Traditional Banking Versus Modern Banking in Venice - Coursework Example

Traditional Banking versus Modern Banking in Venice The period between 1300 and 1400 in Italy is popularly known as the renaissance period. The renaissance in Italy first began in the city states of Italy due to specific and unique reasons. Even though that most large of Europe were undergoing financial and economic meltdown, the city-states in Italy were a little bit stable. The city-states in Italy were of great importance to Italy as well as other landlocked countries since they mostly relied on these city-states for their trade in the Mediterranean Sea. This trade contributed the majority of the income in Italy especially textiles and luxury goods. The town life in Italy cities was bigger than in any other country. During this renaissance period, the governments of various nations were under dictatorship. However, due to the wealth created in the Italian cities such as Venice and Milan, they became autonomous city-states, each of which included an enclosed metropolitan center and the neighboring countryside. In addition, this modernization drove the city-states to create a new social system in the country. Wealth and ability was more important than aristocratic titles and ownership of land. During these times, the wealth merchants of the country together with bankers played a huge role in replacing the aristocrats in the upper class. According to their systems, shopkeepers and artisans were classified below the wealthy merchants, therefore forming a moderate and prosperous middle class that created and gave jobs to most of the poor people. The poor people from the countryside were classified at the very bottom of their social and economic ranking together with the peasants who worked in the country estates (Hildreth 5). During the same centuries of spiritual exploration, trade and industry revolution, and territory building, Venice was also a center of intellectual and artistic activity. The city had a huge number of mathematicians, philosophers, historians, and even humanists thrived from the fifteenth to the seventeenth century. The availability of such intellects paved way for major developments in the country. Venice became the printing hub of the country and was the most important printing press anywhere in the world at that time due to its high level of technology innovation. The development of a printing press paved way for the creation of receipts, which would then be used to acknowledge payments. The receipts would then be developed and be used as money to pay or settle for depts. This noble innovation paved way for the creation of banks in Italy that would be used as a saving scheme for the rich merchants of Venice. The Venetian merchants also used their banks to settle for debts accruing from the trading activities in the region (Johnsson 1). During the trade, the Italian merchants could make loans from the banks they created such as the bank de rialto in Venice to the price of Italy. The loans they would make would then be used to finance wars and the lavish lifestyles of the prince of Italy and the merchants themselves. The merchants would also engage in foreign trade to earn and equivalent of foreign exchange in the modern times. The traditional banks in Italy would then set up trading families among the merchants who engaged in international trade as part of their more general business activities. For instance, in the city of Venice, the Bardi and the Peruzzi families were the dominant and went ahead to establish various branches in other parts of Europe. These banks would then extend loans to the kings of England to finance war with France (Dunbar 308). Another form of banking equivalent to the modern day banking system is the Medici Bank, which was set up in 1397 by Giovanni Medici in 1397. The purpose of this bank was to exchange money for his clients for a fee. Medici expanded the scope of his business and later established branches in other parts of Europe such as England and France. Alongside exchanging money, Medici Bank would then extend its services to issuing of loans to merchants and the royals. This bank also enjoyed privileges in being the main banker to the Pope. Pope was a major influential figure in Medici bank since he earned a lot of profits for the bank than many other activities which the bank engaged in. he was also the driving force for the establishment of various branches in other Italian cities and across the entire Europe (Gladstone 5). Most of the trade in the medieval banks was undertaken using bills of exchange. Bills of exchange involved a creditor giving out local currency to the borrower in return for a bill acknowledging that an assured amount of another currency was billed at a future date. This would happen at the next big international trade fair. However, during this period, the church prohibited charging interest directly to bank clients. Due to this limitation, the connection between banking and trade was essential. However, bankers would take deposits in one city, give a loan to another person conveying merchandises to another city, and then take repayment at the destination. However, in this form of trade, the payment was usually in a different form of currency. This move would easily incorporate what is fundamentally an interest payment, avoiding the church prohibitions. Another major milestone in the medieval banking era was the use of double entry accounting system and the payments could be done purely on bank transfer. According to (Dunbar 308) the traditional Venetian banks would work on fractional reserve basis. This was provided by a Venetian law of 1321 that gave bankers three days after demand in which they would make liquid the deposits made by clients. This was a great indication of fractional reserve in operation. Fractional reserve system allowed a growth of money supply through bank loans, customer overdrafts, and monetized state debt. Another distinct factor that shaped the growth and the development of the Venetian banking system is the provision of certain laws that paved way for the creation of a banking system. The Venetian senate to oversee the control of the then blossoming banking industry formed a series of laws governing nearly forty in number. These laws were formed between 1270 and 1530 to regulate the business of private bankers. (Johnsson 1) notes that much have been borrowed from the traditional Venetian banking system and is being used in modern banking systems. A great example is the structure of the modern banking system in comparison to the structure of the medieval banking system. The banking systems currently being used in the world have many similarities even though they have some differences that are relative to material aspects. This principle differences are contained in the particulars of the organization and techniques. However, they have become minimal due to the increasing efficiency of international communication. In modern times however, banking systems have revolutionized and can be classified based on their structures. They include branch banking, unit banking, and hybrid banking. In branch banking, a single policy from the head office that tends to manage the different branches, which they own, is implemented. The branches are located in or out of the country. The branching system was used in the traditional system when the branching system was not much developed. This system has been developed in modern times and results to a huge profit for the banks due to large-scale banking. Moreover, in this system, banks enjoys great economies of reserve, remittance of funds, spreading the geographical risk, investment of idle funds, and parity in the rate of interest. In branch banking, some similar activities to the medieval banking systems in Venice are used. One great example is the use of foreign currency. Foreign currency in modern banks is because of increased trade between countries facilitated by the modern technology (Hildreth 5). The medieval banking system is similar to today’s unit banking. This form of banking offers services from one of their offices while they have limited services. This includes taking deposits and cashing in checks and balances. (Hildreth 5) notes that some of the changes that have been put into place in the modern banking system include the banking regulations. Unlike the traditional banking, system where there was limited or no banking regulation, todays banking regulation have played a great role in determines the quality and the type service provided in this financial sector. The commercial banks are the most regulated of all banking sectors in the industry. The extensive state and federal laws set these regulations, which are made primarily to protect the interest of the public. For instance, in the U.S. the federal government law in the U.S. to protect the interest of the public in the banking industry formulated the national currency and banking acts. According to this act, the controller evaluates the need, charters new state banks, and frequently scrutinizes these institutions. The central bank offers loans to banks at a certain interest, which determines the rate of interest that the banks issue to their clients. This is a sharp contrast where the traditional banking systems in Venice determined their own interest rates (Johnsson 1). In another example, the Federal Reserve’s act is a federal bank regulatory agency, which serves as a lender of the last resort. This policy ensures that the Federal Reserve Bank provides temporally loans to deposit taking institution, which face financial emergencies and help in stabilizing the financial markets and the economy of the country. However, such a law did not exist in the medieval Venetian banking system (Hildreth 5). In contrast to the medieval Venetian banking system, the modern banking systems have revolutionized to form a well-established form of government for the banks. This includes the formation of a board of directors and senior management to oversee accountability, proper customer protection, and privacy policy. Moreover, the modern banking system provides minimum-security standards that are in tandem with the international standards. Moreover, this policies and regulations provides proper incident management and reporting to a central bank which was not in existence in the medieval Venetian banking system. The policies provide for proper availability management and capacity building to ensure business continuity and planning. Unlike the traditional Venetian banking systems, today’s modern banking system provides services to all members of the societies who are willing and have registered with the different banks. This means that the banks do not seclude themselves for the wealthy class of merchants with the modern era (Johnsson 1). In conclusion, it is important to note that banking has been changing throughout the history more changes are expected in the future. All this changes depends on the effect of demand, and the need for more security as technology develops. The modern banking systems have significant potential benefits to their clients and play a major role in determining the level of trade as well as the state of the economy in the country. Works Cited Dunbar, Charles . "The Bank of Venice." The Quarterly Journal of Economics (1892): 308-335. Print. Gladstone , Wilson. Banking Policy and Structure: A Comparative Analysis. New York: Taylor & Francis, 1986. Print. Hildreth, Richard . The History of Banks:To Which Is Added, a Demonstration of the Advantages and Necessity of Free Competition In the Business of Banking. New York: Batoche Books, 2001. Print. Johnsson, Richard . Fiduciary Media and Banking in Medieval Venice Revisited. Stockholm: Stockholm School of Economics, 2002. Print. Read More