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. To know more about Welingkar School’s Distance Learning Program and courses offered, visit: http://www.welingkaronline.org/distance-learning/online-mba.html

1. Chapter 1

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3. Building a Healthy Economy
Requires an Understanding of
the Principles of Money
Money is a human contrivance.
That has evolved over centuries.
Much of the present misery in the world
derives from a general failure to
understand the nature of money, banking,
and credit.

4. 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.
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5. 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
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6. 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.
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7. 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.
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8. 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
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9. 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.
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10. 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.
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11. 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
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12. 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.
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13. 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. a
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14. 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
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15. 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
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16. 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
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represent both symbolic money and credit money.
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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.
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18. 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.
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19. 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.
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20. 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.
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21. 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.
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22. The Third Evolutionary Step
From Credit Money to Clearing
Money is no longer substantial.
Money is merely an accounting
system.
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23. 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.
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24. 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.
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25. 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.
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26. 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.
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27. 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)
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28. 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.
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29. 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
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30. 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.
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31. A brief history of banking in United States
•Banks are vital to the health of our nation's 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 nation's 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.
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32. •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 nation's 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).
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33. •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
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34. 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
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them accounted for a 33% market
share.
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35. 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.
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