The English word “bank” derives from the Italian term “banco” (or “banca”), in turn stemming from the Frankish word “bank”.

In Italian, “banco” originally referred to a bench with a back, then a bench’s wooden seat, in the 1300s a shop counter, in the 1500s a craftsman workbench. Finally, from the counter where money was exchanged, collected and lent, it came to mean the institution itself offering those services.

Like for almost everything, you can find the remote origins of the banking system in ancient history. Saving and borrowing services existed among the Sumerians of ancient Mesopotamia, where private individuals felt the need to entrust their riches to priests, and among the ancient Greeks.

Other than this mainly formal recognition, banking was an Italian invention.

Letter of credit

A letter of credit was one of the most important financial mechanisms that allowed international trade to flourish in the 15th century. As caravans wheeled, and ships sailed around Europe distributing fine goods, the letter of credit became a necessity for travelling merchants.

A letter of credit is an agreement in which the buyer’s bank guarantees to pay the seller’s bank at the time goods/services are delivered. They would be authorised to receive pounds in the London branch, for example, at 40 pence to the florin exactly 90 days after (the timing was always fixed).

Shipping large sums of money over land on a regular basis was too dangerous during this era. For this reason, traders would deposit florins (the Florentine currency of the day) in a Medici bank for a letter of credit.

Herein this tidy little innovation also lay the genius of the Medici wealth-generating machine. During the early Middle Ages, usury (the lending of money for interest) was a cardinal sin- which posed a problem for banking institutions such as the Medicis in a religiously-zealous society. A letter of credit was one of many ways they could disguise the interest within transactions, and refrain from angering the theocracy.

Continuing our example from above, the London branch of the bank would then turn around and find someone wanting to purchase florins in Florence, but at the rate of 36 pence to a florin (currencies traded in different rates home and away). This little difference of 4 pence per florin gave the cunning Medicis a 22% annual return. In the eyes of the contemporary theologian, this was a currency exchange rather than a sin, absolving them of the judgment of God, whilst making a tidy profit.

 

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Presented by Romano Pisciotti