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The Evolution of Money. Episode II: The Age of Shylocks and Banking awakens


The success of Lydian Stater spread to Europe, and in particular Greece, where the potential of money as a system of mutual trust was copied, adapted, and rapidly improved in the 6th century. The result was the profound transformation of the Greek economy, the growth of its cities, and the emergence of a more sophisticated society.

Before the arrival of the coin money, ancient Mediterranean world used primitive currency that would not have powered the kind of revolution that Greece underwent.

Over 4,000 years ago, people in ancient Mesopotamia used clay tablets to commit themselves to particular financial transactions. With the success of agriculture came the need for people to exchange the surplus goods they produced for those they did not have.

These transaction promises edged on clay did not have inherent value, not like bars of gold or silver coins, but they functioned as money because the parties involved in the transaction trusted it. It is justifiable to say that money has evolved to be what it is because people trust it.

The money counting problem of Europe

The use of coins as money was quickly embraced across Europe and Asia, becoming a big hit where it was introduced. In some societies, coins were minted out of precious metals such as gold and silver and wherever it was accepted, commerce thrived and the economies boomed.

By 1200 AD, independent states in Europe that arose with the fall of the Roman Empire were co-existing and even engaging in commerce with each other. There was however the problem each state developed its own coinage, and this hindered smooth trading to a large extent.

For instance, in popular commercial cities such as Pisa and Venice, it was not uncommon for traders to use as many as seven different types of coins. This really complicated business such that even the smallest transactions required complicated calculations.

Further, these states used the Roman numerical system which was ill-suited for complex mathematical and financial calculations. With this development arose the need for merchants to keep records of their money as they traded, and this led to the invention of the Abacus, the first computer.

In the East, the Suni Muslim Caliphate, the Indians, and the Chinese Empire were far more advanced in money technology than those in Europe. In fact, Europe only began to catch up with them with the introduction of the Hindu-Arabic numeral system after the publication of the book Liber Abaci (Book of Calculation) by Leonardo of Pisa, best known by his nickname Fibbonacci in 1202 AD.

The new number system was more practical when applied to book keeping and currency conversion. It, however, led to the introduction of one new function of money that changed the history of finance: credit and interest.

Emergence of credit and money lending

Coin money served limited functions when it was introduced to feuding states in modern day Northern Italy. Fibonacci’s publication unlocked more potential for money as it was discovered how one person can rely on another to borrow money and pay it back at some future date. By the time Giovanni Medici established Medici bank in 1397, the new number system had taken root.

It was much easier to calculate percentages, dates, and other factors of finance and for this reason, money lending emerged as a trade. The Latin word ‘Credo’ means ‘I believe’, which evolved to be ‘Credit’, was first used by money lenders when advancing money to merchants. Venice, the hometown of Shylock, the money lender popularized in Shakespeare’s The Merchant of Venice, grew to become the greatest money lending city in the world.

The early money lenders were not respected. If anything, they were seen as pariahs because lending money at an interest was a sin according to the Bible. Because of this, the Jews, who were exempt from the commandments of the Bible, were the only people who could lend money at an interest to the majority Christian merchants as far back as 1516. With the increase in the number of merchants borrowing money from the Venetian Jews, these ventures grew to become the first banks.

The word ‘Bank’ evolved from Banco Rosso, the name of the building the Jews operated from at the entrance of their ghetto in Venice.

Money as the new tool of power

The Evolution of Money. Episode II: The Age of Shylocks and Banking awakens - 4C Trading
Giovanni Medici

The price that the Jews had to pay for money lending was social exclusion. They were confined to the Ghetto because while their service was a sin to the Christian world, it became increasingly necessary to the economy of Venice. With time, however, money lending spread from the Jewish ghettos to become a preserve of the most affluent merchants in the city. Money lending was the most rewarding financial activity in the city of Venice.

With the increase in the number of borrowers, the number of people risking eternal damnation just to provide loans at an interest increased. This led to competition among money lenders and eventually decreased interest rates. As more and more individuals entered the banking business, one particular family, the Medici of the Republic of Florence (present day Florence City in Italy), emerged as the most successful money lenders.

No other name in history better symbolizes the success of the money business, and in particular, credit services. Money lending ceased to be irreputable; it became the most glorious business anyone could get into. Within a short time, those in the banking business became the new power brokers because they had the most influence over the economy of a city and even state.

Unlike in the past where Kings had absolute say in the running of a state, bank owners established a kind of legacy that no one could have anticipated. To understand just how influential the bankers became, in just over 400 years, the Medici family produced two queens of France and three became popes in Rome. As a matter of fact, the Medici family played a significant role in the French Renaissance between the 15th and 17th century AD.

The money changing business

By early 16th century, as money became increasingly accepted as a measure and storage of value, almost every kingdom and states across Europe and Asia began producing its own money. This was also a period when commerce bloomed, the shipping industry took shape, and credit enabled more merchants to take bigger risks and travel more widely to trade.

The banking business, though still frowned upon, was the most lucrative trade where only those with money to lend succeeded. Bankers made even more money charging a small commission to convert money from one currency to another.

With time, the church relaxed its anti-usury laws that made it a sin to charge interest on money lent and banks, which meant the business became legitimate and even more profitable. Gradually, the technology of bookkeeping evolved and within no time, banks were using the double-entry system to maintain their checks and balances.

Under Giovanni, the Medici bank remained a trailblazer in the banking business and soon spread from Florence to Venice and Rome. This scale of diversity meant that more regions benefited from the banking services and the bank owners had greater influence in how cities grew.

Paper money

Paper money was first used by the Chinese around 618 AD during the Tang Dynasty. The money was mostly in the form of private bills of credit and later exchange notes. However, due to the overproduction of notes, inflation soared and their value eventually plummeted around 907 AD.

Paper money was completely eliminated in China in 1455 and replaced with a kind of round coin with square corners called kai-yuans, the origin of the word cash.

The literature of the travels of Marco Polo to China introduced the idea of paper money to Europe in the year 1290 AD. Before this, the most developed states in Europe still used coins minted from precious metals such as gold and silver. Florence, the most industrious financial state at the time, used the Florin, a gold coin that was most widely accepted as currency across Europe and in overseas kingdoms where merchants frequented for trade.

Because inflation was not so bad at the time, paper money did not catch on until around 1661 when the Swedish Stockholms Banco began issuing the first paper money in response to the Swedish kingdom minting new coins that were lighter in weight than the previous ones.

The Gold standard of money

With the evolution of the banking business arose the need to standardize money for the sake of its value. The 17th century Europe was a more connected region that thrived in commerce, and the wealthiest members in the society were judged by how much money they had.

Having more money meant having greater influence to determine the outcome of wars, who became king, and which state the world could do business with.

In the next article, we will delve deeper into the emergence of currency into modern money: the first stable currencies (like Byzantine gold coin and the Frankish denarius penny and the roles The Roman Empire and the British played in its evolution.

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