THE EMERGENCE OF MODERN BANKING

Banks are among the most important financial institutions in the economy and are essential businesses in thousands of local towns and cities. They are the principal source of credit (loanable funds) for households (individuals and families) and for most local units of government (school districts, cities, etc.). Nationwide and worldwide, banks grant more installment loans to consumers than any other financial institution and, in most years, they are among the leading buyers of bonds and notes issued by states and local governments to finance public facilities. The deposits held by banks are the principal money medium for global transactions and the principal channel for government economic policy to stabilize the economy.

When did the first banks appear? Linguistics (the science of language) and etymology (the study of the origins of words) suggest an interesting story about banking's origins. Both the Old French word banque and the Italian word banca were used centuries ago to mean a "moneychanger's table." This describes quite well what historians, looking at the civilizations of Greece and Rome more than 2,000 years ago, have observed concerning the first bankers. They were money-changing institutions, situated usually at a table or in a small shop in the commercial district, aiding travelers who came to town by exchanging foreign coins for local money or discounting commercial notes for a fee.

The first bankers were goldsmiths. Several centuries ago, money consisted primarily of gold coins. Wealthy people found the amounts of gold they accumulated quite heavy. An even bigger drawback is that thieves love gold; stolen gold pieces (or modern coins for that matter) are rarely identifiable. Looking around for safe places to store their wealth, people in medieval Europe thought of goldsmiths. Goldsmiths made jewelry, gold statues, and other precious goods. Most also had some excess space in their heavily guarded vaults.

Most goldsmiths were willing to store valuables for a small fee and issued receipts for the gold deposited with them. Buyers found it convenient to exchange these receipts instead of physically getting the gold, and sellers were happy to take the receipts because they knew they could redeem them for gold whenever they wished. This was the beginning of checking accounts – the receipts issued by the goldsmiths were primitive demand deposits.

The first bankers probably used also their own capital to fund their activities, but it wasn't long before the idea of attracting deposits and securing tem­porary loans from wealthy customers became an important source of bank funding. Loans were then made to merchants, shippers, and landowners at rates of interest as low as 6 percent per annum to as high as 48 percent a month for the riskiest ventures! Most of the early banks of any size were Greek in origin. The Romans generally tolerated banking practices, but were hesitant to set up banks of their own.

The banking industry gradually spread outward from the classical civ­ilizations of Greece and Rome into northern and western Europe. Banking encountered religious opposition during the Middle Ages, primarily be­cause loans made to the poor often carried very high interest rates. How­ever, as the Middle Ages drew to a close and the Renaissance began in Europe, the bulk of bank loans and deposits involved relatively wealthy customers, which helped to reduce religious opposition to banking prac­tices.

The development of new overland trade routes and improvements in navigation in the 15th, 16th, and 17th centuries gradually shifted the center of world commerce from the Mediterranean region to northern and western Europe, where banking became a leading industry. During this period were planted the seeds of the industrial revolution, which demanded a well-developed financial system. In particular, the construction and acquisition of steam-driven machinery and mass production methods required a cor­responding expansion in global trade to absorb industrial output, requiring new methods for making payments and credit available. Banks that could deliver on these needs grew rapidly, led by such institutions as the Medici Bank in Italy and the Hochstetter Bank in Germany.

When colonies were established in North and South America, Old World banking practices were transferred to the New World. At first the colonists dealt primarily with established banks in the countries from which they had come. As the 19th century began, however, state governments in the United States began chartering banking companies. Many of these were simply extensions of other commercial enterprises in which banking serv­ices were largely secondary to, for example, sales of food, housing utensils, and farm equipment. The development of large, professionally managed banking firms was centered in a few leading commercial centers, especially in New York. The federal government became a major force in US banking during the Civil War. The Office of the Comptroller of the Currency (OCC) was established in 1864, created by Congress to charter national banks. This divided bank regulatory system, with both the federal government and the states playing key roles in the control and supervision of banking activity, has persisted to the present day and is a truly unique American invention.

1. What is the etymology of the word ‘bank”?

2. When and where did the first bank appear?

3. Can you say what idea became an important source of bank funding?

4. What can you say about the banking industry in the Middle Ages? In the time of the Renaissance?

5. Speak on the development of the banking system in the USA.

T E X T 2

Read the text. Define the questions discussed in the text. In each paragraph, find the sentences supporting the main idea of the text. What paragraph contains the most important information?