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History of Banking and Interest Rates

The history of banking is rich and began with the establishment of prototype banks.

Previously, people could loan each other various trade commodities, particularly grains, which

were common goods. The prototype banks were owned by global merchants that gave grain

loans to traders and farmers and carried the goods between cities. This practice occurred around

2000BC in the most established kingdoms, including Assyria, Sumeria, and India (Velanganni

15). The banking later spread to ancient Greece and the Roman Empire. There were lenders in

temples that gave out loans, accepted deposits, and changed currency.

Literature reveals that critical historical developments of banking systems occurred in

various areas that appeared more economically developed than the rest. For example, the

medieval and Renaissance Italy, particularly the affluent cities of Genoa, Venice, and Florence,

demonstrated advanced banking practices (Hoggson 71). There were established families in these

cities controlling the banking system. For example, in Florence, the families of Peruzzi and Bardi

dominated the banking sectors in the 14th century (Hoggson 72). The families spread their

practices by creating other branches across Europe and other parts across the world. For instance,

Medici Bank rose as the most famous bank during this period that was established in 1397 by

Giovanni Medici.

The development of banking first spread across Italy in the 15th and 16th centuries

throughout the Holy Roman Empire to northern Europe (Hoggson 63). Significant innovations
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occurred in the 17th century, specifically in Amsterdam in the Dutch Republic. More

developments occurred in London in the 18th century and spread through the 19th and 20th

centuries as characterized by advancements in telecommunications and computing. These

innovations brought considerable improvements in bank operations and supported the dramatic

increase in geographic spread and the banking industry's size. The various financial crisis,

including the Great Depression and the financial crisis of 2007, engineered the increased bank

regulations.

Banking practices in the United States began as early as the late 17th century. The growth

of banking in the country was based on the creation of a central bank that would regulate the

flow of banking practices such as the lending of money and commodities, and interest rates. The

act of the Confederation Congress established the Bank of North America in Philadelphia, 1781

(The First Bank of the United States 1). the bank superseded Bank of Pennsylvania, a state-

chartered bank developed in 1780 to fund the war. The Bank of North American dominated the

banking system by offering bills of credit as currency.

The huge developments in the establishment of a central bank are associated with Robert

Morris. The man was the first superintendent of finance. He proposed the change of Bank of

North America into a commercial bank that would act solely as the government's monetary and

fiscal agent (The First Bank of the United States 5). The superintendent was a pioneer of paper

circulation and a system of credit within the country. His ideas were borrowed from the

successful banking system in England that operated at the national level for-profit and private

monopoly. After the end of the civil war, more commercial banks were developed at the state

levels, including Bank of Massachusetts and Bank of New York in 1784. In the early 18th to

mid-18th centuries, more commercial banks arose due to state governments' free charters.
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Michigan and New York were at the frontlines of issuing banking charters, thereby creating

room for commercial banks' growth and widespread growth.

The history of interest rates originates from the trades occurring in Europe, particularly

from the established kingdoms and empires. The merchants who gave out loans to traders and

farmers attached interest while repaying the principal amounts. Homer and Sylla note that credit

preceded the coining of money in the historical period by more than 2000 years (17). Documents

retrieved from early kingdoms such as Sumerians and Assyria provide evidence that traders used

interest rates to give out loans. The common items loaned during this period include grains and

precious metals where the loans carried an interest.

However, loaning with interest during this period was not much common since the idea

of attaching interests on loans was not widely known. Loans without interest were undoubtedly

conventional as they were conducted friendly, charitably, or with neighbors or friends (Homer

and Sylla 18). For instance, because there was no paper money during this period, one would

take a loan of a cup of sugar or even awn mowers and return them after an agreed period.

Afterward, the borrowing of loans became more commercialized, resulting in the rise of interest

rates. The demand and supply of loans determined the interest rates to be attached to the

commodities.

The rise of the paper money and advancements in the banking sector meant that the

practice of lending and borrowing had advanced. Banks operated as institutions that gave out

loans that had to be repaid with interest for profitability. The significant global developments,

such as the Industrial Revolution and the agrarian revolution, significantly spearheaded the

widespread credits and interest rate services among the lenders.

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The history of banking and interest rates globally began around 2000BC in the most

developed kingdoms and empires, including Assyria, Sumeria, and India. Innovations during the

medieval and Renaissance in Italy and the first bank's creation strengthened the practice of

giving loans and attaching interest rates. In the United States, the banking system and methods

spread from Europe, particularly England. Banks rose fast after the civil war, although the

country was much determined to create a central bank to regulate the credit and interest rates.

The developments in the 18th and 19th centuries were critical towards realizing the current

banking system.
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Cited Works

Hoggson, Noble Foster. Banking through the ages. Dodd, Mead, 1926.

Homer, Sidney, and Richard Eugene Sylla. A history of interest rates. Rutgers University Press,

1996.

"The First Bank of The United States: A Chapter in the History of Central

Banking.". Philadelphiafed.Org,

https://www.philadelphiafed.org/-/media/publications/economic-education/first-bank.pdf.

Velanganni, S. "A Comparative Study on Customer Perception on Service Quality in

Cooperative and Nationalized Banking Sector with Reference to Coimbatore District in

Tamil Nadu." Journal of Management and Science Vol. 4. No. 3 (2014).