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Evolution of Banking

Evolution of Banking

Where did the wealthy ancients keep their money before the rise of banking? It turns out that temples played this critical role. Banking fundamentals existed in Mesopotamia, Egypt, Greece, and Rome. Early banking was also crucial for tax collection and trade. Many modern banking practices linked to commerce arose in the independent Italian city-states, such as Genoa, Venice, and Florence, in the Middle Ages and flourished during the Renaissance.

Evolution of Banking, Venetian Merchants in the coin office (officina della Moneda). Source: Wikipedia Commons (public domain), StudySmarter.Fig. 1 - Venetian Merchants in the coin office (officina della Moneda). Source: Wikipedia Commons (public domain).

Evolution of Banking: Overview

The essential functions of banking existed throughout the ancient world.

When the Greeks, for instance, minted coins, they required a safe place to keep them.

Modern forms of banking, such as double-entry bookkeeping, began to develop in Italy during the Middle Ages. The Renaissance established several important banks throughout European cities, which became the first financial centers.

The Emergence of Banking

Ancient people used coins for trade and tax collection.

  • Temples began to be viewed as safe places for keeping money safe. Romans preferred the basements in their temples to do so. Roman temples and those in ancient Greece, Babylon, and Mesopotamia also performed the money-lending function as an early form of credit. Historians believe this is why temples were often plundered during wars.

Taxes were also significant in ancient Greece and Rome. One common form of taxation was tariffs applied to imported products. Temporary property taxes were also used to raise funds for wars. The tax code became more complex as time passed, and other assets began to be taxed.

Evolution of Banking, A Roman coin, bronze, reign of Nero (1st century), showing the completed harbor at Osti. Source: Wikipedia Commons (public domain), StudySmarter.Fig. 2 - A Roman coin, bronze, reign of Nero (1st century), showing the completed harbor at Osti. Source: Wikipedia Commons (public domain).

In the Middle Ages, merchants from Italian city-states like Venice and Genoa significantly contributed to the development of banking and commerce. These forms included:

  • credit and interest on loans,
  • insurance, promissory notes,
  • double-entry bookkeeping.

Banking continued growing and developing during the Renaissance, with powerful families like the Medici controlling much of the industry in Italy. Other European countries, like Germany, also had banking centers like Nuremberg. At the same time, European monarchs exerted significant control over the banking industry to finance their exuberant spending and wars.

In the 18th century, some countries, including the United States, developed more complex forms of banking. These forms of banking included treasury securities guaranteed by the state. In England, banks offered other recognizable forms of banking, such as checks and overdraft protection. Uniform national currencies developed at different times.

For example, the newly unified Germany introduced the German mark in 1871.

A truly modern form of the banking industry emerged after the Second World War popularizing such types of operations as mortgage lending to homeowners. Finally, online banking emerged in the early 21st century.

The Development during the Rise of Banking

In the Middle Ages, Genoese, Florentine, and Venetian merchants helped create new techniques in the trade. In turn, these techniques led to the development of modern banking.

The Crusades

The Crusades—the Church-sanctioned military campaigns to conquer parts of the Middle East—contributed to the rise of banking in the Middle Ages. They required substantial financial backing. As a result, certain rulers, such as Henry II of England, issued taxes to fund this cause. Henry also used the knightly crusading orders, including the Hospitallers and the Templars, as his bankers in the Holy Land (Middle East).

At times, essential merchant cities like Genoa and Venice also participated in the Crusades both through direct manpower and by using their fleets. For example, the Genoese were active in the First Crusade (1095-1099), and the Venetians were instrumental in the Fourth Crusade (1204).

Italian Merchants

The Venetian and Genoese merchants used land and maritime trade routes to operate in Europe, Asia, North Africa, and the Middle East. However, they held a prominent position in their industry because they dominated the seas—the Mediterranean, Adriatic, and Black Seas—and had well-established merchant fleets.

Evolution of Banking, Crusader Fleet at Constantinople, Sébastien Mamerot and Jean Colombe, 15th century. Source: Wikipedia Commons (public domain), StudySmarter.Fig. 3 - Crusader Fleet at Constantinople, Sébastien Mamerot and Jean Colombe, 15th century. Source: Wikipedia Commons (public domain).

First, the merchants relied on partnerships because raising sufficient capital for one merchant was difficult. Partnerships allowed merchants to purchase all the necessities: from the ships and paying the crew's wages to the goods they traded and the supplies their journey required. Because merchants dealt with large sums of money, they believed it was safer to leave it with those they trusted.

Another way to solve the issue of insufficient funds was to use credit. Furthermore, the amount of cash in circulation at this time was not enough to develop trade. Using credit and promissory notes, known as bills of exchange, was also safer.

Bills of exchange also helped hide the interest on loans. The interest could also be concealed by misrepresenting it as a transaction in foreign currencies. This was done because the Church looked down upon applying interest.

Third, merchants insured their trips to protect themselves from poor weather or even pirates. Because their journeys often faced multiple types of danger, the insurance rates were often high.

Evolution of Banking, The Moneychanger and His Wife, Marinus van Reymerswaele, 1539. Source: Wikipedia Commons (public domain), StudySmarterFig. 4 - The Moneychanger and His Wife, Marinus van Reymerswaele, 1539. Source: Wikipedia Commons (public domain).

The fourth significant development was in accounting. Merchants from Italy relied on double-entry bookkeeping to keep track of their profits and losses.

Double-entry bookkeeping (accounting) is a practice that tracks debit (money spent) and credit (money added) or liabilities and assets.

All of these practices, from charging interest, and using deposits to lending money on credit, contributed to the development of the kind of banking familiar to us today.

Did you know?

Beyond the evolution of banking, the Italians were explicitly responsible for the first books that included relevant trade-related vocabulary in different languages, information about trade routes, and different commercial practices. To produce the next generation of merchants, the Italian city-states of Venice, Florence, and Genoa also focused on education in advanced mathematics.

Banking during the Renaissance

Banking continued to grow in Europe during the Renaissance. Major banking centers throughout Europe in places like Florence, and influential banking families, like the Medici, controlled the industry for a time.

The Medici Family

The Medici family, also known as the House of Medici, was instrumental in the development of banking during the European Renaissance. The Medici family was not only a wealthy banking family but also enjoyed a considerable degree of political power in the 14th-16th centuries.

For example, this family alone produced four popes, such as Pope Pius IV, and many political leaders in Florence, where they resided. French queens Catherine and Marie de Medici were also from this family.

Evolution of Banking, Portrait of Giovanni di Bicci de' Medici, the founder of the Medici Bank, Cristofano dell'Altissimo, ca. 1560-1565.Source: Wikipedia Commons (public domain), StudySmarter.Fig. 5 - Portrait of Giovanni di Bicci de' Medici, the founder of the Medici Bank, Cristofano dell'Altissimo, ca. 1560-1565. Source: Wikipedia Commons (public domain).

The Medici family was able to fill the vacuum when another wealthy and well-known Italian banking family, the Bonsignoris, was forced to declare bankruptcy. At this time, the most important banking center in Europe was Siena. As a result of this bankruptcy, Florence became the leading financial center in Italy, where the Medici lived. Gradually, the Medici became the most important family in Florence, and banking played no small part in this rise to power.

Between 1397 and 1494, the Medici established one of Europe's most well-positioned and famous banks, known as the Medici Bank.

Like Italian merchants, this bank used the newest developments of the time in the financial industry, such as double-entry bookkeeping.

Critical European Banking Centers during the Renaissance

CountryCities

Italy

  • Florence
  • Venice
  • Genoa
  • Naples

Germany

  • Nuremberg
  • Augsburg
Spain
  • Barcelona

The Netherlands

  • Amsterdam

The Oldest Banks in Europe

  • Medici Bank, Florence (1397-1494)
  • Taula de canvi (Table of Change), Barcelona (1400-19th century)

  • Bank of Saint George, Genoa (1407-1805)
  • Banco di Napoli, Naples (1463-present)
  • Fugger Bank, Augsburg (1486 to 1647)

The Impact of Banking Evolution

Over time, banking became complex and global. However, its essential functions remain the same today. These functions include safekeeping and lending money.

Evolution of Banking, The Tax Collector,  Marinus van Reymerswaele, 1542. Source: Wikipedia Commons (public domain), StudySmarter.Fig. 6 - The Tax Collector, Marinus van Reymerswaele, 1542. Source: Wikipedia Commons (public domain).

Rise of Banking - Key Takeaways

  • A basic form of banking has existed since ancient times when people had their physical wealth stored safely in such places as temples.
  • Modern forms of commerce and banking gradually emerged during the Middle Ages. In part, the practice emerged thanks to Italian merchants. It further developed during the Renaissance with powerful banking families, like the Medici, and financial centers like Florence and Nuremberg.
  • In the 18th century, some countries like the United States began using treasury securities guaranteed by the government. Uniform national currencies developed.
  • Truly modern forms of banking emerged after WWII, such as the popularization of mortgage lending to homeowners, whereas online banking became popular in the early 21st century.

Frequently Asked Questions about Evolution of Banking

The evolution of banking describes the historic transformation of this industry from its basic forms, such as lending and safekeeping money, to more complex forms such as treasury securities and digital banking.

Banking existed throughout recorded human history. It arose in ancient times in Mesopotamia, Egypt, Greece, and Rome to facilitate the safekeeping of money and trade. Medieval banking was linked to merchant activities. Certain truly modern forms of banking, such as the popularization of mortgage lending to homeowners, arose after the middle of the 20th century.

Banking arose in ancient times and became more complex throughout history. However, its basic and most important functions, such as the safekeeping and lending of money, remained the same. 

During the Renaissance, wealthy banking families, such as the Medici, controlled this industry in cities like Florence and also had direct links to the highest levels of power. They produced political leaders and even popes. Banking also continued to develop at this time with new banks opening in Italy, Spain, Germany, and the Netherlands.

Banking existed throughout recorded human history. It arose in ancient times in Mesopotamia, Egypt, Greece, and Rome to facilitate the safekeeping of money and trade. Temples were often used for this purpose. Temples also began to lend money. 

Final Evolution of Banking Quiz

Question

What type of places functioned as the first banks in ancient times?

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Answer

Temples

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Question

What is the name of a powerful Italian banking family during the Renaissance?

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Answer

Medici

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Question

What type of banking practice did the Medieval Church oppose?

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Answer

Interest on loans

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Question

Who developed double-entry bookkeeping in Medieval Europe?

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Answer

Italian merchants

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Question

What did the merchants from Venice and Genoa use to protect their ships, crew, and goods for trade?

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Answer

Insurance

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Question

Why did medieval merchants often rely on credit?

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Answer

Medieval merchants often relied on credit because the physical money in circulation was insufficient to grow trade, and because they needed large sums of it.

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Question

When did home mortgages become popular in the United States?

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Answer

After WWII

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Question

When did the Medici Bank exist?

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Answer

1397-1494

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Question

Which European city was NOT a banking center in the 1400s?

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Answer

London

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Question

What city did Florence surpass as the key banking center in Italy during the Renaissance?

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Answer

Siena

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