Short Essay on the Evolution of Banking

Banking, in its crude from, is an age-old phenomenon. It was in existence even in ancient times. Revilpout, a French writer, for instance, mentions about bank and bank notes in Babylon in 600 B.C.

In India, the references to money-lending business are found in the Manu Smriti also. Chaldean, Egyptian and Phoenician history also records the existence of rudimentary banking in early days.

Prof. Marshall in his book, Money, Credit and Commerce, (1923) writes about the activities of money­changers in the temples of Olympia and other sacred places in Greece, around 2,000 B.C.

To quote him, “Private money-changers began with the task of reducing many metallic currencies, more or less exactly, to a common unit of value, and even to accept money on deposit at interest, and to lend it out at higher interest permitting meanwhile drafts to be drawn on them.” (p. 295)

As a matter of fact, the origin of banking lies in the business of money changing in ancient days.

Another factor that supported the emergence of banks in the early period was the need for borrowing by the monarchical governments from finance companies.

In the Middle Age, in Italy the first bank called the ‘Bank of Venice’ was established in 1157, on this ground, particularly, when the authorities of the state of Venice were in financial trouble due to war.

In England, however, the bankers of Lombardy had taken the initiative to start modern banking along with their trading activities in London.

But, commercial banking began there only after 1640, when goldsmiths started receiving deposits from the public for safe custody and issued receipts for the acknowledgments which were being used as bearer demand notes later on.

Crowther, thus, speaks about three ancestors of a modern commercial bank, viz., the merchant, the money-lender and the goldsmith. The merchants or traders issued documents like hundi to remit the funds.

Modern banks introduced cheques, or demand drafts for remittance purposes. Money-lenders gave loans. Bankers too gave loans.

Goldsmiths received deposits and created credit. Banks also received deposits and adopted the process of credit in a similar fashion, by issuing cheques.

In short, the evolution of commercial banking is related to the practice of safe-keeping of gold and other valuables by the people with merchants/goldsmiths/money­lenders.

Etymologically, however, the word ‘bank’ is derived from the Greek word banque, or the Italian word banco both meaning a bench referring to a bench at which money-lenders and money-changers used to display their coins and transact business in the market place.

In England, initially the Bank of England was established in 1694 on Italian lines to support government with finance.

Modern joint-stock commercial banks, however, came into the picture with the passage of the Banking Act of 1833 in England.

In India, however, modern banking started when the English agency houses in Kolkata and Mumbai began to serve as bankers to the East India Company and the Hindustan Bank was the first banking institution of its kind to be established in 1779.