History is for human self-knowledge … the only clue to what man can do is what man has done. The value of history, then, is that it teaches us what man has done and thus what man is. – R.G. Collingwood; The Idea of History
It takes a moment for the life of a person to change; nearly four years for an engineer to graduate; or decades for a civilization to establish supremacy. And it has taken 12,000 years for the banking industry to become what it is today.
Today, the banking industry is a global behemoth comprising of global banks, regional banks, community banks, digital banks, fintechs, and a lot more companies that play a very integral part in all our lives.
In an 11-part article, we explore the factors that led to the rise of banking in becoming this behemoth that we see today.
While 12,000 years may look like an exceedingly small-time compared to a million, the importance of banking in today’s world cannot be understated. Much less the fact that it also has the power to make or break the destinies of corporations and nations across the world.
No one knows exactly where banking started. Or which was the first bank? Banks do not have a founding father either. But the wise men say that banking is clearly the third oldest profession in the world[i].
Twelve millennia ago, when a merchant of Uruk, in present-day Iraq, who had foresight beyond his generation, thought of storing his hard-earned money in a temple and obtained a clay tablet in return for the stored money, he may have just set the ball rolling for the banking industry behemoth.
The history of banking has been intertwined with the history of finance, history of money, and the history of humanity. We may never know when finance began because some of the financial contracts are as old as writing. As William N. Goetzmann[ii] points out, ‘writing seems to have been invented to record financial contracts.’ Was not trust the biggest deal 12,000 years ago also?
Before we proceed further and explore various facets that shaped the bank of today, if there is a chance to dissect banking into different eras, we can classify them into these three phases – the Germination Phase which starts from the earliest forms of banking to the period till 1000 AD; the Sapling Phase which starts from 1100 AD when the earliest forms of banking in the current form was established to 1950 AD, and the Rapid Growth Phase which starts from around 1950 and has been going on till now. Needless to say, this third phase has been characterized by the exponential use of technology.
In fact, the word bank has come from the Italian word banco, meaning bench. During the 12th century, Jewish merchants, who were probably the pioneers of banking in the Sapling Phase, sat outside the marketplaces beside benches from where they did their banking. Not just the word bank, but also the word bankrupt owes its existence to the Italian word banca rotta, which means a broken bench. If a banker lost his money in banking, then mercy be upon the poor soul, for his bench was broken into pieces.
As we mentioned before, the history of banking has been intertwined with the history of finance, history of money and the history of humanity. Finance necessitated banking and banking necessitated the evolution of money.
But the greatest interlinkage of the banking industry was with humanity itself. As humans moved from caves and formed small settlements, barter was necessitated. These became the first financial transactions. As small settlements became larger communities, the need to write down the terms of transactions became necessary. Bob from one community may not have necessarily known Rick of the same community. This necessitated the first financial contracts, some of which have been recorded. As communities became states, central authorities came forward who built storage areas where money – whether it was grain, coins, or cattle – was stored. Places of worship became de-facto banks because people trusted these places of worship to hold their money and these places of worship were also the most secure. This was also the reason that temples were the first places to be ransacked when armies ran through cities to gather the spoils of war. The practice of lending money also started during these times and temples acted as the first lenders.
Soon states became nations and banks stepped out of the walls of temples. The kings and the heads of nations began to take note of the power of banks and leveraged these banks to get money for their lavish lifestyle and satiate their desires for war. Banks became organizations with a focus on profits. They became the focal point of trade and economy. As nations became empires, banks fuelled this journey of the empire nations. Wars were fought, and banks again became the channels for pumping in money. As the age of technology dawned on humans and as nations continued to flex their muscles through technology, banks also embraced technology as if they were born to do it.
Across this wonderful journey, not just colorful personalities like the intelligent merchant of Uruk we mentioned before or the Rothschilds or the Morgans, but several social, economic, cultural, political, and technological aspects have shaped banking. One or more of the facets that we mention in the next few articles have always been present in the history we had outlined above.
The 10 factors that we believe contributed to the rise of the modern banking were – 1) The dawn of civilization; 2) The rise of record-keeping; 3) The use of coins and currencies; 4) The growth of religion; 5) The expansion of trade; 6) The rise of the colonial empires; 7) The occurrence of wars; 8) The increased use of paper money; 9) The industrial revolution and globalization; 10) The rise of technology
As we outline the facets that shaped the banks of yesterday over the three phases of banking – germination, sapling, and maturity, let us keep in mind that this is also a brief history of humans and how trust has evolved.
In the next part, we will start from the beginning – how the dawn of civilization helped set the stage for banking.
[i] The Origins of Money – Chapter 2 – Money and Evolution of Banking; Martin Armstrong; Armstrong Economics
[ii] Money Changes Everything: How Finance Made Civilization Possible; William N. Goetzmann; Princeton University Press