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In banking, a merchant bank is a traditional term for an Investment Bank. It can also be used to describe the private equity activities of banking. This article is about the history of banking as developed by merchants, from the Middle Ages onwards. A bank is an institution that provides financial service, particularly taking deposits and extending credit. ...
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Private equity is a broad term that refers to any type of equity investment in an asset in which the equity is not freely tradable on a public stock market. ...
Merchants function as professionals who deal with trade, dealing in commodities that they do not produce themselves, in order to produce profit. ...
History
Merchant banks, now so called, are in fact the original "banks". These were invented in the middle ages by Italian grain merchants. As the Lombardy merchants and bankers grew in stature on the back of the Lombard plains cereal crops many of the displaced Jews who had fled persecution in Spain after 613 entered the trade. They brought with them to the grain trade ancient practices that had grown to normalcy in the middle and far east, along the Silk Road, for the finance of long distance goods trades. Lombardy (Italian: Lombardia) is a region in northern Italy between the Alps and the Po river valley. ...
For other uses, see Silk Road (disambiguation). ...
The Jews could not hold land in Italy, so they entered the great trading piazzas and halls of Lombardy, along side the local traders, and set up their benches to trade in crops.
They had one great advantage over the locals. Christians were strictly forbidden the sin of usury. The Jewish newcomers, on the other hand, could lend to farmers against crops in the field, a high-risk loan at what would have been considered usurous rates by the Church. In this way they could secure the grain sale rights against the eventual harvest. They then began to advance against the delivery of grain shipped to distant ports. In both cases they made their profit from the present discount against the future price. This two-handed trade was time consuming and soon there arose a class of merchants, who were trading grain debt instead of grain. Usury (pronounced //, from the Latin usuria, demanding in return for a loan a greater amount than was borrowed) was defined originally as charging a fee for the use of money. ...
Debt is that which is owed. ...
It was a short step from financing trade on their own behalf to settling trades for others, and then to holding deposits for settlement of "billete" or notes written the people who were still brokering the actual grain. And so the merchant's "benches" (bank is a corruption of the Italian for bench, as in a counter) in the great grain markets became centers for holding money against a bill (billette, a note, a letter of formal exchange, later a bill of exchange, later still, a cheque). In general, a counter is a device which stores (and sometimes displays) the number of times a particular event or process has occurred often in relationship to a clock signal. ...
A £20 Ulster Bank banknote. ...
A negotiable instrument is a specialized type of contract which obligates a party to pay a certain sum of money on specified terms. ...
Typical cancelled personal cheque as used in the U.S. A cheque, or (in American English) check, thought to have developed from Persian Ú†Ùƒ chek, is a negotiable instrument instructing a financial institution to pay a specific amount of a specific currency from a specific demand account held in the maker...
These deposited funds were intended to be held for the settlement of grain trades, but often were used for the bench's own trades in the meantime. The term bankrupt is a corruption of the Italian banca rotta, or broken bench, which is what happened when someone lost his traders' deposits. Being "broke" has the same connotation. Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their creditors. ...
A sensible manner of discounting interest to the depositors against what could be earned by employing their money in the trade of the bench soon developed; in short, selling an "interest" to them in a specific trade, thus overcoming the usury objection. Once again this merely developed what was an ancient method of financing long distance transport of goods. In finance, discounting is the process of finding the current value of an amount of cash at some future date, and along with compounding cash form the basis of time value of money calculations. ...
Islamic banking has the same constraints against usury as Christianity and from the same old testament notions. It will be interesting to see if, as Islam ages and matures, it relaxes its insistence that money cannot be earned from deposits held as debt. To meet Wikipedias quality standards, this article or section may require cleanup. ...
The medieval Italian markets were disrupted by wars and in any case were limited by the fractured nature of the Italian states. And so the next generation of bankers arose from migrant Jewish merchants in the great wheat growing areas of Germany and Poland. Many of these merchants were from the same families who had been part of the development of the banking process in Italy. They also had links with family members who had, centuries before, fled Spain for both Italy and England.
This course of events set the stage for the rise of banking names which still resonate today: Schroders, Warburgs, Rothschilds, even the ill-fated Barings, were all the product of the continental grain trade, and indirectly, the early Iberian persecution of Jews.
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