Seven hundred years ago a bank was established in Venice, which made transactions resembling modern banking. In 1407, another bank was founded in Italy under the name of Banco di San Giorgio which was one of the oldest chartered banks in Europe. Sveriges Riksbank (Riksbanken), is the central bank of Sweden and the world's oldest central bank. The Bank of England is the second oldest central bank in the world, and most modern central banks have been based on that model. Let us explore some interesting events as we learn more about these early banking institutions.
In this article we will take you on an interesting journey of banking from the oldest bank starting transactions like commercial banks, the first European bank to issue banknotes, the enthralling history of the first beginnings of modern banking practices, to why and how Swiss banks enjoy a worldwide reputation for protecting the identity of depositors.
The first regular institution resembling what we call a Bank was established at Venice, nearly seven hundred years ago in 1171. The Government of the Republic of Venice was engaged in war and extracted forced loans as it was in dire need of funds. The Lenders were allowed an annual interest and certain branches of the public revenue were assigned for the payment of that interest, and a corporation, named CHAMBER OF LOANS was created to manage this business. Chamber, in the course of its business, sometimes had occasion to purchase and sell bills of exchange; and by virtue of its reputation, its name upon a bill gave it additional value. The Chamber found an advantageous investment to employ surplus funds in the business of buying and selling exchange and the Chamber became a regular dealer in that branch of business. In modern terminology, it adopted the business of DISCOUNT or lending money upon mercantile paper. Over a period of time, Venetian merchants found it safe to place their money with the Chamber and thus was introduced the business of DEPOSIT. The citizens of Venice began exchanging ownership of these government obligations to transact business, turning these government obligations into a circulating medium of exchange like any other form of money. This history of the Bank of Venice reveals something of the forces that led to the evolution of central banks. In 1374 a committee of scholars proposed the formal organization of a public bank, but no action was taken till 1587 when the Venetian government established the Bank of Venice as the Banco del Piazza del Rialto. By that time other Italian cities had already established public banks, but still the credit for the first beginnings of modern banking practices, however, goes to Venice.
The history of the banking sector is very old. A form of banking had been practiced in Italy since the middle of the 12th century. The Medici family bank was founded in 1397, and it collapsed in 1494. In 1401, the Taula de la Ciutat – was founded in Barcelona, and in 1407, the first modern bank was founded in Italy under the name of Banco di San Giorgio. The Bank or Company of Saint George (Italian: Banco or Ufficio di San Giorgio) was a financial institution of the Republic of Genoa. Founded in 1407 it was one of the oldest chartered banks in Europe, if not the world and known as the world’s first modern, public bank. After years of war with Venice and a crushing defeat at the battle of Chioggia in 1381, the republic of Genoa was effectively bankrupt. To rescue it, towards the end of 1407, Genoa’s Council of Ancients authorized the Casa di San Giorgio to carry out this job by creating a bank that would facilitate the repayment of Genoa’s debts in return for interest at 7 percent and the right to collect taxes and customs owed to the city. This was the beginning of the Banco di San Giorgio which became the forerunner to modern Merchant Banking and survived for nearly 400 years (1407-1805). It would become the world’s first modern, public bank, not just a forerunner of the Bank of England but its prototype. It is argued that many concepts and practices that are commonplace today were pioneered or improved by the Banco di San Giorgio including issuing and managing government debt, double-entry book-keeping, sinking funds, clearinghouse and conduct of lotteries.
Sweden adopted copper as the basis for money in 1625; perhaps because Sweden had the largest copper mine in Europe and the Swedish government-owned a share of it. Copper mines, for convenience and utility, began to pay miners in copper notes that could be redeemed for copper at the mines. These notes were preferable to copper coins and eventually paved way to banknotes as a medium of exchange because payments in copper were bulky and heavy even for domestic transactions. The Riksbank was formed in 1656 as a private bank and issued its first banknotes in 1661. English goldsmiths issued receipts that circulated as money but the Riksbank was the first bank to issue paper money. In 1668 ownership of the Riksbank passed into the hands of the government, making it the oldest central bank in operation today. Sveriges Riksbank got established in 1668 and thus dates back to Sweden’s period as a great power. After a number of years at Storkyrkobrinken, where it was located in a palace built by Axel Oxenstierna, the Riksbank was for the first time given its own building in 1680. Sveriges Riksbank (Riksbanken), is the central bank of Sweden and the world's oldest central bank and also the first European bank to issue banknotes. It is sometimes called the Swedish National Bank or the Bank of Sweden.
The Bank of England (formally the Governor and Company of the Bank of England) is the central bank of the United Kingdom and the model on which most modern central banks have been based. It is the second oldest central bank in the world (the oldest being the Sveriges Riksbank (Bank of Sweden), established in 1668). The Bank of England was founded in 1694 to act as the Government's banker and debt-manager, since then it has evolved to manage the nation's currency and its position at the center of the UK's financial system. The bank got nationalized in 1946. It acts as the government’s bank, regulates the money stock growth rate and the availability of credit, and serves as a banker’s bank for commercial banks, making loans and holding deposits. Like all central banks, it holds the exclusive privilege to issue banknotes (paper money). The Bank managed the Government's accounts and made loans to finance spending at times of peace and war. A commercial bank too, it took deposits and issued notes. During the 18th Century, the Government borrowed more and more money. These outstanding loans were called the National Debt. In May 1997 the Government gave the Bank responsibility for setting interest rates to meet the Government's stated inflation target. This was enshrined in the 1998 Bank of England Act. Today, the Bank's governing body is made up of the Bank's Governor and 2 Deputy Governors, and 9 Non-Executive Directors (under the Banking Act 2009).
Swiss banks enjoy a worldwide reputation for protecting the identity of depositors. This important characteristic helped Switzerland grow to one of the world’s major banking centers in the twentieth century. Another factor contributing to the growth of Swiss banking is Switzerland’s position of neutrality. On 20 May 1815, the Vienna Congress established the permanent neutrality of Switzerland among the European powers—a position the superpowers of the world honored through two great wars in the twentieth century. Switzerland was not a pioneer in early European banking. Geneva was the first of the Swiss cities to become a banking center. By 1709 Geneva boasted of a dozen bankers who left a name in Swiss financial history, and Louis XIV floated loans in Geneva to finance his wars. Geneva bankers kept close ties with France and remained involved in financing French public debt until the end of the nineteenth century. Basel developed a significant banking industry only in the nineteenth century. In 1862 the Basel Register-listed 20 banks, 9 of which were exclusively devoted to banking.
The financial activity of various sorts appeared in Zurich during the sixteenth century. In 1679 an injunction from the city council prohibited a reduction of interest rates from 5 percent to 4 percent. Merchant bankers, who accepted deposits for investment in securities, appeared in the middle of the eighteenth century. Zurich waited until 1786 to see the formation of a bank in the broad sense. In 1805 the official register of Zurich reported two banks devoted exclusively to banking. By the eve of World War I Switzerland ranked as one of the international financial centers. Six large banks, Swiss Credit Bank, Swiss Bank Corporation, Union Bank of Switzerland, Trade Bank of Basel, Federal Bank, and Swiss People’s Bank, controlled a system of branches throughout Switzerland. These banks floated international loans for European governments and railroads and other industrial concerns in the United States. After World War I, inflation in the currencies of the former belligerents made Switzerland more attractive as a safe haven. In the post–World War II era three of the big banking houses remained in business, the Swiss Credit Bank, the Swiss Bank Corporation, and the Union Bank of Switzerland. There was also a large network of smaller banks, rural loan associations, and branches of foreign banks. In 1968 Switzerland had a population of 6 million people and 4,337 banking offices, which added up to one banking office for every 1,400 individuals.
In the 1930s Switzerland enacted laws that strengthened the anonymity protection of depositors in Swiss banks. During that time some countries prohibited citizens from holding assets abroad on pain of criminal penalties and even sent agents to Switzerland to track down assets owned by their own citizens. On the other hand, some people wanted to keep deposits in Switzerland in case they had to make a hasty departure from their homeland for political or racial reasons. Swiss banks began opening the so-called numbered accounts, which substantially reduced the number of bank employees who knew the name of a depositor. Also, the Swiss government claimed no right to pry into bank accounts either to collect information on its own citizens or the citizens of foreign countries. Governments around the world have lodged complaints against Swiss banks for holding deposits of foreigners evading taxes. Switzerland recently has yielded to pressure to open up information on deposits when criminal activity and tax evasion are involved.
In 1997 it came to light that Switzerland, thought to have been a neutral country in World War II, acted as a banking center for Nazi Germany and that Swiss commercial banks had accepted three times as much gold in deposits from Nazi Germany’s central bank as was originally thought. Jewish groups launched a class-action lawsuit in an effort to force Swiss banks to compensate Holocaust victims, emphasizing that Swiss banks held on to dormant accounts of Holocaust victims and laundered millions of dollars in gold stolen from Jews. On 12 August 1998 representatives of Holocaust survivors and Swiss banks announced a $1.25 billion reparation settlement to compensate Holocaust survivors and their heirs.
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