Italy Invented Banks
by Enza Ferreri
Italian theatre show in front of the
Monte dei Paschi di Siena bank
The English word "bank" derives from the Italian term "banco" (or "banca"), in turn stemming from the Frankish word "bank".
In Italian, "banco" originally referred to a bench with a back, then a bench's wooden seat, in the 1300s a shop counter, in the 1500s a craftsman workbench. Finally, from the counter where money was exchanged, collected and lent, it came to mean the institution itself offering those services.
Like for almost everything, you can find the remote origins of the banking system in ancient history. Saving and borrowing services existed among the Sumerians of ancient Mesopotamia, where private individuals felt the need to entrust their riches to priests, and among the ancient Greeks.
Other than this mainly formal recognition, banking was an Italian invention.
Banks, which originally, in ancient times, dealt with wealth's entrusting and safekeeping, later developed the function of promoting and incentivising the economy.
The modern banking industry was born and developed in Italy in the Middle Ages and early Renaissance, in the age of the Italian Communes, city-states and Signorias. Rich northern cities like Florence, Siena, Milan, Venice, Genoa and Lucca were established centres of commerce, trading with foreign states. Genoa and Venice, two of the four Italian "Repubbliche Marinare" (the others being Pisa and Amalfi), controlled the import of fabrics and spices from the Orient.
Italy was Europe's main economic power. International trade was increasing, but journeys by both land and sea to the rest of Europe and to the Orient were very long and hazardous. The establishment of banks in the main international trading centres was crucial in facilitating commerce.
That's why the letters of credit were created, to free merchants from the dangers of being robbed and killed while carrying great amounts of cash or valuable goods during their travels, which could last for months.
Letters of credit were simply the first cheques: bankers accepted to be the guarantors of payments, by signing a letter (called "of credit") which committed them to pay sums of money to the holder of the letter of credit, who was a seller of goods or services. The bank guaranteed to pay in the event that the buyer failed to pay, and also acted on behalf of the buyer by ensuring that the goods or services had been supplied and all the agreed-upon standards and quality of goods had been met by the supplier.
The use of letters of credit became a very important aspect of international trade, and was highly successful.
It was Florentine bankers who invented letters of credit and treasury bonds. During the Renaissance, therefore, Florentine bankers added the function of guarantors of payments to their other existing roles of lenders, custodians of wealth and money-changers. This turned Florence into one of the richest and most powerful cities in the world.
Florence, Cappella Tornabuoni
In the early 15th century Florence was home to around 80 banks, which lent money to kings, emperors and popes and had an income higher than that of England.
One of the oldest banks was the powerful bank founded by the Acciaioli family as early as in the 1200s, called "Compagna di Ser Leone degli Acciaioli e de' suoi consorti", which had branches in the world's main trading cities from Greece to Tunisia to Western Europe.
The bill of exchange (the modern promissory note) was also instrumental in reducing the movement of coined money. The coins were made of metal, but the letter of credit and the bill of exchange started a parallel circulation of payment means.
The families and cities from which banks took their names acquired high political prestige. Among the richest, most renowned merchant and banker families were the Bardi, Peruzzi and Pazzi in Florence in the 14th and 15th centuries, who established branches in many other parts of Europe.
The Medici Bank, founded by Giovanni di Bicci de' Medici in 1397, was what catapulted that great family to political powe