For the earliest communities in history, the barter system in which goods were exchanged worked reasonably well, but once people began trading with new markets sourcing new products, this became problematic when coins were invented, providing a store of value for trade.
Of course, the earliest communities didn’t have a safe place to store these coins, which is when we saw the introduction of the banking system. A functional financial system that enabled the wealthy to distribute wealth, facilitate trade and collect taxes. Over centuries, the banking system has evolved to become the intricate and serving modern system we know today, with some of the oldest banks dating back to 1472.
The birth of banking
Ancient homes were not as safe as modern day homes, so the wealthy individuals in Greece, Rome, Egypt and Babylon had to find an alternative solution to storing their valuable coins. At the time, Temples were the financial centres of the cities, and this was where the wealthy stored their money. With coins safely in the temples, the wealthy began lending coins, charging interest, while the temples handled large loans, including loans to various sovereigns.
The Roman Empire and Banking
The Romans were known for being expert builders and administrators, and their influence changed the banking landscape. The Romans moved banking from the Temples and created purpose-built buildings, essentially creating the first banks.
Although the Roman Empire eventually crumbled, some banking institutions it created continued well into the Middle Ages. During this time, we started to see a shift of power between creditors and debtors, with Julius Caesar beginning to allow banks to confiscate land instead of loan repayments.
Free-Market Capitalism and Competitive Banking
In 1776, when banking was already well-established in the British Empire, economist Adam Smith introduced his invisible hand theory. In this theory, the invisible hand is a metaphor for the unseen forces moving the free market economy, i.e. how individuals operate through a system of mutual interdependence. His work described how free markets can incentivise individuals acting in their own self-interests to create what is necessary for society. Free market capitalism found great strength in the United States of America, which is only emerging now.
When the US first emerged (as it didn’t have a currency), banks would create and distribute a currency, but if the bank failed, its currency became worthless. Alexander Hamilton, the first secretary of the U.S. Treasury, established a national bank that would accept member banknotes at face value; eventually, this national bank created a national currency, creating a liquid market.
The Formation of Merchant Banks
Merchant banks, i.e. a, financial institution that completes underwriting, loan services, financial advising, and fundraising services for large corporations and high-net-worth individuals, soon became responsible for most of the economic duties previously handled by the National Banks. These banks included Goldman Sachs, Kuhn, Loeb & Co., and J.P. Morgan & Co.
Initially, these banks relied on commissions from European bond sales, with a small backflow of American bonds trading in Europe; through this, they could build capital. With the emergence of large industries, a need for major corporate financing arose, which could not be satisfied by one bank, the only way they could raise the money they needed was through initial public offerings (IPOs) and bond offerings.
The Birth of Fed, Black Tuesday and FDIC
In 1913, the U.S. government formed the Federal Reserve Bank (the Fed). Despite this, financial and political power remained concentrated on Wall Street, and when the First World War broke out, the US became a global lender, replacing London as the centre of the financial world. The US government then insisted all debtor nations paid back war loans before the American institute would provide further credit, slowing world trade and causing hostility towards US goods.
On Black Tuesday in 1929, the stock markets crashed, the world economy crumbled and the Fed couldn’t contain the damage; as a result, 9000 banks failed between 1929 and 1933. To restore confidence, the Glass-Steagall Act was passed in 1933; commercial banks were not longer allowed to speculate with consumer deposits, and the Federal Deposit Insurance Corp. (FDIC) was created to insure accounts up to certain limits.
World War II and Modern Banking
World War II not only saved banking but it modernised it. The war required financial investment of billions of dollars, creating companies needing huge credit, encouraging banks into mergers, and creating large banks which spanned the global market. Therefore, domestic banking in the US settled with the introduction of deposit insurance and mortgage lending.
Digital Banking
The late 20th and early 21st centuries saw a rise in digital banking, which officially dates back to the 1980s.
