Origin and Growth of Commercial Banking

There are various views about the origin of the word “bank”. One view is that it is derived from the Italian word ‘banque’ which means a bench. The other point of view is that it has originated from the German word ‘banc’ which means a joint stock firm.

The present day banker has three ancestors; (1) the merchants (2) the goldsmith (3) the money lenders.

1. The merchants. The earliest stage in the growth of banking can be traced to the working of merchants. These merchants were traders in commodities. The trading activities were carried on by them from one place to another. It was risky for the traders to carry metallic money with themselves for payment. The traders with high reputation began to issue receipts which were accepted as titles of money. These receipts or letters of transfers also called hundi in indo sub continenet were the first mode of payments. The merchant banking thus forms the earliest stage in the evolution of modern banking.
2. The goldsmiths. The second stage in the growth of banking is normally traced to earliest goldsmiths. These goldsmiths also called seths in India used to receive gold money kept with them. These receipts with the passage of time became payable to the bearer on demand. In this way the ‘goldsmiths’ note, became termed as the force-runners of the modern bank note.
3. The money lenders. The third stage in the development of banking arose when the goldsmiths became the money lenders. By experience the goldsmiths came to know that they could keep a small proportion of the total deposits for meeting the demands of customers for cash and the rest they actually standing to their credit. In economic terminology, we can say that they allowed the overdraft facilities to their depositors.

When every money lenders/goldsmith issued receipts and most of them allowed the overdraft facilities, there was then too much confusion in the banking system. The money lenders/goldsmiths, in order to earn profits, could not keep adequate reserves for meeting the demands of the customers for cash. The failure on the part of the money lenders/goldsmiths to return money caused widespread distress among the people.