The warrior monks who invented banking

On London's busy Fleet Street, opposite Chancery Lane,
 is a stone arch through which anyone may step, and
 travel back in time.

A quiet courtyard houses a strange, circular chapel and
 a statue of two knights sharing a single horse.

The chapel is Temple Church, consecrated in 1185 as 
the London home of the Knights Templar.

But Temple Church is not just an important
 architectural, historical and religious site. It is also 
London's first bank.

The Knights Templar were warrior monks. A religious 
order, with a theologically inspired hierarchy, mission statement, and code of ethics, but also heavily armed 
and dedicated to holy war.

How did they get into the banking game?


The Templars dedicated themselves to the defence
 of Christian pilgrims to Jerusalem. The city had been captured by the first crusade in 1099 and pilgrims began
 to stream in, travelling thousands of miles across Europe.

Those pilgrims needed to somehow fund months of food 
and transport and accommodation, yet avoid carrying 
huge sums of cash around, because that would have 
made them a target for robbers.

Fortunately, the Templars had that covered. A pilgrim 
could leave his cash at Temple Church in London, 
and withdraw it in Jerusalem. Instead of carrying money,
 he would carry a letter of credit. The Knights Templar
 were the Western Union of the crusades.

We don't actually know how the Templars made this
 system work and protected themselves against fraud. 
Was there a secret code verifying the document and the traveller's identity?


Financial fixers

The Templars were not the first organisation in the world
 to provide such a service. Several centuries earlier, 
Tang dynasty China used "feiquan" - flying money - a
 two-part document allowing merchants to deposit profits 
in a regional office, and reclaim their cash back in the 
capital.

But that system was operated by the government.
 Templars were much closer to a private bank - albeit 
one owned by the Pope, allied to kings and princes across Europe, and run by a partnership of monks sworn to 
poverty.

The Knights Templar did much more than transferring 
money across long distances.

As William Goetzmann describes in his book Money 
Changes Everything, they provided a range of recognisably modern financial services.

If you wanted to buy a nice island off the west coast of 
France - as King Henry III of England did in the 1200s 
with the island of Oleron, north-west of Bordeaux - the Templars could broker the deal.

Henry III paid £200 a year for five years to the Temple
 in London, then when his men took possession of the 
island, the Templars made sure that the seller got paid.

And in the 1200s, the Crown Jewels were kept at the
 Temple as security on a loan, the Templars operating as
 a very high-end pawn broker.

The Knights Templar were not Europe's bank forever, 
of course.

The order lost its reason to exist after European 
Christians completely lost control of Jerusalem in 1244,
 and the Templars were eventually disbanded in 1312.


So who would step into the banking vacuum?

If you had been at the great fair of Lyon in 1555, you 
could have seen the answer. Lyon's fair was the greatest market for international trade in all Europe.

Sophisticated exchange

But at this particular fair, gossip was starting to spread 
about an Italian merchant who was there, and making
 a fortune.

He bought and sold nothing: all he had was a desk and 
an inkstand.

Day after day he sat there, receiving other merchants 
and signing their pieces of paper, and somehow 
becoming very rich.

The locals were very suspicious.

But to a new international elite of Europe's great 
merchant houses, his activities were perfectly legitimate.

He was buying and selling debt, and in doing so he 
was creating enormous economic value.

A merchant from Lyon who wanted to buy - say - 
Florentine wool could go to this banker and borrow
 something called a bill of exchange. This was a credit note,
 an IOU, but it was not denominated in the French livre or Florentine lira.

Its value was expressed in the ecu de marc, a private 
currency used by this international network of bankers.

And if the Lyonnaise merchant or his agents travelled
 to Florence, the bill of exchange from the banker in
 Lyon would be recognised by bankers in Florence, who 
would gladly exchange it for local currency.

Through this network of bankers, a local merchant could
 not only exchange currencies but also translate his creditworthiness in Lyon into creditworthiness in Florence,
 a city where nobody had ever heard of him - a valuable service, worth paying for.

Every few months, agents of this network of bankers 
would meet at the great fairs such as Lyon's, go through 
their books, net off all the credit notes against each other
 and settle any remaining debts.

Our financial system today has a lot in common with
 this model.

An Australian with a credit card can walk into a supermarket
 in Lyon and walk out with groceries.

The supermarket checks with a French bank, which talks 
to an Australian bank, which approves the payment, happy that this woman is good for the money.


Checks and balances

But this web of banking services has always had a darker 
side to it.

By turning personal obligations into internationally
 tradable debts, these medieval bankers were creating
 their own private money, outside the control of Europe's kings.

Rich, and powerful, they had no need for the coins minted 
by the sovereign.

That description rings true even today. International banks
 are locked together in a web of mutual obligations that 
defies easy understanding or simple control.

They can use their international reach to try to sidestep
 taxes and regulations.

And, since their debts to each other are a very real kind 
of private money, when the banks are fragile, the entire monetary system of the world also becomes vulnerable.

We are still trying to figure out what to do with these banks.

We cannot live without them, it seems, and yet we are not 
sure we want to live with them.

Governments have long sought ways to hold them in 
check. Sometimes the approach has been laissez-faire, sometimes not.

Few regulators have been quite as ardent as King Philip
 IV ofnFrance.

He owed money to the Templars, and they refused to 
forgive his debts.

So in 1307, on the site of what is now the Temple stop 
on the Paris Metro, Philip launched a raid on the Paris
 Temple - the first of a series of attacks across Europe.

Templars were tortured and forced to confess any sin
 the Inquisition could imagine. The order was disbanded 
by the Pope.

The London Temple was rented out to lawyers.

And the last grandmaster of the Templars, Jacques de 
Molay, was brought to the centre of Paris and publicly
 burned to death.