Refinements in Banking

Date c. 1150

Locale Western Europe, principally present-day Italy

The surge in trade during the eleventh and twelfth centuries in Europe created new and better methods of handling, using, and transferring money that eventually led to the development of banking houses.

Summary of Event

One of the most important aspects of the renaissance of trade during the eleventh and twelfth centuries was the stimulus it gave to new and improved methods of handling and employing money, which led to the development of full-fledged banking operations. Before the twelfth and thirteenth centuries, only the most rudimentary bookkeeping methods were employed. Credit had already been extended during the eleventh century, although usually limited to consumptive purposes; however, the twelfth century saw the Templars and Hospitalers introduce sophisticated instruments of foreign exchange or letters of credit that were freely employed among their far-flung houses.

The twelfth century also witnessed the emergence of professional moneylenders from the simple moneychangers at the great fairs held all over Europe. Seated behind their long benches, these nascent bankers at first traded in bullion and later in international coin. Selling drafts and changing money, these “bankers” roamed from fair to fair making fortunes exchanging money for a service charge. True banking was born when the moneychanger put out at interest coins that he was keeping for others in his strongbox and not on immediate demand by their owners. In addition, the twelfth century gave rise to the issuance of sound silver currency: the Venetian groat, the contemporary gold Florentine florin, and the later gros tournois and gros parisis of Louis IX. Issuance of such coinage necessitated the development of adequate banking procedures.

Moreover, the twelfth century economic experience caused the Church in the thirteenth century to relax its ban on usury, a ban that had been necessary in earlier centuries when loans were made primarily for immediate consumption rather than for investment. The Church reluctantly recognized the right of lenders to compensation for inconveniences suffered while their money was on loan or for lateness in repayment on the part of the borrowers. It is more proper to view these relaxations as bona-fide legal exceptions to the usury ban than loopholes surreptitiously contrived to circumvent the intent of canon law. Thomas Aquinas’s determination of the just price by the seller’s need, not by his greed, reflects the Church’s adjustment of its economic thinking without sacrificing its basic Aristotelian indictment of the evils inherent in unchecked economic practices.

The twelfth century, as a result, caused the despised Jewish moneylender, whose high interest rates escaped Christian usury regulations, to give way to organized banking houses. Thanks to their profits from a revived overseas and overland trade and to their proximity to the Papacy, which had to transfer enormous sums of money from faraway places, merchants of Italian cities such as Venice, Genoa, Sienna, Florence, and Lucca—especially the houses of the Bardi, the Peruzzi, and the Frescobaldi—became prominent as the so-called Lombards in the European banking world.

These stationary institutions employed many of the sophisticated instruments of modern banking. Interest rates were roughly 15 percent for commercial and industrial loans, while small personal advances brought between 50 percent and 80 percent. Deposit banking allowed a merchant to leave his cash safely at home, where, for a service charge, the bank would transfer his funds to another merchant’s account in the same way that a modern checking system transacts business. By 1200, Genoese banking establishments used merchants’s money to make profitable loans and investments; the merchant customer, in turn, came to regard his deposited money as an interest-bearing savings account. To facilitate the transfer of money all over Europe, bankers developed ingenious new credit instruments such as the simple check and the bill of exchange. A signed check authorized banks of Europe to transfer funds from one person’s account to pay off debts to a second or a third person.

Although the check remained the common instrument of exchange for domestic transfers between nationals, the bill of exchange was developed to expedite larger transactions over longer distances. This credit device originally consisted of a signed statement by a debtor swearing that he owed a certain sum of money to a foreign merchant. The letter of exchange stipulated that the merchant would settle his foreign debt by a specified date and with a fixed interest fee. By a series of paper transfers, a whole series of debts between individuals in different cities might be discharged by the sale and resale of one of these bills. Such transactions often involved few actual transfers of cash. The Papacy, as one of the greatest borrowers and lenders of the Middle Ages, naturally contributed much to the refinement of these instruments of international credit. Through checks and bills of exchange, it transferred, during the high Middle Ages, the great sums involved in Peter’s Pence, ecclesiastical fines, and levies from the distant parts of Europe.

Significance

The settling of accounts at the great international fairs of Europe, the Italian merchants’s invention of bills of exchange that allowed transfer of purchasing power over great distances without shipment of actual coins, and the Church’s relaxation of its ban on usury contributed greatly to the creation and establishment of complex banking practices that would be continued in the Renaissance and into modern times, allowing for more efficient commerce and increased trade between nations.