Banking, as we understand the term, had its origin in the Italian cities during the middle ages. Prior to that time "bankers" were merely money changers, who set up their banks or benches in the streets or market places of the cities of the Orient. Money changers were numerous in the cities of Greece and Egypt. They kept no books, received no deposits, made no loans, sold no drafts or bills of exchange and issued no circulating cur- rency, hence they scarcely possessed any of the real functions of a bank. But when prosperity came to the cities of Italy, and their ships were upon every sea, the merchants found need for other and better facilities in their financial operations, and hence was gradually developed the first banking institutions. The first bank, however, that of Venice, had a peculiar origin. It was founded in 1171 as a combined result of governmental necessity and tyranny. The republic needed money to carry on its wars with Genoa, and levied forced contributions upon the leading mercantile firms and wealthy citizens, in return for which they were given perpetual annuities at a fixed rate per annum. The payment of this annual interest was the means of establishing the bank, and as the annuities were often transferred from one holder to another, or passed by devise or descent to heirs, the transfer was made upon the books of the bank, the same as in the case of the transfer of the stock of a corporation at the present time.

Finally, to avoid the frequent and numerous entries on the books of the bank, certificates payable to bearer were issued and passed from hand to hand, the same as bank bills of the present day. A little later bills of exchange were introduced as a means of transmitting money safely through provinces where property was unsafe from robbers and barbarians, but it was not until three hundred years later (1487) that the system of banking thus begun had developed to the point of deposit banking, and the issuing of circulating notes by this same bank. The Bank of Venice played a great part in the commercial history of its time, proving a vast aid to both the government and the mercantile houses, and yet it answered very imperfectly the modern definition of a bank.

During the sixteenth and seventeenth centuries the commerce of Holland supplanted that of the Italian cities, and Dutch ships were carrying the produce of the world. Amsterdam then became a commercial and financial center. For a time the commerce of the world seemed to focus there. Foreigners came to buy, and found the products from all parts of Europe, Asia and the East Indies, carried thither in Dutch ships. Money flowed into Amsterdam from foreign countries in payment for goods and shipping charges, and this stream of payments made it convenient to settle in Amsterdam the financial transactions of other cities, such as Antwerp and Rotterdam. Thus Amsterdam became a commercial clearing house for the world's commerce, the same as London and New York are at the present time. Bills of exchange came into Amsterdam for collection, and the volume of financial transactions rose to a large figure. Such a concentration of dealings in money could not fail to develop a convenient system of banking. "Individuals began to deal in foreign exchange and to buy and sell coin and bullion; and, sometimes in connection with the exchange business, and sometimes independently of it, began to receive money on deposit, and to effect payments, when ordered by customers, by transfer from one account to another." Thus the business of banking gradually developed to meet the requirements of commerce until by the middle of the seventeenth century it is probable that many of the functions exercised by a modern bank were in use, except the issuing of a circulating currency.

A great variety of coins were in use in the different Dutch provinces, and to these was added the influx of gold and silver of various weights and values from other nations in the regular course of foreign commerce. The rixdaler was the standard of value, but a large portion of the coins in circulation was light in weight, either from abrasion, clipping or debasement. Kings were accustomed to debase the coinage in order to replenish the public revenues. As a consequence the coins of full weight disappeared constantly, leaving the inferior pieces in circulation. Instead of attempting to regulate the coinage itself, the city fathers of Amsterdam ascribed the confusion in the circulating medium to the free banking privileges which prevailed, and attempted to correct the evil by regulating the dealings of private bankers. Their first law was leveled against deposit banking, and by the act of July, 1608, deposit holding was absolutely prohibited, and the receiving or paying out of money for another person, or its transfer by writing, "or by word of mouth, directly or indirectly" was forbidden. The use of bills of exchange was also strictly forbidden. The culling of coin, or selecting the heavy coin from the light was also strictly forbidden. Thus did these ancient law makers display their ignorance of the laws of trade and finance, and while attempting to correct evils which they did not understand, only served to retard the wheels of commerce. Finally they decided to create a great financial institution, which should concentrate under public authority the business of receiving deposits and dealing in specie, and as a result, in 1609, was established the Bank of Amsterdam, more properly called the Amsterdam Wisselbank (i. e. Amsterdam Exchange Bank). The bank created several agencies or branches in different parts of the city, and thus, under the law, monopolized the business of bank ing and dealing in money and exchange.

The advantages offered by the Wisselbank to the commercial world, of which Amsterdam was the center, were security for deposits and a uniform value in its transfers; and while the multitude of debased coins continued to circulate in the channels of trade the same as before, the deposits in the bank were a standard of value. The bank received only money of full weight and paid out only such, hence a credit upon its books was equivalent to so much good coin. Credits in the bank were frequently transferred, and came to be called "bank money." Payments made in "bank money" were preferable to payments made in "current money," owing to the established value of the former. Such payments or transfers were made by means of orders required to be presented by the payee in person, or his authorized agent, but the payee did not receive the credit for the transfer until the following day. This is the first exemplification of the check system, but it fell far short of its modern uses. Even this, however, was a great convenience to the commercial public. The law required that all Bills of Exchange payable in Amsterdam should be settled for by transfers in the bank, and this had the advantage of assuring foreign holders that exchanges on Amsterdam would be paid in standard money, thereby giving stability and uniformity to exchanges and encouraging foreign trade.