Wealth

Part 10 - BANKING

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

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

The barter system was used for early trading; perhaps . one chicken was worth twenty apples. People needed to count and 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). Money lenders provided a useful service but, as some disreputable lenders charged exorbitant rates of interest, or punished people for not repaying a loan, the practice was often banned.

Moneylenders were also beset with borrowers, who disappeared with the money and rulers who jailed, exiled or executed the moneylenders rather than repay debts.

Gradually, rulers accepted the idea that they could borrow money only if they were trusted to compensate the lender and began to enforce private contracts. Money lenders could also charge a flat fee for the use of the money instead of interest. 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.

Jews had few ways to make a living as they were not allowed to own land in Italy but they had a big advantage over the local Christians who were strictly forbidden the sin of usury (lending with interest). Some Jewish bankers loaned money to farmers, at the beginning of the growing season, from benches (banca) in the piazzas of Lombardy. They began underwriting (insuring) crops and providing financing (credit) for the future delivery of grain. They also guaranteed the delivery of the crop to a wholesaler. in the event of crop failure and provided insurance to keep the farmer in business.

Merchant banking gradually developed to settling trades for others and then to holding deposits for settlement of contracts written by other people. Thus, the bankers began holding money against a bill or a letter of formal exchange which later became bills of exchange and eventually cheques.

These funds, held for the settlement of grain trades, were often used for the "bencher's" 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 trader's deposit. Being "broke" derived from the same idea.

Because transporting large sums of money over long distances was dangerous, exchange traders started using promissory notes. Italian merchants, trading wine, woolen clothing and tin, relied on credit, a promise to make payment at a future date, with bills of exchange. The seller could wait until the bill became due or sell it at a discount to a merchant banker. Since traveling with cash was risky, a traveler 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 traveler's cheques.

Muslim and Jewish merchants traders had developed banking for loans and deposits before the 12th century. They also devised lines of credit, cheques, promissory notes, and exchange rates. Before credit, banknotes and cheques were generally available in 18th century England, bills of exchange were used.

However, by the 17th century, traders and merchants had accumulated large amounts of gold which they stored, for a fee, in the vaults of London goldsmiths. Depositor could gain some interest by issuing a promissory note permitting the goldsmith to loan the money to his customers. This was the beginning of fractional reserve banking, as the loans were repayable over a specified time period while the promissory notes were payable on demand.

The promissory notes were a form of money backed by the goldsmith's promise to pay. There was little risk of default as gold deposits often remaining with the goldsmith for many years. In imitation, banks began issuing paper notes which circulated as currency. During the 19th century, in the United States, more than 5,000 commercial banks issued different banknotes.

Early banknotes could be converted into gold or silver but the banks issued far more notes than the amount of gold and silver they had on deposit. This meant that if enough people demanded their banknotes be exchanged for gold, this could result in a run on the bank and bankruptcy.

After 1694, the Bank of England was granted sole rights to issue banknotes in 1694 and the Federal Reserve Bank of the United States was granted sole rights in 1913.