Episode 742: Making Bank : Planet Money On today's show, how a band of medieval warrior monks sworn to poverty got into the banking business and changed the way we think about money forever.

Episode 742: Making Bank

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Hey, it's Robert here. We thought that we would try something slightly different for today's show. A very good friend of PLANET MONEY, economist Tim Harford, is launching a new project. It's a sort of quest for him. And we reached him outside in the middle of London.

TIM HARFORD: I've been working on a new podcast for the BBC World Service called "50 Things That Made The Modern Economy," just trying to understand how it all came together and how the world around us works. You know, the kind of stuff you guys are interested in.

SMITH: Which brings us to where you are right now. Where are you?

HARFORD: I have stepped back in time. I am in a quiet corner of London, and I am standing next to Temple Church in the center of London, which is nearly 900 years old. Let's see if we can get into the church.


HARFORD: So I can hear these ethereal voices coming from inside the temple. I imagine this is a concert they're rehearsing. There's a beautiful door in front of me, a wrought ironwork on it, a knocker and above me a column, and on the top of it is a statue - metal statue - of two nights sharing a single horse, which I think represents their vow of poverty. But these knights belong to a medieval order that you've probably heard of - the Knights Templar.

SMITH: You know, it's funny because what we know about the Knights Templar - what I know about the Knights Templar is that I don't know much about the Knights Templar.

HARFORD: Except that they were in a Dan Brown book, right?

SMITH: (Laughter) Exactly right, exactly right. There's some sort of conspiracy, I'm sure of it. Though I don't know what it is.

HARFORD: There are numerous conspiracies. And who knows? Maybe some of them are true. But the reason I'm here is not because of any particular conspiracy I'm here because the church that I'm standing in front of, it's not just a religious site. It's not just an architectural site. Temple Church is London's first bank.


SMITH: Hello, and welcome to PLANET MONEY. I'm Robert Smith.

HARFORD: And I'm Tim Harford.

SMITH: Today on the show - how a very old church in London, England, changed the way we think about money.

HARFORD: It's a story of bloodshed, world domination and accounting, lots and lots of accounting.

SMITH: It's the birth of the bank coming up.


SMITH: We're just going to let Tim take over the rest of the show. We're going to play an excerpt of his new podcast right now. It's the story of the Knights Templar and London's first bank.


HARFORD: The Knights Templar were warrior monks, 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?


HARFORD: The Templars dedicated themselves to the defense of Christian pilgrims to Jerusalem. Jerusalem had been captured by the First Crusade in 1099, and pilgrims began to stream in, traveling thousands of miles across Europe. And if you're 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 of cash around because that makes you 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 cash, 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 fei qian, 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 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 transferring money across long distances. They provided a range of recognizably modern financial services. If you wanted to buy a nice island off the west coast of France - something King Henry III of England did in the 120s with the island of Oleron northwest of Bordeaux - well, the Templars could broker the deal. King Henry III paid 200 pounds 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. Oh, and the Crown Jewels of England stored today at the Tower of London, in the 1200s, the Crown Jewels were at the temple. They were security on a loan. That was the Templars operating as a very high-end pawn broker. 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 was to step into the banking vacuum? If you'd been at the great Fair of Lyon in 1555, you could've seen the answer.


HARFORD: Lyon's fair was the greatest market for international trade in all Europe and dated back to Roman times. But at this particular fair, gossip was starting to spread. There was this Italian merchant Siem (ph) he was making a fortune. But how?


HARFORD: He bought nothing and he 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.


HARFORD: 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.


HARFORD: Here's 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 the Florentine lira. Its value was expressed in the ecu de marc, a private currency used by this international network of bankers.


HARFORD: And if the Lyonnaise 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. Through this network of bankers then, a local merchant could not only exchange currencies but also exchange his creditworthiness in Lyon for credit worthiness 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, nets off all the credit notes against each other and settle their remaining debts.


HARFORD: 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, well, let's say Lyon - why not? - and she can walk out with groceries. The supermarket checks with the French bank. The French bank talks to an Australian bank. The 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 each other 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.


HARFORD: Sometimes not. Few regulators have been quite as ardent as King 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 Metro, King Philip launched a raid on the Paris Temple. Templars were tortured and forced to confess any sin the Inquisition could imagine. The order of the Templars 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 center of Paris and publicly burned to death.

SMITH: That was Tim Harford's new podcast for the BBC World Service. It's called "50 Things That Made The Modern Economy," available on the BBC website and wherever you get your podcasts. Before we go, I wanted to finish up our conversation with Tim Harford.

HARFORD: Still standing on a street corner in London.

SMITH: (Laughter) As I always pictured you, right?

HARFORD: Exactly.

SMITH: You know, Tim, that was a great story of the first bank. It's obviously one of the things you'd want if you were doing a series on 50 things that made the modern economy. But I noticed some of the other things on the list are somewhat strange or things you wouldn't think about, like the barcode. How did you decide what made the list and what didn't?

HARFORD: Well, the most important thing was to get 50 interesting things, 50 things with a few surprises. This wasn't supposed to be just another 50 most important things that I could think of. I mean, for example, the steam engine is not on the list. The computer is not on the list, not because they're not important; of course they're important. But they're, you know, just stories that are so well told. So I was looking for a spread of different industries, different ideas and different parts of the world and different surprises. So the barcode is interesting not because it's a way of processing transactions more quickly. It's interesting because it changed the shape of global supply change. It changed who was a winner and who was a loser in the retail industry. So that's the kind of - we're looking for the economic impacts as well as just, you know, the computer was important.

SMITH: What's your favorite story?

HARFORD: I have to say it's whatever I've just been working on, and I've just been working on management consulting.

SMITH: Management consultants.

HARFORD: Yeah. Who invented management consulting, who invented management, who invented the idea of selling consulting services to managers, and why did a group of academics start providing management consulting services free in India as part of a randomized, controlled trial? So yeah, management consulting, the barcode, the shipping container, the bank - it's all here.

SMITH: Tim Harford, thank you so much.

HARFORD: Thank you.


SMITH: Tim wanted to recommend two books about the history of banking that he relied on for this episode - William Goetzmann's "Money Changes Everything" and Felix Martin's "Money: The Unauthorized Biography." We always love to hear what you think of the show. You can email us - planetmoney@npr.org. And thanks today to Marnie Chesterton and to our producer, Elizabeth Kulas. I'm Robert Smith. Thanks for listening.

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