Modern Banking has its origins in the finance of foreign trade. In the great medieval trading states of Venice, Genoa and later Florence, a need arose to exchange one currency with another and the early moneychangers also began the practice of accepting deposits of cash and valuable for safekeeping.
The merchants and money-changers of these cities also undertook the financing of commerce, the great medieval trade affairs, and they also called upon to provide finance for the rulers and the states in which they were established and they often became involved in financing the running of their own and other countries. Because of their power, they were seldom popular. Groups such as Jews, were persecuted and sometimes expelled, and the laws against usury were strict. Since modern banking originated in the cities of northern Italy, it is not surprising that some of its basic vocabulary has Italian roots. The word “bank” itself comes from the Italian word “banco” meaning a bench. The “bankrupt” has the same origin and refers to the practice of breaking the money-changer’s bench to indicate that he was no longer able to honour his obligations and therefore unable to continue his business.
When the Jews were expelled from England by Edward I in 1290, their place was taken by the Lombards, who were already established in England. They became the merchants and the important financiers in many European countries. The name of “Lombard Street” in the heart of the city of London is the permanent reminder of the importance of these early times.
The accepting of deposits, the making of loans and the transfer of funds evolved during the 17th century with the growth of the goldsmith - bankers who had by that time taken over from the Lombards as major financiers in England.
Because of the nature of their trade, their premises had to be secured, and even before the 1640 seizure, there is evidence that they accepted coin on deposit from their customers, issuing receipts for them.
The receipts entitled the holder to the return of his actual deposit, but they later became “promissory notes”, giving the holder the promise that he would be able to withdraw, on demand a sum equivalent to that deposited.
Gradually, these notes themselves began to circulate among the merchants in settlement of their debts. Thus, these receipts became the forerunners of the modern banknote. Then, the words “on bearer” were added after the name of the original depositor and they became “bearer instruments”, giving them a greater circulation.
The practice of placing money with goldsmiths with a given notice of required repayment had emerged, thereby originating what we call today “deposit accounts”. The private banknote came into being, but in the following century The Bank of England gradually took over the function of exclusive note issue, when it appeared as a historical necessity, in 1694, when the Government of the day was in need for funds to pursue the war against France.
