Deepak Adhya: Banking in old times was not the tightly monitored and tightly regulated business that it is today. Instead, earlier banking was completely a free market operation. Any entrepreneur could enter and exit the banking business without any restriction or licenses. In this article, I will trace the evolution of banking i.e. how banking changed to be the highly regulated business that it is today.
Goldsmiths to Moneylenders
The banking profession, in the strictest sense of the word, was first carried on by goldsmiths in medieval Europe. Since, it was the business of the goldsmith to deal with valuable commodities the goldsmith would build strong vaults to protect their inventory from theft. The residents of the town wanted to rent the goldsmiths secure vault in order to keep their money safe. The goldsmith therefore started taking deposits and this was in a way the birth of modern banking.
Over a period of time, the goldsmiths realized that the deposits are usually far in excess of the withdrawals. This meant that if 100 gold coins were deposited with the goldsmith, statistically only 10 of them would be withdrawn at any given time. Therefore, the goldsmiths started lending out the money that they had held on deposit even though it did not belong to them! This was the birth of the second major function of modern banking i.e. lending money.
Taking deposits and making loans together changed the nature of the goldsmith’s business to money lending. Over a period of time, this would further evolve and become banking.
| ব্যাংক, ব্যাংকার, ব্যাংকিং, অর্থনীতি ও ফাইন্যান্স বিষয়ক গুরুত্বপূর্ণ খবর, প্রতিবেদন, বিশেষ কলাম, বিনিয়োগ/ লোন, ডেবিট কার্ড, ক্রেডিট কার্ড, ফিনটেক, ব্যাংকের নিয়োগ বিজ্ঞপ্তি ও বাংলাদেশ ব্যাংকের সার্কুলারগুলোর আপডেট পেতে আমাদের অফিসিয়াল ফেসবুক পেজ 'ব্যাংকিং নিউজ', ফেসবুক গ্রুপ 'ব্যাংকিং ইনফরমেশন', 'লিংকডইন', 'ইউটিউব', 'হোয়াটসঅ্যাপ চ্যানেল' এবং 'গুগল নিউজ'-এ যুক্ত হয়ে সাথে থাকুন। |
Unregulated Era
The modern era saw money lending transform into banking. Taking deposits and making loans out of deposits was now the usual business of institutions now called banks. Also, the depositors did not have to pay a fee to the banker to safeguard their gold in his secure vault. Instead they received compensation in the form of interest to park their excess gold with the bankers.
This was the era of unregulated banks. Banking during this era was entrepreneurial in nature. Therefore, anyone who wanted to could set up a bank and enter the business. There were no licenses required and there was no regulation. This era continued till the 1600’s. By then banking had become big business and some of the famous bankers like the Medici family and the Rothschild family were considered to be more powerful than kings!
Issuance of Private Bank Notes
As banking evolved over time, people realized that carrying large amounts of gold over long distances was unsafe as well as inconvenient. The radius of trade and commerce began to spread far and wide and carrying money over long distances became necessary. This was the birth of bank notes. Private Banks would issue private bank notes. The notes were nothing but a receipt for gold that had been deposited at the bank and could be withdrawn if the receipt was presented. Some of these notes were bearer notes i.e. the gold would be paid out to whoever brought in the note to the bank. This was the beginning of what we today refer to as fiat money!
At one point in time, there were over 30,000 different types of private bank notes in circulation in the United States. Needless to say that this created tremendous confusion and as a result special books had to be published. These books would specify the authenticity and the value of different bank notes and how safe was it to accept such notes as payments.
Emergence of Central Banks
The era of unregulated banking can also be considered to be the era of unscrupulous banking. Many fly-by-night banks came into existence during this period. Some of these banks were called “wildcat banks” and they fleeced entire towns and cities of their savings. In order to bring an order to this chaos and prevent the honest banks from losing business, central banks came into existence.
Central banks were banks created by special charter by the government. They would act as a banker to the government. Also, they would be responsible for the proper functioning of the other banks within their domain. This is when licenses became a requirement for banking business. However, Central banks are largely a 20th Century phenomenon. Many countries did not have a Central Bank till the late 1890’s.
Many critics believed that Central Banking was one of the tenets of socialism and that somehow the markets must always be free. However, Central Banks are omnipresent in the modern world. It is downright impossible to find a country without a central bank today.
Fractional Reserve Banking
Another important development in the modern banking system is the fractional reserve system. This means that bankers only need to keep a fraction of the funds on deposit. Therefore, if a bank receives $100 as deposit, it needs to maintain, let’s say $10 as deposit and the rest can be used for lending. This $10 amount is set by the Central Bank and periodically varied to increase and decrease the money supply as required.
Earlier, a certain amount of gold had to be held on deposit. However, nowadays bank notes themselves form the reserves based on which more bank notes are issued. Some banks have excess reserves whereas others are deficient in their reserves. As a result of this, reserves are traded in interbank markets. These markets will be explained later in this module.
Therefore, the banking business has undergone tremendous changes in the course of time. The basic nature of the business has drastically changed from safekeeping to full reserve money lending to the modern day fractional reserve banking.
Bottom of Form
1791 to 1811-The First Bank of United States
The First Bank of United States was proposed in the very first meeting of the first congress. Alexander Hamilton, one of the forefathers, believed that a central bank would be indispensable to facilitate the swift transfer of money across states as well as to provide credit to the state governments. However, the idea faced multiple obstacles from other leaders such as Jefferson. Despite Jefferson’s vehement opposition, the First Bank of United States came into existence in 1791 just 15 years after America gained independence.
Jefferson’s opposition was not the only obstacle faced by this bank. The conditions were not rife for banking at that time. There were over 50 different types of French, Spanish, Portuguese and American currencies in circulation at that time. Also, the banks charter was valid only for a limited period of twenty years post which it was supposed to be renewed. The first bank kept expanding its operations during the tenure. Even one year prior to the expiry of the charter, additional branches were opened along the east coast of the United States.
However, President Madison did not renew the charter of this bank in 1811 amidst rising concerns of inflation and allowed central banking in the United States to come to a sudden end for a short while. Many believe this created monetary instability which lasted for many years following 1811.
1816 to 1832: The Second Bank of United States
For the five years after the collapse of the first bank of United States, monetary instability ran rampant across the United States. The impact was large enough for the Congress to consider the creation of another Central Bank called the Second Bank of United States. This was the successor to the first bank and had virtually the same rights and privileges. The second bank also had monopoly rights over creation of paper money and regulating its value thereof.
However, the second bank faced much larger opposition as compared to the first bank. The seventh president of the United States i.e. Andrew Jackson vehemently and publicly opposed the central bank calling it the work of “monied interests” to ensure their continued domination over the average American. Jackson portrayed the second bank as an extremely corrupt institution that needed to be uprooted from American soil if economic independence were to be maintained. He led a campaign against the bank and finally the second bank too collapsed in 1832 even before it could complete the 20 years tenure that had been granted to it by the charter.
1913 till date: The Federal Reserve
The United States did not have a central bank from the period between 1832 and 1913. Surprisingly, the United States trade and commerce were functioning perfectly fine till the 1900’s. In the early 1900’s, the United States faced a series of financial panics and crises. Most notable amongst these crises was the crisis of 1907. Many banks ended up bankrupt during this period and people ended up losing their life’s savings. As a result, there was public clamor directing the government to bring in some regulation in the banking practice.
After many discussions and negotiations, the Federal Reserve Act was finally passed in 1913 and United States once again had a central bank. This time, the bank has stayed on for many years. One of the reasons behind this is that the charter does not have a limited validity and does not require multiple approvals from the congress every few years.
Creating the Federal Reserve was a challenge for American Senators. They had to create a system to regulate the practices of fraudulent banking. However, they also had to ensure that vested monied interests did not get an upper hand during the process. To ensure this, the Federal Reserve act created a quasi government body. This meant that although private bankers were part of the federal reserve in order to provide industry expertise, the ultimate control of the Fed’s action lay within government hands. This convinced the general population that there were no sinister motives behind the creation of the Federal Reserve. The Federal Reserve Act also ensured that the government does not have excessive control over the Fed. It kept the monetary policy out of the control of the President. Also, the Fed does not require Congressional approvals in the normal course of its business.
Thus, through the Federal Reserve Act, the American population has discovered the ideal mix of regulated central banking as well as avoidance of monetary meltdowns and central banking which had earlier been despised in America now found a permanent place in its economic system.
However, I think today now it is the pick period of modern banking system. At the present moment bank fully depend on modern technology. In future we have fight against bit coin and so many virtual money. so all of us have to take challenge of new modern technology. Now internet banking is very much famous of our private banking sector, this internet banking system have to maintain in our state own banking system. Today different kinds of mobile apps introduce in our banking system. This is to be continue and it spread out to our rural community. finally i want to say that bangladesh govt. as well as our central bank and all commercial will have to well prepared to take the challenge of this modern banking system…………………to be continue.
Writer: Deepak Adhya, Banker of Janata Bank Ltd.
