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History of Banking
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This presentation deals with “History of the Banking Sector”, where in you will be introduced to the evolutionary steps of the Economic Civilization and various stages of development of the ...

This presentation deals with “History of the Banking Sector”, where in you will be introduced to the evolutionary steps of the Economic Civilization and various stages of development of the banking sector.
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History of Banking History of Banking Presentation Transcript

  • Chapter 1
  • me ell !! e t me t m utLe bo a
  • Building a Healthy EconomyRequires an Understanding of the Principles of Money Money is a human contrivance. That has evolved over centuries. Much of the present misery in the worldderives from a general failure tounderstand the nature of money, banking,and credit.
  • Money Plays Its Role Within the Realm of Reciprocal Exchange The other traditional roles of money (measure of value, savings medium) should be considered separately and achieved by other means. a3/26/2007 Prepared by Thomas H. Greco, Jr. 4
  • The Ladder of Economic Civilization Stages in the development of the process of reciprocal exchange: Barter trade Commodity money Symbolic money Credit money Credit Clearing a3/26/2007 Prepared by Thomas H. Greco, Jr. 5
  • Barter Trade Barter is the most primitive form of reciprocal exchange. Barter involves only two people; each has something the other wants. The Barter Limitation If Jones wants something from Smith, but has nothing that Smith wants, there can be no barter trade. a3/26/2007 Prepared by Thomas H. Greco, Jr. 6
  • The First Evolutionary Step From barter trade to commodity money Transcending the Barter Limitation Barter depends upon the coincidence of wants and needs. Money bridges the gap in both space and time by widening the exchange circle. be met wherever and whenever the needed good or service may be found. a3/26/2007 Prepared by Thomas H. Greco, Jr. 7
  • What Is Required for Efficient, Effective, and Fair Exchange? Free Markets An Honest Medium of Exchange or Means of Payment An Objective and Stable Unit of Measure of Value a3/26/2007 Prepared by Thomas H. Greco, Jr. 8
  • Commodity Money The most primitive type of money is commodity money. Some useful commodity that is in general demand is used as an exchange medium and may serve both as a means of payment and a measure of value. a3/26/2007 Prepared by Thomas H. Greco, Jr. 9
  • Examples of Commodity Money Various commodities have historically served as money Cattle, tobacco, sugar, grains, nails, shells, hides, metals, etc. But the transaction is still essentially a barter trade of one good or service for another good. a3/26/2007 Prepared by Thomas H. Greco, Jr. 10
  • Metallic Money Metals became the commodities of choice because they are durable, fungible (divisible), and easily portable. “In all countries, however, men seem at last to have been determined by irresistible reasons to give the preference, for this employment, to metals above every other commodity.” Adam Smith, Wealth of Nations, p. 30 a3/26/2007 Prepared by Thomas H. Greco, Jr. 11
  • Symbolic Money The simplest form of symbolic money is the warehouse receipt on deposit somewhere. Examples: Grain bank receipts. Vouchers for redemption of various goods that have been deposited. Currencies redeemable for gold or silver. a3/26/2007 Prepared by Thomas H. Greco, Jr. 12
  • The First Kind of Paper Money Symbolic Money Bank Gold The first bank notes were symbolic money. They were warehouse receipts for gold or silver placed on deposit. a3/26/2007 Prepared by Thomas H. Greco, Jr. 13
  • The Second Evolutionary Step From commodity money to credit money “Some ingenious goldsmith conceived the epoch-making notion of giving notes not only to those who had deposited metal, but to those who came to borrow it, and so founded modern banking.” Hartley Withers, The Meaning of Money, p. 18 a3/26/2007 Prepared by Thomas H. Greco, Jr. 14
  • The Embodiment of Credit in Bank Notes At first, bank notes were redeemable on demand for commodity money (gold or silver), so they were symbolic money; later bank notes were credit money. The paper money so largely in use in all civilized countries as a common medium of exchange is in reality a coinage of credit or trust. – Henry George, 1894 a3/26/2007 Prepared by Thomas H. Greco, Jr. 15
  • Two Distinct Kinds of Paper Money Symbolic Money Bank Credit Money Mortgage Note Mortgage Gold note Banks issued two different kinds of money but they did not distinguish between them, and few people realized it. The same identical bank notes were issued to a represent both symbolic money and credit money.3/26/2007 Prepared by Thomas H. Greco, Jr. 16
  • Problems With Early Credit Money Bank notes were often problematic because now there were two different kinds of paper money being issued into circulation gold on deposit, and the other a credit instrument issued on the basis of a promise to pay and backed by some collateral assets, yet both were redeemable for gold. because there was never enough gold to redeem all the notes. a3/26/2007 Prepared by Thomas H. Greco, Jr. 17
  • Problems With Early Credit Money Bank notes were often problematic because now there were two different kinds of paper money being issued into circulation gold on deposit, and the other a credit instrument issued on the basis of a promise to pay and backed by some collateral assets, yet both were redeemable for gold. because there was never enough gold to redeem all the notes. a3/26/2007 Prepared by Thomas H. Greco, Jr. 18
  • Redeemability Abandoned Eventually, the redeemability feature was abandoned and symbolic money disappeared. Now, virtually all of the money in circulation is credit money. Most of the money in circulation exists as deposits in bank accounts. Very little money exists as paper notes or coins. a3/26/2007 Prepared by Thomas H. Greco, Jr. 19
  • Money and Banking Have Been Politicized There is a general, but erroneous, belief that the money power should be centralized and is naturally the province of government. Governments have generally given the money power over to bankers by establishing central banks, granting legal tender status to their currencies, and forcing people to accept them. a3/26/2007 Prepared by Thomas H. Greco, Jr. 20
  • The Power to Issue Money Rightly Belongs to Sovereign Individuals If money is issued on a sound basis there is no need to force people to accept it. Forced circulation (legal tender) serves only to concentrate power and expropriate wealth. Democratic government requires the separation of money and state. a3/26/2007 Prepared by Thomas H. Greco, Jr. 21
  • The Third Evolutionary Step From Credit Money to Clearing Money is no longer substantial. Money is merely an accounting system. a3/26/2007 Prepared by Thomas H. Greco, Jr. 22
  • Clearing -- The Ultimate Evolutionary Step The process called clearing is the simplest and most efficient mechanism for mediating reciprocal exchange. Clearing is simply the process of accounting that offsets debits against credits, purchases against sales. a3/26/2007 Prepared by Thomas H. Greco, Jr. 23
  • Early Banking – first references Babylonian Empire (1728 – 1686 B.C.) Code of Hammurabi contains 150 paragraphs pertaining to loans, interest, pledges and guarantees, standardizing procedures. a3/26/2007 Prepared by Thomas H. Greco, Jr. 24
  • Creation of Money Chinese probably invented money. Lydians in Anatolia (modern day Turkey) who invented money in the west. A standardized unit of currency would simplify transactions. (640 to 630 B.C.) they minted coins. Money and sea travel throughout the Mediterranean, Indian Ocean and the Far East supported the growth of trade. a3/26/2007 Prepared by Thomas H. Greco, Jr. 25
  • Roman Empire (1st Century AD) The power and breadth of the Roman Empire controlled piracy and provided uniform, formalized and predictable legal environment. Construction of sea ports and shipping infrastructure underwrote the development of trade further. a3/26/2007 Prepared by Thomas H. Greco, Jr. 26
  • The History of Banking Early Banking - Principles of lending (1728 – 1686 B.C.) – the Code of Mannurabi – a code containing 150 paragraphs that pertain to loans, interest, pledges and guarantees. - Creation of money (640 – 630 B.C.) – Lydians in ancient Anatolia (Turkey) – a standardized coin made from electrum (unit of commerce) to simplify transactions. - Greco-Roman banking in support of trade involved smiths and collectors, money changers and inspectors of currency. - Roman Empire (1st Century AD) – again trade in a stable, far- flung empire - Italy (middle ages) – because of its central location, Italian city- states emerged as the first international banking centers using coins (florin in Forence 1252 and ducat in Venice) a3/26/2007 Prepared by Thomas H. Greco, Jr. 27
  • Importance of Trade Fairs Trade fairs were safe, convenient meeting places between cities. A system of credit made the trade fairs work. Credit was used to settle large cross-border transactions without the physical expense and risk of transporting coined or uncoined bullion. Credit worked in the trade fair system because of the rule of law that supported it as well as a healthy dose of self- regulation. a3/26/2007 Prepared by Thomas H. Greco, Jr. 28
  • Who were the Rothschilds and what innovations did they initiate to support their banking activities? One of the most prominent German banking families in the mid- 1700s. The five sons of Mayer allowed the growth of their business to Paris, Vienna, Naples, London and Frankfurt. They found that superior information could make the difference between massive profits and losses. They constructed their own international intelligence network: Fast packets Agents Carrier pigeons Couriers a3/26/2007 Prepared by Thomas H. Greco, Jr. 29
  • Who were the Fuggers and what important lesson in diversification was learned from their experience? One of the most prominent German banking families in the late Middle Ages (1487 – 1577) Gained control of the country’s silver production as collateral for loans. Developed letters of credit to provide liquidity to clients who faced multiple currencies and inefficient markets for currency exchange. The Fuggers became too closely aligned with Charles V who decided to borrow money to wage a series of wars against the Ottomans, French and German Protestants and they later found that even sovereign leaders are only as solvent as the underlying health of their economies. They learned an important lesson…diversify both sides of the balance sheet. In their case, they developed too much exposure to one political figure. a3/26/2007 Prepared by Thomas H. Greco, Jr. 30
  • A brief history of banking in United States •Banks are vital to the health of our nations economy. For tens of millions of Americans, banks are the first choice for saving, borrowing, and investing. •A central bank founded in 1791 at the initiative of the nations first Secretary of the Treasury, Alexander Hamilton. Its Congressional charter expired in 1811. A second Bank of the United States was created in 1816 and operated until 1832. •When the second Bank of the United States went out of business in 1832, state governments took over the job of supervising banks. These bank notes were supposed to be convertible, on demand, to cash—hat is, to gold or silver. •By 1860 more than 10,000 different bank notes circulated throughout the country. Commerce suffered as a result. Counterfeiting was epidemic. Hundreds of banks failed. Throughout the country there was an insistent demand for a uniform national currency acceptable anywhere without risk. a3/26/2007 Prepared by Thomas H. Greco, Jr. 31
  • •In response, Congress passed the National Currency Act in 1863. In 1864, President Lincoln signed a revision of that law, the National Bank Act. These laws established a new system of national banks and a new government agency headed by a Comptroller of the Currency •Creating a National Currency: 1865 to 1914: National bank notes were produced and distributed through an involved process . National bank notes were the mainstay of the nations money supply until Federal Reserve notes appeared in 1914 •The Banking Crisis: 1929 to 1933: In the last quarter of 1931 alone, more than 1,000 U.S. banks failed, as borrowers defaulted and bank assets declined in value . In June 1933, Congress enacted federal deposit insurance. Accounts were covered up to $2,500 per depositor (now $100,000). a3/26/2007 Prepared by Thomas H. Greco, Jr. 32
  • •A Revolution in Banking: 1970s to Today : Technology has transformed the way Americans obtain financial services. Telephone banking, debit and credit cards, and automatic teller machines are commonplace, and electronic money and banking are evolving Today OCC examiners use computers and technology to help ensure that the banks they supervise understand and control the risks of the complex new world of financial services. •The tools have changed, but for the OCC, the basic mission remains the same as in the days of Lincoln: to ensure a safe, sound, and competitive national banking system that supports the citizens, communities, and economy of the United States a3/26/2007 Prepared by Thomas H. Greco, Jr. 33
  • By the end of 2000, a year in which a record level of financial services transactions with a market value of 410.5 trillion occurred, the top ten banks commanded a market share of more than 80% and the top five, 55%. Of the top ten banks ranked by market share, seven were large Universal type banks (3 Americans and 4 European) and the remaining 3 ere large U.S. investment banks who between a them accounted for a 33% market share.3/26/2007 Prepared by Thomas H. Greco, Jr. 34
  • This growth and opportunity led to financial service community, offering competition to established banks. The main services offered included insurances, pensions, mutual, money market and hedge funds, loans and credits and securities From the last quarter of the 20th century, banking has undergone revolution. Telephone banking, debit and credit cards and automatic teller machines are common place and electronic money and banking are evolving. a3/26/2007 Prepared by Thomas H. Greco, Jr. 35
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