HISTORY OF BANKING


National banks: 17th - 18th century AD
Venice, after being possibly the first city to found a bank for the keeping of money on safe deposit and the clearing of cheques, is also a pioneer in the involvement of a bank with state finances. In 1617 the Banco Giro is established to solve problems encountered by the earlier Banco della Piazza di Rialto, which has got into trouble through the making of unsecured loans.Its debtors include the Venetian government. The Banco Giro is founded on the principle that the government's creditors accept payment in the form of credit with the new bank. In solving an existing problem, this also provides new opportunities. Venice now has a mechanism for raising public finance on the basis of guaranteed credit.
The logical extension of this concept is a national bank, established in some form of partnership with the state. The earliest example is the Bank of Sweden, founded in 1668 and today the world's oldest surviving bank. It is followed before the end of the century by the Bank of England, originally a joint-stock company which begins its existence in 1694 by arranging a loan of £1,200,000 to the government.During the 18th century the Bank of England gradually undertakes many of the tasks now associated with a central bank. It organizes the sale of government bonds when funds need to be raised. It acts as a clearing bank for government departments, facilitating and processing their daily transactions.
The Bank of England also becomes the banker to other London banks, and through them to a much wider banking community. The London banks act as agents in the capital for the many small private banks which open around the country in the second half of the 18th century.All these banks use the Bank of England as a source of credit in a crisis. For this purpose the national bank needs a large reserve of gold, which it accumulates until almost the entire hoard of the nation's bullion is stored in its vaults.


Bank notes: AD 1661-1821
Paper currency makes its first appearance in Europe in the 17th century. Sweden can claim the priority (as also, a few years later, in the first national bank).In 1656 Johan Palmstruch establishes the Stockholm Banco. It is a private bank but it has strong links with the state (half its profits are payable to the royal exchequer). In 1661, in consultation with the government, Palmstruch issues credit notes which can be exchanged, on presentation to his bank, for a stated number of silver coins.
Palmstruch's notes (the earliest to survive dates from a 1666 issue) are impressive-looking pieces of printed paper with eight hand-written signatures on each. If enough people trust them, these notes are genuine currency; they can be used to purchase goods in the market place if each holder of a note remains confident that he can indeed exchange it for conventional coins at the bank.Predictably, the curse of paper money sinks the project. Palmstruch issues more notes than his bank can afford to redeem with silver. By 1667 he is in disgrace, facing a death penalty (commuted to imprisonment) for fraud.
Another half century passes before the next bank notes are issued in Europe, again by a far-sighted financier whose schemes come to naught. John Law, founder of the Banque Générale in Paris in 1716 (and later of the ill-fated Mississippi scheme) issues bank notes from January 1719. Public confidence in the system is inevitably shaken when a government decree, in May 1720, halves the value of this paper currency.Throughout the commercially energetic 18th century there are frequent further experiments with bank notes - deriving from a recognized need to expand the currency supply beyond the availability of precious metals.
Gradually public confidence in these pieces of paper increases, particularly when they are issued by national banks with the backing of government reserves. In these circumstances it even becomes acceptable that a government should impose a temporary ban on the right of the holder of a note to exchange it for silver. This limitation is successfully imposed in Britain during the Napoleonic wars. The so-called Restriction Period lasts from 1797 to 1821.With governments issuing the bank notes, the inherent danger is no longer bankruptcy but inflation. When the Restriction Period ends, in 1821, the British government takes the precaution of introducing the gold standard.


The Rothschild dynasty: AD 1801-1815
William IX, ruler of the German state of Hesse-Kappel and possessor of a vast fortune, has for some years consulted in a private capacity his friend Mayer Amschel Rothschild, a Jewish banker and merchant of Frankfurt. He values Rothschild's advice both on matters of finance and on additions to his art collection. In 1801 he formally appoints him his court agent, and encourages him to offer his financial skills to other European princes in these troubled years when Napoleon is unsettling the continent.Rothschild responds energetically to this opportunity. By 1803 he is in a position to lend 20 million francs to the Danish government.
The Danish loan is the first of many such transactions on behalf of governments which rapidly establish the Rothschild family as Europe's most powerful bankers, rising to a pre-eminence comparable to that of the Medici and the Fugger in earlier centuries.The family is soon represented in all the important centres of the continent. Mayer Amschel has five sons. He keeps the eldest, Anselm Mayer, at his side to inherit the Frankfurt bank. The four younger sons establish branches elsewhere: Solomon in Vienna, Nathan Mayer in London, Karl in Naples and Jacob in Paris.
The Rothschild family gambles heavily on the eventual defeat of Napoleon. Their loans are all to his enemies (surprisingly Napoleon allows Jacob, operating from Paris, to raise money for the exiled Bourbons). Their network of contacts enables them to move money around Europe even in wartime conditions. A famous example, but only one of many, is Nathan's transfer of large sums of money from London to Portugal to pay the British troops in the Peninsular War.By the end of the war the Rothschild family has a vast reputation among the allies, and a close involvement in the government finances of many nations.
The qualities soundly underpinning their good fortune, in addition to undoubted financial flair, are that they are trustworthy and very well informed. An example of the former is the fortune left in Mayer Amschel Rothschild's care when his patron flees from Hesse-Kassel after Napoleon's victory at Jena in 1806. It amounts to perhaps half a million pounds in the money of those days. In spite of every attempt by Napoleon's agents to make him make him hand it over, Rothschild keeps it safe and returns it, with interest, to its owner in 1815.
As to reliable information, the most famous incident concerns that same year, 1815. On June 20 Nathan Mayer Rothschild calls on the government in London, during the morning, with a startling piece of good news. The duke of Wellington, he informs the officials - who are at first somewhat incredulous - has two days earlier won a decisive victory over Napoleon at Waterloo.Confirmation arrives that afternoon through the government's own channels. The Rothschild network of communication includes, famously, the use of homing pigeons. But on this occasion their success is due to one of their couriers, who was waiting in the harbour at Ostend for the first scrap of news.

This History is as yet incomplete.