It’s hard to imagine what we would do without safe, secure places to store and manage our money — that is, what we would do without banks.
But have you ever stopped to think about how banking began? Who invented it, where it originated, how it’s evolved over the years… and when it truly became the modern banking system we know today?
Let’s go back in time and see how banking has changed since its creation — and how it’s changed us.
The History of Banking
Money Management in Mesopotamia
When Faith Meets Finance
Around 4000 BC, the citizens of Babylonia became the first to experience the banking system. Wealth at the time was measured in gold, silver, and jewels, which were cumbersome to store in the home — and highly susceptible to theft.
So temples around Mesopotamia began offering to store citizens’ gold for a fee. The exact fee depended on how much you were depositing, amounting to as much as 1/60th of the total deposit amount.
The First Bank Loans: Literal Seed Money
But while the temples filled up with riches, many citizens were destitute: traders unable to make good on their transactions, farmers without seeds to plant.
Seeing a need for a formal lending system, temples began issuing seeds to farmers — on the condition that when the harvest was completed, the farmers would repay the loan with interest.
Banks Become Formalized in Rome
Banking as Society’s Backbone
Societies from Egypt to Greece to India offered citizens the ability to bank at temples. But it was the Romans who first separated banks from temples, creating the world’s first public bank around 352 BC.
This public bank was responsible for managing loans and debt, testing coins for authenticity, exchanging foreign currencies, and arranging book transactions between cities. What’s more, the bank processed almost all government spending, making it an economic force to be reckoned with.
The Empire’s Economy
When Julius Caesar took over Rome in 49 BC, he gave the bank even more power. Previously, those who defaulted on their debts could retain ownership of their land — but now, the bank could seize debtors’ real property, allowing debts to be paid off more quickly.
But as Christianity took hold in the Roman Empire, banks felt the effects of this new system of morality. Interest and deposit fees, which were now widely seen as immoral examples of usury, became forbidden.
And when the Roman Empire collapsed in 476 AD, so did the bank. Banks would not be seen again in Europe for over 600 years.
The Rebirth of Banking in Italy
The Lombards’ Loophole
Throughout the 11th and 12th centuries, smaller sects of Europeans attempted to reinstitute the banking system, lending money to the wealthy and powerful. The Jews and the Knights Templar were particularly successful in their endeavors — but as persecuted minorities, their success was short-lived.
However, in the 13th century, a group of crafty Italians known as the Lombards circumvented the ban on usury by inventing double-entry bookkeeping. Interest, rather than being called such, was now disguised as a voluntary gift from the debtor to the creditor — a reward for assuming the risk of the loan.
Florence’s Financial Figureheads
Italy then exploded as Europe’s financial hotbed. Within just a few decades, the Bardi and Peruzzi families of Florence had become synonymous with banking, providing financial services to wealthy traders, the papacy, and even foreign rulers like King Edward III of England.
While these private families had a foothold in Florence, the rest of Europe’s banks were increasingly controlled by the state. It would be several centuries before this norm was challenged — and when it was, banking changed forever.
The Rise of Modern Banking
Adam Smith and Self-Regulation
In 1776, British economist Adam Smith voiced his vision of a self-regulated economy: a free market where the state had little to no say in the machinations of banks, trade, and the economy as a whole.
The concept appealed greatly to banks and other lenders, particularly those in the newly-established United States. By the late 1800s, merchant banks — privately-owned, opaquely managed, and often elitist against the common people — had largely supplanted America’s national and state-run banking systems.
These merchant banks included names we’re all familiar with today, such as Goldman Sachs and J.P. Morgan & Co. They built capital by selling foreign bonds, then lent those profits to upstart companies — and sometimes created their own.
Ordinary Citizens Go to the Bank
For centuries, banking was largely limited to corporations and the wealthy. Ordinary citizens were not qualified or permitted to borrow money — and even if they were, they had little confidence in the banking system.
But that changed in 1917 with the creation of the Federal Reserve. This provided a government-backed safety net in the event of a private bank failing, and it reintroduced a reassuring amount of state control over the machinations of banks.
Post-WWII, the economy boomed and banking became more accessible to the average person. Banks began offering mortgages and other lines of credit to private citizens, whose trust in banks grew with the introduction of deposit insurance and government regulations.
The Digitization of Banks
In the 1980s and ’90s, the internet became an integral part of banking. Banks around the world could use it to facilitate business with one another near-instantly, and digital transaction records provided extra security and veracity.
And with the advent of personal computers and smartphones, ordinary people found it easier and more efficient to utilize banking services without having to leave their homes. Today, 94.6% of American households have at least one bank account.
It’s hard to say where banking will go next, but the popularity of cryptocurrencies and fully-virtual banks suggests that it will only get more digital from here. Whatever happens, it’s sure to be an exciting new chapter in the already-amazing history of banking.
Astonishing Banking Facts and Figures
Bank Growth by the Numbers
In 1820, America was home to just 300 banks. Today, there are over 5,000 banks in America alone, with holdings totaling $21.2 trillion.
And worldwide, there are 44,000 banks. The largest is the Industrial and Commercial Bank of China Limited, which holds $5.5 trillion USD in assets!
Hussein’s Massive Bank Heist
In March of 2003, just before the start of the Iraq War, dictator Saddam Hussein stole nearly $1 billion from the Central Bank of Iraq — a quarter of the country’s currency reserves.
It was the largest amount of money ever stolen from a bank. And while some of the money was eventually recovered, much of it was lost… or spent on weapons and security for Hussein’s upcoming war.
Using Cheese as Collateral
Most banks deal with money, precious commodities, and other traditional valuables.
But at the Credito Emiliano bank in northern Italy, you can take out a small business loan using Parmesan cheese as collateral.
Dairy farmers, who often have trouble getting bank loans, can bring their young wheels of cheese to the bank, which ages them in a special vault for the duration of the loan. When the loan is repaid, the farmers get their cheese back — properly aged and ready to sell.
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This means that farmers don’t have to manage their own aging facilities and processes. And if they default on their loans, well… suffice to say the bankers won’t go hungry!