During the Renaissance period, banking operations became common. In 1609, the Bank of Amsterdam was established and for the first time in history it guaranteed to keep 100% reserves for demand deposits. The bank followed that principle for 170 years and, consequently, though it did not generate high income, but it survived all crises.
From the 16th century onwards, goldsmiths in England were involved in lending, currency exchange or bullion trading. Prior to this, it was the scribes who held deposits for lending. The merchants deposited gold with London goldsmiths, who had private vaults and charged service fees. For each deposit, goldsmiths issued receipts confirming the quantity and purity of the metal. The receipts were not transferable (i.e. could not be assigned to another person) and, over time, goldsmiths took on the role of scribes, making loans on behalf of the depositor. English goldsmiths delivered their banking services by issuing bills of exchange for deposited money, which represented a loan to the goldsmith. As bills of exchange were payable on demand and loans to the goldsmith’s customers were repayable over a longer period, this was an early form of fractional reserve banking. Bills of exchange became a convenient form of money with a guarantee of payment from the goldsmith.
In 1694, the Bank of England was established in the British isles, which suspended its banking operations in 1797 following a scandal caused by the speculations of colonial companies. In 1656 the Bank of Sweden was established which was later nationalized and is considered the first modern state bank. This bank started to issue depository receipts (notes) for an amount higher than the value of the deposit, which had impact on the underlying bullion money and created artificial demand.
In 18th century France, John Law, the financier, became the author of a new banking system that involved issuing too many banknotes and creating a speculative bubble. The bubble burst in 1720 and resulted in the collapse of the East India Company. The 1880s saw inflation and financial chaos, which became one of the causes of the Great French Revolution.
Adam Smith introduced the theory of the invisible hand, creating free market economy systems (1776). This had the effect of reducing state interference in the banking sector and in the economy. The ideas of the free market and capitalism perfectly established themselves in the USA. Indeed, in the United States, national banks were established to secure banknotes with the purchase of securities, which helped to ooze out the activities of state banks. In 1904, corporate banks were outlawed in the state of Texas.
In the 19th century, the Rothschilds were regarded to be the pioneers of the banking sector, lending to the Bank of England and buying government bonds in the stock exchanges . Their wealth was believed to be the largest in modern history. Nathan Mayer Rothschild not only traded in financial instruments on the stock exchange, but later also started to trade in gold, which became the foundation of his business. From 1811 onwards, he started to finance the English army, also during the battles fought against Napoleon.
The Rothschilds also supported the railway systems, contributing their capital to fund such projects as the Suez Canal. They became the owners of numerous companies: Alliance Assurance (1824; now Royal & SunAlliance), Chemin de Fer du Nord (1845), Rio Tinto Group (1873), Société Le Nickel (1880; now Eramet) and Imétal (1962; now Imerys). The Rothschilds financed many ventures, including Cecil Rhodes’ expeditions to Africa and the establishment of the Rhodesia colony.
During the Napoleonic Wars, France became an international financial center with a national bank and a whole range of private banks. Rothschild founded the De Rothschild Frères bank in 1812. An interesting fact about the Rothschild bank is that it financed France’s wars and its colonial expansion.
Merchant banks such as Goldman Sachs, Kuhn, Loeb & Co. and J.P. Morgan & Co. played a large role in the history of banking. Their main source of profit included commissions on the sale of foreign bonds from Europe. At the time, banks were required to disclose capital reserves, so family-owned merchant banks existed for years and enjoyed a good reputation.