Recap of the Intriguing Banking History

Excerpt: The article provides a summary of banking history to give readers a better idea about the events occurring in the book, as it is mainly about banks and bankers.

Introduction

Conspiracy Suisse is about banks and bankers. Many dialogues in the story refer to banking as well as its history. Therefore, I thought it may be useful for some readers to have a general idea about banking history to be able to get a better idea about the events occurring in the book. What you’ll find below are well-known facts. In other parts of the website, such as on The Mind-Blowing Conspiracy of Bank Wars blog post, as in the novel itself, I provide alternative perspectives about them.

The Beginning of Banking History

The history of banking goes all the way back to the first merchants of the world, who gave grain loans to farmers and then carried their goods between cities already around 2000 BC in Assyria, India, and Sumer. In ancient civilizations like Mesopotamia, Egypt, Greece, and Rome various forms of rudimentary financial systems were in place whereby moneylenders provided loans to individuals through informal arrangements. Archaeological finds show that in ancient Greece and during the Roman Empire, but also in ancient China and India, lenders based in temples gave loans while accepting deposits and performing the change of money.

While many earlier scholars traced the historical roots of the modern banking system to medieval and Renaissance Italy, particularly the affluent cities of Florence, Venice, and Genoa, historians generally agree today that most banking activities were established a few centuries earlier, during the Crusades.

Knights Templar as the First Bankers

The role the Knights Templar played, as presented by several characters in the novel, is based on historical facts. While their contributions to banking may have been relatively short-lived – two centuries nevertheless – their innovations in financial services left a lasting impact on the development of banking practices in medieval Europe.

Originally founded in the early 12^th century as a military order to protect Christian pilgrims traveling to the Holy Land, the Templars became involved in financial activities as a means to support their military endeavors. During the Crusades, pilgrims needed a safe way to transfer their money to the Holy Land, and carrying large amounts of coins was both impractical and dangerous. The Templars offered a solution by creating a system of travelers’ cheques. Pilgrims could deposit their money at a Templar preceptory in their home country and receive a document that could be presented at a Templar establishment in the Holy Land, allowing them to withdraw funds.

This system not only provided a secure means of transferring funds but also allowed the Templars to amass wealth and influence. They became adept at managing financial transactions, serving as bankers to monarchs and nobles. The Templars’ reputation for reliability and trustworthiness contributed to the growth of their financial operations.

However, their prominence and wealth eventually led to their downfall. In the early 14^th century, King Philip IV of France, facing financial difficulties, orchestrated the arrest and dissolution of the Knights Templar. The charges included accusations of heresy, but the suppression of the order was mainly motivated by a desire to eliminate his debt to them and to seize their assets for himself.

Jewish Bankers of the Middle Ages

As trade and commerce started to grow during the Middle Ages, the need for more sophisticated financial services arose. However, the Christian Church forbade usury – the charging of interest on loans – creating a challenge for the development of formal banking. Jews, on the other hand, while forbidden to charge interest upon loans made to other Jews, were obliged to charge interest on transactions with non-Jews, which helped them take the forefront of banking from early on.

In places like medieval Italy, particularly in cities like Florence and Venice, early forms of banking began to emerge. The word bank is derived from the Italian word banco, which means a bench or money exchange table, referring to the benches at the piazza of these cities where money was transacted. The original banks were merchant banks that Italian grain merchants invented in the Middle Ages.

Venice as a financial center in banking history as imagined by Midjourney AI

As Lombardy merchants and bankers grew in stature based on the strength of the Lombard plains’ cereal crops, many displaced Jews fleeing Spanish persecution were attracted to the trade. They brought with them ancient practices from the Middle and Far East silk routes. Originally intended to finance long trading journeys, they applied these methods to finance grain production and trading.

Jews in Italy were unable to hold land and entered the Lombardy trading piazzas alongside local traders to trade in crops. They had an advantage over locals as Christians were strictly forbidden usury, which allowed them to make high-risk loans to farmers against crops in the field. This allowed them to secure grain-sale rights against the eventual harvest and advance payment against future delivery of grain shipped to distant ports. This two-handed trade was time-consuming, leading to the emergence of a class of merchants trading grain debt instead of grain. Jewish traders performed both financing and underwriting functions, providing loans and insurance against crop failure. Thus, merchant banking evolved from financing trades to settling trades for others and holding deposits for the settlement of notes written by brokers.

Italian Banking Dynasties in Banking History

Merchant families, such as the Medici, played a significant role by facilitating trade through bills of exchange and promissory notes as credit instruments, which laid the groundwork for advanced banking practices. In the 13^th century, Christians, particularly the Italian Lombards and French Cahorsins, invented legal loopholes not only to bypass the ban on Christian usury, becoming known as the pope’s usurers, but also to charge interest on fictitious loans not secured by coins. This created some extremely wealthy banking families.

The most powerful of these came from Florence, including the Acciaiuoli, Mozzi, Bardi, and Peruzzi families. However, by the later Middle Ages, political forces turned against these Italian free enterprise bankers. The Bank of Saint George, the first state bank of deposit, was founded in Genoa in 1407. The Acciaiuoli joined the Medici through marriage after their bank collapsed in 1345, from which the later Grand Dukes of Tuscany as well as several royal houses are descended. The largest grain merchants in Florence at the time, the Mozzi, also survived the failure of their bank and remain part of the Italian nobility even today.

The Bardis lent Edward III of England 900 thousand gold florins, a debt which he failed to repay along with 600 thousand florins borrowed from the Peruzzi family, leading to the collapse of both families’ banks. However, both families continued to operate in various European centers for another two centuries, playing a notable role in financing some of the early voyages of Christopher Columbus and John Cabot.

The Birth of Capitalism

The rise of Protestantism in the 16^th century weakened Rome’s influence, and its dictates against usury became irrelevant in some areas, freeing up the development of banking in Northern Europe. One school of thought attributes to the Reformation that started in Switzerland and in particular Calvinism the setting of the stage for the later development of capitalism in northern Europe. In this view, elements of Calvinism represented a revolt against the medieval condemnation of usury and, implicitly, of profit in general. According to Max Weber, the Protestant work ethic was a force behind an unplanned and uncoordinated mass action that influenced the development of capitalism. As an example, the Amsterdam Stock Exchange was established in 1602 by the Dutch East India Company for dealings in its printed stocks and bonds.

The first Amsterdam stock exchange as imagined by Midjourney AI

In the late 16^th and 17^th centuries, traditional banking functions were combined with the issuance of bank debt as a substitute for gold and silver coins. This led on one hand to commercial and industrial growth by providing a convenient means of payment and a more responsive money supply. But on the other hand bank failures became more and more frequent because of it. As banking had become crucial for funding European states, government regulations became a necessity leading the way to the creation of the first central banks.

The Birth of Central Banking

Fractional reserve banking and the issuance of new banknotes during the lending process, as employed today, emerged in the 17^th century. These practices created a new kind of “money” – goldsmiths’ debt – which required acceptance in trade based on the belief that coins would be available to cover them. The concept of negotiability was well developed by the 17^th century.

The Bank of England was founded to supply money to the English King in 1694. A year later, it supplied banknotes, which were initially hand-written and issued on deposit or as loans. By 1745, standardized printed notes were issued, with fully printed notes appearing in 1855. In the 18^th century, services offered by banks increased, including clearing facilities, security investments, cheques, and overdraft protections. The number of banks substantially increased during the Industrial Revolution due to growing international trade, particularly in London. Merchant-banking families, such as Rothschild and Baring, facilitated trade growth and became dominant in world banking. In 1797, the Bank of England suspended cash payments due to war threats, leading to the issuance of low-denomination notes.

The Rothschild family, known for their wealth, played a significant role in international finance and central banking during the early 19^th century. They provided loans to the Bank of England and purchased government bonds in stock markets. In 1804, Nathan Mayer Rothschild began trading on the London Stock Exchange, focusing on gold bullion. The family developed a network of agents, shippers, and couriers to transport gold and information across Europe. They supported railway systems and government financing for projects like the Suez Canal. Major businesses founded by the Rothschild family in addition to banking include Alliance Assurance, Chemin de Fer du Nord, Rio Tinto Group, Société Le Nickel, Imétal, and De Beers among many others.

In the 19^th and early 20^th century central banks in most of Europe and Japan developed under the international gold standard. Free banking or currency boards were common at the time. Problems with collapses of banks during downturns – justifiedly or not – often led to wider support for central banks in those nations that did not as yet possess them.

In the United States, The First Bank of the United States which had been chartered by the United States Congress for 20 years in 1791 was dissolved in 1811. Bankers made another attempt in 1816 and The Second Bank of the United States was chartered for 20 years. It was ended in the so-called Bank War of the 1830s by President Andrew Jackson amongst great resistance against central banking by the population. In 1913, bankers were finally successful and the U.S. Congress created the Federal Reserve System through the passing of The Federal Reserve Act, establishing a cartel with the legal authority to issue legal tender.

Booms and Busts in Banking History

While the main promise of central banking was the stabilization of financial markets, this result was often not observed. The 1929 Crash led to the collapse of banks due to low-margin requirements and unpaid loans. This caused a loss of billions of dollars in assets and a vicious cycle of bank failures. Over 9000 banks failed during the 1930s. To address this, many countries increased financial regulation, such as the U.S. establishing the Securities and Exchange Commission and passing the Glass-Steagall Act, which separated investment banking and commercial banking to prevent future failures. Government guarantees and Federal Reserve banking regulations were ineffective.

The Federal Reserve Building according to Midjourney AI

Executive Order 6102 signed by U.S. President Franklin D. Roosevelt in 1933 forbade ownership of gold coin, gold bullion, and gold certificates by US citizens beyond a certain amount, effectively ending the convertibility of US dollars into gold.

After World War II the US dollar was established as the reserve currency upon the agreement that it would again be redeemable in gold. The International Monetary Fund and the World Bank were established, encouraging commercial banks to lend to third-world countries. However, in 1971, U.S. President Richard Nixon canceled the direct convertibility of the United States dollar to gold by foreign nations, essentially ending the existing Bretton Woods system of international financial exchange. Abandoning of the gold standard led to bankruptcies once again.

At the same time, technology in retail banking increased, with the first automated reader-sorter machines and ATMs developed in the 1960s. Banks invested heavily in computer technology, shifting from large clerical staff to automated systems. By the 1970s, electronic payment systems for international and domestic payments emerged, including the international SWIFT payment network.

Birth of Global Banking

The 1980s saw a surge in global banking and capital market services due to deregulation in various countries. The 1986 Big Bang, which was the name given to the deregulation of London financial markets by Margaret Thatcher, served as a catalyst to reaffirm London’s position as a global center of world banking. It allowed British Banks to access capital markets in a way that led to significant changes in banking operations. British offshore jurisdictions, with their favorable regulatory conditions, became greater hubs for cross-border financial activities. This trend spread to the US, with retail banks merging with investment banks and stock brokerages. However, this wasn’t without problems: With the failures of Continental Illinois National Bank and Trust, First Republic Bank, and American Savings and Loan $100 billion in assets were wiped out.

Financial services continued to grow due to increased demand from companies, governments, and financial institutions, and buoyant financial market conditions. The internationalization of financial markets, particularly stock exchanges, led to increased interest in foreign stocks and mutual funds. This internationalization and opportunity in financial services changed the competitive landscape, with many banks adopting the “universal banking” model, which allowed them to engage in all forms of financial services.

In the early 2000s, banks were consolidated, and non-bank financial institutions entered the market, offering services like insurance, pension, mutual funds, loans, credits, and securities. The 21^st century saw a shift from traditional banking to Internet banking, with developments like open banking making it easier for third parties to access transaction data. The Office of the Comptroller of the Currency (OCC) encouraged banks to explore other financial instruments, reducing the distinction between different financial institutions. In 2020, the OCC clarified national banks’ ability to custody cryptocurrency and use blockchain innovations.

Recent Bank Failures

The 2007-2008 financial crisis led to major bank failures, resulting in government bailouts. Bear Stearns and Lehman Brothers collapses caused a credit crunch and global banking crises. Governments bailed out, nationalized, or arranged fire sales for banks, causing the term too big to fail to be popularized – albeit in a negative sense – and raising moral hazard concerns. In 2008 the largest bank failure in history up to this point occurred with the collapse of Washington Mutual wiping out $307 billion in assets. During the same year, the collapses of IndyMac and Downey Savings and Loan wiped out another $45 billion. And in 2009 BankUnited FSB, Guaranty Bank, Colonial Bank, and AmTrust Bank failed erasing $63 billion. Bank failures are in no shape or form over. As recently as 2023, the failures of Signature Bank and then Silicon Valley Bank meant that $319 billion of assets were lost. Finally, the second largest Swiss Bank, Credit Suisse, was acquired by UBS, the largest bank in Switzerland, only days before it would have gone bankrupt.