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History Of Banking Part 4 – Trade And Empire

By SunTec Research Team

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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 – trade and empires.

The expansion of trade

As the Roman empire collapsed during the 5th century AD, the evolution in banking also came to a standstill. While people were still saving money in banks and taking money on credit, there was no significant progress. For nearly 500 years, the status quo continued.

Banking, in its current sense of form, is traceable to medieval and early Renaissance Italy, to rich cities in the north such as Florence, Venice, and Genoa and the reason banks flourished in these regions was because of the growth in trade.

The original banks were “merchant banks” that Italian grain merchants invented in the Middle Ages. In the 11th century, as the Lombardy plains in Italy grew more fertile, the merchants of Lombardy also grew rich and expanded their trade.

Meanwhile, by a twist of fate, Jews, one of the richest classes, were being shunted out from many parts of the world. We may call it selective discrimination or the result of the depraved human mindset, but few Jews benefited from this tragic act.

The Jews moved around and were attracted to the richness of the Lombardy plains. The Jews, well versed with the trade practices of the Middle East and the Far East through silk trade, adapted these trade practices and financed grain production and trading in the fertile plains of Italy. They had one great advantage over the local Christians – the local Christians could not lend out money for interest whereas the Jews could.

Initially, the Jews, with lots of money in hand, lent out money to finance grain production and insured their loans against the grain produce. Gradually, the Jews moved forward the value chain and began to advance the payment against the delivery of the grains to traders. In both cases, luck and profits favored the Jews. Probably, these were the first futures contracts. In due course of time, these bankers learned to trade debt and performed financing along with underwriting. Soon this practice flourished, money grew, and more people entered the banking industry. As I had mentioned earlier, it was during these times that the word bank and bankrupt originated.

The growth in trade also necessitated a way to measure the time value of money and the practice of discounting was started to cater to this need. This also helped intelligent bankers to override the usury rule.

But the happiness of Jews did not last for long. Wars disrupted the success that Jews were enjoying, and they were again displaced. These Jewish families moved to Poland and Germany and became the people who defined the banking industry.

During the later stages, even goldsmiths began to lend out money on behalf of the depositor.

But the Church caught up. The rise of Protestantism freed many Christians from the boundaries of usury. The increase in trade from the late 16th century pulled many more merchant families into the gold mine of banking. Some survived, some flourished and some lost. In trading countries like the United Kingdom, Germany, and the Netherlands, the number of banks virtually doubled in the second half of the 18th century. Even in the 19th century, as a new superpower was rising in the form of the US, the increased requirement for investment created a new set of banks – the investment banks.

The demands of trade made banks become structured corporations. As nations began to trade further, the national banks crossed boundaries and became multinational banks. The demands of modern-day trade also led to the creation of several practices and technologies that are being used by banks these days. Mainstream technologies such as SWIFT happened because corporations wanted to send money across continents in the fastest way possible. Practices such as overdraft happened when the famous merchant William Hog, who was a customer of Royal Bank of Scotland, was having problems in balancing his books and was able to come to an agreement with the newly established bank that allowed him to withdraw money from his empty account to pay his debts before he received his payments.

The growth of trade created a huge demand for capital. Nor the kings nor the government had this kind of money. Only the banks which were the original platforms could cater to this demand. Thus, the growth of trade helped in the growth of banks and this formed a virtuous circle. To this day, this remains the gospel truth.

The world of empires

The political history of the world is intricately linked with the rise and fall of several great empires. At its core, an empire is the domination of one state by another. To achieve this domination, empires needed money – to wage wars, to feed the soldiers and to build weapons. Additionally, empires needed access to credit to pay for foreign goods and services.

Just as banks financed the traders, banks also financed emperors. Loyalty does not buy mercenaries.

The world’s first empire, the Akkadian Empire, which existed around 2,000 BC, understood the power banking provided. This empire created systems that provided them with the capital in times of need.

The next great empire was the Roman Empire. From around 27 BC to 476 AD., the Roman Empire established the roots of the modern banking industry. Even Rome had temples which acted as quasi banks. Priests were the quasi bankers.

As the Roman Empire grew the Mediterranean, the need for more credit came up. The money stored in the temples could not cater to these needs. This led to the establishment of modern-day banking as money changers, who sensed an opportunity in these times, set up benches outside government buildings and started to handle banking activities. This also led to the establishment of three kinds of bankers in Rome – the argentarii, who were private individuals who lent money and handled foreign transactions; the mensarii who were the de-facto representatives of the government and ensured social equality through their banking; and the nummularii, who tested the quality and genuineness of minted coins – new and old.

Banking was also growing in empires that were far from Rome. In India, the Mauryan dynasty (321 BC – 185 BC) played a critical role in the development of banking in India. In China, the Qin dynasty (221 BC – 206 BC), helped introduce standardized coins to facilitate easier trade across China.

The fall of the Roman empire led to a decay in the growth of the banking, but the practices established by the Roman empire lived on because the mindset of humans never changed – the need for more was always there. Kings, like any normal human being, wanted to expand their kingdoms.

In fact, in 1157 AD, the real reason the first state-guaranteed bank was established was to cover the costs for the expansion of the empire under Doge Vitale II Michiel, who was a key military leader in Italy at that time.

After the first bank, Medici Bank was established in 1397, the 15th century saw the rise of new empires. This period saw the establishment of many banks in Spain, Germany, Holland, etc. The common thread amongst all these banks was that they funded the expansion of empires as well as the voyages undertaken by the ambitious seafarers of this time.

But it is interesting to note that in England, at the home of the empire where the sun never set, there were not any banking houses operating in a manner recognized as so today until the 17th century.

The last great period of the empires was from the 17th century to the mid-20th century. During this time, the rise of empires helped spread the banking practices followed in these nations across the world. While the conquered nations had their own banking practices, the current banking practices that are followed across most nations reflect the empires of the era from the 17th to 20th centuries. The empires also helped in setting up the infrastructure and processes for the modern-day banks in these conquered nations. And this was the greatest impact empires had in the world of banking.

While banks provided money for countries to expand, the countries, through their conquest of new nations (or shall we call them organized loot) and forced trade agreements, provided banks with the largesse of gold and other precious artifacts for storage.

While these precious items were the wealth of the nations from which they were taken, there was a need for a safe place to store them and banks acted as the default safe-houses. An abundance of wealth helped the banks further expand their services, but it is debatable whether they benefited the citizens of the conquered nations who led lives filled with poverty, hunger, and diseases.

In the next part, we will look at the factors which made the growth of banking from a national industry to an international industry – the wars and the emergence of printing paper money.

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