CHAPTER XX

BANKING AND DEALINGS IN MONEY IN THE PRE-CAPITALISTIC AGE

Prior to the period of capitalism the activity of a bank consisted primarily, wherever a plurality of kinds of money were in circulation, in the business of exchanging money. To this was added the necessity of a money disbursing business, especially that of making payments at a distance. In antiquity as a whole, and especially in Greece, we find as the typical banking transaction the assumption of obligations to make payments and the issue of letters of credit to travelers as a means of making payments at a distance, and in addition, not indeed exchange operations in the modern sense, but the creation of means of payment which suggest the check of the present day. Furthermore, the function of providing for the safekeeping of money, or deposit business, belongs to the very oldest of banking operations. It was so in Egypt, where the bankers were to a large extent administrators of property, and also in Rome. Where there was no coinage of any kind, as in Babylonia, and also in China and India, the business of money changing was absent. In its place the bankers were the agencies which stamped the silver bars which circulated as money, as in the case of the tael, and hence carried on the business of providing money.

Thus in the pre-capitalistic age the banks transacted a deposit business with transfer or assignment of credits for the elimination of cash payments. The arrangement presupposed that the depositor-customer permanently maintained a deposit in the bank in question; correspondingly we find bank “notes” even in Babylon. Yet one must not think in this connection of bank notes in our sense, for the modern bank note circulates independently of any deposit by a particular individual. In contrast, the Babylonian bank notes or tickets were merely a means for the more rapid and secure transmission of¹ payments between depositor-customers. The extent of this more ancient deposit business is unknown; in any case one must guard against thinking of conditions in terms too modern. The relations were generally restricted to strictly local transactions and to those taking place between merchants; consequently the bank tickets were not a medium for general circulation.

Peculiar to Babylon was the development out of the deposit business of the role of the banker as a lender of credit. The professional banker made loans on a small scale against pledges or personal security. The credit function of the Babylonian banker was based on the absence of coinage. Payments were reckoned in silver shekels, but these were not used for payment, so that the banker was necessary as an intermediary; and in this connection he arranged for postponement, since he was also often in a position to provide the means for payment in cash, and afforded certainty to the seller by substituting himself for the future payer. Another peculiarity in Babylonia was that the banker regularly furnished commenda credit, that is, capital for enterprise; a large number of commenda contracts have come down to us in cuneiform writing, while we have no other example of such credit business in the ancient world. The reason is that where coined money was in use the banking business developed out of coinage, but in Babylon it developed out of money, that is to say, credit, dealings.

In Rome, the occupation of the banker exhibits two special features. The first, which is of no particular concern to economic history, is that the banker was the professional auctioneer. In the second place, we find here for the first time the transaction of an account-current deposit business in the modern sense, and its recognition as a specific means for the liquidation of debts with the aid of the banker. In Rome the purpose of this business was originally to provide a uniform and secure means of payment, in view of the fact that the coinage of silver was not introduced until late and that the amount of the coinage depended upon the booty secured by the generals. This backwardness of coinage relations in Rome affords the simplest explanation for the fact that the deposit (receptum ), and the order or draft (actio receptitia) drawn only against the balance of the account current, possessed so much significance, and that the bookkeeping of the banker was there subject to a unified legal regulation. The books of the Roman argentarii speak of receipts and expenditures, though not in the sense of the modern bookkeeping. A special book was kept for each individual customer, in which he was credited and debited (acceptum ferre, expensum ferre). These entries served to prove that payment had been made. Beyond this too little has survived of the bookkeeping of the argentarii to permit of more exact statements.

In general, however, the banks of antiquity were only exceptionally private undertakings, and these were subject to an extensive competition by temple banks and state banks. The temple of antiquity first served as a depository. Insofar as they served as banks this was their primary function, and in this connection they were much more famous than the depositories of the private bankers. The deposits in the temple were sacred and could not be stolen without committing sacrilege. The temple at Delphi was a storehouse for numerous private persons, and especially for the savings of slaves. Numerous inscriptions tell how the liberty of slaves has been purchased by the god; in reality the purchase was made out of the savings of the slaves which were given over to the temple for safekeeping in order to protect them from the master. The same function as depositories was performed by numerous temples in Babylon, Egypt, and Greece, while in Rome they lost this character in early times. In consequence, the temples in antiquity also became important lending agencies, especially for the princes, who secured more favorable terms from them than from private money lenders. It is true that we find the large money lender, even in the code of Hammurabi, but in general the treasury of the state and its money lender was the temple. This function was fulfilled in Babylon by the temple of the sun god Sippar, and in Egypt by the temple of Ammon; the treasury of the Attic maritime league was the temple of Athena.

A second source of competition for the private banker grew up in the state banks. The making of banking into a public function resulted, where it happened, not in consequence of mismanagement and bankruptcy of the bankers as in the middle ages, but from fiscal considerations. Not only had the money changing business developed into a fruitful source of profit, but for political reasons also it seemed advantageous to be in possession of the largest possible quantity of private deposits. In almost all the Hellenistic states, especially in Ptolemaic Egypt, the result was a royal banking monopoly. It is true that these establishments had nothing to do with the tasks of the modern state bank, such as note issue, regulation of standards, and coinage policy; they were purely fiscal institutions. The extraordinary power of the capitalistic knights as a class in Rome rested essentially on the fact that they succeeded in preventing such a monopolization of the banking function by the state.

The beginnings of medieval banking are diverse in character. In the 11th century we meet with campsores, money changers, who secured a considerable profit from their work. At the end of the 12th century the business of making payments at a distance was in their hands; it was carried out by means of the cambium or exchange letter, a device taken over from the Arabs. In contrast with antiquity, the business of lending money was only assumed by the resident banker relatively late or not at all; as a rule they loaned only large sums and only to the political powers. The small scale business in money was in the hands of an alien class, the Jews, Lombards, the Caursines, the two latter designations being used to include southerners of every sort. This consumptive credit in the hands of aliens was originally emergency credit at a very high rate of interest, and based on a pledge or other security. Alongside it appears at an early date the business of commenda credit. In the granting of such credit the bankers also took part, but were subject—in contrast with Babylonian conditions—to the competition of merchants dealing in goods of the most various sorts, and also that of private money lenders. The deposit business was called into existence by the continual monetary debasement. Communal banks arose among the merchant class with deposits in metal or in various coins at their bullion value, on the basis of which payments were made by deposit transfers or checks, limited to a certain minimum. For a time, deposit banking business was in the hands of the money changers, but in the long run they did not enjoy sufficient confidence, and large company banks arose.

In the field of medieval banking is further included the collection of taxes, corresponding roughly to the tax farming of antiquity. From the beginning of the 13th to the end of the 14th century this was the main source of the large fortunes, especially those of the Florentine banking families, the Acciajuoli, the Peruzzi, and the Medici. As these maintained their factors in all large commercial places, they were the natural agency for gathering from all quarters the taxes of the Curia, which was the greatest taxing power of the age; also they kept the most accurate accounts and accepted only full value money in the sense of the Florentine gold gulden. This function brought the collectors, as in the case of the mandarins in China, very large opportunities for profit, as it lay in their hands to evaluate the money of the various regions in terms of the coin demanded by the Curia.

Finally, the business of financing is to be named among the functions of medieval banking. By this, however, is not to be understood the financing of large enterprises in the present sense. The need for financing operations existed only exceptionally, and generally in connection with military ventures. In this field it was undertaken in Genoa as early as the 12th century. In this way, for example, the great sea expeditions of the Genoese against Cyprus were financed through the formation of a “ma-ona,” a share commenda enterprise for the conquest and exploitation of the island. In the same way to a large extent the wars of the cities among themselves were financed by organizations of creditors. For roughly a hundred years together the total tax and harbor customs receipts of Genoa were administered exclusively in the interests of such a consortium. Far beyond these limits went the financing operations of the great Florentine bankers in the Franco-English wars of the 14th century.

To the extent to which these transactions remained in private hands arose the questions out of what source the funds came, where the money went, and by what means the banks were at all able to meet an effective obligation to pay, which in fact tended to collapse. That is, we are confronted by the problem of the “liquidity” of the medieval bank. The liquidity of the institutions we have described was very poor. The money which the Peruzzi or other great Florentine bankers advanced to the citizens of Florence for their wars did not come out of their own capital, which would not have been at all sufficient, but out of deposits which they received on the grounds of their prestige, out of every circle of the population down to the lowest strata, and for a low rate of interest. But these deposits were payable on short notice while the war loans ran for long periods. Consequently the financial operations ended in bankruptcy as soon as the military ventures in which they were employed resulted unfavorably. This applies even to the Fuggers, for the way in which they finally settled with the Spanish crown meant that not only did they suffer enormous losses but also that the remainder of their wealth was tied up in forms on which they could not realize.

The private means of the large banking houses being insufficient for the financing of large enterprises of the state, and their liquidity being easily lost, the pressure of events was in the direction of monopolistic banking. The political authority which required money for its purposes received it only in return for a grant of various monopolies, of trade, of the customs, and of the banking business also. The prince, or the city, made banking a public enterprise and granted the privilege as a monopoly, or farmed it out to private persons in return for a loan of money. The oldest example of such a banking monopoly is the Banca di San Giorgio in Genoa, and the latest the Bank of England. Even this latter did not arise out of a voluntary organization of merchants but was a purely political undertaking which financed the War of the Spanish Succession. The distinction between it and the medieval banks lies only in the manner in which it was able to establish its business, namely on the basis of bills of exchange.

The present day bill of exchange is a means of payment characterized by the fact that three persons are involved in it; besides the receiver there are the drawer and the drawee. Of these the drawer is always responsible, as is also the drawee or acceptor, from the moment of acceptance. In addition, when the bill is transferred to third parties by endorsement, every individual endorser becomes responsible, with no question raised regarding the transaction in connection with which the bill was drawn. In case of nonpayment a special process of execution is available which in the middle ages involved imprisonment for debt. The significance of the bill of exchange for the bank of today lies in these characteristics; they impart to it the certainty that specific sums can be drawn at a specified time and hence give it liquidity. In the middle ages there was no such possibility. It is true that the bill of exchange was known, but it then signified only an instrument similar to our checks. It was a mere means of payment, ordinarily of payment at a distance, by means of which one paid debts with money to which one had a claim at some other place; difference in place between the one who promised payment and the point where payment was made was essential to the instrument, especially as the canon law condemned with all its power the use of local bills as a usurious business.

The typical medieval bill originally consisted of two separate documents. One of these, the “open letter,” (litera aperta), was what we should call a domiciled bill. The merchant A in Genoa promised to pay to B in Barcelona on a certain day a certain sum, through C, the debtor of A. If the bill was issued by a prince it was drawn upon his treasury which had to pay to the court a certain sum. The second document, the “closed letter” (litera clause) or “draft” evolved into the present bill. It informed the debtor of the drawer that he was to pay the sum on account of his creditor the drawer. The literac apertae had to be drawn up and witnessed officially while the literae clausae were ordinary letters. Both documents were placed in the hands of the person in favor of whom the bill was drawn. The further development consisted in the gradual dropping of the literae apertae on account of the expense. The binding promise which they originally contained became included in the draft and recognized as a part of the latter, which thus increased in significance; but it was still distinguished from the modern bill in that it was not negotiable by endorsement, which character it did not achieve until the 17th century.

It is true that it contained the formula promitto tibi vel tuo certo nuntio, which made it possible to place it in the possession of a third party and to legalize his receipt of the payment in place of the named receiver; but this order clause disappeared later because a regular machinery for making payments developed in the large fairs. These afforded the possibility of liquidating bills without incurring the risk of transporting money, by turning it over to a clearing house for entry, with payment only of net balances. Actually the bills were only discount instruments in connection with which it was tacitly assumed that they would be liquidated through a deposit bank or a local merchants’ association. This condition worked to the advantage of the merchants engaged in the exchange business, giving them an interest in securing a monopoly of the fees for effecting exchange transfers, and they opposed endorsement. Thus even in the 16th century when any exchange was transferred a new bill had to be drawn instead of endorsing the old one. It is true again that in the 16th century the law of exchange had reached its present development, and equivocation on legal grounds was excluded by the maxim “chi accetta paghi” (the acceptor must pay). This unconditional assurance of payment made it possible for the bill of exchange to become the bank paper of today.

The part of the medieval banker in payments consisted in accepting the bill; the banker of today discounts it, that is, he pays it, with the deduction of the discount with the view of cashing it later and thus invests his operating capital in bills. The institution which first consistently carried on such an exchange business is the Bank of England.

English banking history before the founding of the Bank of England shows that the goldsmiths, as dealers in the precious metals and owners of stocks of metal, were in a position to carry on a banking business and often had a monopoly of the testing of coins as to weight and fineness, but that they never played the role of bankers in the sense described above. They received deposits in the manner of the medieval banker, and financed political enterprises, those of the Stuarts as well as of Cromwell. They also transacted a deposit business and in connection therewith issued paper means of payment, to their customers first, but the circulation of these “goldsmith notes” did not remain confined to this circle. The state bankruptcy of 1672 put an end to all this. When, at that time, the English government declared that it could not repay its debts but would pay interest on them only, while the depositor-customers of the goldsmiths were entitled to withdraw their capital at any time, the result was inability of the goldsmiths to meet the demand for payment of deposits. The result was that in England at this time, as earlier in the Italian cities, there was a clamor among the depositors for a public monopoly bank.

The political authorities took advantage of this demand to monopolize the banking business and secure a share in its profits for the state. The merchants hoped for loans at a low interest through the fact that a state bank, in view of the security which it offered, would be in a position to attract to itself deposits in large volume, and also hoped for release from their coinage difficulties—although we cannot be sure how they argued. On the other hand, we must not assume as applicable to that time the modern view according to which a large bank of issue undertakes the task of using its credit through a suitable discount policy to draw gold into the country or to force an accumulated stock into circulation. Rather it was hoped that the bank would function as a deposit bank, that is, circulate its notes on the basis of a definite quantity of metal and so assist in reducing the fluctuations in the ratio between gold and silver.

The final establishment of the Bank of England in 1694 was based on purely political motives with a view of financing the war of William of Orange with Louis XIV. In its establishment the procedure customary to the country was employed; certain payments, especially the salt tax, were pledged to the money lenders, and the participating creditors were organized as governors into a company with legal privileges.

The new establishment was combated by many interests. Opposed to the project were, in the first place, the Tories, as opponents of William of Orange, and, on the other hand, the Whigs who on general principles feared the strengthening of the position of the king. Hence the bank could only be organized as an independent private corporation, not as a state bank, and it was necessary to include in the act the specification that money could be advanced to the state only on the basis of a special authorization by Parliament. Hence in the view of the Tories the bank was consistent only with a republic, not a monarchy; they contended that a bank with such an organization presupposed a kingdom under the control of the capitalist groups interested in the bank. Finally the goldsmiths also opposed the bank because they were excluded from the business, and also because, in common with the nobility, they feared the political and economic power of the merchant class.

The bank came into existence with a share capital of £1,200,000, all of which disappeared into the pockets of the state. In exchange it received the right to deal in bills of exchange. The last named right was by far the most important, since it was connected with the issue of notes. The use which the bank would later make of this right through its discount policy was in fact foreseen by no one. In any case, however, it was the first institution to begin systematically to purchase exchange, thereby shortening for producers as well as merchants the interval before the product reached the final consumer, by discounting the bills before maturity. With the Bank of England the acceleration of capital turnover is the clearly conceived purpose of exchange dealings; it pursued this business in a systematic way as no bank had done before.

Only in part does the development of banking outside of Europe offer a parallel to that in Europe itself. In India and China, banking retained down to the last few decades the character which it had in antiquity and in the middle ages. It is distinguished from occidental banking by its extraordinary power in connection with the regulation of monetary standards. In China the banker conducts the stamping of the taels; he determines the conditions of credit, fixes the rate of interest, and designates all the conditions of making payments, so that the standardization of commercial settlements lies entirely in his hands. But this mechanism of settlement is a credit business insofar as foreign trade is concerned, which in Canton for example, is in the hands of a few large Chinese houses. As long as the independent Chinese states existed the banks also carried on war financing, as in Europe; with the establishment of the unitary Chinese empire this opportunity was lost.

In India the banking business in its entirety is strictly regulated by sects or castes. Here also in the period of the great independent states political credit was financed by the banks, and here also the unitary state of the Grand Mogul put an end to this; subsequently political monetary dealings were involved only in connection with governmental budgeting and the anticipation of income through loans. The functions of the banks in India and China today still consist essentially of the business of making payments and small or occasional credit operations. There is no business credit in any way systematized, no business organization which could make any use of our discount policy; the native Asiatic commerce knows only checks and payment assignments of the most various sorts, but not the bill of exchange. That in addition the Chinese bankers still possess a monopolistic control over the regulation of standards is explained by the enormous misuse of paper money in China.