Modern Banking Part 1

Despite the classical origin,banking in its modern form and structure started in Britain when many of Lombardy merchants came to England in the fourteenth century and settled in the parts of the city of London now called Lombard Street. These Lombards were so resourceful that even the kings had to depend on them for loans despite the face that the Church was firmly against usury. They dealt with not only keeping the money in safe custody from general public but also changed money for the travelers or merchants engaged in foreign trade.

By that time maritime transport picked up fast and it provided further expansions to trade to and from London.The Lombards responded to the needs of this expansion and developed the most important banking facility of documentary credits, in additions to other lending products for trade. The links with other countries outside Britain helped them to introduce money-transfer operations as well. All these banking services were however,provided at every high rate of usury. Therefore,it forced King Henry III of Britain to issue an order to ban charging of interest in excess of 43% per anum.

The Business of changing money was so lucrative that Kind Edward-III of Great Britain established the Office of Royal Exchanger for changing foreign money at a profit for the benefit of the Crown.

The discovery of America brought riches to Britain and gave a tremendous boost to foreign trade. The merchants now began to hold part of their riches in cash. These transactions,however,received a big setback in 1640, when King Charles-I seized £ 130,000 and bullion left for custody with the city merchants at the Royal Mint.

This shook the confidence of the merchants in the Royal Exchanger and the Royal Mint. Consequently this business was taken over by the goldsmiths who, up to that time,were dealing only in gold and silver. Since these goldsmiths required strong safes for the purpose of their own business,they introduced necessary facilities of safe-keeping of the valuables and cash of their customers. These goldsmiths issued receipts or notes to their depositors in respect of the cash or articles left with them. These were called Goldsmiths Notes, and carried an undertaking to return the money and articles to the depositors or bearers on demand. There was a considerable number of such Notes in circulation among various classes of merchants;and thus they can be aptly called 'Bank Notes' in their earliest form.

Over a period of time,these goldsmiths discovered that large sums of money were left in their custody for long periods;therefore,they started the use of this cash to advance loans to other persons for a fixed period of time and at a considerably high rate of interest. Moreover,they further encouraged cash deposits by their customers by offering them a part of the profits earned on the money. Thus began the 'issue' and 'deposit' banking of modern times. Some of the enterprising goldsmiths issued 'check books',for the attraction of their customers;and thus another important step in the evolution of banking was taken.

Early Growth

Banking in face is as primitive as human society,for ever since man came to realize the importance of money as a medium of exchange, the necessity of a controlling or regulating agency or institution was naturally felt.

Perhaps it were the Sumerians who carried on some such activities around 3400 BC which are considered as 'banking activities'.Later on the Babylonians further enlarged these activities.The scripts dating back to 20th century,discovered in Babylonian area,confirmed that Babylonians made great advancements in the areas of credit,specially in agriculture credits.It is evident that the temples of Babylon were used as 'Banks' because of the prevalent respect and confidence in the clergy.

King Hammurabi(1728-1686 B.C.) the founder of the Babylonian Empire,drew up a Code wherein he laid down standard rules of procedure for banking operations by temples and great land-owners. He got his Code inscribed on blocks of diorite about 8 feet tall,containing about `50 paragraphs which deal with nearly all aspects of deposits,and loans,interest,pledges,guarantees,natural accidents,loss,theft etc.

In the following era we find Greeks carrying on banking activities similar to those in Babylonia in 4th Century BC.Because of their sancity the temples remained the most popular place of banking activities. The Greek temples of Ephesus and Delphi were the biggest 'Banks' of their time,where the people not only deposited their money and valuables for safety and security,but also borrowed money from there.The business of exchanging money and making remittances between various cities was also carried out under the Greek system.After some time,Aristotle's dictum that "Charging of interest was un-natural and immoral" became very popular,but in the following periods growing necessity forced the acceptance of the principle of interest in lending and borrowing.

Evolution of money as medium exchange and store of value brought a revolution in the monetary and financial systems,yet it is not certain as to who invented money. History records that Gyges,King of Lydia,casted elect-rum(a natural alloy of gold and silver) ingots of identical shape and of uniform weight with a triple emblem engraved on it as an official guarantee of value in 687 B.C. They are regarded as the earliest currency coins in the world.

The Romans brought some drastic changes in the banking procedures and practices established by the Greeks earlier. They regulated the conduct of private banks in such a way that utmost confidence of the people was created in them because the banking business was mostly done by individuals.

The Egyptians brought a great deal of improvement in the banking and other financial activities during first and second centuries A.D. These developments could not be perpetuated in the following years due to instability,disturbance of peace and interruptions in the means of communication. The ultimate fall of the Roman Empire and subsequent effects completely destroyed the established traditions and practices of banking and finance by 5th Century AD.

The fall or Roman Empire caused adverse effects on banking but the 'Revival of Civilization' (Renaissance) in the following century brought great increase in commercial transactions in European countries. It heralded re-emergence of banking operations in the area. Foreseeing the opportunities in near future many dealers in money started moving to the cities where business potentials were high. The cities of Venice,Florence and Genoa became the center of trade and commerce. The development compelled the business community to borrow from the Hebrew money dealers on high rate of interest and usury.

Generally these money dealers were sole proprietors and provided their services at very harsh terms and conditions. Therefore,it was felt necessary to regulate it and institutionalize it.Some countries established public banks either to facilitate trade and commerce or to serve the government. The earliest known public bank is said to be the Bank of Venice which was establish in 1157 A.D. This was followed by some 'Monte' or 'standing' banks during 1336 to 1349 in various cities in Italy. Though all these institutions were called banks,but they were not 'banks' in the same sense as we see them today.

Seeing the change,other money-dealers started organizing themselves;and banks started coming up at the principal seaports in southern Europe also. Soon Venice and Genoa became the most important money-markets of the time;and banking,though different from its present from,flourished.What we know now as 'modern banking' originated, in face, in the 14th century in Barcelona.

In 1401 a German public bank was formed comprising the operations of discounting,deposit and transferring of money. This was followed by the formation of Bank of Genoa, in 1407. By the 16th century, some more public banks were formed in Venice,Milan,Amsterdam,Hamburg and Nuremberg.

Introduction

Evolution Of Banking.

It has not so far been decided as to how the world 'Bank' originated.Some authors opine that this word is derived from the words 'Banque' which mean a bench. The explanation of this origin is attributed to the face that the Jews in Lombardy transacted the business of money exchange on benches in the market-place; and when the business failed, the 'Baancus' was destroyed by the people.Incidentally the word 'Bankrupt' is said to have been evolved from this practice. The opponents of this opinion argue that if it was so, then how is it that the Italian money changers were never called 'Banchierei' in the middle ages?

Other authorities hold the opinion that the word 'Bank' is derived from the German word 'Bauk' which means 'Joint stock fund'.Later on,when the Germans occupied major part of Italy,the word 'Bauk' was Italianized into 'Bank'.

It is,therefore,not possible to decide as to which of the opinions is correct, for no record is available to ascertain the validity of any of the opinions.