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History of banking

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banking, history, crisis, evolution, deposits, loans, savings, commercial, financial, credit, cash, crunch,

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History of banking

  1. 1. History of www.zubairmirza.pk
  2. 2. Banks have been around since the first currencies were minted, perhaps even before that, in some form or another. In the early days of ancient empires, a tax of one healthy cow per year might be reasonable, but as empires expanded, this type of payment became less desirable. Additionally, empires began to need a way to pay for foreign goods and services, with something that could be exchanged more easily. Currency, particularly the use of coins, grew out of taxation. Coins of varying sizes and metals served in the place of fragile, impermanent paper bills.
  3. 3. Flipping a Coin These coins, however, needed to be kept in a safe place. Ancient homes didn't have the benefit of a steel safe, therefore, most wealthy people held accounts at their temples. Numerous people, like priests or temple workers whom one hoped were both devout and honest, always occupied the temples, adding a sense of security. There are records from Greece, Rome, Egypt and Ancient Babylon that suggest temples loaned money out, in addition to keeping it safe. The fact that most temples were also the financial centers of their cities, is the major reason that they were ransacked during wars.
  4. 4. Coins could be hoarded more easily than other commodities, such as 300- pound cows, so there emerged a class of wealthy merchants that took to lending these coins, with interest, to people in need. Temples generally handled large loans, as well as loans to various sovereigns, and these new money lenders took up the rest.
  5. 5. The First Bank The Romans, great builders and administrators in their own right, took banking out of the temples and formalized it within distinct buildings. During this time moneylenders still profited, as loan sharks do today, but most legitimate commerce, and almost all governmental spending, involved the use of an institutional bank.
  6. 6. Julius Caesar Julius Caesar, in one of the edicts changing Roman law after his takeover, gives the first example of allowing bankers to confiscate land in lieu of loan payments. This was a monumental shift of power in the relationship of creditor and debtor, as landed noblemen were untouchable through most of history, passing debts off to descendants until either the creditor's or debtor's lineage died out.
  7. 7. Post Roman Era The Roman Empire eventually crumbled, but some of its banking institutions lived on in the form of the papal bankers that emerged in the Holy Roman Empire, and with the Knights Of The Temple during the Crusades. Small-time moneylenders that competed with the church, were often denounced for usury.
  8. 8. Visa Royal Eventually, the various monarchs that reigned over Europe noted the strengths of banking institutions. As banks existed by the grace, and occasionally explicit charters and contracts, of the ruling sovereign, the royal powers began to take loans to make up for hard times at the royal treasury, often on the king's terms. This easy finance led kings into unnecessary extravagances, costly wars and an arms race with neighboring kingdoms that lead to crushing debt.
  9. 9. Phillip II of Spain In 1557, Phillip II of Spain managed to burden his kingdom with so much debt, as the result of several pointless wars, that he caused the world's first national bankruptcy, as well as the second, third and fourth, in rapid succession. This occurred because 40% of the country's gross national product (GNP) was going toward servicing the debt. The trend of turning a blind eye to the creditworthiness of big customers, continues to haunt banks up into this day and age.
  10. 10. Adam Smith & Modern Banking Banking was already well established in the British Empire when Adam Smith came along in 1776 with his "invisible hand" theory. Empowered by his views of a self- regulated economy, moneylenders and bankers managed to limit the state's involvement in the banking sector and the economy as a whole. This free market capitalism and competitive banking found fertile ground in the New World, where the United States of America was getting ready to emerge.
  11. 11. Beginning of Modern Banking In the beginning, Smith's ideas did not benefit the American banking industry. The average life for an American bank was five years, after which most bank notes from the defaulted banks became worthless. These state-chartered banks could, after all, only issue bank notes against gold and silver coins they had in reserve. A bank robbery meant a lot more before, than it does now, in the age of deposit insurance and the Federal Deposit Insurance Corporation - FDIC. Compounding these risks was the cyclical cash crunch in America.
  12. 12. Alexander Hamilton Alexander Hamilton, the secretary of the Treasury, established a national bank that would accept member bank notes at par, thus floating banks through difficult times. This national bank, after a few stops, starts, cancellations and resurrections, created a uniform national currency and set up a system by which national banks backed their notes by purchasing Treasury securities, thus creating a liquid market. Through the imposition of taxes on the relatively lawless state banks, the national banks pushed out the competition.
  13. 13. Merchant Banks Most of the economic duties that would have been handled by the national banking system, addition to regular banking business like loans and corporate finance, fell into the hands of large merchant banks, because the national banking system was so sporadic. During this period of unrest that lasted until the 1920s, these merchant banks parlayed their international connections into both political and financial power. These banks included Goldman and Sachs, Kuhn, Loeb, and J.P. Morgan and Company. Originally, they relied heavily on commissions from foreign bond sales from Europe, with a small backflow of American bonds trading in Europe. This allowed them to build up their capital.
  14. 14. Morgan & Monopoly J.P. Morgan and Company emerged at the head of the merchant banks during the late 1800s. It was connected directly to London, then the financial center of the world and had considerable political clout in the United States. Morgan and Co. created U.S. Steel, AT&T and International Harvester, as well as duopolies and near-monopolies in the railroad and shipping industries, through the revolutionary use of trusts and a disdain for the Sherman Anti-Trust Act.
  15. 15. The Panic of 1907 The collapse in shares of a copper trust set off a panic that had people rushing to pull their money out of banks and investments, which caused shares to plummet. Without the Federal Reserve Bank to take action to calm people down, the task fell to J.P. Morgan to stop the panic, by using his considerable clout to gather all the major players on Wall Street to maneuver the credit and capital they controlled, just as the Fed would do today.
  16. 16. The End of an Era This prompted the government to form the Federal Reserve Bank, commonly referred to today as the Fed, in 1913. Although the merchant banks influenced the structure of the Fed, they were also pushed into the background by it. This slowed down world trade and caused many countries to become hostile toward American goods. When the stock market crashed in on Black Tuesday in 1929, the already sluggish world economy was knocked out. The Federal Reserve couldn't contain the crash and refused to stop the depression; the aftermath had immediate consequences for all banks. A clear line was drawn between being a bank and being an investor. In 1933, banks were no longer allowed to speculate with deposits and the FDIC regulations were enacted, to convince the public it was safe to come back. No one was fooled and the depression continued.
  17. 17. World War II Rescues World War II may have saved the banking industry from complete destruction. WWII, and the industriousness it generated, lifted the American and world economy back out of the downward spiral. For the banks and the Federal Reserve, the war required financial maneuvers using billions of dollars. This massive financing operation created companies with huge credit needs that in turn spurred banks into mergers to meet the new needs. These huge banks spanned global markets. More importantly, domestic banking in the United States had finally settled to the point where, with the advent of deposit insurance and mortgages, an individual would have reasonable access to credit
  18. 18. The Bottom Line  Banks have come a long way from the temples of the ancient world, but their basic business practices have not changed.  Although history has altered the fine points of the business model, a bank's purpose is to make loans and protect depositors' money.  Even if the future takes banks completely off your street corner and onto the internet, or has you shopping for loans across the globe, the banks will still exist to perform this primary function.

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