Rita Farhat Mukand
Banks have taken centre stage in the world economy shifting the tectonic economic belts of nations with lending, borrowing, storing, restoring, multiplying or emptying.
Tracing back the history of the world’s most powerful nation, the United States, in its earliest days did not have any currency. Banks could create a currency and distribute it to anyone who would accept it. The system was so fragile that if a bank fell, the banknotes would be useless. A small bank robbery could devastate a bank and its customers.
In the ancient past with no formalized system of banking, the barter system of exchanging goods for goods worked reasonably well for the earliest communities though was problematic when people started travelling from town to town in search of new markets for their goods and new products to take home. Over time, coins of various sizes and metals began to be minted to deliver a store of value for trade. Coins could be exchanged and accumulated more easily than other commodities.
While coins needed to be kept in a secure place, and ancient homes did not have steel safes, rich Romans stored their coins and jewels in the basements of temples. They were seen to be secure, given the presence of priests and temple workers, along with armed guards.
In India and other ancient civilizations, religious temples became the earliest banks because they were seen as safe places to store money. Temples were in the business of lending money at interest, much as modern banks do. The fact that temples often served as the financial centres of their cities is one reason why they were inevitably looted during wars.Historical records from Greece, Rome, Egypt, and Babylon suggest that temples loaned money in addition to keeping it safe.
Julius Caesar of Rome initiated the practice of allowing bankers to confiscate land instead of loan payments. This was a huge shift of power in the relationship between creditor and debtor, as landed nobles had previously been untouchable, passing debts on to their descendants until either the creditor’s or debtor’s lineage died out.The Roman Empire eventually crumbled, but some of its banking institutions lived on in the Middle Ages through the services of papal bankers and the Knights Templar. Small-time moneylenders who vied with the church were often attacked for usury.
Eventually, the monarchs who reigned over Europe noted the value of banking institutions. As banks existed by the grace—and sometimes, the explicit charters and contracts—of the ruling sovereignty, the royal powers began to take loans, often on the king’s terms, to make up for tough times at the royal treasury.This easy access to financing led kings into gross extravagances, costly wars, and arms races with neighbouring kingdoms, along with grinding debt. Much of aristrocratic luxuriant living led to the the gruesome French Revolution.
In 1557, Philip II of Spain managed to burden his kingdom with so much debt due to several useless wars that he caused the world’s first national bankruptcy—as well as the world’s second, third, and fourth, in rapid succession. These events occurred because 40% of the country’s gross national product (GNP) went toward servicing the nation’s debt.The practice of turning a blind eye to the creditworthiness of powerful customers continues to plague banks today. While big tycoon loans have been easily granted loans or their huge debts waived, the farmers in India were forced to pay back their loans that led to hundreds of suicides of farmers. The terms and conditions for getting a loan for the common folk are so stupendous that one would not even venture into that avenue.
Free-market capitalism and competitive banking found productive ground in the New World, where the United States of America was about to emerge. Free trade while prospering countries has also made them slaves to the bigger capitalists with their controlling rules and regulations.
Alexander Hamilton, the first secretary of the U.S. Treasury, who lived during 1789 to 1795 during George Washington’s presidency, designated a national bank that would accept member banknotes at par, thus keeping banks afloat through challenging times.The original banks were “merchant banks” which were first invented in the Middle Ages by Italian grain merchants. As the Lombard merchants and bankers evolved in importance based on the rise of the Lombard plains cereal crops, many displaced Jews fleeing Spanish persecution were attracted to the trade.The fallacy that America is ruled by Jewish bankers goes back to the journey of Jewish Immigrants in the USA who brought many Jewish bankers to earn the reputation of reshaping Wall Street and influence modern America with their financial dynasties, spanning from the Gilded Age to the Civil War, World War I, and the Zionist movement. Hostile conspiracies about the Rothschilds are that they orchestrated the Holocaust to garner sympathy for Jews to create the State of Israel, while other, wild conspiracies claim the Rothschilds, the affluent Jewish Ashkenazi aristocratic banking family initially from Frankfurt, funded the Nazis, created COVID-19, and control the weather, all of which have been debunked.
Merchant banks come into power when the majority of economic duties that would have been handled by the national banking system, in addition to normal banking business like loans and corporate finance, soon fell into the hands of large merchant banks. During this duration which went into the 1920s, the merchant banks parlayed their international links into enormous political and financial power.As large industries emerged and formed the need for major corporate financing, the amounts of capital required could not be provided by any single bank. Initial public offerings (IPOs) and bond offerings to the public became the only way to raise the amount of money needed.
By the late 1800s, many banks requested a position on the boards of the companies seeking capital, and if the management proved lacking, they ran the companies themselves.J.P. Morgan & Co. surged at the head of the merchant banks during the late 1800s connected directly to London, then the world’s financial centre, and had significant political clout in the United States. It remained tricky, however, for average Americans to obtain loans or other banking services. Merchant banks didn’t advertise and rarely extended credit to the “common” people. Racism was widespread. Merchant banks left consumer lending to the lesser banks, which were still dying at an unsettling rate.
The collapse in shares of a copper trust set off the Bank Panic of 1907, with a run on banks and stock sell-offs. Without a Federal Reserve Bank to take action to stop the alarm, the task fell to J.P. Morgan. Morgan used his considerable power to collect all the major players on Wall Street and persuade them to deploy the credit and capital that they controlled.In a twist of fate, Morgan’s rise to power guaranteed that no private banker would ever again wield that much power. In 1913, the U.S. government formed the Federal Reserve Bank (the Fed). Although the merchant banks influenced the structure of the Fed, they were also thrust into the background by its creation.
Even with the Fed, massive financial and political power remained concentrated on Wall Street. When World War I broke out, the United States became a global lender, and by the end of the war, it had replaced London as the centre of the financial world.At that point, the government determined to hinder the ease of the banking sector urging that all debtor nations pay back their war loans—which traditionally were pardoned, especially in the case of allies—before any American institution would extend them further credit.
All this stalled world trade and caused many countries to become hostile toward American goods. When the stock market crashed on Black Tuesday in 1929, the already lagging world economy was struck leading to 9,000 bank failures from 1929 to 1933, which the Fed could not handle.
While fresh laws emerged to rescue the banking sector and revitalise consumer confidence, commercial banks were no longer allowed to speculate with consumers’ deposits, and the Federal Deposit Insurance Corp. (FDIC) was designed to ensure accounts up to certain limits.
It is believed that World War II may have protected the banking industry from complete obliteration. For the banks and the Fed, the war needed financial manoeuvres involving billions of dollars. This giant financing operation created companies with huge credit needs that, in turn, spurred banks into mergers to meet the need. These huge banks traversed global markets.
At this point, domestic banking in the United States eventually settled to the point where, with the advent of deposit insurance and widespread mortgage lending, the average citizen could have faith in the banking system and reasonable access to credit and this was the beginning of the modern era of banking.
During the late 20th and early 21st centuries, online banking emerged which in its earliest forms dates back to the 1980s but took to its wings with the emergence of the Internet in the mid-1990s.
Later, smartphones and mobile banking apps further accelerated the movement.
In the modern era, with 120 million registered users trading the world’s most popular cryptocurrencies, governments around the world are scrutinising Bitcoin warily because it has the prospect of upending the existing financial system and undermining their role in it, challenging government authority: as cryptocurrencies cannot be regulated, criminals use it, and it can help citizens circumvent capital controls.
If a bank crashes, millions can get a resounding fall unless that crash is cushioned by governmental intervention as was done with the crash of Silicon Valley Bank. Compounding these risks was a cyclical currency crunch that could disrupt the system at any time.
The Silicon Valley Bank crash within 48 hours on March 10, 2023, generated panic waves across the USA with President Joe Biden soothingly assuring the Americans that their money was safe in the banks. No one knows that banks keep only 10% of their money while the rest is out circulating in different circles.
In India, the State Bank of India was compared to the new Swiss Bank recently when funding details of the Electoral Bonds were not made available to the public, and the Supreme Court finally rose to rule on February 15, 2024 and invalidated the electoral bonds scheme for anonymous political funding, specifically mandated the disclosure of electoral bonds’ data starting from April 12, 2019.
Swiss Banks over the decades have been a haven for Black Money depositors as Swiss law states that the bank can’t disclose any information regarding an account (even its existence) without the depositor’s permission.
India was not as affected as other nations by the 2008 global crash as India’s resilience during this period was partially attributed to its relatively lower dependence on global trade and capital flows compared to other nations.India’s typically conservative financial system played an essential part, too. Its banks and financial institutions were not enticed to buy the mortgage-supported securities and credit-default trades that ruined several Western financial institutions.
While moneylenders still profit, as loan sharks do today, most legitimate commerce and almost all government spending applied the use of an institutional bank.While banks have come a long way from the temples of the ancient world to the present modern banking system, their basic business practices have not changed much. Although history has altered the finer points of the business model, a bank’s purposes are still to make loans and to protect depositors’ money and it could get more complicated with innovative technology which has the propensity to crash with the fall of a bank, which may lead people to feel safer with food, fodder and barter if it ever came to that!
Rita Farhat Mukand is an independent writer