The History of Money: Part 3

March 12, 2021

The History of Money - Part 3

With the largest institutions decimated by the fall of an empire, people still needed some form of finance to get by. To meet this need, grain and textile merchants in Lombardy, Italy created the first merchant or investment banks. These were decentralized institutions which would provide financing, grants and investments for the entrepreneurs of the day.

Local merchants perfected ancient practices used in Middle East trade routes and the Far East silk routes which helped to finance commerce throughout the medieval world and establish grain markets as financial centers.

Deposited funds were held for the settlement of grain trades, but often were used for the bank's own trades. The term bankrupt is a corruption of the Italian banca rotta (broken bench) which is what happened when someone lost their traders' deposits (this is also where the term of being "broke" originates from).

Paper Money in the Far East

As far back as 1024 AD, the Chinese were finding new ways to facilitate the circulation of wealth. After running out of copper to mint their coins, The Qing dynasty merchants built a system involving "Letters of Credit" - and the printing of government-certified paper vouchers, which would become paper money (the most common form of currency).

Regarded by many historians as the world's first paper money, the Jiao Zi was stamped with six different inks and further secured by multiple banknote seals. It was an innovative system that would take Europe and Western Civilization many years to catch up.

The government quickly realized how powerful it was to issue currency and created their own centralized treasury (bank). By the 1120's, officials would produce their own state-issued paper money using a woodblock printing process.

The Crusades: A Banking Revival

In November 1095, the Council of Clermont in southern France and the Pope called on Western Christians to take up arms and aid the Byzantines to recapture the Holy Land from Muslim control. It was the start of an epic war that would redraw all the maps and move staggering amounts of wealth across nations.

Long abandoned banking systems suddenly became thriving industries. In 1162, Henry II of England levied a tax to support the crusades. The mythical Templar Knights acted as Henry's personal bankers in the Holy Land, trading and issuing in local currencies and the first known instances of paper bank checks, which provided a lot more security for travelers, as they were less prone to theft.

These transactions were made possible by the advent of foreign exchange contracts, the first of which which occured in Genoa in the year 1156. Two brothers borrowed 115 Genoese pounds and agreed to reimburse the bank's agents in Constantinople for the sum of 460 bezants, one month after their arrival in the City. The knowledge that wealth could be transferred across great distances was indeed a game changer for all global commerce.

The first federally insured bank was opened in Venice (circa 1157), establishing a Chamber of Loans to oversee and regulate financing. All loans were issued with an interest rate of 4 percent. The institution is also recognized as the first national bank operating in all of Europe.

Many more banks would soon open during this era, including "Banca Monte dei Paschi di Siena" (BMPS), which is in fact the oldest banking organization still in operation (talk about old money).

Expanding Markets and the Renaissance

In 1295, Venetian explorer Marco Polo returned from China with many tales of his adventures - among them he documented their economy in a publication entitled "How the Great Khan Causes the Bark of Trees, Made into Something Like Paper, to Pass for Money All Over His Country".

Khan's system had left quite the impression on Marco Polo, perhaps due to both its brilliance and pure simplicity. Banknotes were made from a sheet from the bark of mulberry tree, signed by multiple officials, sealed in bright red vermilion and authenticated by the Chinese emperor Kublai Khan himself.

While IOUs (I Owe You) and checks were already widely used in the West, this was the first time Europeans were introduced to the concept of state-sanctioned paper money as a common form of currency for businesses and individuals.

Venice wasn't the only Italian city flourishing from the resurgence of banking. Some of Italy's most wealthy and influential families were in Florence, which was incidentally the first city to mint pure gold coins called Florins. The first Florin was issued in 1252 and weighed 3.52 grams or 72 grains of fine investment gold.

The government declared that the gold bullion was to be used in large transactions by international merchants, manufacturers and money changers. This resulted in exponential growth for the Florentine economy. The universally held value for gold helped to establish the Florin as a monetary standard throughout all of Europe.

Holding the defacto currency for an entire continent created untold wealth. As a result more and more banks were created over the next 200 years. Among them was the famous House of Medici - a dynasty which would not only produce 4 popes, but finance much of the Renaissance itself. They were among the earliest banks to use a ledger system of accounting via a double-entry bookkeeping system for tracking credits and debits.

For a time they were considered the richest family in all of Europe and bankrolled the invention of the piano, opera and funded the construction of Saint Peter Basilica and Santa Maria del Fiore, all while commissioning legendary works by Leonardo, Michelangelo, Machiavelli and Galileo.

The Medicis continued to dominate European finance until 1494 when Charles VIII of France invaded and the bank's remaining assets were seized and distributed to creditors.