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The Evolution of Banking Over Time: From the ancient world to the digital age

Banking has been present since the inception of currencies, as affluent individuals recognized the necessity for a secure location to safeguard their wealth. Ancient empires required a functional financial system to support trade, distribute wealth, and manage tax collection. Banks played a crucial role in those processes then, just as they continue to do in the present day.


The Birth of Banking:

The initial barter system, where goods were exchanged directly, functioned adequately for early communities. However, it encountered challenges when individuals began traveling between towns in search of new markets and products.


To address this, various-sized coins made of different metals were gradually minted to serve as a standardized store of value for trade. Nevertheless, the storage of coins posed a challenge as ancient homes lacked secure storage like steel safes. In Rome, affluent individuals opted to store their coins and jewels in temple basements, deeming them secure due to the presence of priests, temple workers, and armed guards.


Historical records from civilizations like Greece, Rome, Egypt, and Babylon indicate that temples not only safeguarded money but also lent it. The role of temples as financial hubs for their cities contributed to their vulnerability during wars.


Given the ease of exchanging and hoarding coins compared to bulkier commodities like 300-pound pigs, a class of prosperous merchants emerged, engaging in lending coins with interest to those in need. Temples handled substantial loans, including those to sovereigns, while wealthy merchant moneylenders managed smaller transactions.


Banking in the Roman Empire:

The Romans, known for their expertise in construction and administration, separated banking from temples and institutionalized it in dedicated structures. During this period, although loan sharks continued to profit, akin to contemporary practices, the majority of legitimate transactions—particularly government expenditures—involved the engagement of institutional banks.


According to the World History Encyclopedia, Julius Caesar introduced a significant change by permitting bankers to seize land as an alternative to loan repayments. This marked a substantial shift in the power dynamics between creditors and debtors, as previously, landed nobility were immune, passing debts to their descendants until either the creditor’s or debtor’s lineage ceased to exist.


While the Roman Empire eventually declined, some of its banking traditions endured into the Middle Ages through the services of papal bankers and the Knights Templar. Smaller moneylenders, competing with the church, often faced criticism for engaging in usury.


European Monarchs Uncover Effortless Wealth:

Over time, the European monarchs recognized the significance of banking institutions. As banks operated with the approval—and sometimes explicit charters and agreements—of the ruling authority, monarchs began taking loans, often on terms favorable to the king, to address financial challenges in the royal treasury.


This readily available financing led kings to indulge in excessive spending, costly warfare, and arms races with neighboring realms, resulting in substantial debt. In 1557, Philip II of Spain accumulated such immense debt through unnecessary wars that it led to the world’s first national bankruptcy, followed by subsequent ones. This occurred because 40% of the country’s gross national product (GNP) was allocated to servicing the nation’s debt.


The practice of overlooking the creditworthiness of powerful clients continues to be a concern for banks today.


Adam Smith Paves the Way for Free-Market Banking:

Banking was already well-established within the British Empire when economist Adam Smith introduced his invisible hand theory in 1776. Empowered by his vision of a self-regulating economy, moneylenders and bankers successfully curtailed the state’s involvement in both the banking sector and the economy at large.


This concept of free-market capitalism and competitive banking found a receptive environment in the New World, as the United States of America was on the brink of emergence.


In its early days, the United States lacked a unified currency. Banks had the authority to create and distribute their own currency to those willing to accept it. The failure of a bank rendered its issued banknotes worthless, and a single bank robbery could have severe repercussions, affecting both the bank and its customers. Adding to these risks was a recurring cash shortage that could disrupt the system at any moment.


Alexander Hamilton, the inaugural secretary of the U.S. Treasury, established a national bank that accepted member banknotes at face value, thus assisting banks during challenging periods.


Despite some setbacks, cancellations, and revivals, this national bank eventually established a standardized national currency and implemented a system where national banks secured their notes by acquiring Treasury securities, creating a liquid market. The national banks then eliminated competition by imposing taxes on the relatively unregulated state banks.


Nevertheless, the repercussions persisted as the general distrust of banks and bankers among average Americans grew. This sentiment prompted the state of Texas to outlaw corporate banks, a law that remained in effect until 1904.

Merchant Banks Rise to Prominence:

The majority of economic responsibilities, encompassing tasks that would typically be managed by the national banking system along with routine banking activities such as loans and corporate finance, swiftly transitioned to the control of prominent merchant banks. Throughout this era, extending into the 1920s, these merchant banks leveraged their extensive international networks to amass significant political and financial influence.


Notable institutions in this category included Goldman Sachs, Kuhn, Loeb & Co., and J.P. Morgan & Co. Initially, they heavily relied on commissions generated from the sale of foreign bonds in Europe, with a modest flow of American bonds trading in European markets, enabling them to accumulate capital.


As large industries emerged, necessitating substantial corporate financing, the capital required exceeded the capacity of any individual bank. Initial public offerings (IPOs) and public bond offerings became essential for raising the necessary funds. Successful offerings enhanced a bank’s reputation, positioning it to request more opportunities to underwrite offers. By the late 1800s, many banks insisted on securing positions on the boards of companies seeking capital, and in cases where management proved inadequate, these banks assumed operational control of the companies themselves.


J.P. Morgan Comes to the Aid of the Banking Sector:

J.P. Morgan & Co. emerged as a leading force among merchant banks in the late 1800s. Directly linked to London, then the global financial hub, it wielded significant political influence in the United States.


Under Morgan & Co.’s leadership, U.S. Steel, AT&T, and International Harvester were established, along with the formation of duopolies and near-monopolies in the railroad and shipping sectors. This was achieved through the innovative use of trusts and a disregard for the Sherman Antitrust Act.


Despite these developments, accessing loans or other banking services remained challenging for average Americans. Merchant banks seldom advertised and were reluctant to extend credit to the general populace. Widespread racism further complicated matters. Consumer lending was left to smaller banks, which were experiencing a high rate of failure.


The Bank Panic of 1907 ensued when the shares of a copper trust plummeted, triggering bank runs and stock sell-offs. With no Federal Reserve Bank in place to intervene, J.P. Morgan personally took on the responsibility. Leveraging his significant influence, Morgan gathered major players on Wall Street and persuaded them to deploy the credit and capital under their control, a role that the Fed would assume in contemporary times.

The End of an Era, the Birth of the Fed:

Ironically, Morgan’s actions ensured that no private banker would ever again wield such immense power. In 1913, the U.S. government established the Federal Reserve Bank (the Fed). While the structure of the Fed was influenced by merchant banks, their significance diminished with its creation.


Despite the presence of the Fed, substantial financial and political power remained concentrated on Wall Street. As the United States became a global lender during World War I, replacing London as the financial hub, the government imposed constraints on the banking sector. It demanded that all debtor nations repay their war loans before receiving further credit from American institutions, slowing world trade and generating hostility towards American goods.


The stock market crash on Black Tuesday in 1929 exacerbated the already sluggish world economy. The Fed was unable to contain the damage, resulting in around 9,000 bank failures from 1929 to 1933.


New laws were enacted to rescue the banking sector and restore consumer confidence. The Glass-Steagall Act of 1933, for instance, prohibited commercial banks from speculating with consumer deposits, and the Federal Deposit Insurance Corp. (FDIC) was established to insure accounts up to specific limits.


As of 2023, the insured limit is $250,000 per account.


World War II and the Emergence of Modern Banking:

World War II played a crucial role in averting the complete demise of the banking industry. The war necessitated significant financial operations involving billions of dollars for both banks and the Federal Reserve. This extensive financing initiative gave rise to corporations with substantial credit requirements, prompting banks to engage in mergers to fulfill the demand. These large banks extended their influence across global markets.


Most importantly, within the United States, the state of domestic banking stabilized. With the introduction of deposit insurance and widespread mortgage lending, the average citizen gained confidence in the banking system and gained reasonable access to credit. This marked the onset of the modern era in banking.


The Digitization of Banking:

The most noteworthy advancement in the banking sector during the late 20th and early 21st centuries has been the emergence of online banking. Its initial forms trace back to the 1980s, but it experienced significant growth with the widespread use of the internet in the mid-1990s.


The increasing prevalence of smartphones and mobile banking applications has further propelled this trend. Although many customers still engage in some transactions at traditional brick-and-mortar banks, a 2021 J.D. Power survey revealed that 41% of them have transitioned to digital-only banking.



Banks have evolved significantly from the ancient temples, yet their core business practices have remained relatively consistent. Despite modifications to the finer details of their business models over time, the fundamental purposes of banks persist—making loans and safeguarding depositors’ funds. Even in the era of digital banking and financial innovations replacing traditional physical branches, banks continue to fulfill these essential functions.

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