Evolution of Banking during Different Periods

After reading this article you will learn about the evolution of banking during different periods.

Ancient Period:

Any effort to trace the roots of banking or history of banking in an authenticated written form may perhaps always remain incomplete as in one or the other way the functions of a bank always existed right from the day human race came into existence. No doubt its shape, style and methods differed from time to time according to the required needs of banking.

Today we think about a bank as an institution that deals in money. But what about banks or banking when there was no money. Today we recognize money in the form of coins, currency notes and lately plastic money etc., for purchasing things, commodities and services etc., for our day to needs. We also take care to keep our money in a safe place or custody for money is valuable.

This concept of safekeeping or safe custody of valuable things was ever present in the mind of everyone. On the other hand something valuable also existed always in all times. When value existed the sense of its safe custody also existed. It is another concept that value of things changed from time to time.

In the early stages of human history like stone age the value differed in form of things then required for day to requirements of living, thereafter many other things like animals, animal skins, plants etc. attracted more value and man started protecting and taking care of such things. Accordingly first stage of Banking appears to have started with collection valuable things and safekeeping thereof.

Now Question arises what are valuable things. Anything that is needed or required in any form and for any purpose may it be of daily use or for food carries value and is a valuable thing. Taking care of valuable things or safe keeping of valuable things is not only human tendency. This tendency is seen among animals also.

Have you ever seen a very long queue of small ants holding something in their mouths and going towards an ants-hill. All these ants are carrying food in their mouths for depositing in their respective ants-hill. The Honey bee collects honey from flowers and stores it in their Honey-combs. Likewise humans in the early stage of humanity had been safe keeping anything they found valuable.

First the used to keep surplus valuable items in a safe place and at the time of need these items were taken out of the safe place for use. Safekeeping of valuable things was like depositing the money(valuable things carry value And hence money) in a safe place(Say Bank) and taking these out for use was like withdrawing from safe place(Say Bank).

The first step for banking starts with collection of valuable things which are useful for consumption or otherwise. If seen as evolution of human being this phenomena can be traced even in Pre-Historic period. The Pre-historic period can roughly be taken from 20000BC to over 2000-1800 BC.

During this period human civilization was in its infancy as in Stone-Age about 25000-18000 years ago man was living like other creatures with no knowledge of basic needs of today like house, cloths or shelter etc. This period is also known as Pleolithic period or old stone age period.

At this stage of human development people were not settled. They remained wandering from one place to another place. They were Nomadian, hunter-gatherers. The animals killed by them were source of food, bones, horns and Antlers to meet the need of, hunger by flesh of killed animals, cloth by skins and tool by bones.

In addition to servicing the purpose of cloths the skin of killed animals was also used for making sacks and water carriers. The fact is that human living during this period was basically food gatherers and dependent on nature also.

For hunting and staking wild animals single person had to track long distances in search of animals. It was always not possible to kill any animal bare handed. As such slowly people leaned the use of stones as tools and weapons. Stones hard and tough capable of penetrating with sharp edges were collected in rough forms.

This enhanced the capacity of hunting and people were able to collect more and more food leaving enough for future use. But it was perishable. Resultantly people started to form small groups to share such surplus food and also started making more and more stone weapons and tools. In the beginning tools were simple.

Slowly these were improved; specialised and flanking tools were made. In short stone tools and weapons developed during this period were very valuable items. Once a tool was made it was preserved and kept in safe custody for future use. Thus the value of these tools was used as money also.

Next comes Mesolithic-Age means middle Stone-Age. By this time man had learnt to make use of fire. The group of people also started to increase acquiring more food and more tools for which more and more improved tools came into existence. Now wood, Bone, reeds were also used for making tools. Some flinty stones attached with wood handles were also prepared.

During this period man also learnt domestication of animals. Instead of hunting and killing some category of animals were being domesticated. Although first stage of taming the animals had been in practice even in nomadic stage also.

The practice and domestication of animals necessitated the protection and preservation of Plants as well. It was beginning of Neolithic –Age (New Stone-Age) 4000-2000 BC and late Paleolithic man was gradually advancing to the circumstances of changing from nomadic(Wanderers) to settlers.

Keeping in view the convenience, climate, natural resources and favorable sites became their stay points where they settled for longer periods in comparison to nomadic time.

This was turning point when man started behaving with animals for training them. Longer stay at one place provided them an opportunity to see the growing grass, plants, trees in natural for by spread of seeds through the channels of nature and ultimately man also started growing useful plants and thus initial form of cultivation started.

They started learning and to be used to assured and constant availability of food. Longer stays at one place were becoming more longer taking shape of small settlements where growing crops and domestication of animals was becoming way of life leading towards agriculturism and early farming.

Such evolution of human society can well be traced in history throughout the world right from Indus, Vedic, Harrapa in Asia and India but also in Summer, Mesopotamia, Egypt, Aegean China etc.

Without Money there cannot be banking. The purpose of discussing human evolution is just to make it easy to understand that the money was not always in the form in which we see it today. The money according to requirements, circumstances and needs of livelihood had been taking different shapes through the ages.

Not going by the evolution of money and its history it can well be understood that the money had been changing its forms, shapes, type and Value from time to time and through civilizations to civilizations from ancient civilizations to modern day civilization and shall in future also it tends to change as per new requirements and development of new technologies. Money is neither a Currency Note, Gold, Silver, Diamond nor anything else.

These items or names are just token of many as other people have some value for these items and are ready to accept these items in the name of Money. Accordingly it is our mind that decides what money is. All these type of items are only symbols of many representing value of goods or services.

Pre-Historic Age:

Before we proceed further let us have a bird eye view of some things, items, goods etc., which had been used as symbol of money(or Money) and were treated like having some value and acceptable by others.

About 20000BC -5000BC during stone age stones, flints, bones, skins of animals, stone/wood tools, spears, bows, arrows, axes like items were valuable. These type of items were essential for living during ancient periods and were useful in performing day to day activities. Every one was willing to possess such items and others were also willing to accept them for value.

Usefulness added value to these items and in return the added value served the purpose of money of that time. All such items we collected and kept in safe custody. The historians and other scholars have categorized such items as commodity. The value of any commodity can not be ascertained separately. The value of everything is attached with requirement.

If I am in need of FOOD and someone is offering me CLOTH the cloth has no value for me. Likewise during this period people had been acquiring the items of requirement having some value for them in place. Some other item which was not required by them were treated valueless. Anything that fulfills requirement is Money in terms of value and leads to gathering and retaining the value.

1000 B.C Onwards:

With the start of settlements of societies when cultivation and farming started the shape of commodities used as money also changed periodically. With domestication of animals the live-stock and draft animals became more useful in terms of value easily acceptable by all an were therefore used as money.

With increased farming and cultivation, the plant products, grains, wood etc. also became part of valuable things and used as commodities as money. Among animals cattle, goats, sheeps, horses, pigs, camel etc. were though not commodities but used as money because all such type of animals were not only useful for agriculture but were also source of other valuable goods like wool, milk, meat, skin, horns etc. serving the purpose of commodity as money. Till the end of 20^th century cattle were used as money in Africa as a commodity.

Barter System:

When we talk about the commodity, it comes to our mind as an object, material, a good having some peculiar attributes and inherent quality because of which it becomes a useful commodity.

This state of mind creates certain symbolic value for each type of commodity. In turn our mind analysis the utility of such value and creates a type of quantum of value for every object or commodity. This quantum of value of an object becomes a major factor in determining the value of money for the commodities.

Money is what that is easily acceptable by others. This factor therefore becomes value of any object to accept it as money be it a cattle, cloth, pig, grains, currency or coins.

There was a time when money did not exist and what did exist was barter. As the human mind had given certain symbolic values to commodities, these commodities having inherent values were accepted in exchange for certain other types of commodities.

The inherent value of these commodities was like a standard of measure and unit for exchange. It was not always easy to determine a unit of measurement during the period i.e., 20000BC to 1000 BC for all the commodities in terms of money. There had always been a big problem in barter system of accepting one type of commodity to another type of commodity only because individual requirements could differ from man to man.

A person in need of cattle was not able to accept a horse in barter system. It was therefore necessary to search a person who is willing to exchange our commodity in place of his commodity which is required by us. The commodity money in barter system had its own inherent problems but it provided a platform to identify the money and its value.

A unique feature of money emerged in early 2500BC when Slaves (human beings) were also used as commodity. People used to buy the slaves in exchange of anything required by the seller of slaves. If we go through the history and evolution of money many strange commodities can be seen being used as money.

In China and Africa a type of marine gastropod shell known as Cowrie was also used as money around 1500 BC When Cowrie shells were first introduced in Uganda during 1800- 1900BC. Two to Three shells were sufficient to purchase a WOMAN. In NIGERIA the cowries were in use till 1935(By which time Reserve Bank of India was founded).

When in the supply of such shells increased a type of inflation took place. The cost of one woman increased abnormally for 2-3 shells to 10-15 shells. Till 1935 cattle was also used as money in some parts of Africa.

There examples show a typical style of barter system. In the absence of some standard money when things were exchanged for completing a transaction by barter system trading depended only on exchange of goods or as per history of commodity money, most of produce was consumed by the producers themselves but if any surplus was left, it was sold by barter system either directly to the consumer or to professionals traders or was kept in safe custody (like depositing in a bank) in warehouses.

Most of the warehouses were maintained by the states and some by private owners. The people used to deposit their surplus commodities in such warehouses which charged a small annual fee for providing services of safe keeping the stocks. Such warehouses served as BANKERS and the people keeping their commodities as CUSTOMERS for having depositing their goods.

After deposit of every lot of goods, the warehouses used to issue a RECEIPT for the commodity deposited with them. This receipt contained the words “WILL PAY TO THE BEARER ON DEMAND THE PARTICULAR LOT OF COMMODITY”. Say if a person had deposited a lot of 10 KG of wheat with the warehouse the receipt shall contain words “will pay to the bearer on demand 10kg of wheat”.

Such warehouses in ancient times were mainly meant for collecting the grains as TAX from public. Later on these warehouses were used as Safekeeping places for surplus grains of producers also. These were also known as GRAIN-HOUSES. Such warehouses developed in many shapes and were dealing in many diverged activities.

The people knew from experience that the items deposited at the warehouses shall remain deposited for any period of time till they need these again. The people were free to keep their deposits for days, months or years as per their requirements only because by this time such warehouses had earned enough reputation of trustworthiness among people in general.

The History of Knights Templar provides us a living example of well-maintained warehousing services that came into being after Christians took over JERUSLEM from the Muslims in 1099. In order to ensure the safety of large number of Pilgrims from all over the Christian world coming to the pilgrimage of Jerusalem. The traveling at that time was very dangerous.

The knights Templar enjoyed favored status with Popes and Archbishops from all over Europe and North Africa for their gallantry and honesty. They were also rewarded with Alms, Farms, Lands, Livestock etc. They had developed a special recognition among public. As such many pilgrims came to temples for safe keeping their valuable items because of their difficult journey.

This created safe and secure storage facilities at strategic locations along the most used routes. These Templar also used to issue Receipts verifying that they held certain valuables owned by the bearers.

Such receipts were freely transformed into valuable items written on these receipts. We can see such receipts issued by Templar or other warehouses as FIRST FORM OF CHEQUES and most probably earlier form of Banking until 1727.

The tobacco was also a commodity and was deposited in warehouses and in turn warehouses used to issue certificate of quality and quantity of tobacco deposited with them. Such certificates were transferable and used as money.

Bronze-Age:

Approximately in 4000-2500BC man learnt about a metal Bronze. Preceded by the Paleolithic, Mesolithic and Neolithic periods and followed by the Iron-Age the period was known as Bronze – Age. The metal bronze, which is an alloy of copper and tin became more favorite and used extensively to make tools, weapons and other items of Daily use. This helped grew commerce and trade tremendously.

After the new metal Iron was found the bronze age came to an end and Iron became a popular replacement of bronze. During this period of history with refined use of metals many cultural and other developments were noted among the society. With phenomenal development of society the era of some sort of controls emerged.

The society therefore diverged itself in communities like Traders, Farmers, Hunters, Craftsmen, Smiths, Artisans etc. and commerce and trade started growing rapidly which necessitated a form of such MONEY that may carry value and the value can be divided into units and be able to take care of Barter system. This gave the birth of money in the shape of COINS.

No doubt the different parts of the world were being ruled by different type of Governing Bodies having their own ethics and different rules and with that background the Coins used as many were also of different kinds in the economy of different countries with different methods of payments. For example in Rome business transactions and payments were noted on Clay Tablets upto 2500BC.

Likewise in Summer and Mesopotamia payments were recorded in Cuneiform. On the trading route called Silk Road from Rome to China different system was adopted. Lydians made coins around 650BC,During 330BC Alexander the Great’s Empire coins were called silver Tetradrachoes. Julius Caesar’s coin were made in 44BC Islamic coins 632BC. About 600BC China Made coins were shaped like shells. In India coins were made around 300BC. In 620BC Japan made coins were known as Kai Yuan Tong Bao during Tong Dynasty.

Over the time for ancient period to modern days the money had been changing its shape, value and the use as requirement of the society. In Europe and Rome right from 2500BC money had been changing into different forms.

From Bartering of commodities like Honey, Skin, Cloths, Dyes, Metal. Metal made items, Animals, Wine, Pottery, Marble, Spices, Perfumes in countries like Britain, Spain, Egypt, France, Greece, China etc. to developing new type of money like Coins, Silver and Gold.

In Australia also before colonization some islands had been using Stone-Discs of different sizes as money in addition to shells, feathers in ancient times. By late 1788 Austrians had started using coined money. By 1993 New Zealand started their own coins with image of Kiwi on its coins.

The Money Needs Banks:

Like money banking institutions also changed their shapes and functioning methods from time to time as per the need of society. May it be Babylon, Mesopotamia, Summer, Egypt, Arya, India, Rome, Greece or any other country, nation or society the trading and commerce activities became specialised and more specific day by day. It was no more easy to deal with others with type of money having no specific unit of measurement to ascertain the value of commodity.

In these circumstances people started moving from place to place in order to form rudimentary cities only because trading through barter system had become impractical. People wanted to mass wealth and bartering was too slow, too impractical and some times impossible.

It is therefore a need was felt to introduce such an item that carried value for money, acceptable across the societies, towns, places and easily divisible into different units of different values and off course easily portable to function like money. Some of items used in barter system were no doubt valuable but were not acceptable to all, difficult for porting and not enough durable.

The qualities were found in metals particularly Gold and Silver. But these items also had their inherent deficiencies as could not be used for direct consumption. But they carried most required quality of being acceptable by all.

A certain amount of Gold or Silver was enough for ascertaining amount of other goods having equal value. Be it Babylonia, Egypt, Rome, China, India, Australia or any other civilization every person wanted to store maximum money to be able to exchange it for other things actually needed for living.

The Economist have explained well that money is something valuable that serves the purpose of:

1) Medium of Exchange,

2) Standard measure of value for exchanging goods or services, and

3) Provides a method of storing value.

In view of these basic facts the Metal in form of Gold and Silver in shape of coins began universally acceptable which provided some sort of standard money.

This form of money was difficult to be stored. People keeping such store of money always feared that their money can be stolen. Everyone wanted to grow his stores faster and the quickest way was to store it somewhere as such people started looking for safe-keeping of their money.

First Bank in the World-Piggy Bank:

During middle period some secret and hidden places located nearby were used as points of safe­keeping by many people. Some others used to dig pits in their own places and used to keep their money under earth. In middle age about 15^th century the metal was expensive and seldom used for household wares for which a special type of clay was used economically for making household items like Dishes and Pots.

During the course of making household items with clay a sort of Pot looking like. Jar was also made and kept in a secure place in the house. Whenever people could safe an extra coin they dropped it into one of their clay Jars It was a way of depositing as much money as possible.

Among Barter system in some civilizations the Pig animal was having more value. Some Jars were therefore made looking like Pig and used as storing the coins in Pig shaped Jars. In fact the clay used for making dishes, pots and Jars was of yellow colour and in old English language it was called “Pygg”.

Most probably the Jar made in shape of pig derived its name from the clay used for it. With continued practice to store the money in pig shaped Jars these became famous and known as Piggy Banks. This was perhaps First Bank of human history for depositing money.

It is not a matter of wonder that even today we all are using such type of Boxes made of clay, locally know as GULAK for dropping the coins. Now a days such boxes are made of Metal and Plastic also and favored Toys for children which serve the purpose of safe-keeping of their surplus pocket-money.

Use of Temples and Churches for Storing Money:

With more classification of commerce and trade the problem of storing excess money largely increased and it expanded from Individual capacity to Institutions like Churches and Temples. In early time these Institutes were considered safest place because they had developed their own security arrangements and were regularly attended by people.

Moreover these places were of religious character for GOD fearing people and were as such deterrent to thieves also. It was not necessary that only money could be deposited in churches and temples. Other commodities like Grains, Corps and precious metal were also deposited.

The farmers would deposit their surplus grains with these institutions and in return a receipt was issued having received the certain amount of grain with other specifications and particulars. In case of need farmers could withdraw the whole deposits or part thereof showing the receipt and the necessary changes were again recorded on such receipts.

Likewise Traders used to deposit their merchandise and merchants their money. A small amount of fee was charged for providing such services. With more and more use of such receipts, the depositor himself was no more required to be present himself physically to withdraw the deposits form temples or churches.

Instead he could bargain or negotiate such receipts in the open markets and other traders used to accept such receipts in lieu of money. A deeply felt trust and acceptability made these receipts equal to money.

It was the time when such deposits receipts were treated as HUNDIES. But sometimes it was felt by temple and church authorities that the money and merchandise deposited remained in their custody for a very long time. These remained lying idle without any use for others in need.

On the other hand some people wanted to start some revenue generating business but were not having any money to do so. At this stage the Temple and the Church authorities started LENDING money out of the lot lying idle with them for long time. The borrowers after taking loan from temple or church had to pay it back after sometime and also used to pay fee (say interest) for having used it.