Wealth compressed into the convenient form of gold brings one disadvantage. Unless well hidden or protected, it is easily stolen.
In early civilizations a temple is considered the safest refuge; it is a solid building, constantly attended, with a sacred character which itself may deter thieves. In Egypt and Mesopotamia gold is deposited in temples for safe-keeping. But it lies idle there, while others in the trading community or in government have desperate need of it. In Babylon at the time of Hammurabi, in the 18th century BC, there are records of loans made by the priests of the temple. The concept of banking has arrived.
Greek and Roman financiers: from the 4th century BC
Banking activities in Greece are more varied and sophisticated than in any previous society. Private entrepreneurs, as well as temples and public bodies, now undertake financial transactions. They take deposits, make loans, change money from one currency to another and test coins for weight and purity.
They even engage in book transactions. Moneylenders can be found who will accept payment in one Greek city and arrange for credit in another, avoiding the need for the customer to transport or transfer large numbers of coins.
Rome, with its genius for administration, adopts and regularizes the banking practices of Greece. By the 2nd century AD a debt can officially be discharged by paying the appropriate sum into a bank, and public notaries are appointed to register such transactions.
The collapse of trade after the fall of the Roman empire makes bankers less necessary than before, and their demise is hastened by the hostility of the Christian church to the charging of interest. Usury comes to seem morally offensive. One anonymous medieval author declares vividly that ‘a usurer is a bawd to his own money bags, taking a fee that they may engender together’.
Religion and banking: 12th – 13th century AD
The Christian prohibition on usury eventually provides an opportunity for bankers of another religion. European prosperity needs finance. The Jews, barred from most other forms of employment, supply this need. But their success, and their extreme visibility as a religious sect, brings dangers.
The same is true of another group, the knights Templar, who for a few years become bankers to the mighty. They too, an exclusive sect with private rituals, easily fall prey to rumour, suspicion and persecution. The profitable business of banking transfers into the hands of more ordinary Christian folk – first among them the Lombards.
Bankers to Europe’s kings: 13th – 14th century AD
During the 13th century bankers from north Italy, collectively known as Lombards, gradually replace the Jews in their traditional role as money-lenders to the rich and powerful. The business skills of the Italians are enhanced by their invention of double-entry book-keeping. Creative accountancy enables them to avoid the Christian sin of usury; interest on a loan is presented in the accounts either as a voluntary gift from the borrower or as a reward for the risk taken.
Siena and Lucca, Milan and Genoa all profit from the new trade. But Florence takes the lion’s share.
Florence is well equippped for international finance thanks to its famous gold coin, the florin. First minted in 1252, the florin is widely recognized and trusted. It is the hard currency of its day.
By the early 14th century two families in the city, the Bardi and the Peruzzi, have grown immensely wealthy by offering financial services. They arrange for the collection and transfer of money due to great feudal powers, in particular the papacy. They facilitate trade by providing merchants with bills of exchange, by means of which money paid in by a debtor in one town can be paid out to a creditor presenting the bill somewhere else (a principle familiar now in the form of a cheque).
The ability of the Florentine bankers to fulfil this service is shown by the number of Bardi branches outside Italy. In the early 14th century the family has offices in Barcelona, Seville and Majorca, in Paris, Avignon, Nice and Marseilles, in London, Bruges, Constantinople, Rhodes, Cyprus and Jerusalem.
To add to Florence’s sense of power, many of Europe’s rulers are heavily in debt to the city’s bankers. Therein, in the short term, lies the bankers’ downfall.
In the 1340s Edward III of England is engaged in the expensive business of war with France, at the start of the Hundred Years’ War. He is heavily in debt to Florence, having borrowed 600,000 gold florins from the Peruzzi and another 900,000 from the Bardi. In 1345 he defaults on his payments, reducing both Florentine houses to bankruptcy.
Florence as a great banking centre survives even this disaster. Half a century later great fortunes are again being made by the financiers of the city. Prominent among them in the 15th century are two families, the Pazzi and the Medici.
The Fugger dynasty: 15th – 16th century AD
At the start of the 15th century the Medici are Europe’s greatest banking dynasty, but their political power later distracts them from the highly focussed business of making money. After the reign of Lorenzo the Magnificent the bank’s finances are in a perilous state.
The Medici later triumph as dukes of Florence. But their role as leading bankers is usurped by a German dynasty, that of the Fuggers. Like the Medici, the Fuggers amass vast wealth by massaging the finances of the papacy and of great princes.
The shift of European power to the Habsburgs in the late 15th century is the basis of the Fugger wealth. The family descends from an Augsburg weaver and their first fortune is in textiles. They make their first loan to a Habsburg archduke in 1487, taking as security an interest in silver and copper mines in the Tirol – the beginning of an extensive family involvement in mining and precious metals. In 1491 a loan is made to Maximilian; a subsequent loan to him in 1505 (by which time Maximilian is the Holy Roman emperor) is secured by the feudal rights to two Austrian counties.
But by far the largest Fugger project is undertaken in 1519 on behalf of Maximilian’s grandson, Charles.
Charles is determined to succeed his grandfather as German king and Holy Roman emperor, but the post involves election and there is a rival candidate – the French king, Francis I. Charles turns to the Fugger family for his election expenses. Out of a massive total of 852,000 florins, to be spent on bribing the seven electors, the Fuggers provide nearly two thirds (544,000 florins). The campaign succeeds. The candidate is elected as Charles V.
Interest rates at the time are never less than 12% per annum. And when a loan has to be raised urgently, the 16th-century banker is often able to negotiate a rate of as high as 45%. Banking for emperors is profitable.
Continuous warfare and other expenses of state are a constant drain on Charles’s treasury. Like any ruler of the time, his costs outrun his sources of revenue. Loans from bankers fill the gap, and they are often repaid by leases on sources of royal income.
Thus the Fuggers are granted in 1525 the revenues from the Spanish orders of knighthood, together with the profits from mercury and silver mines. The bankers therefore become, in a sense, both revenue collectors and managers of state assets. But their high rates of interest can quickly cripple a kingdom engaged in too many unprofitable wars.
The Fuggers use their wealth responsibly, as can still be seen in the Fuggerei – a community for the poor, built in Augsburg in 1519 (the year of the imperial election) and still in use today. By the end of the 16th century the family withdraws from financial risk-taking, after some disastrous ventures, and settles into the more conventional aristocratic existence which their wealth has bought.
There will be other such exceptional dynasties, most notably the Rothschilds. But by the early 17th century banking begins also to exist in its modern sense – as a commercial service for customers rather than kings.
Banks and cheques: from the 16th century AD
In 1587 the Banco della Piazza di Rialto is opened in Venice as a state initiative. Its purpose it to carry out the important function of holding merchants’ funds on safe deposit, and enabling financial transactions in Venice and elsewhere to be made without the physical transfer of coins.
This was an accepted part of trade in ancient Greece, but it has previously been carried out by individual moneylenders – involving a high risk of bankruptcy. The Venetian initiative, with the expenses born by the state, is an attempt to provide a measure of security in this central aspect of the risky business of trade.
Other Mediterranean trading centres (in particular Barcelona and Genoa) have possibly taken this step before Venice, and it is soon followed in northern cities – Amsterdam in 1609, Hamburg in 1619, Nuremberg in 1621.
A related development is that of the cheque, a device which depends on the existence of banks as recognized institutions. A bill of exchange, the original method of transferring money without the use of coins, is a complex contract between private parties and one or more moneylenders. A cheque is a bill of exchange between banks, payable by one of the banks to whoever holds and presents the cheque.
This much simplified version of a bill of exchange slowly gains acceptance from the late 17th century. At the same time it is realized that the banking process has its own in-built potential for profit which can more than cover the costs of processing cheques and transferring money.
The total of the money left on deposit by a bank’s customers is a large sum, only a fraction of which is usually required for withdrawals. A proportion of the rest can be lent out at interest, bringing profit to the bank. When the customers later come to realize this hidden value of their unused funds, the bank’s profit becomes the difference between the rates of interest paid to depositors and demanded from debtors.
The transformation from moneylenders into private banks is a gradual one during the 17th and 18th centuries. In England it is achieved by various families of goldsmiths who early in the period accept money on deposit purely for safe-keeping. Then they begin to lend some of it out. Finally, by the 18th century, they make banking their business in place of their original craft as goldsmiths.
With private banking part of the fabric of commercial life, the next stage in the story is the development of national banks.