Author: BORAN SUEKINCI
Publication date: 16.09.2024
With the way banks are intertwined with money and economy, understanding how banks became as they are today can also be a gateway to understanding the inner workings of money in general. While the history of banks are too long and varied to be fitted into a single blog post, we will try to give a brief rundown chasing the roots of how the core aspects of banking came to be as it is today through this article.
How Money is Printed
Before we talk about banks it might be better to talk about how money currently gets made in the first place. The core thing to note about money today is that most of it is actually purely digital. Not digital as in referring to cryptocurrencies but digital as in the amount of total money in circulation right now is much larger than the amount of physical money present in the world.
In simple terms, the way money is made is through the central bank and through the proliferation of that money in circulation. The central bank prints the money, the money gets handed to other banks as loan and the other banks loan away the money handed to them. The total money in circulation increases further as the money gets used for more exchanges. For example, when somebody deposits their money to a bank and the bank uses that money to give someone a loan, the money doubles in the sense that both the loaner and the depositor now has the same amount of money even though the amount of deposited money didn’t originally match up.
There are two things to be conferred from here. One is that there will always be more total debt than the amount of total money in this economic system. The other is that the creation of more money is as simple as a bank writing numbers to somebody’s account. We will try to go through the history of banking to look at the main cornerstones which eventually resulted in such a process of money creation through this article.
Mesopotamia and Early Beginnings
The earliest forms of banking we know go back to Mesopotamia around 2000 B.C. where people used to give their goods to temples for safekeeping. The sacred status of the temples meant that their goods wouldn’t be under the threat of pillagers. The temples also gave loans to people in need. The Code of Hammurabi included laws regarding banking. The goods stored in these places weren’t just money but also materials with use value such as grain.
Goldsmiths and Banknotes
17th century London saw the emergence of goldsmith notes, which could be considered as the ancestors of the banknotes we have today. These goldsmith notes were not actually the first time notes were used for exchange. The first banknotes had been used at China in much earlier dates. However, we can say that the spread of banknotes and us using banknotes today was the result of goldsmith notes.
Back then, the job of goldsmiths included the production of silverware and exchange of gold and silver. They were trusted with safekeeping peoples gold and silver because of their safe storage so they also functioned as bankers. With the loss of trust in the government after King Charles I seized the gold people deposited to the Tower of London even more people started to deposit their gold to goldsmiths to the point that the goldsmiths started giving loans trusting their increased reserve.
Goldsmiths gave people goldsmith notes which they could use to exchange back their gold. Over time people started to use these notes for trade instead of the gold itself as it could also be exchanged for gold. As time went on, the amount of total goldsmith notes in circulation exceeded the amount of gold which goldsmiths had at their reserves. In other words, the notes used for trade no longer could all be exchanged because there wasn’t enough gold. Goldsmith notes only kept their exchange value because of the mutual belief that they were worth gold even though they weren’t. This made the goldsmith notes the beginning of the banknotes we use today.
Aftermath of the Bretton Woods Agreement
It was decided in the Bretton Woods Agreement that America would keep dollar at a fixed exchange rate to gold and that the other countries would use dollar as their reserve currency. America stopped exchanging dollar in 1971 meaning that dollar, which was the dominant currency, could now be printed freely by the American central bank without any anchor. In other words, money became less dependent on solid materials like ores and exchange became more focused on currencies and notes that doesn’t represent any specific solid material.
Conclusion
Through their history, banks have evolved from simple places for safekeeping and loans to changing the way money is used. Changes such as the introduction of goldsmith notes and the separation of gold and dollar brought us to the way money is created today with banks sitting on the center of this process.
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