Books are the carriers of civilization…They are companions, teachers, magicians, bankers of the treasures of the mind. Books are humanity in print. – Barbara W. Tuchman; Bulletin of the American Academy of Arts and Sciences
In the last part, we looked at an overview of the different factors that shaped the world of banking. In the second part of the blog, we will talk about two factors in detail – how the rise of civilization and the emergence of record keeping helped in the growth of banking.
The dawn of civilization
The act of banking is said to have originated in the Mesopotamian Civilization in the region of Sumeria.
Around 12,000 years back, humans still lived in small communities, probably around 50 people formed a community. Everyone knew each other. During hard times, if Raul needed fifteen goats, he could always ask Pepe. Pepe gave Raul fifteen goats and he trusted Raul to give back those fifteen goats soon enough.
Trust and cooperation between individuals were the keys here.
As humans grew ambitious and smaller communities became larger communities, it was impossible for everyone to know every other person. Probably the neighbor was a stranger. Still, Raul would have needed fifteen goats in times of need. If he asked Pepe, how could Pepe be sure that he will get back the fifteen goats. Trust and cooperation were still essential, but how can one combine trust and cooperation with the inherent risk that was obvious in the above situation.
Humans found two ways to cater to this difficult situation – record keeping and interest. Record keeping gave rise to contracts and contracts gave birth to the practice of charging interest. While we will talk about record keeping a bit later, let us talk a bit about interest.
As pointed out by Goetzmann in Money Changes Everything: How Finance Made Civilization Possible[i], linguistic evidence gives the clue to the rise of interests.
Around twelve millennia back, livestock was money. Cows, goats, sheep – everything was of value. Barter was the heart of the economy. If one had fifteen cows, he expected it to become sixteen or seventeen in a years’ time, accounting for births and deaths and not accounting for natural disasters or diseases. So, it was natural for Raul to expect his fifteen goats to grow to sixteen even if he gave it to Pepe.
In the Sumerian language, the word for interest, mash, is also the term for calves. In ancient Greek, the word for interest, takos, also refers to the offspring of cattle. All these terms point out to the fact that interest rates came from the natural multiplication of livestock.
So, if Raul gave Pepe fifteen goats, he now expected to be repaid with more than fifteen goats, obviously with the offspring of the fifteen goats. The interest rate also depended on how well Raul knew Pepe. Knowing someone led to the personalization of interest rates also.
In the great settlements of these times, like Mexico, China, India, Iran, there has been evidence of banking when civilizations grew.
Just as the greatest of the earliest civilizations grew on the banks of rivers, the rise of civilizations were the first rays of sunlight for banking and the greatest component of banking – lending. The rise of civilization provided banking with the biggest platform that every industry needs – transactions between people. As civilizations prospered and empires were formed, banking rose to become a behemoth.
The act of record keeping
Everything between the bank and its customers is a financial contract. Our relationship with our bank is a financial contract that the bank will pay back our money when we ask them.
When the German archaeologist Julius Jordan discovered the Inanna temple precinct in the Uruk region in present-day Iraq, along with precious artifacts, he and his team discovered curious little tokens. While they were forgotten for a large period until Professor Denise Schmandt-Besserat found out that these tokens were a system of accounting. These tokens were a period of 4,000 BC to 3,000 BC. Each of these tokens had a different shape and represented a different item. These tokens were stored inside hollow clay envelopes called bullae. It was a curious thing indeed as these clay envelopes had to be broken to see the contents inside them. So much for the trust!
Once the writing was invented through hieroglyphics and later progressed to more structured forms, banking took off as more contracts were created that were more complex and this helped create a wider variety of financial products and services.
The capacity of the human mind to remember details is high, but to recover these details at the right time is tough. Record keeping made the recovery easy. Trust was now on a clay tablet or a piece of paper that could stand the test of time. We believe it is safe to argue that writing formalized trust between our ancestors.
As communities grew larger, people of different types began to stay together. In these communities, barter was not practical. What if two people could not agree on the value of the items to be exchanged? What if one could not find a person who required what he had to give in return?
Humans solved this problem through the idea of standardized money. The earliest forms of standardized money that were used by humans were salt, tobacco, bitumen, seeds or even cattle. But cattle can die, grain can rot, and stone can be reduced to dust.
By 1,100 BC, in China, these old forms of currency were replaced by miniature replicas of the things the people used in their day to day life. But it was not easy to handle such miniature tools. These miniature replicas gave way to square coins, but they were also not easy to handle. Imagine cutting your hands handling the square coins with sharp edges[ii]. Those times, vaccinations to prevent further infection were also not available.
However, it was not too far away that the first minted coins came into existence. The place was Lydia (now western Turkey). Around 600 BC, Lydia’s King Alyattes minted the first coins. These coins were made from electrum, a naturally occurring mix of silver and gold.
Some argue that kings liked their pictures or the pictures of their kingdom’s symbols in the hands of everybody and hence coins were minted. But coins helped the trade to flourish. In fact, the Lydian kings became very wealthy after the introduction of coins. Coins also helped money to be stored in a more convenient way. This led to the growth of banking.
Ancient India also is known to have had coins in circulation around the 6th century BC. China also has records of using money during these times. Since that time, coins have been the most universal embodiment of money.
Most coins are circular, but some were rectangular. Also, a lot of coins, especially in China had a hole through the center so they could be tied on to a string.
Coins and all such money reflected the period in which it was used. But, apart from that, coins also helped translate the intrinsic value of an object in a simpler way. Knowingly or unknowingly, coins helped speed up and ease larger transactions – a necessity for banks. Coins, in addition to being a propaganda item, also helped the rulers of the earlier times control the flow of money through the economy helping banks achieve better control over the economy.
While these two factors played a great role in building the banking industry, in the next part, we will look at the factors that took it to the next level – the ability to mint coins and also the rise of the driving factor behind banks – religion.
[i] Goetzmann, William N. Money Changes Everything: How Finance Made Civilizations Possible. Princeton, NJ, and Woodstock: Princeton University Press, 2016.Print
[ii] The History of Money https://www.investopedia.com/articles/07/roots_of_money.asp