The A B C of Banking

Jokes:__________________________________________________________

If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.__________________________________________________________

It is “common knowledge” that:

- Banks’ degree of contribution to the development of economy is next to nothing. Providing interest bearing loans banks simply cash in on individual and corporate needs for financial funds.

- Banks create money just out of thin air. They get money from other people but do not do anything in return.

Care to guess? This is a part of wide spread stereotypes about banking. Whatever the reason for such views, they do not seem to be complimentary, do they?

Is it really true what is pictured? In order to answer the question we need to sort the wheat from the chaff and see what is true and what is false. So, let us start our analysis of banking from the logical beginning - the historical outlook.

A little bit of history

First references of early forms of banking date back to the times of classical Antiquity. The banks of the ancient world before Christ were those of merchants which made grain loans to farmers and traders who carried goods between cities. This began around 2000 BC in Assiria and Babylonia. Later in ancient Greece and during the Roman Empire two main important innovations were added in banking: deposits and changed money.

At that time banking was already highly developed and subject to Roman Law, money deposits were to be safeguarded and not lent out. A specialty were banker associations or societates argentariae, where members supplied capital to form them, but they had unlimited liability to prevent fraud. Most banks failed during the economic crisis of the third and fourth centuries A.D.

It’s impossible to separate history of banking from that of money. Baking development per se was based on simultaneous or even forestall rise of monetary circulation. In this sense money has been accumulating to be further safely stored in a bank. And in turn, banks have been developing to suit the process in the best way.

Historically, the implication of money has had dramatic changes over the past millenniums evolving from its primitive commodity format to token money. Commodity money is goods with either industrial or consumption uses which enabled to swap goods for other goods in barter economy. Token money which face value exceeds its cost of production includes paper money (banknotes), coins and IOU (I owe you - vast variety of money obligations). Token money, providing four major functions to its owner as medium of exchange, unit of account, store of value and standard of deferred payment, form a cornerstone of contemporary banking and financial system.

Bank as we see it now, finds its more or less contemporary lineaments in the Middle Ages in the rich cities of the Northern Italy, such as Florance, Venive and Genova. The Bardi and Peruzzi families dominated banking in 14th century Florence establishing branches in many other parts of Europe. The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy, which has been operating continuously since 1472. By the way, since that time on Italian terms “nostro” y “loro” have been generally used in banking to label correspondent accounts in interbank transactions. “NOSTRO” means our bank’s account is opened with a foreign bank (as a rule in foreign currency), “LORO” means their bank account is opened with us.

The major difference of medieval banks with the contemporary ones is that while ancient banks did store currency and valuables, they did not pay interest on those deposits. They simply provided safe storage and proper accounting. Besides, ordinary folk did not put money in banks, and the bank draft (or signature cheque) had not yet been invented. In contrast to the actual banking practice on loans, that of Middle Ages did not presume loan servicing since payment on the principal and the accrued total interest were supposed to be effected at once as it was due.

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