The Evolution Of Banking
by Andrew Beattie (Contact Author | Biography)
With the exception of the extremely wealthy, very few people buy their homes in all-cash transactions. Most of us need a mortgage or some form of credit to make such a large purchase. In fact, many people use credit in the form of credit cards to pay for everyday items. The world as we know it wouldn't run smoothly without credit and banks to issue it. In this article we'll, explore the birth of these two now-flourishing industries.
Banks have been around since the first currencies were minted - perhaps even before in some form or another. Currency, particularly the use of coins, grew out of taxation. In the early days of ancient empire, a tax of on healthy pig per year might be reasonable, but as empires expanded, this type of payment became less desirable. Additionally, empires began to need a way to pay for foreign goods and services with something that could be exchanged more easily. Coins of varying sizes and metals served in the place of fragile, impermanent paper bills. (To read more about the origins of money, see What Is Money?, Cold Hard Cash Wars and From Barter To Banknotes.)
Flipping a Coin
These coins, however, needed to be kept in a safe place. Because ancient homes didn't have the benefit of a steel safe, most wealthy people held accounts at their temples. Numerous people (like priests or temple workers), whom one hoped were both devout and honest, always occupied the temples, adding a sense of security. There are records from Greece, Rome, Egypt and Ancient Babylon that suggest temples loaned money out in addition to keeping it safe. The fact that most temples were also the financial centers of their cities is the major reason that they were ransacked during wars.
Because coins could be hoarded more easily than other commodities (like 300-pound pigs), there emerged a class of wealthy merchants that took to lending these coins, with interest, to people in need. Temples generally handled large loans as well as loans to various sovereigns, and these new money lenders took up the rest.
Primus Bank, The First Bank
The Romans, great builders and administrators in their own right, took banking out of the temples and formalized it within distinct buildings. During this time, moneylenders still profited, as loan sharks do today, but most legitimate commerce and almost all governmental spending involved the use of an institutional bank. Julius Caesar, in one of the edicts changing Roman law after his takeover, gives the first example of allowing bankers to confiscate land in lieu of loan payments. This was a monumental shift of power in the relationship of creditor and debtor, as landed noblemen were untouchable through most of history, passing debts off to descendants until either the creditor's or debtor's lineage died out.
The Roman Empire eventually crumbled, but some of its banking institutions lived on in the form of the papal bankers that emerged in the Holy Roman Empire, and with the Knights Of The Temple during the Crusades. Small-time moneylenders that competed with the church were often denounced for usury.
Eventually, the various monarchs that reigned over Europe noted the strengths of banking institutions. As banks existed by the grace, and occasionally explicit charters and contracts, of the ruling sovereign, the royal powers began to take loans to make up for hard times at the royal treasury - often on the king's terms. This easy finance led kings into unnecessary extravagances, costly wars and an arms race with neighboring kingdoms that lead to crushing debt. In 1557, Phillip II of Spain managed to burden his kingdom with so much debt as the result of several pointless wars that he caused the world's first national bankruptcy - as well as the second, third and fourth, in rapid succession. This occurred because 40% of the country's gross national product (GNP) was going toward...
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