Wealth

Part 4 - Banking

https://www.youtube.com/watch?v=fTTGALaRZoc Kurzgesagt TOP

https://www.youtube.com/watch?v=UE7nd36EpRU Mediaeval anim

The barter system was used for early trading. Two fish for one chicken or ten apples. People needed to count. Two methods came into use. The decimal system came from the ten fingers and thumbs, but another system came from the 12 knuckles on the fingers of one hand which is why we still have twenty four hours in a day (2 x 12) and 360 degrees in a circle (3 x 12 x 10) and, until recently, in Britain 240 pence to a pound Stirling. 

 Money lenders provided a useful service lending out their own money to those in need. But, as some of them levied exorbitant rates of interest or punished people for not repaying a loan the profession fell into disrepute. The collection of interest became disreputable and was sometimes banned. However, money lenders could circumvent this by charging a flat fee for the use of the money. Moneylenders also had to put up with borrowers who disappeared with the money and rulers who, reluctant to repay debts, either jailed, exiled or executed the moneylenders. Gradually, rulers accepted the idea that they could borrow money only if they were trusted to repay the loan with interest. They also accepted the idea that the government should enforce contracts made for loans between citizens. 

Since Jews were not allowed to own land in Italy, and had few other ways to make a living, they set up their benches (banca) to trade in crops in the piazzas of Lombardy. They had a big advantage over the local Christians who were strictly forbidden the sin of usury (lending with interest). So the Jews could lend to farmers against crops in the field, a high-risk loan, at usurious rates of interest.

The practice expanded to providing payment for the future delivery of grain shipped to distant ports. The Jewish bankers thus provided both financing (credit) and underwriting (insurance). They also provided loans at the beginning of the growing season and guaranteed the delivery of the crop to a merchant wholesaler. They also arranged to supply the buyer of the crop in the event of crop failure and kept the farmer in business by selling insurance against crop failure.

European banking began in the Italian cities of Florence, Venice and Genoa in the 14th century and spread throughout the Holy Roman Empire, reaching Amsterdam and London by the 18th century.

Merchant banking developed from financing trade, to settling trades for others, and then to holding deposits for settlement of notes written by the people who were still brokering the grain. And so, the merchant bankers became centres for holding money against a bill or a letter of formal exchange. These later became bills of exchange and, later still, cheques.

These deposited funds, held for the settlement of grain trades, were often used for the benches' own trades in the meantime. The term bankrupt comes from the Italian 'banca rotta', or broken bench, which is what happened when someone lost his traders' deposits. Being "broke" comes from the same idea.

Money exchange traders started using promissory notes in medieval Italy and Flanders because of the danger of transporting large sums of money over long distances. Italian merchants, relying on credit to trade in wine, woolen clothing, cloth, tin and other commodities, issued bills of exchange (a buyer's promise to make payment at a future date). The seller could wait until the bill became due (or redeem it for money at a discount) by presenting the bill to a merchant banker. Since travelling with cash was risky, a traveller would make a deposit at a banker in one town in return for a bill of exchange that he would redeem in another town; the first traveller's cheques.

Between the 7th and 12th centuries, Muslim and Jewish traders and merchants developed banking for loans and deposits, credit lines, cheques, promissory notes, loans, trusts, exchange rates and the transfer of credit and debt.

Late in 18th century England, bills of exchange were used before credit, banknotes and cheques were generally available. Early in 17th century, merchants and traders had accumulated large amounts of gold and that was typically stored in the vaults of London goldsmiths who charged a fee for the service. Gradually, the goldsmiths began re-lending the gold on behalf of depositors. A depositor could gain some interest by issue a promissory note expressly allowing the goldsmith to use the money for loans to his customers. As the loans were repayable over a specified time period while the promissory notes were payable on demand, this was the beginning of fractional reserve banking.

The promissory notes often circulated as a form of money backed by the goldsmith's promise to pay, and there was little risk of default as gold deposits often remaining with the goldsmith for many years. In this way, the London goldsmiths became creators of new money based on credit and were the forerunners of the British banking system.

Inspired by the London goldsmiths, banks began issuing paper notes which circulated in the same way that currency circulates today. During the 19th century, in the United States, there were more than 5,000 different banknotes issued by different commercial banks, but only notes of the most creditworthy banks were widely accepted.

These banknotes could be converted into gold or silver but as banks issued far more notes than the amount of gold and silver on deposit, a loss of public confidence, might cause a run on the bank as people demanded their banknotes be exchanged for gold and this could result in the bank failing (bankruptcy).After 1694, the Bank of England was granted sole rights to issue banknotes in England. The Federal Reserve Bank of the United States was granted sole rights in 1913; and most countries now have a national or central bank to issue (fiat) currency.