On London’s busy Fleet Street, just opposite Chancery Lane, there is a stone arch through which anyone may step and travel back in time. Just a few yards south, in a quiet courtyard, there is a strange, circular chapel—and next to it, on a column, is 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, a religious order. But Temple Church is not just an important architectural, historical, and religious site. It is also London’s first bank.1
The Knights Templar were warrior monks: they were a religious order, with a theologically inspired hierarchy, mission statement, and code of ethics. But they were also heavily armed and dedicated to a holy war. How did those guys get into the banking game?
The Templars dedicated themselves to the defense of Christian pilgrims to Jerusalem. In 1099, with the First Crusade, Jerusalem had been captured from the Fatimid Caliphate, and pilgrims began to stream in, traveling thousands of miles across Europe. And if you are a Christian pilgrim, you have a problem: you need to somehow fund months of food and transport and accommodation, yet you also want to avoid carrying huge sums around, because that makes you a target for robbers. Fortunately, the Templars had that covered. A pilgrim could deposit funds at Temple Church in London and withdraw them in Jerusalem. Instead of carrying a purse stuffed with money, he’d 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 identity of the traveler? We can only guess. But that wouldn’t be the only mystery to shroud the Templars, an organization sufficiently steeped in legend that Dan Brown set a scene of The Da Vinci Code in Temple Church.
Nor were the Templars the first organization 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.2 Templars were much closer to a private bank—albeit a private bank 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 transfer money across long distances. They provided a range of recognizably modern financial services. If you wanted to purchase a nice island off the west coast of France—as King Henry III of England did in the 1200s with Oléron, northwest of Bordeaux—the Templars could broker the deal. Henry paid £200 a year for five years to the Temple in London, and when his men took possession of Oléron, the Templars made sure that the island’s previous owner was paid. Oh, and the Crown Jewels of England, stored today at the Tower of London? In the 1200s, the Crown Jewels were stored at the Temple—security on a loan. That was the Templars operating as a very high-end pawnbroker.
The Knights Templar weren’t Europe’s bank forever, of course. The order lost its reason to exist after European Christians completely lost control of Jerusalem in 1244; the Templars were eventually disbanded in 1312. But then who stepped 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 of Europe, and dated back to Roman times. But at this particular fair, gossip was starting to spread. There was this Italian merchant, see him? He was making a fortune. But how? He bought nothing and had nothing to sell. All he had was a desk and an inkstand. And he sat there, day after day as the fair continued, receiving other merchants and signing their pieces of paper, and somehow becoming very rich. Extraordinary. And frankly, to the locals, very suspect.3
But to a new international elite of Europe’s great merchant houses, this particular Italian’s activities were perfectly legitimate. He had a very important role: he was buying and selling debt, and in doing so he was creating enormous economic value.
Here is how the system worked. A merchant from Lyon who wanted to buy—say—Florentine wool could go to this banker and borrow something called a “bill of exchange.” The bill of exchange was a credit note, an IOU. This IOU wasn’t denominated in the French livre or Florentine lira. Its value was expressed in the écu de marc, a private currency used by this international network of bankers. And if the Lyonnais merchant traveled to Florence—or sent his agents there—the bill of exchange from the banker back in Lyon would be recognized by bankers in Florence, who would gladly exchange it for local currency.4
Through this network of bankers, then, a local merchant could not only exchange currencies but also exchange his creditworthiness in Lyon for creditworthiness in Florence, a city where nobody had ever heard of him. That’s a valuable service. No wonder that the mysterious banker was rich. And every few months, agents of this network of bankers would meet at the great fairs like Lyon’s, go through their books, net off all the credit notes against one another, and settle their remaining debts.
Our financial system today still has a lot in common with this system. An Australian with a credit card can walk into a supermarket in,say, Lyon, and she can walk out with groceries. The supermarket checks with a French bank, the French bank talks to an Australian bank, and an Australian bank approves the payment, happy that this woman is good for the money.
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—and that private money was outside the control of Europe’s kings. They were rich, and powerful, and they didn’t need 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 understanding or control. They can use their international reach to try to sidestep taxes and regulations. And, since their debts to one another are a very real kind of private money, when the banks are fragile, the entire monetary system of the world also becomes fragile.
We’re still trying to figure out what to do with these banks. We can’t live without them, it seems, and yet we’re not sure we want to live with them. Governments keep searching for ways to hold them in check. Sometimes the approach has been laissez-faire. Sometimes not.
Few regulators have been as ardent as Philip IV of France. 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 Métro, King Philip launched a raid on the Paris Temple—the first of a series of attacks across Europe. Templars were tortured and forced to confess to any sin the Inquisition could imagine. The order of the Templars was disbanded by Pope Clement V. The London Temple was rented out to lawyers. And the last grandmaster of the Templars, Jacques de Molay, was brought to the center of Paris and publicly burned to death.