Introduction
The history of banking began around 2000 BCE in Assyria, Sumeria, and India when wealthy families kept gold and silver coins in their homes. However, in the U.S., the banking system was started in 1782, where the first real bank was chartered in the then young republic. Hiding of the gold and silver coins was referred to as hoarding, and it was considered a crime not to spend money. Eventually, some of these people began lending money to friends or borrowers.
This became known as banking and led to the establishment of many banks over the years that grew in number and size. The evolution of the banking system has been a difficult task. The first bank dates back to the 6th Century BC, while the modern bank was created in the early 18th century. The essay illustrates how hoarding gold and silver coins, the modern bank, and early modern banking were developed in the late 20th century and early 21st century.
Summary
The evolution of the banking system has been a continuous process that has seen changes added to the banking system from time to time. The first traditional bank dates back to the 6th Century BC, while the modern bank was created in the early 1800s. However, many banks would provide various services during this time, such as a central money lending institution and an institution for recording transactions. Below is a detailed overview of the development of the banking system.
Hoarding Gold and Silver Coins
During the Middle Ages (5th to 14th Century), wealthy families hoarded gold and silver coins they found in their homes. Some of these people began lending money to friends, coworkers, and strangers. This practice evolved into banking during the Middle Ages (from the 14th Century), which led to the establishment of many banks over the years that grew in number and size. The use of currency dates back to 3000 BC when the Chinese used a ‘form of money called Cowrie shells. Later, although they were not used as currency in Europe until 1000 BC, bronze coins were traded as payment for goods and cattle (Campbell et al. 72). People used to carry around coins in a variety of ways. Some were rolled into tiny balls and worn hanging from the person’s neck; others were more easily transported in a purse or pocket.
The invention of silver coins proved to be quite an advancement for commerce and individual wealth (Pavlek et al. 23). Initially, the gold or silver coins were minted by the government and encoded with a unique stamp to ensure the coin’s authenticity. During this period, paper currency was not in use. Hoarding money is, as some would call it, a symptom of greed or avarice. In medieval times, wealthy families hoarded gold and silver coins they found in their homes (Gordon). In those times, that was hoarding, and it was considered a crime not to spend money.
These ‘money pots’ eventually led to the creation of the first banks. These individuals were known as ‘bankers,’ and they would lend out their hoarded money at interest rates that often were extremely high. Indian moneylenders were the first to operate quasi-banks using the modern banking system. However, the first bank is known as Banca Monte dei Paschi di Siena or Berenberg Bank, and its present form was founded in 1624 (Asso and Nerozzi 16). Nonetheless, the original form of first banks dates back to 1472.
The Modern Bank
The modern bank was created in the early 1800s during the beginning of the Industrial Revolution (West). These banks were more stable and organized and became a place for individuals to store their money. However, according to Begenau and Landvoigt (1753), this bank was not entirely safe itself, and most had failed by 1866. The failure was because of poor management that led to mismanagement and other issues that caused these banks to fail.
The purpose of the first national bank in America was to provide a secure place to store money, make free loans, and coordinate currency throughout the country. The first national bank was established when the First National Bank of the United States was created in 1791 (Ugolini). Initially, this bank held government deposits and distributed new currency when required. The bank also collected information about financial trends, monitored the country’s economic status, and set rates for loans and exchange rates for foreign currencies. Abraham Lincoln passed the National Banking Act on December 23rd, 1863, establishing a system for recording and passing information about money nationwide (Gorton and Zhang 10). This was later strengthened by the Federal Reserve Act of 1913, which made the Federal Reserve Bank an independent entity from the government.
The Federal Reserve banks brought the necessary regulation to the banking sector, especially with the boom in the economy in the United States and the rest of the world. The federal reserve system was created in 1913 by combining most of the different banking systems into one central bank (Wells). President Woodrow Wilson created the Federal Reserve System on December 23rd 1913, after he signed the Federal Reserve Act into law (Wells n.p).
This created a single, coordinated system for recording and passing on information about money nationwide. Under this system, the federal reserve banks created a new form of currency: fiat currency, controlled by law rather than metal ‘backed’ by gold or some other valuable substance. Federal reserve banks are also responsible for creating the debt money system, which results in inflation.
The first federal reserve bank was created in New York City when the First and Second Banks of the United States were combined. This created a bank known as the Reserve Bank of New York, which was later changed to the Federal Reserve Bank of New York (Wells n.p). Jaremski and Wheelock (21), state that the other federal reserve banks are in Atlanta, Boston, Chicago, Cleveland, Dallas, and Philadelphia.
Early Modern banking in the late 20th Century and early 21st Century
The modern banking system is characterized by its autonomy from the government’s oversight. According to Begenau and Landvoigt, it is used to manage the country’s money supply and finance (1753). It includes automated systems such as ATMs, credit cards, and bank accounts that the general public can access (Begenau and Landvoigt 1756). The modern banking system also can grant loans, accept deposits, issue currency, and set financial policies.
Conclusion
The essay has provided a detailed overview by illustrating how hoarding gold and silver coins, the modern bank, and early modern banking were developed in the late 20th century and early 21st century. However, banks have come a long way from the original barter system. The modern banking system was created with the premise of being able to handle all forms of currency and deposits, which has made it more versatile and efficient at helping economies grow.
Works Cited
Asso P.F and S Nerozzi. “Preserving Financial Stability in Times of Crisis. a Tale of Two Public Banks: Monte Dei Paschi Di Siena and Banco Di Sicilia 1929-1940.” Journal of European Economic History, vol. 47, no. 2. 2018, pp. 9-39.
Begenau J, and Landvoigt. “Financial regulation in a quantitative model of the modern banking system.” The Review of Economic Studies, vol. 89, no. 4. 2022, pp. 1748-1784. Web.
Campbell, Roderick, et al. “Chinese Bronze Age political economies: a complex polity provisioning approach.” Journal of Archaeological Research, vol. 30, no. 1. 2022, pp. 69-116. Web.
Gordon Bryan J et al. Hoarding and the Cult of Money. Concordia University, 2020.
Gorton, Gary B and Jeffery Zhang. Taming wildcat stablecoins, 2021.
Jaremski Matthew and David C Wheelock. “Banker Preferences Interbank Connections and the Enduring Structure of the Federal Reserve System.” Explorations in Economic History, vol. 66, 2017, pp. 21–43. Web.
Ugolini Stefano. The evolution of central banking: Theory and history. Palgrave Macmillan, 2017. Web.
Pavlek Barbara, James Winters, and Olivier Morin. “Ancient coin designs encoded increasing amounts of economic information over centuries.” Journal of Anthropological Archaeology, vol. 56, 2019. Web.
Wells, Donald R. The Federal Reserve System: A History. McFarland, 2017.