Financial Intermediation: Commercial and Investment Bank Structure

In medieval times, merchants who traded between regions of a country or between countries needed to be able to change one currency in the form of gold or silver coins into other currencies. Merchants also needed to be able to keep their wealth somewhere they believed to be safe (gold and silver are very heavy to carry and ‘keeping it under a mattress’ was not safe). They grew to trust particular moneychangers with whom they would deposit their money, i.e. their gold and silver coinage, for safekeeping. The moneychanger would then make a book entry in his accounts showing who had deposited money and would give them a receipt. When merchants wanted to pay each other large sums, this could then happen across the books of a moneychanger rather than in coinage. If the person being paid did not have an account with that moneychanger, he could either open an account with him or the transaction could be settled between his moneychanger and that of the seller. This settlement could easily be undertaken physically between moneychangers if they worked in the same area. All that was required would be a short walk at the end of the day to settle any outstanding balances amongst the competing moneychangers. Similar services could also be provided by goldsmiths and even by monasteries and innkeepers — if they were trusted. The receipt that a moneychanger issued when a merchant deposited money was in effect a debt, i.e. a liability of the issuer (the moneychanger) and an asset to the holder (the merchant).