MONEY AND FINANCIAL HISTORY
Money and Financial Law
History can be understood from a number of different perspectives. This includes kings and royal succession, wars and politics. Financial and economy history also provides an almost unique insight into the evolution of society and social and political governance as well as business organisations, trade and commerce. This is both inclusive and comprehensive as well as succinct and insightful. It deals with general causes and effects as well as specific events and reactions.
Financial history is not just the history of money and its cold economic functions. Almost any form of trade and even social organisation is dependent on some giving of value and mechanism for payment beyond simple barter. Primitive trade and later fairs and markets would have impossible without effective means to measure value and exchange. Money has nevertheless also been closely associated from early times with religious ceremonies and later organised religions, family and marriage rituals, feudal and other royal obligation, military service and war reparation, city and local government, political party support and modern public administration and finance. None of this would have been possible without some agreed unit of account, measurement of value and means of exchange.
Money has also acted as a necessary store of value throughout history while the development of credit and avoidance of religious restrictions on usury and the payment of interest have allowed trade and business expansion since the great fairs in the 13th and 14th centuries. The history of money is then one of the development of commercial loopholes against the hardening restrictions imposed by organised church on interest and usury. This conflict persists in the development of modern forms of Islamic banking including the mudaraba and musharaka.
The history of money has also been one of great controversies intimately connected with the development of government and any form of organised economic system since early times. There has always been a basic conflict between the value of money in terms of its physical value, such as a defined way of silver or gold, and its assigned value as legal tender. The history of coinage is one of balancing the problems of valuing money in specie (physical weight) and in tale (legal tender). Coinage has always been debased through ‘clippage’ or co-mingling most notably with Henry VIII and his re-coinages. Creditors have also wished to protect the value of money while debtors have attempted to dilute its value over time such as through debasement, the introduction of close substitutes or inflation. Controversies also surrounded the need for central government control and a central bank or open free banking. Monetary theories also still wrestle with the conflicting arguments of the bullionism and mercantilism, currency and banking schools, the quantity theory of money and modern monetarism. Much of this has only served to confuse rather than enlighten debate and the management of complex modern economies.
The history of finance is also one of banking and the development of increasingly sophisticated forms of financial intermediation with a wide variety of institution that can receive and distribute surplus assets to those in need of funds in a low cost and effective manner. Essential banking practices are over 4,500 years old dating from the temples of Babylon in Mesopotania in 2500 BC and taken forward in Egyptian, Greek and Roman times. Modern banking had its origins in the Italian fairs and city states in the 12th and 13th centuries with Amsterdam and London later emerging as leading financial centres from the 17th century onwards. The essential importance of a stable and effective banking system within any modern economy was confirmed with the 2007/2008 financial crisis. While a range of financial practices were discredited and will be removed through new regulation or more immediate changes in market practice, this has confirmed the central importance of the core deposit (savings), loan (credit) and payment as well as investment and security functions discharged.
The history of finance is also one of innovation in the evolution and development of markets and transactions or instruments. The modern economy is based on a increasingly complex mix of underlying money markets and securities or capital markets that have become increasingly integrated in recent times. New contracts, products and services have constantly been created at the national and international levels. This includes the post-War euro-dollar markets and later shorter-term euro note and commercial paper markets as well as post-Bretton Woods derivatives markets and then even more recent securitisation and structured finance innovations with excesses within these markets eventually leading to the virtual collapse of the international financial system in the autumn of 2008. These processes of innovation and evolution will nevertheless continue albeit within a more strictly controlled and monitored environment.
The purpose of this chapter is to consider the basic nature of money, finance and credit and the development of the principal banking and financial markets. The meaning and use of money, finance and credit are initially referred to. The history of banking and finance is then considered in terms of its ancient origins, medieval Europe, the 16th and 17th centuries, 17th and 18th centuries and then 19th and 20th centuries. The development of financial instruments, including specifically negotiable instruments with bills of exchange, promissory notes and cheques, are considered separately with the creation of the Law Merchant or Lex Mercatoria. The principal issues that arise with regard to the evolution of money and then examined in terms of form and value, limits and volume, money supply and monopoly rights, central banking and monetary policy and market support and financial stability. A number of final comments and conclusions are drawn with regard to the proper meaning, nature, function, definition and value of money.
(b) Commodity and Representative Money
(c) Metal Coinage and the Gold Standard
(e) Account, Electronic and Digital Money
(c) English and Scottish Banking
1. MONEY AND COINAGE
Money has had a long and complex history with money existing in a number of forms.[1] While barter can be considered to be around over 100,000 years, commodity money in the form of shells dates from 3000 BC and stamped coins from 650 BC.[2] Metal coinage using the silver gold alloy electrum was first used around 800 BC[3]. Chinese banknotes were introduced in the 7th century and European notes were first issued by the Stockholm Bank in 1661. Charlemagne restored silver money in 800 AD with the Carolingian system of pounds, shillings and pence. A number of mono-metallic, bi-metallic (principally gold and silver) and even tri-metallic currencies (gold, copper and copper) were then experimented with subsequently in various countries at different times.
These more traditional forms of specie money were supplemented by private and then public bank notes which were initially convertible into metal but later issued solely on a fiat and fiduciary basis relying only on the credit of the central bank acting as agent on behalf of the government or state. The custody or deposit of money dates from pre-Roman times with deposit accounts being used since the invention of double account book-keeping. Other forms of electronic or digital money have also been introduced more recently. These either operate as electronic record and transfer devices for separate account credits or store pre-loaded credits on them in an electronic form. These do not create or constitute a separate source or stock of money as such but only re-use the existing money supply with strict controls being imposed on the types of institutions that may provide such services.
Kindleberger refers to the history of money as one of continuous innovation in the discharge of its functions of measuring value and exchange while avoiding the limitations of barter.[4] The objective has always been to protect the value of money from damage or debasement and to ensure sufficient quality to support trade. Attempts have always been made to develop new forms of money, or money substitutes,[5] to deal the problems of transportation and security in moving heavy coinage or gold or silver bullion. This would subsequently be achieved through the development of promissory notes (including banknotes) and bills of exchange and cheques (which are legally bills of exchange drawn on bankers) and other more modern forms of electronic payment.
Money carries out a number of key economic functions. These have traditionally been described in terms of acting as a unit of account, store of value and means of exchange to which acting as a standard for deferred payment has subsequently been added.[6] Other functions can also be identified include acting as a liquid asset, framework of prices and means of control within the economy.[7] A number of more general theories of money have also been developed over time. Early theories included the commodity[8] and then Chartalist[9] and State[10] theories of money and then commoditisation or critical theories[11] as well as later Societal theories of money.[12]
A huge amount of writing has been produced on the theories and functions of money but with a correspondingly significant amount of confusion having arisen and uncertainty remaining. Money is a complex concept and a number of separate perspectives can be distinguished. A series of separate economic or transaction, market or value, legal, and social or cultural theories of money have already been distinguished. Each of these implies certain functions and characteristics with all of them have to be taken into account in understanding the full importance and significance of money. These are considered in further detail bellow.[13] The specific theory of money adopted also determines the scope and content of the particular type, or types, of money covered. Money can take many forms depending upon how it is defined.
While money principally now consists of coinage and bank notes as well as account credits, electronic and digital representations of money and foreign exchange, the historical development of money can be considered in terms of barter and gift economics, commodity or representative money, metal coinage and gold, bank notes and accounts credit, electronic and digital money.
(a) Barter and Gift Economics
The origins of money are often attributed to primitive barter systems. This is correct to the extent that money can be considered to have developed out of the exchange function of barter although money and barter have historically been developed in parallel with money never replacing barter completely[14]. Barter suffers from the limitation of lacking any common standard of value or measurement, the need for a double coincidence of wants and inability to store value over time[15]. Barter systems still benefit from their simplicity and flexibility.
Many earlier more primitive societies have also relied on gift economics rather than barter directly with barter only often been used for non-close community exchanges with strangers[16]. Under a gift economy model, no strict consideration is paid although other favours or valuables may be exchanged or circulated[17]. Such gifts or donations may be made through self-interest or collective benefit as well as for other altruistic, status or prestige and reputation purposes. Barter and countertrade are still used in modern international trade and in retail trade[18]. Retail barter has also been facilitated through the Internet and exchange or social exchange sites while this may also still be used informal or underground banking economies.
(b) Commodity and Representative Money
Early forms of money used commodities with an inherent sue or exchange value or other tokens or items which could be used to represent an agreed amount of value. These took various forms including seashells, glass beads and salt as well possibly as livestock and agricultural produce. The shekel was developed as an important form of commodity money in Mesopotamia from 3000 BC[19]. Commodity money was used by the Sumer civilisation with the Sumerians also using silver bars for account purposes. One of the most commonly used items was the mollusc shell or Cowrie which was relied on in the Indian and Pacific Oceans and Africa and the Middle and Far East[20]. Commodities, such as shells, could also be for weighing, valuation and currency payment purposes. A ‘touchstone’ might be used to determine purity with value then being calculated from the total weight available.
Intermediate commodity money could also be used to facilitate barter with the representative item being held until one of the barter products was available such as on a later harvest or trading voyage. Japan used a rice based koku. Other commodities with an inherent value may also be used for this purpose including cattle, tobacco and wine or other alcohol. The shekel originally used barley which was tied to other commodities including metals such as silver, bronze and copper. Shells or ivory were often used where metal was not available. These had the advantages of limited availability, easy of transportation and storage, relative permanence and security not being copyable or counterfeited.
(c) Metal Coinage and the Gold Standard
These early forms of commodity or representative money would later be replaced by various forms of metal coinage including copper, silver and gold.[21] The first coins were made from an alloy of silver and gold electrum in 800 BC. Gold or silver coin was first used by the Lydians[22] with stamped coins were first used between 650-600 BC[23] The Egyptians used gold bars as a medium of exchange.
Gold and silver were commonly used although iron was also used in Sparta and large copper slabs in Sweden. The Greeks used metal coinage in the 6th century BC and developed silver based coinage in the 5th century BC with their mines in Laurium and Thorikos.[24] The Carolingian system of pounds, shillings and pence was introduced by King Pepin the Short of France (751-68) who was the father of Charlemagne[25]. Early Celtic coinage dates from the 5th century.[26] Paper coins were used in Leiden during the Spanish siege of 1574 due to the absence of metal to make coinage.
Coins with a fixed weight and density would later be stamped to confirm authenticity and avoid the need for testing. Coined metal had the advantages of assigned and differentiated value and authenticity of content. Metal coins had the disadvantage of being ‘clipped’ (metal removed) or their purity debased (through mixing with other cheaper metals). Governments could earn fees on minting the original rough metals or when old coinage was brought to the mint either voluntarily or under a formal re-coinage.[27] This is referred to as seigniorage.[28]
Early laws on debt, contracts, property and business practices were developed by the Babylonians under the Code of Hammurabi in 760 BC[29]. Hammurabi was the 6th King with the law following the earlier codexes of Ur-Nammu of Ur (2050 BC), the Codex of Eshnunna (1930 BC) and the Codex of Lipit-Ishtar of Isin (1870 BC).
Metal currency was in many countries convertible into gold or silver although convertibility would be suspended during crises and later removed under a law. The British ‘Pound Sterling’ represented the amount of sterling that the pound was convertible into. England would later formally adopt the Gold Standard with banknotes being convertible into gold at a pre-set price.[30] The Gold Standard formerly operated between 1880 and 1913 with major currencies agreeing to a fixed price and continuous convertibility. This only created a system for the exchange of value between currencies. It did not allow for the convertibility of all notes into gold on demand. France and US had attempted to adopt a bi-metallic standard using gold and silver as legal tender.
A Gold Exchange Standard was also introduced later with sterling being fixed to gold and all other currencies to sterling. This would later be replaced by the Dollar Gold Exchange Standard set up following the Bretton Woods Conference in July 1944. Under the Bretton Woods arrangements, the dollar would be fixed to gold at US$36 per ounce and with all other currencies being fixed to the dollar subject to a formal revaluation system. Convertibility was ultimately suspended in the US in 1971 with the closure of the gold window under the Bretton Woods system.[31]
(d) Bank Notes
. Chinese merchants kept coins with a hole in the middle [32]Paper money was introduced in 600s in the Song Dynasty to make up for the limited supply of copper coinage. ‘Jiaozi’ notes being introduced from the 7th centuryon strings which were then deposited in exchange for a receipt. These developed into jiaozi. Paper currency was issued in 600 AD and notes commonly used during the Song Dynasty following a shortage of copper. Standard paper currency with the Chao became common during the Yuan Dynasty under Kublai Khan. [Notes had limited duration, were exchangeable for specie and usually traded at a discount.] Following excessive printing, paper money was prohibited during Ming Dynasty after 1455 in an attempt to limit hyperinflation with external trade also being halted.
Warehouse receipts were used in Egypt from around 330 BC under the Ptolemies. These represented deposits of grain which could be used for exchange purposes. This allowed the creation of an early banking system with the receipts being used as representative money. Early forms of deposit accounts and accounting records were also developed which allowed transfer by account entry only.
Paper instruments, including bills of exchange and promissory notes, were developed by the Italians from the 1300s onwards[33]. The issuance of European banknotes can be considered to date from the Stockholm Bank (Stockholms Banco) in 1661 although the bank had to be closed in 1664 after it could no longer redeem notes for coinage. Goldsmiths in England began to issue receipts in return for coinage deposited with them from 1633[34]. All banks in England and Scotland were able to issue their own banknotes in the form of promissory notes until monopoly rights were conferred on the Bank of England under the Bank Charter Acts [1833 and 1844][35].
. The use of a modern non-convertible fiat paper-based monetary system was originally developed by Law in the 1700s although the system collapsed after the Law also took over the whole of the country’s debt with an over issue and massive increase in price of notes not supported by the overseas trading rights conferred. This Mississippi crisis followed the South Sea Bubble in the UK and Tulip mania in Holland and resulted in the development of [36]A limited amount of banknotes were issued during the reign of Louis XIV in France before the infamous Scotsman John Law transformed this into a full currencypaper based currency systems being out back over 100 year. Inconvertible paper currency was introduced in the UK after the suspension of payments in 1797 despite the failures of paper currency in France and America. Monetary regulation would be introduced in the UK under the Banking Act [1833] and Bank Charter Act 1844.[37] American ‘Greenbacks’ were be printed during the American Civil War. Confusion remained within the US with regard to the issuance of notes until the establishment of the Federal Reserve Bank in 1914.[38]
Credit instruments dated from the 13th and 14th centuries using payment instruments not involving coinage. Difficulties arose with the Church which attacked usury although that had originally been condemned by Aristotle. Various devices were developed to overcome this with many of these practices continuing to be used in modern Islamic banking[39].
The English Treasury used wooden tallies which denoted the amount of taxation to be collected for borrowing and payment purposes.[40] Tallies were used between the 12th and 19th centuries. Two wooden tallies would generally be used with the Treasury holding one and the taxpayer the other. The tallies could be discounted for silver or gold and the Treasury could create additional funds by issuing tallies not backed by any specific tax debts.
Goldsmith receipts were later issued in England which confirmed the amount and purity of metals or other valuables held on deposit. The goldsmiths could later lend specific amounts of specie as this was fungible and subsequently provide credit through receipts only. Bills of exchange were commonly used for payment purposes and as a store of value. Bank notes were originally exchangeable for specie although this commodity convertibility would later be removed with the introduction of fiduciary or fiat (‘let it be done’ in Latin). Legal tender was originally referred to as ‘forced tender’. The US gold stock only covered 16% of currency and demand deposits in 1880 and 0.5% by 1970. Up to 5,000 different types of banknotes were issued in the US before monopoly rights were conferred on the Federal Reserve.
Fractional reserve banking can be understood to refer to the issuance of notes in excess of the amount of specie on deposit. Issuing banks would later be required to hold fixed reserves of currency or government securities to cover a proportion of their note issuance.
(e) Account, Electronic and Digital Money
Coins and notes may also be deposited with banks which create account credits. This is often referred to as ‘bank money’ although the term ‘account credit’ will generally be used in this text as this is not strictly money and deposit accounts may be offered by central banks and by other non-bank financial institutions. Funds deposited with central banks have also referred to as reserves. Coins, notes and reserves can also referred to as’ ‘high powered money’ or the monetary base.[41]
With the removal of issuance rights in favour of monopoly central bank money, banks can still create account money through deposits and credit transfers. Only around 3% of modern money exists in the form of coin or banknotes with most money taking the form of deposit or account credits with either the central bank or private banks. This bank or account credit money originally arose where monies were deposited with a bank. These funds may then have been transferred into a separate account with the same bank or an account with another bank or financial institution. Account credits can also be created where an account holder borrows additional funds from the bank either by way of loan or overdraft which funds may then again either be transferred to other accounts within the same bank or other banks.
These account values may then either have been created through original deposits or separate borrowing or credit.[42] While some depositors may withdraw some funds in the form of coin or cash, the largest part of these values remain in the form of credit. When monies are transferred from one account to another account, the total amount of deposits increases which, in turn, increases the total money supply. This is known as the ‘credit multiplier effect’. [43] While this is also referred to as the private money creation, the banks are strictly only creating lending or credit rather than separate money. These credits are nevertheless taken into account in calculating the total money supply. The banking and financial system more generally can then be considered to operate through complex overlapping systems or networks of inter-connected financial claims.[44]
Private banks may then historically either have issued their own bank notes or later credit through account transfers. The amount of credit created may have been far in excess of their underlying deposit base or reserves although this was more carefully controlled subsequently. Banks traditionally have kept a fraction of their reserves (under a fractional reserve system) which has been as high a third or around 30-33%. These liquidity reserves have since fallen significantly to between 3-5% with the emergence of inter-bank and other secondary money markets which allow banks to borrow large amounts of money on a short term basis. Banks will now hold minimum liquidity and capital reserves both as a matter of practice and law or regulation which limit their total debt or leverage levels.
Electronic money generally exists in one of two forms. Electronic, Internet or other digital systems may be used to transfer payment instructions. Instructions and being carried out through traditional banking payment and settlement systems. Alternative forms of digital cash or Ecash of [45]Account values may also be transferred through electronic or other digital means. Electronic money, Digital cash or Ecash has become of increasing importance with the development of computers and digital telecommunications.operate on a pre-payment basis with traditional money being loaded onto the device for later use. Both of these systems use traditional money and money channels.
The most recent innovation has been to attempt to create substitute currency systems using some form of electronic or digital token.[46] These then operate on a pure internal issuer credit and trust basis outside traditional money and payment systems. These and other electronic money systems can confer specific advantages, including increased choice and improved convenience, lower transaction costs, new entry incentive and reward schemes a well as the promotion of higher consumption levels more generally. Problems nevertheless remain with regard to cost, anonymity and privacy, security, usability and acceptability and issuer solvency and viability.[47] This may also interfere with the ability of central banks to control the money supply and carry out traditional monetary policy with possible further difficulties in terms of lack of transparency, abuse for financial crime or money laundering purposes and potential wider collapse in confidence, contagion and financial stability issues.[48]
The development of such schemes is also subject to strict legal and regulatory control and, in particular, where they provide for initial payment or later exchange or convertibility.[49] These will often create insurmountable obstacles except possibly for small private, community or social schemes that can benefit then from appropriate exemptions or concessions.
The development of new electronic money options and facilities are important initiatives. These promote innovation and competition and provide new services and facilities for corporate and retail customers. This can increase business opportunities and promote consumption and growth. More simple payment instruction and pre-loaded schemes nevertheless only represents extensions of more traditional money systems while new form of digital currency schemes may either be subject to strict regulator controls or only operate on the basis of users’ confidence in their viability, integrity and longer-term stability.
2. BANKING AND CREDIT
The intervention of formal financial institutions more generally only become necessary where [50]The provision of finance and credit was historically initially limited either to close family relations or within land holding relationships and then later to immediate merchant or trade counter parties.longer term credit was involved or some geographic distance existed. The development of more formal financial or credit facilities has then occurred with the increased trade that took place at the end of the medieval period and associated increases in national and regional commercial mercantile dealings. This was associated with the emergence of the early towns and cities during this period and with the expansion of local, regional, country and then cross-border markets and fairs.
(1) Ancient Period
While modern banking is generally credited to the Italians in the 12th and 13th centuries, early forms of credit, deposit-taking and money-changing did exist in the ancient world. Banking in the form of custody or deposit originated in religious temples due to their security and accessibility. Any form of wealth may have been deposited including agricultural produce and animals or precious metals or jewels. Banking was practiced in the temples of Babylon in Mesopotamia as early as 2500 BC[51]. Early records of advances date from 18th century BC temples in Babylon with priests making advances to merchants. The oldest known banking house in the world is possibly that of ‘Egibi and Son’ in Babylon which was established in the reign of Sennacherib about 700BC.[52] The first banking law was possibly the Code of Hammurabi.
Public grain banks had developed in Egypt in the 4th century BC which system was formalised under the Greek Ptolemies (332-30 BC). This allowed for the creation of a centralised credit system in Alexandria using a network of storage banks with payments being made through account entry transfer.
The Aegean island of Delos emerged as an important banking centre in the 3rd century BC which position was confirmed further following the Roman victories in Carthage and Corinth. The Romans developed the earlier Greek models and formalised deposit and lending practices. The Romans still preferred to make payment in cash which limited expansion of the system. A major crisis arose during the reign of Gallienus (260-268 AD) when the banks rejected the copper sent from the mints.
These practices were then taken forward by the Greek money-changers and money-changer bankers. Early deposit, coinage, foreign exchange and credit transactions were conducted in Greek temples and by public and private parties. Moneylenders could provide credit notes allowing funds to be obtained in different ports. These grapezites carried out a range of money exchange or changing, deposit-taking and payment services.[53] Money changers increasingly became deposit takers as coinage was standardised. The first banker on record was Pythius in Asia Minor in the 5th century BC. The slave Pasion would later be freed and acquire Athenian citizenship having succeeded as a banker in 371 BC. By the first 3rd century BC payment could either be made through a written order for payment, a giro transfer (with a bank as intermediary) or an early form of advice note or cheque (payment direction to a bank).[54]
The Greek city states developed early forms of monopoly banking to guarantee income. Public or state banks (demosiaia trapezai) were also developed from the late 4th century BC. Money-changers operated in Rome from the end of the 4th century BC before the city even minted its own currency. Early managers of silver (argentarii) then evolved into money-changer bankers by the 2nd century BC (trapezita or trapessita).[55] These early forms of banking generally fell into disuse between the 5th and 11th centuries.[56]
The Romans used to estimate values in such as assets cattle or sheep with unminted copper coin then being used for exchange purposes. Scales were used to ensure that the correct amount was transferred which practices were imported from Etruria.[57] Early forms of financial contracts were developed by the Romans which included the Stipulatio (verbal undertaking which could include the payment of money) and Mutuum (loan of money or goods for consumption) as well as Commodatum (gratuitous loan for use), Depositum (deposit for safe custody) and Pignus (security for a debt).[58]
Usury and charging interest was prohibited under the Jewish Torah and Hebrew Bible. The charging of interest was previously not prohibited such as by the Mesopotamians, Hittites, Phoenicians and Egyptians. Interest was permitted on commodity money including ‘food money’ using olives, dates, seeds or animals[59]. Even the Jewish restrictions were only understood to apply to lending between Jews and not with Gentiles[60].
Banking fell into disuse following the end of the Roman Empire until the beginning of the Middle Ages. Payment and exchange was stimulated through the growing fairs and the need for the transfer of payment to support the Crusades in the 12th century. Banking was restored by the Knight Templars and Hospitallers which established European-wide deposit and credit facilities. Double-entry accounts were kept and demand notes were redeemable at any lodge across Europe. Foreign exchange contracts date from the 1100s. Receipts issued by moneychangers at fairs later developed into bills of exchange. Early receipts were redeemable at other fairs or discountable.
(2) Italian and Dutch Banking
The business of modern banking began with the pawnbrokers, money-changers and deposit banks in Italy in the twelfth and thirteenth centuries.[61] The early banks developed in the Tuscan towns of Florence, Sienna and Lucca, although they subsequently spread to Venice and Genoa and later to all of the major cities in Europe including Amsterdam and London.[62]
Banking developed in the large Italian city-states with Italian financiers spreading across Europe. The Medici became among the most successful. Forty-three branches of Italian banking houses had been opened in Avignon by 1327 after Pope John XXII took up residency. Philip IV of France had expelled the Jews in 1306 and closed down the Knights Templar in 1307 to steal their wealth. Italian bankers were excluded in 1311 and their debts collected. The Bardi was subsequently bankrupt in 1353 after Edward III of England defaulted in 1347 with the Peruzzi being bankrupt in 1374. The Italians were expelled from Arragon by King Martin I in 1401 and prohibited from carrying on business in England by Henry IV in 1403. Many were imprisoned in Flanders in 1409 and expelled from Paris in 1410. Giovanni di Bicci de’Medici later became the banker to the Pope in 1413. Lorenzo di Antonio Ridolfi had earlier won a case in Florence in 1403 which confirmed that interest payments paid by the government were legal.
Following the Bardi and the Paruzzi in the fourteenth century, the largest bank in Italy in the fifteenth century was the Medici. In the sixteenth century, the Italians were replaced by the Germans from Augsburg and Nuremberg, who dominated the fair at Lyons and Frankfurt, the Bourse of Bruges and later Antwerp.
Of particular importance were the Fuggers of Augsburg who developed from wool traders to bankers to the House of Hapsburg to elect Charles V as Holy Roman Emperor, although the Bank collapsed in 1557 when Philip II, son of Charles V, ordered payments to his creditors to be stopped.[63] The Fuggers were, however, particularly significant in developing modern financial intermediation involving borrowing funds from retail customers and then lending wholesale with a return based on the saving in transaction cost for the borrowing government.
The first state deposit bank had been the Casa di San Giorgio in Genoa in 1407 with the oldest surviving private bank the Monte de Paschi which has been set up in Siena in 1472. The early deposit banks did not create money as such and operated on a system of 100 per cent reserves with no discounting or lending facilities. Although the Bank of Amsterdam was not a lending or discounting bank as such, and [64]At the end of the sixteenth century and the beginning of the seventeenth century, financial supremacy moved to Amsterdam, with the Bank of Amsterdam being established in 1609, which was the first deposit bank outside Italy and Spain whose bank money went to a premium over coin because of its assured high-quality and ease of handling.operated of a full reserves basis, lending was made to the City of Amsterdam and the East India Company during the seventeenth century and in the 1780's. Following the Napoleonic Wars and the movement of the precious metal trade to Hamburg, the Bank turned into the Netherlands Bank.[65]
The first central bank was the Capital Bank of Sweden (Riksbank) which was taken over by the state in 1668, although it had been formed in 1656 as an exchange and lending bank with the two departments being operated separately. The exchange section was modelled on the Bank of Amsterdam with the lending operations modelled on the Bank of Lending which had been set up in Holland in 1614, although it had failed to develop. The strict division between operations is similar to the separation of the issue and banking operations of the Bank of England established under the Bank Act of 1844.The Bank issued the first banknotes in Europe in 1661, following the issuance of ‘copper’ notes by copper companies in Sweden as a substitute for payment in coin. Although goldsmith receipts in England were circulated in the seventeenth century, the Swedish copper notes of 1661 were the first banknotes.
Usury had remained a problem in the development of banking with the Church’s ban on charging interest on the lending of money to others. Usury was banned under the Bible in Deuteronomy 23:19-20 and Exodus 22:25. Usury by the members of the clergy was banned under the Council of Nicea in 321 which was extended to all church members by Leo I. Various means of avoiding the restrictions were developed including payments for actual loss (damnum emergens) and opportunity loss (lucrum cessens) as well as penalty payments made on the rolling over of loans (poena conventionalis) as well as partnership arrangements (including contractus trinius)[66]. Charging interest was permitted in England under Henry VIII and Elizabeth I although ceilings on permitted interests rates were lowered from 10% to 5% under Queen Anne in 1713[67]
(3) English and Scottish Banking
Banking and finance developed more slowly in England and Scotland than elsewhere[68]. England would surpass its Continental rivals following the Financial Revolution in the 17th and 18th centuries with many forms of modern banking being first introduced in Scotland in the 18th and 19th centuries. English coinage was characterised by the emergence of the silver penny from the 700 onwards which was not subject to the same degree of debasement as Continental coinage until the end of the medieval period around the end of the Wars of the Roses in 1485. Monetary expansion during the Renaissance period was accompanied by corresponding advances in sailing (with the invention of the compass) and trade, printing and communications and mining and minting.[69] Britain would then enjoy a series of parallel Financial, Agricultural and Commercial revolutions between 1640 and 1780 which brought forward the Industrial Revolution in 1750-1850. Sterling and the Gold Standard would then emerge as the world’s dominant monetary anchors until the outbreak of World War One in 1914 with more limited corrective initiatives being undertaken in the 1920s. The Sterling Gold Exchange Standard would then be replaced by a US dollar Gold Exchange Standard under the Bretton Woods system agreed in 1944 which would last until fixed currency arrangements were abandoned between 1971 and 1973 following the closure of the ‘Gold Window’ by US President Richard Nixon in 15 August 1971.
Numism (or Numismatics) refers to the scientific study of the history of money and its nature and use. Notaphily (or Notaphilia) is the study of banknotes. Scripophily (or Scripophilia) is the study of share and bond certificates. Exonumia (or [1]Paranumism or Paranumismatics) is the study of tokens.
[2] See generally E H Quiggin, A Survey of Primitive Money: The Beginnings of Currency (Methuen London 1949). See also Glyn Davies, A History of Money (University of Wales Press Cardiff 2002) 27-28. See also John Chown, A History of Money from AD 800 (Routledge London 1994); and Niall Ferguson, The Ascent of Money (Penguin London 2008).
[3] On early forms of exchange, Quiggin, Primitive Money (1949). Only the Incas of Peru were able to develop a structured civilisation without money. Hemming (1970).
[4] C P K Kindleberger, A Financial History of Western Europe (Allen & Unwin London 1984) 17.
The term [5]money substitute can be given separate meanings. It is essentially any alternative to money although the scope of this depends on the particular definition of money adopted. It is most commonly used to refer to means of payment, such as bills of exchange, cheques, bankers’ drafts and other payment instruments and may also include deposited funds or any other obligation to make payment. See Chapter 1, (n 4).
[6] On the meaning of each of these, Section V.
[7] Davies refers to acting as a liquid asset, providing a framework of prices for a market allocative system, acting as a causal medium within the economy and as a means of control within the economy Davies (n) 27-28.
[8] Commodity theories of money consider money only in terms of s specific commodity or metal such as gold, silver and copper.
[9] The Chartalist theory of money considers money as a creation of the government or state. Section and ().
The State theory of money represents a more sophisticated form of Chartalist theory with the state defining money and assuming a monopoly power of issuance as well [10]as accepting money as defined in the form of taxation. This was referred to as the ‘circularity’ of money by G F Knapp. George F Knapp, The State Theory Money (Macmillan London 1924).
Karl Marx criticised the capitalist system is resulting in the [11]commoditisation of labour with earlier feudal servitude been replaced by a capitalist production and debt system. Karl Marx, Kapital (1867, reprinted Lawrence and Wishart London 1954). This corresponds with other ‘Critical’ theory writers in the development area who criticise modern globalisation as creating an exploited and dependent third model.
[12] The Societal or Societary theory of money examines money in terms of commercial practice or social attitudes and was develop by earlier German monetary writers. See, for example, [Nussbaum] and W Gerloff, Geld und Gesellschaft (1952). For comment, Mann (5th ed) 22-23 and (n 110) and (n 363 below).
[13] Section V.
[14] On early barter systems, Paul Einzig, Primitive Money in its Ethnological, Historical and Economic Aspects (1966).
[15] Glyn Davies, A History of Money (University of Wales Press Cardiff 2002) 13-18.
[16] Marcel Mauss, ‘The Gift: The Form and Reason for Exchange in Archaic Societies’ 36-37; and David Graeber, ‘Toward an Anthropological Theory of Value’ 153-154.
David J [17]Scheal, The Gift Economy (Routledge New York 1988).
Davies refers to the use of barter in [18]economic crisis such as in Germany in the 1920s and with bilateral trade agreements following the Second World War. International barter was promoted in London in the 1970s including with Eastern Bloc countries, Iran, Algeria and Brazil and during the 1980s. This was supported by growth in planned trading with Communist and former Communist countries, international price disruptions, the need to avoid conditional borrowing, increase in global inflation and instability in international exchange rates following the collapse of the Bretton Woods system of managed exchange rates from 1971. Davies (n) 18-21.
[19] Kramer, History Begins at Sumer ( ) 52-55.
[20] Davies notes that the most common source of cowries was The Maldives Islands. Davies (n) 36. Other early items included whales’ teeth and yap stones and beads. Davies (n) 37-42.
[21] On money as a social institution and public good, James Tobin, The New Palgrave Dictionary of Money and Finance (Macmillan London 1992) vol.2 770-779.
[22] Herodotus, Histories (450-420 BC) I, 94. This as one of the first significant historical texts. See also Reid Goldsborough, ‘World’s First Coin’ http://rg.ancients.info.2003-10-02.
[23] (n 17). Davies (n) 66-68. On pre-coin metallic money, Davies 45-48. [ ]
[24] On Greek and Roman money, Davies (n) ch.3.
[25] John Chown, A History of Money – From AD 800 (Routledge London and New York 1994) 23. The English King Offa of Mercia introduced a silver penny in 1760 with silver pennies later being first minted in Scotland by David I (1124-53). Chown 24-26. [ ]
[26] Davies ch.4.
[27] Section II (3).
This can also be understood to refer to the difference between the legal ([28]specie) and market (commodity) value of the currency. The term can also be used more generally to refer to any wider economic benefit from producing money or credit. This would, for example, include lending money by private banks although this is strictly credit rather than money creation as such. Mary Mellor, for example, refers to the benefits of seinorage as having been transferred from the state to the private bank sector and to speculative financial investors. Mary Mellor, The Future of Money (Plutopress London 2010) 25.
[29] Charles F Horne, ‘The Code of Hammurabi: Introduction’ Yale University available http://www.yale.etu/lawweb/avalon/medieval/hammint.htm.
[30] Section II (3)(d).
[31] Section II(5)(d).
[32] On Chinese coinage, Davies (n) 55-58.
[33] Section II(2).
[34] Section II(3)(b). Davies (n) 248. Kindleberger questions the attribution of the origins of English banking to the goldsmith bankers. Charles P Kindleberger, A Financial History of Western Europe (George Allen & Unwin London).
[35] Davies (n) ch.7; and Kindleberger (n) ch.5. See also Chown [ ]. There was a separate Bank Charter Act in 1847.
[36] Section IV(2).
[37] Sections II(3)(d) and IV(2).
[38] Section II(5).
[39] Blair and Walker,
[40] Section II(3)(b).
[41] On monetary aggregates, Chapter 1, Section 4(1)(d) and Chapter 2, Section..
A deposit or credit represents an amount held in an account maintained for this purpose. Deposits would historically have been made a form of coin and then banknotes. A deposit may also be created through the transfer of funds from another account either held with the same bank or a different bank. Accounts would originally have been held in a paper form using [42]double entry book-keeping with separate credits (assets) and debits (liabilities). These are now usually held in an electronic form. Accounts we also now be held by other institutions, other than banks, such as building societies in the UK.
This is referred to as the credit multiplier effect. Banks may historically either have [43]onlent the full amount deposited or kept a reserve and lent the balance to another customer. Banks have traditionally kept a liquid reserve of around 30%, with 70% being advanced in the form of new lending. This 30% reserve has been given statutory basis at certain times such as in the UK during the 1960s and 1970s. Modern banks are subject to separate liquidity and capital adequacy requirements. Liquidity ratios were as low as 1-3% although these have since been replaced by the new requirements imposed by the Basel Committee in 2011 following the global financial crisis (Basel III). Banks are also subject to separate capital adequacy obligations which impose a minimum 8% of capital to risk-adjusted assets ratio. This effectively means that they cannot lend more than 12 times (the opposite or obverse of 8%) of their capital.
[44] Chapter 1, Section.
[45] Different options included Mondex, Visa Cash, DigiCash and eCash and CyberCoin and NetCash.
[46] Systems System include Flooz, Beenz, iPoints and Cybergold.
A number of different costs have to be considered including website design and software programming, systems or terminals, settlement services as well as other legal and administrative costs. The programming must also allow for identification and verification in payment systems but also ensure full privacy and anonymity in digital money systems without audit tagging or audit trails. Systems must also be fully secure and have appropriate contingency planning arrangements in place. Usability, participation and access must be [47]sufficient wide and with sufficient internal liquidity and circulation. Issuer stability and wider system stability must also be fully protected to support confidence and reliance.
On the monetary policy [48]implication of the development of electronic money, Section 4(4) and (n 338).
A number of laws have to be considered in determining whether a new currency scheme can be set up. These include confirming that the new system does not contravene domestic currency monopoly and counterfeiting statute. The issuer must not be carrying on banking or deposit-taking without a licence or dealing in investments or interests in securities or operating [49]a collective investment schemes. Other provisions may also be relevant such as with regard to the provision of money exchange or transmission services as well as payment services (such as under the European Payment Regulation) and money-laundering controls.
[50] R C Michie, ‘Development of Stock Markets’ The New Palgrave Dictionary of Money and Finance (1992) 662-668.
Valuable assets including cereals and money were placed in the storerooms in the temples for safekeeping. The priest could then lend portions of these assets to those requiring food or money. Michael Rostovtzeff, The Social and Economic History of the Hellenistic World (Oxford 1953) Vols. I-III. See also B Bromberg, ‘The [51]O`rigin of Banking: Religious Finance in Babylonia’ The Journal of Economic History (1942) 2, 77-88. For discussion, R Bogaert, R Brion, G Kurgan-Van Hentenryk, J-L Moreau and H Van der Vwee, A History of European Banking (Mercatorfonds Antwerp 2000), Part I.
[52] http://www.banking-history.co.uk/history1.html .
[53] Early money changing was complex due to the large number of different standards in operation and up to 2,750 different coins in circulation.
[54] Bogaert et al (n 7) Ch. 2.
[55] While all of the earlier banking techniques were applied by the Greeks and Romans including deposit taking, on-lending, payment transfers and account entries, the scale of these operations was still relatively limited. Early bankers did not finance and support industry and commerce in the same manner as today. Bogaert (n 7) 68. Bogaert (n 7) 44-70. See also T Frank et al , An Economic Survey of Ancient Rome (Baltimore 1933-1940) 4 vols; A H M Jones, The Later Roman Empire 284-602: A social, economic and administrative survey (Oxford 1964) 3 vols.
[56] Rome was sacked by the Germanic tribes in 476 AD with the only banker surviving by AD 600 working for the Pope. Classical banking on a limited scale did continue in the Eastern Roman Empire although only on a small scale. The collapse of trade and commerce during the Middle Ages restricted its development. The only principal activity to survive in the West was money-changing. Herman Van der Vwee, European Banking in the Middle Ages and Early Modern Times (476-1789) in Bogaert (n) Part II. [Ginette Kurgan-Van Hentenryk, ‘European Banks in the 19th and 20th Centuries’ in Bogaert (n 7) Part III.] [Ginette Kurgan-Van Hentenryk, Rene Brion and Jean-Louis Moreau, ‘European Banks since the Second World War (1944-2000)’ in Bogaert (n 7) Part IV.]
James Muirhead, Historical Introduction to the Private Law of Rome (A & C Black 3rd ed 1916 London) 54. Muirhead notes that under [57]Servious Tullius land transfers (Mancipatio or Mancipium) would be carried out publically with officials being used to weigh the copper on the scales to act as impartial balance holders with five citizens acting as witnesses. Servius later introduced rectangular pieces of copper of fixed values which were stamped under his authority and used to measure raw copper on the scales. Coined money was then introduced by the Decemvirs around the fourth century. 54-55 and 122.
On the [58]Stipulatio, Zimmerman (n) Chs 3-4; on the Mutuum Ch 6 and Commodatum, Depositum and Pignus Ch 7. Chapter 1, Section and (n) . See also Buckland (n) Chs 10-12.
[59] Fritz E Heichelchein, An Ancient Economic History (Leiden 1965) vol.1 104-566.
[60] Paul Johnson, The History of the Jews (Harper Collins New York 1987) 172-173.
The money-changers which later became exchange bankers originally had benches or [61]banca from which the word ‘bank’ was derived.
Lending to English kings in the thirteenth and fourteenth century resulted in considerable losses to the [62]Cicciardi of Lucca and the bankrupting of the Bardi and the Paruzzi of Florence following Edward III's default in 1348.
[63] Kindlberger (n 6) 45.
[64] Kindlberger (n 6) 18.
[65] (n 6) 49.
[66] Chown (n 2) 119-122.
[67] Kindleberger (n 6) 41.
[68] D C Coleman notes that England, in the middle of the 1400s, remained, ‘on the near fringes of the European world, economically and culturally as well as geographically... London was overshadowed in wealth and size by the great cities of Continental Europe, and nothing in England even began to match such a manifestation of wealth and power as the Medici family controlling the biggest financial organisations in Europe’. D C Coleman, The Economy of England 1450-1750 (OUP Oxford 1977) 48.
[69] Davies (n) Ch.