importance of the Jews to European monarchs. The rise of Protestantism in the 16th century weakened Rome’s influence, and its dictates against usury became irrelevant in some areas. This was a key in the development of banking in Northern Europe and the rest of the world.
In Islam, it is strictly prohibited to take interest or riba as the Quran strictly prohibits lending money on interest. The prevention of charging interest coupled with the creative mind of humans led to the development of innovative developments in the 20th century that led to the development of Islamic banking where no interest would be charged, but banks operate for profit through charging for loans or through different ownership models. I must point out that, in India alone, more than USD 1,500,000,000 is unclaimed as even taking an interest on bank deposits is considered as haram.
As per the sacred texts of Hinduism, charging interest was considered as a sin. The sacred texts also forbade people of different castes from participating in usury. By the 2nd century AD, usury seems to have become an accepted norm. This dilution of concept has remained today also and usury, in India, refers only to interest charged above socially accepted ranges.
While the above three religions had strong views about usury and charging of interest, the rules defined for Jews helped them play a critical role in modern-day banking. Jews were forbidden to charge interest on loans made to other Jews but could charge interest on transactions with non-Jews. In the early 11th century AD, when trade grew, and kingdoms wanted more access to credit for expansion, Jews, who were not allowed to do many other jobs, found an opportunity in the field of banking. To add to this, as Manfred Lehman has about the Jewish law Torah that ‘the Torah, before any other code or law, set down strict rules for commercial honesty and public-mindedness, so that a Jewish banker was always more trusted than other bankers’. 11 Who knows, Mayer Amschel Rothschild, the founding father of international finance would not have been a banker had the rules been different.
The role of religions in the evolution of banking cannot be undermined. Religion and its key stakeholders understood the importance of banking in the past itself. Kings also understood the role of religions in further enhancing their economic agenda. The fact that the earliest banks were temples is the prime example of this close relationship. Several of the practices followed by the banks have been a result of the freedom given or control established by the world’s religions. Islamic banking would not have evolved without the religious beliefs and practices of Islam. Jews would have played a prominent part if not for the rules on usury. In short, religion, along with the economy and politics played the most important role in shaping the world of banking.
In the next part, we will look at the factors which made the growth of banking from a national industry to an international industry.