The History of Banks and Banking

Podcast Transcript

One of the biggest and most important industries in the world is banking.

Banks control an enormous amount of money and are often the most influential economic institutions in most countries.

Yet, banks are not a modern invention. Banks, in one form or another, have been around for thousands of years and have evolved into the modern institutions we have today over that time.

Learn more about the history of banking and how it came to be on this episode of Everything Everywhere Daily.

Banks and banking can be a very confusing topic. How banks work is often opaque to the average person.

I’ve been planning a series of episodes covering various aspects of banks and banking and how they work.

However, I realized that before I jump into those topics, I should probably first do an episode covering the history of banking.

Previously, I’ve done episodes on the history of money, and much of that will tie into this episode. While banks and money are closely related, they are ultimately very different things.

Banking began not with paper money or computers, but with agricultural commodities. In Mesopotamia around 3000 BC, temples and palaces provided secure spaces where people could store grain and other valuables. Priests and temple workers served as the world’s first bankers, issuing receipts for deposits—clay tablets that functioned as early promissory notes.

If you remember back to previous episodes, these clay tablets were the origins of writing, mathematics, and accounting. Babylonian law, famously codified by Hammurabi around 1750 BC, included regulations governing lending practices.

In ancient Egypt, the centralized economy operated with a grain banking system where farmers deposited harvests in state warehouses and received receipts. These receipts circulated as a form of currency, allowing Egyptians to pay taxes and conduct trade without physically moving heavy grain.

The ancient world also saw the emergence of private banking. In Babylon, the Egibi family operated across multiple generations, from 600 to 400 BC, handling activities remarkably similar to modern banking: loans, deposits, investments, and even international trade financing.

Ancient Greece introduced several important banking innovations. By the 5th century BC, Greek temples functioned as financial centers where citizens and foreigners could exchange different currencies, obtain loans, and make deposits. The term “bank” itself derives from the Greek “trapeza,” referring to the tables where money changers conducted business.

Professional bankers called “trapezites” emerged, establishing the first private banks separate from temples. They took deposits, made loans, and provided letters of credit for merchants traveling between city-states.

Ancient Rome built upon Greek foundations and further formalized banking. Roman banking families operated sophisticated enterprises with multiple branches across the Mediterranean. They introduced more standardized accounting practices and legal frameworks for banking operations. The Roman Empire saw the development of specialized banking roles, including argentarii (private bankers), mensarii (public bankers), and nummularii (money changers).

After the fall of Rome, banking activity declined in Western Europe but continued in the Byzantine Empire and the Islamic world.

Islamic banking developed distinctive practices to comply with religious prohibitions against interest (riba). Financial innovations like partnerships (mudaraba) and profit-sharing arrangements helped finance trade while adhering to Islamic religious principles.

By the 12th century, banking began to revive in Europe, particularly in Italian trading cities like Venice, Florence, and Genoa. The Crusades increased trade with the East, creating demand for more sophisticated financial services. Italian merchant families established banks that financed international trade, managed deposits, and created credit instruments.

The Medici Bank, founded in 1397, became the largest and most respected banking house in Europe. They pioneered double-entry bookkeeping and operated a network of branches across major European cities. Their innovations in letters of credit and bills of exchange facilitated safer international transactions.

During this period, money-changing became increasingly important due to the proliferation of currencies. The Bardi and Peruzzi families in Florence became prominent “super-companies” handling both banking and trading operations across Europe.

Jakob Fugger became one of the richest people in history during this period due to his banking enterprises throughout Europe.

The Age of Exploration created new demands for banking services. As European powers established colonial empires, they needed ways to finance voyages, manage trade, and move wealth between continents.

The first public banks emerged during this period. The Bank of Amsterdam, established in 1609, was a watershed moment in banking history. Unlike previous private banks, it was backed by the city government, giving it unprecedented stability. It introduced the concept of a “bank guilder”, a stable unit of account separate from circulating coins, providing a reliable standard for international trade.

In England, goldsmith-bankers emerged as an important banking class. Initially, storing gold for customers, they began issuing receipts that functioned as an early form of paper money. When they realized that not all depositors would claim their gold simultaneously, they started lending out a portion of deposits, developing the fractional reserve banking model still used today.

Fractional reserve banking will definitely be a subject of a future episode.

The Bank of England, established in 1694, marked another crucial development. Created to finance a war against France, it soon evolved into something more: the world’s first true central bank. It issued banknotes, managed government accounts, and gradually developed tools to stabilize the financial system.

In Sweden, the Riksbank, founded in 1668, claimed the title of the world’s oldest central bank, though its modern central banking functions developed later.

This period also witnessed significant theoretical advancements in understanding the role of banking in the economy. Adam Smith’s “The Wealth of Nations”, published in 1776, analyzed how banks create credit and contribute to economic growth.

In the United States, early banking was politically contentious. The First Bank of the United States, championed by Alexander Hamilton, and the Second Bank faced opposition from those who feared centralized financial power. Following President Andrew Jackson’s “Bank War,” the U.S. entered a period of “free banking” where individual states chartered numerous small banks that issued their own notes.

The Industrial Revolution transformed banking by creating unprecedented demand for capital. Commercial banks expanded rapidly to finance factories, railroads, and other industrial ventures. Investment banking emerged as a specialized field, with firms like J.P. Morgan & Co. arranging large-scale financing for corporations and governments.

During this period, banking institutions became more standardized and regulated. The U.S. National Banking Acts of the 1860s created a system of federally chartered banks and a uniform national currency. Germany established the Reichsbank in 1876, which played a crucial role in financing the country’s rapid industrialization.

The gold standard, which I covered in a previous episode, became the foundation of international finance, linking major currencies to gold and creating a relatively stable international monetary system. This facilitated the first true era of global finance, with unprecedented international capital flows.

This era also saw recurring financial panics and bank runs, culminating in the Panic of 1907 in the United States. The severity of this crisis led to the creation of the Federal Reserve System in 1913, establishing a true central bank for the U.S.

The Great Depression revealed weaknesses in the banking system and prompted major reforms. Thousands of banks failed across America and Europe as depositors rushed to withdraw their money. In response, the U.S. created the Federal Deposit Insurance Corporation or FDIC in 1933 to insure deposits and prevent bank runs.

The Glass-Steagall Act separated commercial and investment banking to prevent conflicts of interest and excessive risk-taking. Similar regulations were enacted in many other countries, creating a more compartmentalized and regulated banking system.

The economic devastation of the Depression and World War II led to a rethinking of the international financial system. The Bretton Woods Conference in 1944 established a new international monetary system, with the U.S. dollar as the world’s reserve currency, backed by gold, and other currencies pegged to it.

The post-war decades saw unprecedented economic growth and stability in developed economies. Banking became more accessible to average citizens through expanded branch networks and new consumer-oriented products like credit cards, which were introduced in the 1950s.

International banking expanded dramatically with the growth of multinational corporations. American banks established extensive international operations, and the Eurodollar market emerged—dollar deposits held outside the reach of U.S. regulations.

The term Eurodollar is a misnomer. A Eurodollar is any dollar held outside of the United States, not just in Europe.

In developing countries, government-owned development banks played a crucial role in financing industrialization and infrastructure projects. The World Bank, established by the Bretton Woods Accord, provided loans for development projects globally.

Starting in the 1980s, many countries began deregulating their banking sectors. In the U.S., the Depository Institutions Deregulation and Monetary Control Act of 1980 phased out interest rate ceilings and expanded the powers of savings institutions. The 1999 repeal of Glass-Steagall through the Gramm-Leach-Bliley Act removed barriers between commercial and investment banking.

Technology transformed banking operations. ATMs became widespread in the 1980s, electronic payment systems expanded, and the first online banking services appeared in the 1990s. These innovations reduced costs and expanded access, but also created new security challenges.

Financial globalization accelerated dramatically. Capital flowed more freely across borders, and financial markets became increasingly interconnected. Banks expanded globally, and new financial centers emerged in Asia and the Middle East.

Financial innovation created complex new products like mortgage-backed securities, credit default swaps, and collateralized debt obligations. These instruments enabled banks to spread risk but also created opaque interconnections within the financial system.

This era saw a series of financial crises, including the Latin American debt crisis of the 1980s, the Asian financial crisis of 1997-1998, and the Russian default of 1998. Each prompted reconsideration of banking regulations, but the general trend toward deregulation continued.

The 2008 financial crisis revealed systemic problems in global banking. The collapse of the U.S. housing bubble triggered a chain reaction throughout the financial system. Major investment banks like Lehman Brothers failed, while others required government bailouts to survive.

In response, governments worldwide implemented new banking regulations. The Dodd-Frank Act in the U.S. and the Basel III Accord internationally imposed stricter capital requirements, stress testing, and oversight of important institutions. The crisis also led to the creation of new regulatory bodies like the Financial Stability Board and the Consumer Financial Protection Bureau.

The 2010s saw the emergence of cryptocurrencies and blockchain technology, beginning with Bitcoin in 2009. These innovations proposed alternative approaches to financial transactions outside the traditional banking system.

The Federal Reserve Board recently lifted restrictions on banks using bitcoin to allow them to make faster, more secure transfers at lower costs around the world, as well as provide it as a client service.

As much as banking has evolved over the centuries, banking will continue to change in the future.

Traditional brick-and-mortar banks may continue to shrink or disappear altogether, replaced by digital-only institutions. Already, neobanks — entirely online banks like Chime, Monzo, and Revolut — have shown that banking services can be delivered efficiently without physical branches.

In a fully digital future, banks would operate primarily through mobile apps and web platforms, offering instant transactions, AI-driven customer service, and seamless integration with people’s financial lives. Physical cash would continue to decline in importance, perhaps even disappearing in some countries.

Another plausible future involves the deep integration of banking with broader technological ecosystems. “Embedded finance” is a concept gaining traction, where banking functions — lending, payments, insurance — are invisibly woven into non-bank platforms. Imagine getting a loan at the point of sale while shopping online without interacting with a bank at all, or managing investments through your social media app.

In this model, traditional banks might retreat into the background, providing infrastructure while technology companies like Amazon, Apple, and Google become the customer-facing brands.

Decentralized finance, or DeFi, offers a radically different vision of the future of banking, one where trust is no longer placed in centralized institutions but in code and distributed networks. In a DeFi future, blockchain technologies could allow people to lend, borrow, and transfer money without intermediaries. Smart contracts — self-executing agreements coded into a blockchain — could automate financial services.

This possible future of banking could look very different from the world we are used to today. And it is a very long way from Babylonian farmers putting their grain in a centralized storage facility thousands of years ago.