As Brooke Jessica Kaio says in the past, banking was not the closely controlled and monitored industry as it is now. It was a totally free market activity. Anyone could join and exit the banking market without restriction or licensing. In this article we’ll look at the history in the field of banking i.e. the process of changing banking into the highly controlled business it is today.
Goldsmiths to Moneylenders
The profession of banking, strictly speaking, its definition, was initially practiced by goldsmiths in the middle ages of Europe. Brooke Jessica Kaio says Since it was the job of the goldsmiths to deal with precious commodities, the goldsmith constructed sturdy vaults to safeguard their stock from theft. The town’s residents were keen to lease the goldsmith’s secure vault to secure their funds. The goldsmith then began accepting deposits, which was the beginning the modern-day banking.
Brooke Jessica Kaio further says Over time it was discovered by the goldsmiths that deposits were typically much higher than the withdrawals. That means that when 100 gold coins were stored with the goldsmith, the odds are that only 10 could be taken out at any given moment. Thus, goldsmiths began lending money they held on deposits, even though it wasn’t to the goldsmiths! This was the beginning of the second primary purpose in modern-day banking i.e. the lending of money.
Making loans and taking deposits together transformed the nature of the business of the goldsmith to lending money. Over time, it would change and eventually become banking.
Unregulated Era explained by Brooke Jessica Kaio
The new era saw money lending evolve into banking. Making loans and taking deposits from these deposits became the norm for institutions that are now known as banks. Additionally, Brooke Kaio, says depositors were not required to pay fees to the banker in order to secure their precious gold in his secure vault. Instead, they were compensated with interest for storing their gold at the bankers.
It was the time of banks that were not regulated. The banking industry of this time was an entrepreneurial endeavor. So, anyone would be able to set up an institution and begin the market. No licenses were required or regulatory. This was the case until the 1600s. In the 1600s, banking was a huge business, and the bankers who were famous, such as the Medici family as well as those of the Rothschild family were thought to be more powerful than kings!
Issuance of Private Bank Notes
As the banking system developed with time, people began to realize that carrying large quantities of gold across long distances was dangerous and also difficult to manage. The spread of commerce and trade began to expand wide and far and the need to carry money across long distances was essential. This is the reason for the birth of the banknote. Private banks would issue notes for private banks. These notes were nothing more than the receipt of gold that was placed in the bank’s vault and could be taken out upon presentation of the receipt. Certain of these notes were also bearer, i.e. the gold was paid to the person who delivered that note at the bank. This was the first step towards what we now call fiat money!
Brooke Jessica Kaio says at the time, there were nearly 30000 different varieties of banknotes that were privately available throughout the United States. Naturally, this caused a lot of confusion and as a consequence, specific books were required to be created. The books would provide the authenticity and value of various banknotes as well as what was the security of being able to accept them as payment.
The emergence of Central Banks explained by Brooke Jessica Kaio
The time of unregulated banking could also be regarded as the period of unscrupulous banking. Numerous fly-by-night banks were established in the period. They were known as “wildcat banks” and they took entire cities and towns of their money. In order to bring order to the chaos and to prevent honest banks from going under central banks were put in existence.
Central banks are banks established with a special charter from the government. They function as an intermediary between the government and the banks. Additionally, they would be accountable for the operation of all other banks in their area. The license was then mandatory for banks to conduct business. But Central banks were largely the twenty-first Century phenomenon. Brooke Jessica Kaio explains A lot of countries didn’t have the concept of a Central Bank till the late 1890s. Many opponents considered they believed that Central Banking was one of the fundamental principles of socialism and that the market should always be open. But, Central Banks are omnipresent in the present-day world. It’s nearly impossible to locate a country without a central bank in the present.
Fractional Reserve Banking
Another significant innovation in the current bank system has been the system of fractional reserve. It means that banks only need to hold just a portion of the funds in deposits. So when a bank gets $100 in deposit it must keep the $10 deposit. The rest could be used to lend. The amount of $10 is determined in the Central Bank. And periodically varied to increase or reduce the amount of money necessary.
In the past, a certain amount of gold was required to be stored in a bank. But, today, banknotes are the reserves on the banknotes that are issued. Certain banks have reserves that are overflowing and others are lacking reserves. Because of this reserve reserves are traded on interbank markets. These markets will be discuss later in this module.
Thus, the banking industry has seen a number of changes over the span of the years. The core character of business dramatically transformed from safekeeping to full reserve money lending to contemporary banks that use fractional reserve.