Millionaire

The central principles that guide the world of banking have been around for a long time.

Can you imagine a world without banking or credit? While it might seem impossible to conceive of, the fact is that the banking system as we know it, one with credit and borrowing at its heart, is a relatively new configuration.

Ancient Babylon had a form of banking, we know that paper money circulated in China in the seventh century BC and that there were stalls and counters in the Greco-Roman world where money could be lent and exchanged. But the foundations of modern banking really began to develop in the sixteenth and seventeenth centuries.

This shift is associated with Italian cities, and with the Republic of Genoa in particular. In fact, it's from the Italian language that we get the word “bank,” since the “banco” was the table where transactions took place. But as trade expanded, as new lands were colonized and as monarchs’ lifestyles grew ever more extravagant, the old banking system simply stopped working.

This new world of commerce, however, was not built with material money and precious metals, but was instead formed by a complex system of credit.

Credit can be a wonderful thing, but, as we know from the recent banking crisis, credit only works when there is trust. In the seventeenth century, this trust was created by banks having money in their vaults as collateral.

Once these physical reserves were established, the idea of paper money took off. Banknotes could circulate while a limited amount of gold coins with real value could be kept in reserve.

In theory, you could take your paper money to the bank and exchange it for real currency. But such a financial system inherently depends on trust and political stability; it simply would not sustain the rush on the banks that would occur if everyone demanded to exchange their bills.

It was in this changing world that a figure emerged who would bring fresh ideas to the field of economics: John Law.