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EARLY HISTORY OF

BANKING
ETYMOLOGY OF THE WORD “BANK”

Derives from two words
 Banque (French) = chest (safekeeping)

 Banca (Italian) = Bench (Transactions)

First (non-modern) Bank recorded in town
of Ur in Chaldea – a temple where wealth
was stored (safekeeping function only)
EARLY BANKING - EUROPE

Banking evolved from the needs of commerce
Trade: peddling of luxury goods from
“familiarize” to Europe
Italy – great location and accepted the trade
merchants
Venice – oldest and most important Italian seaport
First institution resembling a modern bank
appeared in Venice in 1135 A.D. “a Bankhouse”
Banks appeared in inland cities:
 Milan: Military armor

 Lucca: Silk

 Florence: Cloth

By 1250 there were 80 Bankhouse in Florence alone
Banking was safe: (1) land/property used as
collateral on loans (2) Pope excommunicated
defaulters
Italians Innovative: 4-Name Paper, used in trade,
requires 4 signatures:
 Importer
 Exporter
 Import Bank
 Export Bank
 (like a Banker’s Acceptance today)
 Note: Import Bank provides a service (fee income),
export bank provides loan (interest income)
All in all, Italy became banking center
because:
 Location

 Accepted merchants
 Expertise

 innovative
Italians expanded Banking to Northern Europe
particularly in manufacturing centers (e.g.
monasteries in Yorkshire – wool)
By 16th Century trade centered at (1) Bourse in
Antwerp and (2) Royal Exchange on Lombard
Street in London
Goldsmiths emerged as new bankers in Europe
(expertise in coin and “bills of exchange”
(personal promissory notes)
CENTRAL BANKS

As markets became more complex,
there was a need for a monetary
policy and a currency, thus Central
Banks emerged:
 1674 Bank of Sweden

 1694 Bank of England
HOW CENTRAL BANKS WORKED

Stock in bank was bought with either coin or “bills
of exchequer” (I.e. government bonds)
All proceeds given to State in return for new
interest-bearing bonds
Central Bank is given right to issue banknotes up
to full extent of its capital – the banknotes could
be exchanged for customer promissory notes
(banknotes served as a currency)
Note: double-interest on bonds and promissory
notes
U.S. BANKING – EARLY HISTORY

In colonies a barter system arose since little
species came from Europe and no known gold or
silver reserves
Mediums of Exchange: wampum, tobacco,fur
skins, corn, livestock (all not work)
Each colony started Banks, Massachusetts and
Pennsylvania are typical examples:
U.S. BANKING – EARLY HISTORY (cont.)

MASSACHUSETTS
First bank 1733, it issued banknotes convertible into
silver, but notes were stockpile and it did not work
Bank closed in 1741

PENNSYLVANIA
Penn Land Bank started in 1723
It provided a stable currency and made loans for land
EARLY HISTORY

State Banks did not work because of:
 Fraudulent state paper

 Lack of acceptability

 Lack of variety

 Need to finance Revolutionary War

Alexander Hamilton proposed a National Bank
EARLY HISTORY

1782 Bank of North America opened in
Philadelphia
 Financed with shares purchased with
gold/silver and a $500,000 loan from France
guaranteed with tobacco
 It loaned 1.2 million pounds @ 8% to
government to finance the war
Hamilton started a private bank, Bank of New
York (still exists today)
EARLY HISTORY

National Banks less popular by 1820s, number of
State Banks increased from 88 to 246 from 1811
to 1816
1837-38 “Free-Banking Acts” passed in Conn,
Michigan, New York
“Wildcat Banks” appeared in the West
By 1861, 1600 State Banks
1860 need to finance Civil War led to a revival of
National Banks
EARLY HISTORY
1864-1866: # State Banks 1089 to 297
# National Banks 139 to 1582
1890-1920 State Banks made a comeback, there
were 30,000 by 1920

FIRSTS:

First U.S. Bank failure March 25, 1809, Farmers
Exchange Bank of Maryland
EARLY HISTORY

FIRSTS (cont.)

First payment of interest on deposits in 1804,
Farmers Bank of Maryland

First term loan made in 1934 by First National
Bank of Boston to American Metals Climax
Corporation (AMAX)