The History and Evolution of Banking

Ancient banking tools meant to represent the history of banking

Banks are one of the oldest businesses in the world and are often the backbone of successful economies. Strong financial systems are at the forefront of technological advancement and provide the financial plumbing necessary for economies to flourish. Banking has changed significantly since the commodity banks of the past, and modern financial institutions continue to adapt to the most complicated issues.

Earliest Banking done with Grain, Food, Livestock

Before the time of currencies, banking was done by trading grain and other necessities. Farmers could deposit grain at a grain bank and withdraw periodically to provide a constant source of food while their next crop was growing.

Grain banks were developed first in the Fertile Crescent by the Babylonians in Mesopotamia, but they were later perfected by the ancient Egyptians. Historians believe the grain banking system in Egypt was so advanced that it was like modern-day banking systems in terms of transaction volume and networked banks.

The problem with a commodity-based banking system was the logistics of handling all the grain, food, and livestock. Therefore, as civilizations spread across the world, new commodities became the focus of trade across borders. However, there was no centralized medium of exchange for all.

As currencies developed, so did banking.

The first civilization in the western world that was believed to develop metal coins as currency were the Lydians in 700 BC. At the time, precious metals, like silver, bronze, and gold were already being actively traded, so metal coins were the natural solution to ancient leaders’ trade issues. For many centuries metal coins dominated currencies.

During this era, banking was often conducted at religious institutions. However, during the Roman empire, banking began shifting to private depositories, catering more to the common folk. As the Roman Empire fell, their banking organization followed. Banking persisted however, these banks were often under state control.

It wasn’t until sometime around the 10th century when the Chinese first introduced paper money. Modern governments preferred having a standardized currency because it was much easier to manage tax collection, and paper currency was less expensive to maintain than metal currency.

Adam Smith and the Beginnings of Modern Banking

The market-centric approach returned to banking around the time of the American Revolution where British economist Adam Smith advocated for a laissez-faire approach to banking. Competition, like that of the Romans, should result in the best banking experience for the public.

The first modern banks had an average lifespan of around five years because they issued their own banknotes. This meant if that bank became insolvent, customers lost their deposits. After the Revolutionary War, the first Secretary of the Treasury, Alexander Hamilton, created the first central bank in the U.S. and a national currency.

During this time, banking proliferated but lacked proper regulation. Merchant banks, those that handled banking activities for the general public as well as large corporations, gained massive power. J.P. Morgan, the biggest of these banks, gained power over many major aspects of the U.S. economy through banking. During a financial crisis in 1907, J.P. Morgan alone was able to use its vast resources and political clout to avert a larger crisis.

Transition to Modern Regulated Banking

The U.S. Government soon created the modern Federal Reserve system to monitor and oversee banking activity. Preexisting mistrust of the banking system and the stock market crash of 1929 solidified the need for regulation in the banking system.

What followed was the creation of the FDIC to insure deposits. A line was then drawn between investment banks and depository banks to prevent depository banks from engaging in risky investments. It was also at this time that the U.S. left the gold standard, which gave the government more tools to steer the economy.

The Bretton-Woods agreement was the nail in the coffin for gold standards worldwide and established the U.S. dollar as the world’s reserve currency. The IMF and the World Bank were also created during this time, and the modern banking stage was set.

Modern Banking Technology

Banking is often at the forefront of modern technological advancement. For example, ATMs were developed in the ’60s to help depositors access their funds after-hours. And recently, electronic payment systems have revolutionized modern commerce with the help of the internet.

In the 60 years since the first ATMs were developed, banking technology has flourished. Credit cards and mobile apps have made accessing deposits and making electronic payments instantaneous from just about anywhere. However, in the last few years, a new breed of financial technology has emerged, and it’s been dubbed fintech.

Fintech is changing banking as we know it.

Fintech is disrupting almost every aspect of traditional banking. Apps are now replacing brick and mortar branches with mobile deposits and online account management. Growth in online banking is far outpacing traditional banks, and that trend is only expected to continue.

For businesses, the changes have also been drastic. In the past, companies needed to maintain relationships with multiple banks to ensure cash reserves in excess of the $250k limit were not at risk. In addition, making payments to vendors, transaction processing, and other formerly manual processes have been enhanced by fintech.

Going forward, expect the advancement in these technologies to accelerate. At the American Deposit Management Co., we have been revolutionizing business cash management for over a decade. Our services are complementary to traditional banking, so companies keep their banks while accessing our great services. Our goal is to provide the MOST safety and the MOST return for business cash.

Earn More, Risk Less®

At ADM, we take the work of cash management off your plate. If your business maintains a large reserve of cash, or if you are looking to reduce the work required to manage your cash, don’t hesitate to contact us. We look forward to the opportunity to provide your business with the MOST safety and the MOST competitive return available.

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