The history of the Bank of Venice reveals something of the forces that led to the evolution of central banks.
In 1171 the government of the Republic of Venice extracted forced loans of specie from wealthy citizens. The government kept a record book that showed the amounts it owed individual citizens but otherwise issued no bonds, promissory notes (IOUs), certificates of indebtedness, or other proof of indebtedness. The government’s creditors received 4 percent interest per year, but the government did not pay down the principal on the loans. The citizens of Venice began exchanging ownership of these government obligations to transact business, turning these government obligations into a circulating medium of exchange like any other form of money. Money transactions settled by entries in books were much more convenient than coined money transactions, particularly when large amounts were involved. The citizens of Venice soon voluntarily deposited specie with the “bank” in return for book entry deposits that could be transferred to other depositors in any amount.
In 1587 the Venetian government established the Bank of Venice as the Banco del Piazza del Rialto. As early as 1374 a committee of scholars had proposedthe formal organization of a public bank, but no action was taken for over two centuries. By the late 1500s other Italian cities had already established public banks, costing Venice claims of priority in the history of banking. The credit for the first beginnings of modern banking practices, however, belongs to Venice.
The Venetian practice of banking on the security of government loans survived into the modern period. Today in the United States the Federal Reserve System issues Federal Reserve Notes and deposits at Federal Reserve Banks, holding government bonds as securities against these notes and deposit liabilities.
