HISTORY OF BANKING


Banks and cheques: from the 16th century AD
In 1587 the Banco della Piazza di Rialto is opened in Venice as a state initiative. Its purpose it to carry out the important function of holding merchants' funds on safe deposit, and enabling financial transactions in Venice and elsewhere to be made without the physical transfer of coins. This was an accepted part of trade in ancient Greece, but it has previously been carried out by individual moneylenders - involving a high risk of bankruptcy. The Venetian initiative, with the expenses born by the state, is an attempt to provide a measure of security in this central aspect of the risky business of trade.Other Mediterranean trading centres (in particular Barcelona and Genoa) have possibly taken this step before Venice, and it is soon followed in northern cities - Amsterdam in 1609, Hamburg in 1619, Nuremberg in 1621. A related development is that of the cheque, a device which depends on the existence of banks as recognized institutions. A bill of exchange, the original method of transferring money without the use of coins, is a complex contract between private parties and one or more moneylenders. A cheque is a bill of exchange between banks, payable by one of the banks to whoever holds and presents the cheque.This much simplified version of a bill of exchange slowly gains acceptance from the late 17th century. At the same time it is realized that the banking process has its own in-built potential for profit which can more than cover the costs of processing cheques and transferring money. The total of the money left on deposit by a bank's customers is a large sum, only a fraction of which is usually required for withdrawals. A proportion of the rest can be lent out at interest, bringing profit to the bank. When the customers later come to realize this hidden value of their unused funds, the bank's profit becomes the difference between the rates of interest paid to depositors and demanded from debtors.The transformation from moneylenders into private banks is a gradual one during the 17th and 18th centuries. In England it is achieved by various families of goldsmiths who early in the period accept money on deposit purely for safe-keeping. Then they begin to lend some of it out. Finally, by the 18th century, they make banking their business in place of their original craft as goldsmiths. With private banking part of the fabric of commercial life, the next stage in the story is the development of national banks.