History of Banking
This two-year research programme investigates the history of banking - a business whose roots are traceable to Mesopotamian civilisation in the third millennium BC and with an influence both extensive and profound in shaping the story of humanity. Civilisation’s successes and its crises, the rise and fall of governments, the evolution of ethical systems and codes of conduct- both individual and corporate, jurisprudence, military enterprise, the advance of knowledge in the natural and human sciences, philanthropic endeavour, agricultural settlement, the development of towns and cities: these are among the many means by which human beings have shaped the world they inhabit. These historical developments have also, at varying times, been influenced by the availability of credit, judgements about probity, the money supply- its expansion and contraction, investment possibilities, assessment of ‘wealth’, the expectation of plenty and calculation of risk- the relation of both to quotidian need: in short, the business of those we call “bankers”. The investigation into banking, here envisaged, embraces familiar topics: methods of deposit, calculation of assets, the business cycle, lending and credit, getting and spending, boom and bust, animal spirits and prudential restraint, bullish markets and bearish ones. In tracing the impact of these phenomena- their influence on the lives of individuals, societies and nations- we also gain an understanding of the dynamic historical context - the role played by the banker in human history. It is this wider dimension which makes the Erasmus Forum’s ‘History of Banking’ such a unique enterprise.
Two questions should be asked at the outset - and answered. Is it possible to define the term ‘bank’ in a way that makes banking different from other financial services? The answer is – probably - not. Banks are associated in the public mind with two services: the extension of loans and the provision of a safe deposit for assets. Other institutions and individuals however can and do provide those same services. Pawn brokers and moneylenders operated in the markets of Babylon and Sumer. Theirs is an ancient and often regulated trade- and very few of these practitioners feel the need to call themselves “bankers”. As for the provision of a safe deposit – a walk through the financial district of most major towns and cities will reveal any number of non-banking companies prepared to provide secure custodianship of a client’s assets.
The research programme is concerned with an immense variety of institutions and it is not necessary to wait for a lexicographer, a regulator or a parliamentary commission to provide an agreed definition as a procedural guide. Three types of banks can be descried in an initial inventory. A ‘clearing’ or ‘High Street bank’ is sharply distinguished from the contemporary ‘investment bank’ (once more familiarly known as the “merchant bank”). In the case of the United Kingdom the development of a centralised banking system led to the absorption of a plethora of regional, civic and country banks within the ‘big five’. This development, which reached its culmination in the 1890s, mirrored contemporary developments in the country’s political, economic and administrative history. A greater homogeneity, observable in the clearing banks’ provision of services, matched the bureaucratic pace of reform and centralisation in Britain’s local and central government.
The central bank, as in the case of the U.S. Federal Reserve and the Bank of England, has a uniquely public role to play in the management of the national currency, the setting of interest rates and the regulation of a country’s banking system. The economic expansion of north-western Europe in the seventeenth century led to widespread changes in the regulation of the money supply and the Bank of Amsterdam (1609) has some claim to be considered the very first central bank : it operated a cross-border payments system and by the 1680s the guilder coin was a reserve currency.
These three broad categories of banking activity, while reasonably distinct, have also operated within three geographical areas: the U.S., the United Kingdom and continental Europe. Historical experience has given a unique flavour to banking operations within these areas and comparisons of a direct kind are therefore often impossible to make. European banking history for example offers few if any analogies with the centrality of the City of London to the British economy. The nineteenth century history of U.S. banks-with a myriad being founded, going bust and new ones springing up in their wake- is unique to that jurisdiction forming as it does part of the westward expansion from the original colonised eastern coast.
It is hardly surprising that the parliamentary commission on banking standards, established in the wake of the 2008 banking crises, found it so difficult to produce a comprehensive, and plausible, regulatory framework for this diffuse phenomenon.
The research programme is divided into six major areas of enquiry, chronologically organised and with a particular focus on the British banking industry during the two latter periods.
Banks, and therefore ‘banking’, elude definition of an exclusive kind. Does this matter from the point of view of an historian? The answer Is surely no. Captain Mainwaring and Nathan Rothschild for example were both bankers and the disparity between some of their activities (hobnobbing with clients at Rotary and the financing, through government bonds, of the Coalition Wars against Napoleon) is, to an historian, instructive. Most of us think that we know what makes a bank- a bank. These must be among the most familiar of all institutions. In the United Kingdom an important milestone was reached in 1976 since that was the year when, for the first time, a majority of the country’s adults were in possession of a bank account. Up until at least the 1950s a bank account was the prerogative of the monthly paid, professional middle classes. At the beginning of this century banking seems to be for everybody who is in work though, by the same token, Everyman is occasionally befuddled by the whole business. The familiar - as banks seem to be- need not be the same thing as that which is known-or understood. The very fact of familiarity encourages, first of all, assumptions.
An assumption that we know all that we need to know is rarely advisable in human affairs and the unexamined assumption can
tweak- or indeed bite- our tails. Knowledge being, on the whole, preferable to ignorance, our history of banking will shine a light on much that is assumed, ignored and unknown.
The long list of organisations called “banks” would have to include the northern and central Italian enterprises associated with such famous names as Medici, Bardi and Peruzzi. Etymology takes us to the banca or counters found in the markets of northern Italy in the thirteenth and fourteenth centuries: it was there that the local grain merchants negotiated the conditions of loans. A closer look however at the history of these organisations shows how very different they were from the banks that evolved from the eighteenth century onwards. The records of the Medici bank for example reveal the organisation to have been fundamentally a trading company or partnership. Bills of exchange were issued, and deposits required, in order to facilitate the company’s international trade in, most typically, wool and silk products.
In the twentieth century the usefulness of ‘bank’ as a descriptive term has seemed almost inexhaustible. The Bank of International Settlements, established in 1930 in order to facilitate payments agreed as part of the Versailles peace treaties, and which now co-ordinates the operations of the central banks; the Bank of Credit and Commerce International which spent two decades evading the regulatory authorities before its collapse in 1998; Julian Hodge’s Commercial Bank of Wales (1972) – an entity inspired by a Bank of Newport note dated 1812 and which aimed to channel investment in to the South Wales valleys (while charging interest rates at above 20-25% for loans taken out by the local): these, very different, organisations can not be really brought under a single umbrella term - and yet, for want of a better alternative, ‘bank’ is the word we are left with.
Pope Leo X with Cardinals Giulio de Medici and Luigi de Rossi, Raphael, 1518-9
Nathan Mayer Rothschild, by M. D. Oppenheim, 1853
The beginning: Mesopotamia
We start in ‘the land between the two rivers’ for two reasons. Babylon and Sumer were the world’s first examples of a ‘temple society’ and it was the priests of those temples who guarded the grain supplies. Civilisation, it has been said, is an answer to the question: “what are we going to do about the agricultural surplus? “The ‘fertile crescent’- a term that includes the Nile valley and delta, the Levantine eastern Mediterranean and, to the east, the region between the Tigris and Euphrates rivers- was home to the ‘agricultural revolution’. By at least c .5000 BC Mesopotamian nomads had become pastoralists and it was in Sumer and Babylon that we first see the temple society in operation. Assets, ownership- and the deposit in safe keeping of agricultural surpluses: these were well established by c.3,500 BC.
Mesopotamia attracts the historian of banking for another, equally vital, reason: this is where record-keeping was invented. Writing- first on clay tablets (as with the cuneiform script) and using symbolic representation (numerals) was now possible along with methods of arithmetical calculation (addition, subtraction, multiplication). The history of mathematics is integral to banking activity and the cultural context has shaped both the discipline and the business. Zero, as both a number and concept, has a history which extends back to at least the fourth century BC when it was used in Babylonian record keeping and calculation. The civilisations of India in the fifth century AD had developed sophisticated forms of mathematics and it is probable that usage of zero was exported from the sub-continent to north Africa. Zero’s association with necromancy made it suspect in some cultures and its adoption in western Europe dates from only the early thirteenth century AD. Arabic numerals, including zero, had been transmitted from north Africa to Italy by c.1200.
The argentarii of the late roman republic were, without any doubt, bankers. Banking had become, by the first century BC a distinctive enough activity- in terms of the advance of loans and the financing of trans-border trade- to merit a distinct term describing the kind of people engaged in its pursuit. But ‘banking’ , as our introduction may have established, does not need to hang around and wait for a term to be invented before it gets going. The guardians of the Athenian treasury built at Delphi, and completed by c. 480 BC, were priests since the structure was consecrated to the god Apollo. But they were surely also bankers since charged with the custodianship of the treasure amassed as a result of the Athenian defeat of the Persians at Marathon (490 BC). Boeotia and Siphnos- among many other city states - also had their own treasuries built at Delphi- and it was to these temples and their priests that the political leaders of Hellas would resort when in need of the gold and silver that would finance the embellishment of their towns. The silver mines of Laurion, in southern Attica, were in full operation by the early fifth century BC. Slave labour was used to extract copper and lead as well as silver and the specie, used as Athenian currency, helped to pa yfor the extra triremes that prevailed against the Persian navy at the battle of Salamis ( 480 BC). Guardianship of the currency reserves; calculation of the weight of the coins; distribution of the specie and protection of its value: banking operations such as these provided a link between the mining operations at Laurium and the financing of the Athenian military expansion, by land and by sea.
Historical reconstruction, Delphi sanctuary, Albert Tournaire, 1894
The Treasury of Athens, Delphi
Early and high medieval European civilisation
As James I almost said: no coins, no banks. Means of exchange have evolved from being precise equivalents (barter) to being symbolic (first as metal coins and then as paper money). Numismatics affords us an important way into a deeper exploration of banking activity. This is the story of not just coins (and the iconographic symbolism engraved thereon) but also of paper money - itself a major financial revolution at a later stage in this narrative. In the civilisation that emerged in western Europe from the 6th to the 10th centuries coinage was the one activity that, above all others, signified that a king or, perhaps, in some cases, dux, had real authority. Many of these leaders might promulgate laws- but a legal code had to be supplemented by exclusive control of the coinage system, unique access to the centres where cons were manufactured, and an ability to detect- and punish- counterfeiters. If this is true of western Europe it is also par excellence the story of Byzantium where the solidi maintained its value, with scant inflationary pressure, for close to half a millennium
‘Household government’ - so called since concentrated in the various centres of activity where a king and his officials established themselves- is the distinctive apparatus of monarchical government. Medieval treasuries, and exchequers, from Winchester in the west to Vienna and Regensburg in central Europe deserve a close scrutiny. By the early fourteenth century the banking houses of central and northern Italy were playing a key role in the financing of merchant capitalism’s east-west trade routes, both maritime and land-based.
Gold Solidus Coin, reign of Constantine I (307-337 AD)
Banca Monte dei Paschi di Siena
Banking in the early modern world: 1500-1800
This is a story, above all, of war: how to raise money to pay for the expensive new equipment needed by rulers in age of rapidly developing military technology. The relationship between the emperor Charles V (perennially broke) and the Fuggers of Augsburg show how banking has developed in specialism of function (and attained, in some cases, an independent, neo-princely, power). Banking houses are no longer traders- as the Medici were. ‘Usury’- and how to get round the prohibition (Christian- Catholic and Muslim) of interest rates: this issue becomes central to banking history in the sixteenth century although its origins, as a problem, are very early. Relations between Christians, Jews and Muslims were often defined by the usury issue in the central medieval period. Inflation is the other big issue in the ten decades (1540- 1640) that precede a major trans-border European crisis of government.
Banking’s specialism of function is connected to the emergence of ‘central banks’ (see above) - whose activities are almost always related, directly or indirectly, to state/government power. The Bank of England existed in order to provide a) William III with the money required to finance his anti-Catholic west European crusade and b) the Hanoverians with the credit supplies that allowed them to garrison England with regimental centres- thereby buttressing an often-shaky regime. A comparison might be allowed here with the work of the Federal Reserve and the regulatory regime surrounding the dollar currency - arguably a more mighty force in the welding together of a common American identity than the, rather over-studied, clauses of the US constitution.
Jakob Fugger, Albrecht Dürer, c.1519
Jakob Fugger supervising his accounts, anon
Banking and morality
'Probity’ as an issue- and seen for example in the nonconformist origins of Lloyds and Barclays. Earlier forms of religious dissent, seen in the seventeenth century history of Quakerism for instance, were becoming increasingly ‘established’ and less political. Nineteenth century British banking was overwhelmingly Anglican in religious affiliation. The emergence of a Jewish banking house- that of the Rothschilds- brings a European-continental dimension to bear on British banking.
The Nineteenth Century Bank
Who financed the heavy industries that emerged in Britain?
Some of the ‘county banks’ were undoubtedly important towards the start of our period. The Brecon bank for example was well capitalised and able to extend loans to the iron-masters and coalmine owners of south-east Wales. Further research is needed however on the relationship between early entrepreneurs and their sources of capital.
Circulation of money and investment of assets
Issues arising here would include the impact of slavery emancipation. The compensation paid, in effect a state-subsidised refinancing operation, was a huge boon for- among others- Britain’s rentier class and merchants more generally.
Banking and Empire
High finance’s political, and diplomatic, importance comes into its own during the age of empire and of nationalist expansion. Gerson Bleichroder, Bismarck’s private banker, saved the chancellor’s family estates from bankruptcy and he also put together the finance needed in order to meet the bill for the three wars ( against Denmark, Austria and France) waged by Prussia and that led to the proclamation of a new German empire in 1871. But what of Britain’s empire and the relationship between colonial policy and the country’s banks? Here the debate is still dominated by consideration of ‘gentlemanly capitalism’- a debate which started some twenty-five years ago and which is still going strong.
Empire-it has been claimed- gave new opportunities in areas of activity with a long antecedent history of gentlemanly participation. Ever since the seventeenth century, land, finance and commercial services had been considered appropriate spheres for gentlemen. Empire appealed to gentlemanly capitalists as a natural extension of what they had been doing for at least a century and a half. Doing deals- with native princes- on imports and exports; land management; architectural and building projects : these were the imperial activities that attracted the British ‘gentlemanly capitalists’ who included, of course, lawyers and bankers. They paid comparatively little attention to industrialisation in Britain—which was, in any event, a very patchy and long-term process.
The origins of this debate lie in the yellowing pages of a once famous, and wrong-headed, book. In Imperialism: A Study (1902) A.L.Hobson argued that imperial expansion was driven by a search for new markets and investment opportunities. Capital, having exhausted investment potential in domestic markets, would always look further afield. Colonialism- and its associated wars- was capitalism’s consequence. Hobson was a propagandist and his general theory is as simplistic as it is crude. Nowadays, if referred to at all, ‘Hobson on Imperialism’ is dismissed as a matter of course. But a good deal of ‘Gentlemanly Capitalism ‘- a thesis developed by the historians P. J. Cain and A.G. Hopkins – amounts to a sophisticated version of Hobson. It would be good to have a more focussed view- one concentrated on a particular industry (banking) and significantly less distracted by theories about ‘elites’ and their formation.
The sign of the Golden Bottle, at C. Hoare & Co
In Britain, the Bank of England became associated with maintenance of the Gold Standard in the years of economic contraction after 1919, and the Crash of 1929- leading to the formation of a National Government- caused a notorious fissure between the Labour Party and the Bank- and City finance in general. Montagu Norman’s long tenure as Governor (1920-44) is the background to the 1945 Labour government’s decision to ‘ nationalise’ the Bank. This, in effect, transferred responsibility for the setting of interest rates to the Treasury and Chancellor- a less than complete nationalisation-certainly compared to what happened to the country’s heavy industries.
The arrival of a ‘New Labour’ movement, pledged to free markets and fiscal probity, led to an, equally phantom, ‘privatisation’ of the Bank after the 1997 election. Assorted individuals, officially described as “wise”, sat on a committee whose counsels guided the Governor on interest-rate decisions.
Banking in the Twentieth Century- and Beyond
The British ‘High Street’ banks having been reduced, by 1900, to just five, the next phase in the industry’s development is dominated by ‘internationalisation’ and the emergence of the central bank as a dominant institution. We are now a very long way away from the local and county banks of the nineteenth century, let alone the drovers’ banks whose letters of credit enabled west Wales farmers to herd their cattle on foot to Smithfield market. As the clearance banks have become more homogenised-the greater the influence upon them of the central bank as regulator and as controller of the money supply. A constant theme of this period has been the relationship between central banks and central government. Continental Europe and the United States yield their own examples of this relationship in action. The survival of Italy’s Banco di Siena is dependent on the government’s largesse and its toleration of debt – along with the need to maintain public, governmental, credibility.
Very few observers however supposed that the opinions of the First Lord of the Treasury- and those of the Chancellor of the day- could be anything other than consequential when those decisions were made. The fact that Britain has been through an unprecedently long period of low-interest rates, and with little or no dissension about the advisability of continuing that policy, means that the relationship between bank and government- re-defined twenty years ago- has yet to be tested in the stormy waters of policy divergence.
The emergence of that piquant phenomenon- the central banker as superstar - brings an added dimension to the world of economic policy. Richard Nixon’s cancellation, in 1971, of the U.S. dollar’s direct convertibility to gold had been a decisive moment in the history of ‘fiat money’- currency whose value is assigned, and enforced, by governments rather than being intrinsically related to a commodity (usually gold or silver). Fiat money would prevail globally with exchange rates floating, freely, within a system of national fiat currencies. The declaratory role played by governments, together with the end of neo-Keynesian demand management, amounted to a vast access of influence, and power, for central bankers many of whom acquired a celebrity status, and some were no longer shy in delivering their opinions. The central banker who muses aloud in press conferences about what he might- or might not- do to interest rates is a new, and bizarre, phenomenon in banking history.
‘Economics’ v ‘Finance’:
‘I do not expect you to advise me. It would however be appropriate were you to explain to us the reasons why we (the Governor and Court of Directors) arrived at a certain decision.’
Thus, loftily, Montagu Norman to the Bank’s first ‘senior economic adviser’. For much of the twentieth century the Bank, and its officials, continued to prize their- almost intuitive- understanding of ‘finance’- their feel for markets and judgement about where the money was heading. But in the Treasury a new kind of official was becoming pre-dominant- one who thought of economics as a distinctive discipline- a rationalist’s guide to ‘policy-making’. The difference between ‘finance’ and ‘economics’ is the context in which the banking industry develops during this period. We start with the revival of ‘protectionism’ in the 1900s- a rejection of the ‘sound money’ principle associated with Gladstonian Liberalism. The protectionist resurgence in the 1930s gives way to ‘industry policy’ and ‘national planning’ in the 1950s and 1960s- and the idea that there are such things as ‘business cycles’ had become by then a common assumption. Despite the faith in planning, expansion and contraction, boom and bust, continued to disrupt the best laid plans of bankers, financiers, economists- and politicians. The banking collapse of 2007 came after a long period of economic growth- fuelled of course by debt but also sustained by optimism about a neo-mathematical application of economic forecasting. Scepticism about our ability to measure, and thereby understand, certain kind of economic activity and performance – productivity for example- is now widespread. Indices once regarded as reliable indicators have become fragile. Banks and bankers still make their judgements about borrowers and lenders, but the basis of their business was always knowledge- a secure understanding- about people and circumstances. Technology’s ceaseless prodigality now discloses ‘instruments’- forms of credit, investment and deposit- which can by-pass the bank as intermediary and, perhaps, make bankers of us all.
National Government Cabinet Ministers. Conservative leader Stanley Baldwin on PM Ramsay Macdonald's right
Richard Nixon campaining for the American presidency, July 1968
Montagu Norman, Bank of England Governor, (1920-44)