Barter worked quite well in early societies, but ran into problems when people started travelling from city to city in search of new markets and new goods to bring home. Over time, coins of different sizes and metals began to be minted, which made transactions easier. But coins had to be kept in a safe place, and old houses didn't have steel safes.
Rich people in Rome kept their coins and jewellery in the basements of temples. These places were considered safe because priests and temple attendants were there, not to mention armed guards. Historical documents from Greece, Rome, Egypt, and Babylonia show that temples not only lent money but also secured it. The fact that temples often served as the financial centre of a city is one reason why they were so often looted during wars.
Because coins were easier to exchange and store than other goods, such as 300kg of pigs, rich merchants began to lend them to the needy at interest. Large loans, such as to various rulers, were usually made by temples and the rest by wealthy merchants.
Banking in the Roman Empire
The Romans, who were skilful architects and administrators, separated banking from the temples and formalised it in a separate building. Then as now, usury continued to be profitable, but most legitimate business transactions and almost all government spending was done through corporate banks.
Julius Caesar introduced the ability for bankers to seize land to repay debts, a monumental change in the relationship between creditors and debtors. The Roman Empire eventually fell, but some financial institutions survived into the Middle Ages thanks to papal bankers and the Knights Templar. Petty moneylenders who competed with the church were often condemned for usury.
European monarchs discover easy money
Eventually, the ruling monarchs of Europe realised the value of banking institutions. As banks existed through the goodwill of the ruling class, and sometimes through explicit concessions and agreements, kings began to borrow, often on royal terms, to supplement the dire straits of the royal treasury. This easy access to finance led to kings living in luxury, not to mention huge debts, wars and arms races with neighbouring kingdoms.
In 1557, King Philip II of Spain caused the world's first state bankruptcy as several aimless wars left the country with huge debts, soon followed by a second, third and fourth. These events occurred because 40 per cent of the country's gross domestic product (GDP) went to paying off debts. Ignoring the creditworthiness of influential customers remains a problem for banks today.
Adam Smith laid the foundations for a free financial market
When economist Adam Smith published his theory of the ‘invisible hand’ in 1776, banking was already well established in the British Empire. Building on Smith's ideas of a self-regulating economy, moneylenders and bankers were able to limit government interference in the banking sector and the economy as a whole. Free market capitalism and competitive banking found fertile ground in the New World, where the United States was soon born.
In the early days of the United States, there was no single currency. Banks could create their own currency and distribute it to anyone who wanted it. If a bank failed, the notes it issued were worthless; a single bank robbery could ruin both the bank and its customers. This risk was compounded by periodic cash shortages, which at any time could bring the system to collapse.
Alexander Hamilton, the first U.S. Secretary of the Treasury, created a national bank that accepted notes from member banks at face value so that banks could maintain liquidity in difficult times. The national bank, which was stopped, started, suspended, and revived several times, created a single national currency and established a system in which national banks bought government securities to redeem the notes, creating a liquid market. The national bank then taxed relatively lawless state banks to drive out competitors. But the damage was already done when ordinary Americans began to distrust banks and bankers in general. This feeling led the state of Texas to pass a law banning corporate banks, which remained in effect until 1904.
The emergence of commercial banks
Except for standard banking functions such as lending and corporate finance, most of the economic functions that the national banking system was supposed to perform were soon taken over by large commercial banks. During this period, which lasted until the 1920s, commercial banks used their international connections to acquire enormous political and financial power.
These banks included Goldman Sachs, Kuhn, Loeb & Co and J.P. Morgan & Co. Initially, they relied heavily on commissions from the sale of foreign bonds in Europe and a small influx of U.S. bonds traded in Europe. This allowed them to accumulate capital. When a large industry emerged and large-scale corporate financing was required, no bank could provide the necessary capital. IPOs and public bond issues became the only way to raise the necessary funds. A successful IPO enhanced a bank's reputation and allowed it to obtain further support. By the end of the 19th century, many banks were offering directorships in companies in need of capital, and even running companies themselves if they thought their management was ineffective.
Morgan saved the banking industry
In the late nineteenth century, J.P. Morgan & Co. led a commercial bank with direct ties to London, which was the world's financial centre at the time, and with considerable political influence in the United States. Through innovative use of trusts and ignoring the Sherman Antitrust Act, Morgan & Co. created monopolies or near-monopolies in the railway and shipping industries, as well as in U.S. Steel, AT&T, and International Harvester.
However, it was still difficult for ordinary Americans to obtain credit or other banking services. Commercial banks were not advertised and rarely made loans to ‘ordinary’ people; in addition, racism was rampant. Commercial banks left consumer lending to smaller banks, which still failed with appalling frequency.
In 1907, a banking panic occurred when the stock of a copper trust company collapsed, causing the bank to collapse and sell off shares. Since there was no Federal Reserve that could stop the panic, this task was taken on by J.P. Morgan himself. Morgan himself used his considerable influence to unite all the major players on Wall Street and convince them to use the credit and capital they controlled, similar to what the Fed does today.
Conclusion
From the hallowed halls of ancient temples to modern digital platforms, the evolution of banking mirrors the development of human civilisation itself. What began as a simple need for safe storage has evolved into a complex, interconnected global system. The future of banking is undoubtedly bright, but it is also uncertain. With new technologies such as blockchain and artificial intelligence promising to revolutionise the industry once again, it is clear that the story of banking is far from over.
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