History and development of banking

History and development of banking

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History and development of banking

History and development of banking

Banking has come into existence to cater for the economic needs of society and is, therefore, an offshoot of civilization. Surely, there would be know need of a bank for a savage who live on wild roots and fruits. It is the increase of human wants which gives rise to the efforts of man. The history of civilization is, in fact, the history of man’s efforts for the satisfaction of his growing needs and he, thus, advances from stage to stage. The Root-grubbing stage is followed by that of Hunting, the Early Palaeolithic by the New Stone Age, and the Bronze by the Iron Age and so on. In this way. Man instead of living a precarious life of an animal settled upon plans, took to agriculture and stored food for him and his family and there it seems that the conception of private property first arose.


The family was, at first, a self, a self-sufficing unit and produced all it required but gradually this system broke down and a body of professional craftsmen came into existence, This kind of change was due to the fact that the family group took the occasional help of outsiders such as carpenters and cobblers who were supplied with the necessary materials by the family groups. These workers in the course of time, specialized themselves in their professions and, thus, were formed into autonomous craftsmen and began to work in their places with their own tools and their own materials and disposed of their goods in their own shops. This marks the stage when wealth began to accumulate in their hands which necessitated safe keeping and, later on, led to lending and borrowing the starting point of banking. This stage of the Guild (Handicrafts) system was reached in Europe in the Middle Ages while the banks were already developed in other parts of the world long before this.

During this long course of history need must have been felt of a medium of exchange to replace the barter system ( i.e. direct exchange of goods against goods) Exchange by barter cannot occur without the double coincidence of wants and possessions. What one wants the other must possess and vice versa. Even when there is this double coincidence there would be difficulty in deciding how much of one thing ought to be exchanged for how much of the other. This difficulty is obviated if a common measure of value is arrived at that is money. It is a standard of value and must have been invented in the past to represent in a small bulk the large quantities of perishable goods, grain, cattle, weapons, cloths and other commodities and the concentration of wealth in small bulk would have brought about a need for some place where it would be protected against thieves. ‘Since only a fool-hardly robber would dare to arouse the wrath of Allah, the earliest banks in the ancient were national temples such as the Greek shrines at Delphi, Delos and Ephesus. The Babylonians are known to have used their temples as banks as early as 200 B.C. and the priests derived their temporal power from their control over these financial resources.

Ancient Banking

Banks in ancient times, seem to have been confined to money changing and money lending. No one can tell with certainty when banking and financial institutions were first started yet it may be said that extensive banking actually continued in the Roman Empire. The Western system of banking and finance stems directly from the trading operations carried on by oriental peoples over the bridge from India to the Near East. The ethnic identity of these tribes is still obscure, although excavations in the Tigris and Euphrtes valleys, particularly of the ancient cities of Babylonia, lead to a belief that non-Semitic nation of probably Indian origin established trade routes between Asia Minor and the Far East as early as 5000 B.C. They are known as the Sumerians, and are referred to as the inhabitants of the land of Shinar in the Old Testament account of the Babylonian cities of Bables Erech. Accad and Calneh. Babylonian records show that these people were carrying on surprisingly complex system of lending, borrowing, holding money on deposit, and providing letters of credit long before 2500 B.C.

European banking came to an end with the fall of Rome, although banking continued in other parts of the world. But rudiments of banking were retained in Europe, first by firms of Jews who braved the discipline of both Church and State by lending money at interest later by fraternities of monks, and still later by guilds of gold-smiths and merchants.

Banking during the Renaissance

Following the capture of Constantinople in 1204, the goldsmith of Lombardy became specially influential in financial circles and established banks in many European cities. Among the great commercial cities of the Middle Ages. Venice became of outstanding importance because of her merchant fleet which maintained contact with all parts of the then known world.

Florence which was the capital of lambardy, a province in north Italy, boasted of a large number of prominent bankers, the most famous of whom were the Medici. This Lombards were much troubled in the 13th century with internecine wars which led to their migration to more settled countries such as Belgium, France and England. They built a street in London and established banking among other pursuits, thus making the name of Lombard street famous.

A little later, Deposit banking and Exchange Banking flourished on the continent of Europe. The Banco di Rialto was the first public bank started in Venice in the year 1584, which did business both in the deposit and exchange branches. The bank of Sweden was established in the year 1556. It is now known as the State Bank of Sweden. The bank has credit of having invented Bank Notes. Exchange Banks were started in Amsterdam in the year 1609 and in Hamburg in 1690, the object of which was to do foreign exchange business, as well as finance the trade of their country with foreign countries. Later they began to do deposit banking.

History and development of banking

Modern Banking

The commercial revolution of the sixteenth and seventeenth centuries, caused by the discovery of America and other sea routes, was a prelude to the later industrial Revolution in England. Industrial Revolution gave a fillip to the production of wealth and to the expansion of internal external trade. This has ushered in a new era in the system of banking which reflects the growing dependence of people in every country on other country for supplies of essential materials and products. Modern banks are geared to modern transportation and communication, which bring the most remote countries into frequent contact with other parts of the world.

Perhaps the most striking features in the structures of Modern Finance is the employment through credit institutions of accumulated wealth. Loans based on deposit funds provide financial support for the varied business and industrial enterprises in which men engage. Financial institutions would be severely limited in the extent of their services if they made use only of the capital invested in their own shares. If they could only hold and repay on demand the wealth placed in their keeping by depositors, accepting a fee for such service, wealth would tend to become static and self-consuming. Through credit, the accumulations of wealth represented by bank deposits, have become a dynamic force in the modern world. Banking systems not only make the actual value of their deposit service available for us, but they have multiplied the effective use of such funds by system of discount and reserve which is of a comparatively recent origin. Commercial banks perform all these functions and are considered to be the chief product of this age. 

It is of significance to note that the credit of planting the seed of modern banking in England belongs to the goldsmiths. They were the first bankers in London. In the days of civil war in England, when the Cavaliers and the Round Heads were fighting, people were compelled to deposit for safety their valuables with the goldsmiths who had strong boxes and other arrangements for this purpose. This developed into a custom and merchants also started depositing their cash with these goldsmiths who used to charge a commission for safe-keeping. But with the passage of time the goldsmiths began to use this money and keep current accounts. Thus it is stated that banking in England began to grow somewhere between 1642 to 1645.

The goldsmiths issued receipts promising to pay the value deposited on demand. Later on these receipts became mere promises to pay and when the goldsmith ultimately began to do banking business, they became full-time professional bankers. They began to keep pass-books which were handed to the depositors who could draw drafts on the banker after being guided by the pass-books. This formed the first step towards the ultimate use of cheques.


Commercial Banks

 There is no satisfactory definition of a bank and the term bank, as such, may apply to an organization, a financial institution operated by an individuals as sole proprietor, or it may be a partnership, a corporation, or other type of association. In modern use it is an establishment for the custody of money received from, or on behalf of, its customers, whose drafts it has to honor and pay. The principal function of a bank is to bring into a common fund or pool the idle money of the general public, for the purpose of making advances to others, to gain a return in the form of interest and dividends. Banks are sometimes classified according to the nature of their ownership, and sometimes according to the source of their charters. But the most common classified is according to the purpose they serve. In this way there are many kinds of banks. If they are looked upon essentially as receivers of demand deposits then commercial banks alone stand distinct from others. A commercial bank is distinguished by the fact that it receives deposits from the general public that are payable on the written demands of the individual depositors. Unlike investment banks which receives time deposits and therefore, can give long-term loans, commercial banks have to devote most of their lending capacity to the giving of short terms loans.