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History of Banking

Updated on May 26, 2010

Clay tablets have been found in Babylonia and Assyria showing some of the functions of the banker, such as money-changing, advances, and the like; we also know from the code of Hammurabi that payments were made through a banker and by drafts against deposits. Deposits bearing interest, letters of credit, and other means of transferring credits from one place to another were also known in ancient Greece and Rome. The Chinese are said to have had a paper currency about AD 800. But though it is possible to trace the evolution of banking, especially in Italy during the Middle Ages, continuously from early times, it is now accepted that the first public 'bank', properly so called, was the Banco di Rialto, established at Venice by Acts of the Senate in 1584 and 1587. In 1619 the Banco del Giro was founded; this became the only public bank in the state, and was long famous as the Bank of Venice. Banking in Venice developed out of the money-changers and private exchange bankers, who as early as 1318 seem to have taken deposits, and as far back as 1270 gave security to the state for the proper carrying on of their business. It was the failure of many of these deposit banks that led to the founding of the Rialto Bank as a public bank by the state. The Bank of Venice suspended payment several times owing to its loans to the state, and ceased after the French invasion in 1797. Another early Italian bank was that at Genoa, the famous Bank of St George; this was a private bank of deposit; it was founded in 1407, and by its advances to the republic dominated the state and managed the public funds. The French appropriated its property in 1800. The bank had an earlier history, dating back to 1200, as a merchant and financial company, and is the first example of a body of shareholders whose liabilities were limited to their shares.

The banks mentioned above were 'deposit' banks, receiving cash and paying it out on demand, and developed out of the business of the dealers in foreign exchanges. Another class of early banks was those which remained, at any rate principally, as exchange banks, of the utmost importance in the days when there was a large quantity of debased and clipped coin in circulation. Of these exchange banks the Bank of Amsterdam, founded in 1609, lasting until 1820, and the Bank of Hamburg, 1619-1873, are the most famous. Their business lay 'in the assistance of commerce not by loans but by the local manufacturing so to speak of an international currency' (Palgrave, Notes on Banking). This currency was 'bank money'. Merchants brought coin or bullion to deposit, and were credited with the real intrinsic value; their credit was in 'bank money,' which they could draw on to meet their requirements. The income of the bank was gained from the small charges for such transfers in the books of the bank as were made from one merchant to another to meet their dealings. There is a good account of the working of the Bank of Amsterdam in Adam Smith's Wealth of Nations, iv. iii.

The next great step in advance was the appearance of the bank-note, i.e. a promise to pay in coin made by the bank which issued it. If these notes were backed by a general confidence in the bank issuing them, they would circulate as cash, and thus create a great expansion of credit and business with an economy of actual metal currency. The invention of the bank-note (apart, that is, from the Chinese paper money already alluded to) is due to Palmstruck, who founded the Bank of Sweden (Riksbank) in 1656; the first bank-note was issued from the bank in 1658.

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