Emergence of banks – edifying story

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By FERNANDO NOGUEIRA DA COSTA*

The first large-scale banking institution arose not from the merchant community, but from religious knights known as the Templars.

When and where were banks created? ChatGPT responds: “There is no consensus on which was the first bank in history. However, there are records of financial institutions existing for thousands of years.”

For such an answer, he treats banks only as “vaults” when informing the first known “banks” to have been created in temples in Mesopotamia, around 2.000 BC These temples received deposits of grains and precious metals – and granted loans to the merchants of the time.

In China, around the XNUMXth century, exchange houses appeared to exchange the currencies of merchants from different regions of the country. Over time, these houses would have started to offer banking services, such as deposits and loans.

In the West, the Eurocentric approach claims that the first medieval banks emerged in Italy from the XNUMXth century onwards. There is no evidence that these banks, known as “deposit banks”, work with resources from unknown third parties and set up a network capable of multiplying deposits with continuous loans.

Hence, ChatGPT takes a leap of five centuries to claim that “modern banks” were created in the 1668th century, with the emergence of the Bank of Sweden (1694) and the Bank of England (XNUMX). These, later on, when they started to prioritize safeguarding the few existing banks against “bank runs”, that is, massive deposit withdrawals, became, in fact, Central Banks.

In fact, conceptually, there is no causal correlation between commodity or minted money and the emergence of banks. These are defined by three basic functions, interactive through the subsystems of payments, money management and financing. Currency effectively becomes money when it fulfills the three interactive functions as means of payment, unit of account and store of value.

According to the book the history of money (1999) by Jack Weatherford, the first large-scale banking institution arose not from the merchant community, but from a strange and seemingly implausible order of religious knights known as the Templars. Founded in Jerusalem around 1118 by the Crusaders, the Military Order of the Knights of Solomon's Temple dedicated its life to the service of the Church, and specifically to the task of liberating the Holy Places from infidel possession.

The Templars later became entrepreneurs, managing the largest international banking corporation for nearly two hundred years. During that period, they laid the groundwork for seen ahead as the modern bank, albeit at a very high price for them. Its financial success led not only to the destruction of the order, but also to the public torment, torture and burning of its leaders.

Although recruited from among the younger descendants of the nobility, they did not inherit titles or wealth. The feared warriors dedicated themselves to a life of devotion to the Church in the Crusades and in the safekeeping of funds obtained from religious and secular sources for its financing. Knights regularly transferred contributions from fiefs in Europe, where they conquered land, to their headquarters in Jerusalem.

They constituted the safe way to transport the valuable currency species over long distances, including across the Mediterranean. After all, they were responsible for security, both on the roads and on the maritime routes.

Possessing some of the most impregnable castles in the world and being one of the most fearless fighting forces in the world, at the time, its castles were the ideal place to deposit money and other valuables. At the height of their guard operations, they employed around 7.000 people and owned 870 castles scattered across Europe and the Mediterranean, from England to Jerusalem.

However, in 1295, King Philip IV of France wrested control of his finances from the Templars and established the Royal Treasury in the Louvre. Furthermore, he began a campaign designed to vilify and seize the Order's vast possessions and treasury.

To solve his constant need for money, the monarch initially resorted to the expropriation of Lombard merchants. After an unsuccessful attempt to tax the clergy, he turned against the Jews, expelling them in July 1306 after confiscating their property. But not even all that wealth was able to meet the growing governmental apparatus of Felipe IV, eager for absolute power.

The greatest concentration of wealth in all of Europe was on the outskirts of Paris, in a well-fortified castle, where it functioned as the central treasury of the Templars' wealth. To get hold of this wealth, the king would have to destroy the Order. In 1307, he had his prosecutors denounce them, just as bankers are today: “the Templars must have made some pact with the devil to have enriched themselves so much”.

Subjected to unbearable torture, the order's senior officials signed forged a priori confessions. In them, they provided vivid details of their activities as idolaters, desecrators of sacred objects, conspirators allied with the devil, and sexual deviants.

Yielding to pressure from the French monarchy, Clement V shot down the order in a papal bull, Vox in Excelso, issued March 22, 1312. The pontiff thought it more prudent to sacrifice the knights of his Church rather than defy the will of the Gallic monarch.

By abolishing the order, the pope hoped to maintain some degree of control over Templar property, transferring it to other religious groups subject to him. He was thwarted in this pretense, despite delivering all the knights to death at the stake in the year 1314.

The complete triumph of King Felipe IV over the Knights Templar marked a clear rise of power to a national state. No power would tolerate such a powerful international financial adversary any longer.

At this crossroads in Europe's economic history, when the financial power of the Church had waned and the power of the State had not yet grown enough to replace it, families in the northern Italian city-states of Pisa, Florence, Venice, Verona and Genoa began to offer the same services as the Templars had done before, albeit on a much more modest scale at first. They gave rise to a new group of institutions: banks, in this case, outside the immediate control of Church and State, although with close ties with both entities.

These Italian banking families traded unrestrictedly with Muslims, Tatars, Jews and pagans, as well as with Orthodox Christians and Catholics. The banking network of Italian merchant families soon extended from England to the Caspian Sea, and financed trade missions from the Middle East to China.

The modern term “bank” comes from the way these early money merchants conducted their business. It meant “table” or “bench”, the support where it literally formed the basis of its operations at fairs.

The bank went beyond being just a lending institution, because bankers did not deal so much with gold and silver, but with small sheets of paper (“bills of exchange”), where they recorded deposits. They represented gold and silver.

In practice, bankers began to lend to the rich, while pawnbrokers continued to lend to the poor. While they did not diversify risk with massive retail, bankers were subject to “real defaults” or “sovereign risks”…

Together, Italy's banking families financed the English monarchy under Edward I and Edward II, in campaigns of conquest in Wales and Scotland. By supporting the English monarchy, Italian family banks made more money than they received in interest on these high-risk loans. With the English monarch as their debtor, they had special access to English markets and this relationship even gave them a monopoly on the trading of English sheep on the continent.

Italian bankers prospered but, like the Templars, failed as a result of their own success and their dealings with the government. Some of the leading Italian banking families supported Edward III at the start of the Hundred Years' War between England and France. However, in 1343, the English monarch defaulted on his loans. His “royal default” led to the bankruptcy of the main Florentine banking families and many of their depositors.

The entire monetary system based on bills of exchange ultimately depended on the honesty and good faith of the participants, but when a government was burdened with its debts, it had the power to ignore them, destroying the system. “Italians' bank fortunes were diluted like sand castles by the effect of high tide”, says Weatherford (1999). Worse, to seal the fate of Florentine banking, the Black Death swept across northern Italy and devastated the region until 1348. Interval, not the end.

*Fernando Nogueira da Costa He is a full professor at the Institute of Economics at Unicamp. Author, among other books, of Brasil dos bancos (EDUSP).


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