Today, London is the financial capital of the world and for good or ill the hub of global banking and finance. How banking started in the capital is every bit as intriguing and mysterious as the ways that modern international finance seems to work today. Basically we owe it all to a religious order of heavily armed warrior monks who set up London’s first bank some 900 years ago.
Some explanation is clearly needed and as we shall see Medieval Banking was every bit as sophisticated as our own rather seemingly esoteric sytems today.
The Warrior Monks Who Invented Banking
In a quiet courtyard off of London’s busy Fleet Street you will find a strange, circular chapel with a statue of two knights sharing a single horse outside.
The chapel is Temple Church, consecrated in 1185 as the London home of the Knights Templar. But it’s not just an important architectural, historical and religious site. It was also London’s first bank.
The Knights Templar were warrior monks. A religious order, with a theologically inspired hierarchy, mission statement, and code of ethics, but also heavily armed and dedicated to holy war.
How did the Templars Get Into Banking?
Long Distance Banking
It was the Templar order that dedicated themselves to the defence of Christian pilgrims to Jerusalem after the city had been captured by the first crusade in 1099 and pilgrims began to stream in – travelling thousands of miles across Europe.
Those pilgrims needed to somehow fund months of food and transport and accommodation but also avoid carrying huge sums of cash around – which would of course make them a target for robbers.
So the Templars came up with an ingenious solution. A pilgrim could leave his cash at Temple Church in London, and withdraw it in Jerusalem. Instead of carrying money, he would carry a letter of credit. The Knights Templar were the Pay Pal of the crusades.
We aren’t actually sure how the Templars made this system work and protected themselves against fraud. Was there a secret code verifying the document and the traveller’s identity – but make it work they did.
The Knights Templar were the Pay Pal of the crusades
The Templars system of finances wasn’t the first of its kind. Several centuries earlier, Tang dynasty China used “feiquan” – or flying money – a two-part document allowing merchants to deposit profits in a regional office, and reclaim their cash back in the capital. However that system was operated by the government. The Templars were much closer to what we would consider a private bank – albeit one owned by the Pope, allied to kings and princes across Europe, and run by a partnership of monks sworn to poverty.
The Knights Templar did much more than transferring money across long distances, in fact they provided a range of recognisably modern financial services.
For Example : If you wanted to buy a nice island off the west coast of France – as King Henry III of England did in the 1200s with the island of Oleron, north-west of Bordeaux – the Templars could broker the deal.
Henry III paid £200 a year for five years to the Temple in London, then when his men took possession of the island, the Templars made sure that the seller got paid.
Another Example : In the 1200s, the Crown Jewels were kept at the Temple as security on a loan, the Templars operating as a very high-end pawn broker.
After European Christians completely lost control of Jerusalem in 1244 the Knights Templar lost its reason to exist in Europe and the Templars were eventually disbanded in 1312.
So who would step into the banking vacuum?
Private Banking Houses & ‘All the Fun of the Fair’
The answer was private merchants and new banking houses.
What grew up in its place was a network of bankers, agents of whom would meet up every few months, at ‘fairs’ around Europe. At these fairs teh agents would set up a booth and would buy and sell debt.
For Example : A merchant from Lyon who wanted to buy – say – Florentine wool could go to this banker’s agent and borrow something called a bill of exchange. This was a credit note, an IOU, but it was not denominated in the French livre or Florentine lira. Its value was expressed in the ecu de marc, a private currency used by this international network of bankers.
So when the Lyonnaise merchant or his agents travelled to Florence, the bill of exchange from the banker in Lyon would be recognised by bankers in Florence, who would gladly exchange it for local currency.
Through this network of bankers, a local merchant could not only exchange currencies but also translate his creditworthiness in Lyon into creditworthiness in Florence, a city where nobody had ever heard of him – a valuable service, worth paying for.
At these fairs as well as buying and seling debt the agents of this network of bankers would also go through their books, netting off all the credit notes against each other and settle any remaining debts – effectively acting as a clearing house.
Our financial system today has a lot in common with this model.