Source: The Ascent of Money: "The Origin of Banking"
This video from the PBS documentary The Ascent of Money looks at early Renaissance Italy, when credit came of age, and explores how money lending became the foundation of a new kind of power. Against the backdrop of the powerful Medici family, historian Niall Ferguson describes how credit became a legitimate international business and led to the birth of modern banking.
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Banks play a vital role in the world today. They facilitate access to money for individuals and businesses. Banks take in deposits and then lend that money out to people and businesses for important financial needs. The banking system provides money so the financial system can run smoothly.
There are different types of banking institutions. Commercial and retail banks provide services for consumers and businesses. Savings and loan associations take savings deposits and make mortgages and other loans. Credit unions are non-profit organizations owned by their customers and offer similar services to retail banks. Investment banks are larger and provide banking services for corporations.
Banks take in money through consumer and business deposits and then lend money out. Banks provide a service by bringing together cash deposits with the need for cash in the form of credit for consumers and businesses that can ultimately be channeled into economically productive activities. Before lending money, banks also evaluate the creditworthiness of the borrower, or the likelihood that the borrower will repay the loan on time.
People deposit their money in a bank for several reasons. First and foremost, your money is safe and secure in a bank. Banks can currently insure deposits up to $250,000 per account. Banks also provide convenience. You can access your money almost any time you need, either through the bank itself or though Automatic Teller Machines (ATMs) that are available anytime, day or night. Banks also provide other benefits when you have a savings or checking account, like paying interest on some deposits. Banks provide other services for consumers as well, including credit cards, investments like CDs, auto loans, home loans, and small business loans.
On a larger scale, banks also provide services and loans for businesses. Through this kind of lending, banks help generate economic activity as their financing provides opportunities for companies to expand, which means they can produce more goods and employ more people. Banks help provide cash for businesses when they need it, because banks allow businesses to borrow and repay the loan with a future revenue stream.
NIALL FERGUSON: One clue is that Shylock is one of the many Jewish moneylenders in history. Jews who stayed in Venice for more than two weeks were supposed to wear a yellow ‘O’ on their backs or a yellow hat. And they were confined to a special area which became known as the ghetto nuovo.
This is the entrance to the Jewish ghetto in Venice where Jews were obliged to live and indeed confined at night. Jews were tolerated in Venice. But for a reason.
The key was that Jews could provide a service that Christian merchants were forbidden to do: they could charge interest on their loans.
This is where the Venetian Jews used to do business. This building here was the old Banco Rosso and it was outside here that they used to sit behind their tables—their tavule—on their benches—their banci, the root of the Italian word for banks. Now, there was good reason why the merchants came here to the Jewish ghetto to borrow money. For Christians, what the Jews were doing, lending money at interest, was a sin.
The medieval Church’s laws against usury—charging interest on loans—were a major obstacle to the development of finance in Europe. After all, what God-fearing Christian merchant wished to risk the torments of Hell?
There the moneylenders were eternally tortured with scorching earth and freezing snow, their necks weighed down with bulging purses.
But it was in another Italian city state, Florence, that the key financial service of providing credit moved out of the ghetto and away from the gates of hell to become the legitimate preserve of banks.
It was a transition symbolized by the rise of one family: the Medici.
With their ascent, credit came of age. Money-lending ceased to be disreputable. It became glorious—and the foundation of a new kind of power.
The dazzling legacy of the Medici family’s power still surrounds you in Florence today.
In the space of four hundred years, two Medici became queens of France; three became Pope. Appropriately, it was Machiavelli, the supreme theorist of power, who wrote their history.
Perhaps no other family left such an imprint on an age as the Medici left on the Renaissance. You might even say that they paid for the Renaissance, their patronage running the gamut of genius from Michelangelo to Galileo.
Nothing could better illustrate the extraordinary ascent of money. For what the Medici had achieved was nothing less than the birth of modern banking.
For 500 years few things in economic life have mattered more than the ability of individuals, companies and governments to borrow from banks.
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