From the earliest days of civilisation, people understood the need to organise their commercial affairs in a structured, formal and transparent manner.
Throughout the history of banking, this need to maintain proper records of financial transactions between individuals, ultimately led to the creation of what we know today as the banking sector.
From grain banks in Ancient Egypt to street benches in 14th century Florence, right the way through to the Bank of England’s role in modern Britain; banking has evolved and today is absolutely critical to the global financial system.
The issue of money, the flow of money and the control of money has always been at the heart of how we function as a civilised society.
Early history of banking
Long before banks ever existed, commercial transactions were conducted between individuals trading in livestock, agricultural products and precious metals.
The earliest known records of these transaction were recorded on clay tablets in c. 3200 BC in Mesopotamia (present-day Iraq).
In the history of banking, it is believed that these clay tokens were the first practical example of a financial instrument and acted in many ways like a modern-day bank draft.
The tablet would be created and issued by the lender and would record the details of the ‘products’ that would be used in settlement of an obligation or service provided. It would also include the date by which the product would be delivered.
For example, the lender might be a farmer who agrees to deliver a quantity of barley to the person in possession of the tablet (the bearer) once harvest was completed.
Because the tablet was issued to a bearer and not a named individual, this meant that the tablet could be transferred to any other party.
The first ’conventional’ banks were established in Ancient Egypt to store grain on behalf of local farmers. Warehouses were created as a physical space for the safekeeping of grain where farmers could place sacks of grain in return for a receipt confirming the amount deposited.
The grain stored in the warehouse could be withdrawn at any time to feed livestock, exchange for something else and could also be transferred to other farmers’ accounts as a way to settle debts.
The first principles of banking were established in this way: the ability of an individual to make a deposit or withdrawal or to transfer their ‘assets’ to a third party.
Modern day banking
The fact that the word “bank” derives from the Italian word “banca” (meaning “bench”) provides a strong hint about the origins of modern-day banking.
During the Italian Renaissance period, which began in the 14th century, independent city states such as Florence, Venice, and Rome grew increasingly wealthy through commerce and trade.
The resulting flow of money (or more specifically coinage minted from gold, silver or base metals) from around the world had to be converted to a common value.
The need for a formal, transparent currency conversion business model created the initial stimulus for an organised, controlled and regulated banking environment. This eventually led to the formation of an embryonic banking sector where bankers conducted their business, at benches behind tables, on the streets of Florence.
The first formal bank was believed to have been established here in 1397 AD by the Medici family – a wealthy and powerful family who dominated Italian business, politics and religion during the late 14th and early 15th century.
From this 14th century Italian banking system emerged the next wave of European banks in Amsterdam in 1609 and Stockholm in 1657. Each institution in its own way pioneered further advances in the way banks conducted their day to day activities; from the creation of cheques and direct debits to printing the first banknotes in Europe in 1661.
The financial innovation driving these banks eventually led to the Bank of England being founded in London in 1694.
The Bank of England
The Bank of England is central to the UK economy but what is its history, who owns it and what does it do?
History of the Bank of England
The Bank was established when money was needed by King William III to wage war against Louis XIV of France. Over 1,200 individuals from a variety of different backgrounds ranging from Knights of the Realm to carpenters agreed to invest £1.2 million in return for bank stock (shares).
Consequently, these individuals became the first owners of the Bank.
Who owns the Bank of England?
While the Bank continued to operate as a privately-owned company until 1946, it increasingly acted more like a central bank and in 1844, for example, it assumed sole responsibility for issuing banknotes in England and Wales. Such was its importance to the UK economy that in 1946, the government decided to nationalise it. Today, the Bank remains owned by the UK government through HM Treasury.
What does the Bank of England do?
Although the Bank is owned by the UK government, it has been mandated to operate on an independent basis. The Bank’s broad remit is to assume responsibility for UK monetary policy which includes controlling inflation, setting interest rates and acting as lender of last resort to UK high street banks or other eligible financial institutions.
The latter responsibility means providing liquidity (financial support) to those banks that have problems getting access to funding (usually when that bank is deemed at risk of failure and savers rush to withdraw their money).
In addition, the Bank also decides when new banknotes are required, what denomination should be issued and whose face should go on the back (the front always being reserved for the reigning Monarch).
Lastly, the Bank oversees the Prudential Regulation Authority (PRA), an institution which has responsibility for supervising the management and operations of over 1,500 banks, building societies and credit unions in the UK.
Bank of England Museum
For anyone who wants to learn more about the history of banking, the Bank of England museum holds a series of ever-changing exhibitions. To see what’s on, please click here.
The museum is open during banking hours, Monday to Friday. Admission is free.
The history of money
To learn about the history of money please click here.
