Do you have money in the bank? How about a mortgage? The reason why we have banks may shock you.
In fact, banks sort of started by accident!
From trading chickens for a beer and a feed, to the introduction of paper notes and lending, without banks we wouldn’t live in the world we do today.
Where did banks come from?
Basic forms of banking (deposit and lending) can be traced back to the temples and royal treasuries of Mesopotamia in the 2nd millennium BCE.
At time time, everyone relied on bartering goods, and it worked well for a while, until people got sick of the heavy lifting. Have you ever tried lugging a cow and two sheep to the market?
Some bright spark eventually realised that the gold and silver that was being used to make weapons and throne rooms for mad kings could be used to solve the inefficiencies and inconsistencies of bartering.
Gold and silver was attractive, malleable and easy to work with and soon trade was made much easier when goldsmiths began casting coins. The standardisation of units of these metals by weight and purity followed.
The goldsmiths resorted to building vaults to protect their gold and, soon, merchants wanted to rent space in goldsmiths’ vaults to protect their own coins and valuables. This gave the goldsmiths an idea.
Before long, the goldsmiths were renting every shelf in the vault and earning a small income from their vault-rental business.
The depositors rarely came in to remove their actual physical gold and never all at once. This was because the goldsmiths were lending some of their gold out in exchange for paper certificates redeemable in gold coins which, in time, began to be favoured over the use of coins.
The more these paper certificates were accepted as trading items, the more borrowers began asking for the loans in the form of paper rather than coins.
Basic banking was born.
Like most things, the Italians made banking better
Things went along like this until Middle Ages Italy, where the modern concept of a banking system of depositing and withdrawing funds and the writing of loans began to take hold.
The word ‘bank’ itself comes from the Italian word banco meaning bench. The first Italian bankers – during the Renaissance period – would put down benches in Venice and Florence and conduct their commercial transactions while sitting on this bench.
Similar to the goldsmiths of Ancient Greece, people would “deposit” their money with these bankers in exchange for credit. If someone wanted to borrow money, they would take out a loan, which was known as a debit.
The first public bank, the Banco della Piazza di Rialto, opened its doors in Venice in 1587. People could deposit money in this bank and draw out funds when they needed it.
By 1619, gold and silver items began to be deposited at the bank for which the bank issued paper receipts. These paper receipts became the first currency notes in the world.
These paper receipts have been in use ever since, except in the United States during the Great Depression when a major cash shortage saw the introduction of wooden bills. Yes, this actually happened!
When its only bank failed, the small town of Tenino, Washington began producing its own money printed on thin shingles of wood from around 1932 to 1933. Today, these wooden nickels are used more as tokens and souvenirs.
Banks of War
By the end of the 17th century, banking was becoming important for the funding requirements of warring countries like Sweden, leading to the establishment of the world’s first central bank.
Answering directly to parliament, the Sveriges Riksbank or Riksbanken was founded in 1668 from the remains of the failed bank Stockholms Banco.
One major role of the Riksbank was to lend money to the government to fund wars such as the Scanian War (1675-1679) and the Great Northern War (1700-1721).
The world’s second central bank was established only 1400 kilometers away from Sweden, in England.
Financially drained during the 1690s mainly due to 50 years of warring with France, England was in desperate need of new revenue.
In order to finance the ongoing Nine Years’ War (1688-1697), King William III wanted to borrow £1.2 million but there was nowhere to get the money from.
Raising taxes was out of the question because England had already seen its fair amount of civil wars mainly due to excessive taxation. King William III could try borrowing the money but there was no one willing to lend.
So what happened?
Along with the government at the time, William III founded the Bank of England in 1694 and gave the new institution an exclusive licence to print England’s paper currency. William could then borrow all the money he needed, mind you, the money was backed by almost nothing. Only a fraction of coin, to be exact, but no one would actually know that!
In just under two weeks, the Bank of England raised the £1.2 million the country needed to fund its war efforts..
The following year, the Bank of England became the first bank to begin the permanent issue of banknotes.
Cheques or paper certificates were initially hand-written and issued on deposit or as a loan. These ‘promissory notes’ promised to pay the bearer the value of the note on demand.
By 1745, the Bank of England had started printing standardized printed notes ranging from £20 to £1,000.
It’s crazy to think that up until 1855, fully printed notes required the name of the payee and the cashier’s signature on them. In a way, they were like blank cheques!
More and more private and public banking institutions popped up due to the advent of the Industrial Revolution and growing international trade.
Banking activities gradually split into retail banking (individuals and small businesses), business banking (middle market firms), corporate banking (large businesses), private banking (high-net-worth individuals and families) and investment banking. We still have these today.
Innovations in the industry such as providing different types of loans, giving clients the ability to transfer money by wire (and now through the internet) and providing intermediary or advisory services broadened the scope of banking well beyond its early foundations.
The Great Depression
Although there was a longer economic recession that hit the UK and the US between 1837 and 1896, it wasn’t as deep and widespread as the so-called “Great Depression” following the stock market crash of ‘Black Tuesday’, 29 October 1929.
Up until the late 1930s, an estimated 9,000 banks collapsed during the Great Depression and US depositors saw more than $140 billion disappear out of their accounts.
Desperate times called for desperate measures, so much so that a notorious bank robber named Charles “Pretty Boy” Floyd turned from a despised gangster into an unexpected anti-hero in the eyes of the public.
Floyd endeared himself to the public by allegedly destroying mortgage papers at the banks he robbed. As a result, thousands were freed from their bank debts.
No one knows why the so-called “Robin Hood of the Cookson Hills” destroyed the mortgage papers, and it’s likely a big myth, but it hasn’t stopped homeowners everywhere from dreaming about their mortgages disappearing.
Today, homeowners struggling to make their home loan repayments have a lot more, less destructive solutions to their mortgage problems.
This includes negotiating a change in the terms of your home loan with your bank, applying for government mortgage relief, consolidating your debts and refinancing your home loan to a lower interest rate.
Although we don’t like to think about it, banks can fail. In fact, there have been at least four global recessions since World War II, with the most recent ‘Global Financial Crisis’ claiming 465 banks between January 2008 and December 2012.
Of course, they’re more than happy for you to continue depositing your money with them but taking out a loan, particularly a large loan like a mortgage, can sometimes be difficult depending on risk appetite of the bank in relation to wider economic conditions like the real estate market.
Do you need help qualifying for a home loan?
Banks are continually evolving and it’s evident in recent changes to investment lending policies and postcode restrictions affecting your ability to get a home loan for certain suburbs.
There are many reasons why your home loan application may be declined so it pays to speak with a professional that is on top of these changes.
Mortgage brokers are credit specialists that understand bank lending policies and they know how to build a strong case with the right lender so you’re in with a good chance of qualifying for a mortgage that’s right for your situation and needs.
Call 1300 889 743 or complete our free assessment form today.
Interested in a little more history? Check out the fascinating evolution of the Australian banking and home loan industry.