From Medieval Merchants To Twentieth Century Traders: The Evolution of Modern Banking

Sitting at a Bloomberg terminal in a Canary Wharf skyscraper, it’s easy to forget banking’s historic roots.

Many of the practices that bankers, brokers and traders undertake today began hundreds of years ago, and the aims of investment banking – to service the financial needs of governments, corporations and institutional investors – have remained constant ever since.

The story of how modern banking came to be is long and rich. It goes something like this.

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Medieval Merchants

The Lombardy merchants of Italy are the founding fathers of modern banking, with Banca Monte dei Paschi di Siena – the recent recipient of a state bailout – claiming to be the oldest surviving bank in the world, founded as a ‘mount of piety’ in 1472.

From Siena, banking spread through Italy as the ambitious Lombardy merchants expanded their empire. Innovative instruments – such as bills of exchange and loans – were used to finance proprietary commodities trading. This led to commercial banking centres popping up in Milan, Genoa and Venice. However, it was Florence that grew to be the world’s first banking centre, with its gold coin, the florin, the reserve currency of its day.

Dutch Courage

In the 17th Century, power shifted from Florence to Amsterdam, whose location, history of able seafaring and ready adoption of corporate finance methods made it the world’s banking hub. This progressive approach led to the Dutch East India Company becoming the first publicly listed company when it sold shares on the Amsterdam Stock Exchange in 1602.

If the Italians invented banking, then the Dutch invented investment banking through gutsy ambition, intellectual prowess and financial ingenuity.

This ingenuity led to the Dutch adopting new banking practises – such as the issuance of debt and equity – and gave rise to a great era of exploration and trade, notably in the Far East where a monopoly was gained by the Dutch East India Company to trade with Japan and China. This hegemony led to Dutch banking dominance throughout the 17th and 18th centuries.

The British Empire Strikes Back 

Due to the ever-growing influence of the British Empire, London emerged in the late 17th and early 18th century as the capital of global banking.

Following on from the Bank of England’s bold decision to issue the first permanent banknotes in 1695, London provided headquarters for many behemoths that still survive today. British merchant bank Barings was founded 1763, then Rothschilds, and these two family-led merchant banks dominated for the next century. Schroders, Hambros and Kleinwort followed.

The far-flung tentacles of the British Empire allowed trade connections with all corners of the globe and London became the world’s trading centre for a full range of securities – notably on the London Stock Exchange, founded in 1698. Banking quickly began to look like the world of investment banking that we all know today, with the adoption of derivatives contracts, such as options.

At the end of the 18th century, Adam Smith’s invisible hand empowered and emboldened self-regulated economies, moneylenders and bankers even more, and limited the state’s involvement in the sector. Free market capitalism and competition found fertile ground in the New World, where the biggest beast of all, bloodied but unbowed following an expensive civil war, prepared to emerge.

The United States of Banking

At the turn of the 20th Century, all industrialized nations had adopted the modern financial system. Global institutions and markets continued to form, creating one single banking universe.

Following the industrial and machine revolutions, the United States sat at the centre of this universe. Investment banking enjoyed a golden era in the US, fired by investors and speculators at giant banks like JP Morgan & Co, National City Bank and Brown Brothers, whose co-joined commercial and investment operations allowed more risk to be taken.

The establishment of the Federal Reserve in 1913 sought to provide the US – and the rest of the world – with a flexible and stable financial system. This solid base fuelled the growth of the US economy and the speculative institutions within it.

This growth continued and, indeed, thrived on opportunities created after World War I and continued to fire throughout the early part of the 20th Century. All looked swell until 1929, when a stock market crash, huge loan defaults and a drought led to the Great Depression. Modern banking, 500 years in the making, suffered near catastrophic failure.

The crash of 1929 ushered in a new era of regulation. The US established the Securities and Exchange Commission and implemented the Glass–Steagall Act, hoping to limit risk and losses.

Once again, the US picked itself up, and led the global financial system through the 20th century right up to electrification, the age of OTC derivatives, Big Bang and beyond.

From Siena onwards, it’s quite a story.