Short History of Banking
Although there was probably banking of some nature carried on in biblical days, it was not until the middle ages that banking procedure began to be established, which was to be the forerunner of the present worldwide system.
The original bankers in those days were the goldsmiths. Because they had strong rooms in which to keep their own precious metals, other people gradually deposited their money and valuables with them for safekeeping. As travel was not easy and often dangerous in medieval times, travelers and merchants did not wish to carry much money with them, but they discovered that if they deposited valuables with a goldsmith in their town he would give them a letter to a fellow goldsmith in another town to whom they could apply for funds. Gradually this system spread throughout Europe.
A further stage came when the goldsmiths discovered that very often money and valuables for safe custody were left with them for long periods so they decided that they could lend out some of this money to other people and charge them interest. By the 14th century a number of these goldsmiths were situated in London where they were known as “Lombards” from the territory of Lombardy in Italy from which they originated. This name is commemorated in Lombard Street in the city of London, which is still the financial centre of England and Europe. Another name that originated from Italy was “Bank” from “banco” a bench, as the original moneylenders used to transact their business on a bench outside their houses. Through time, the goldsmiths extended the business of accepting deposits, lending money and arranging for funds to be available in other towns and countries for their customers, and by the 16th century other merchants were also performing the same function and so developed the Merchant Banker.
In 1695 a consortium of such merchants, or bankers as they were becoming known, formed the Bank of England to provide funds for Government expenditure. Following this formation, various other groups went into the business of banking on a large scale and became known as joint stock bankers. Each individual put up certain monies, which became the initial capital or “stock” of the bank, and any profits were paid out to the individual stockholders in proportion to the stock held. As time went on the private or merchant banker was gradually taken over or absorbed by the joint stock banks who eventually become known as commercial banks.
