Banking is the main business we think of when it comes to transferring storing and keeping track of money. The history of banking is an interesting one. I will not attempt to cover banking in much detail, but rather give a brief overview if recent history as I have come to understand it through textbooks and documentaries. My apologies, as I’m about to be really vague. I’ll also add that the goldsmith banking I mention is not the first example of banking. I’ve chosen this form because it has a great influence on the fixed fractional banking we see today in many countries. If you’re interested in financial history, I recommend watching “The Money Masters.” It’s quite a detailed video of the history of FIAT currency.
In many countries coins were and still are a standard of money value. They are portable and easily added together and divided into small denominations for commerce. Historically, these were often made of precious metals. This way the material and size of the coin was a reflection of its value. Today, if you buy a gold or silver coin, it’s value will still increase as the weight increases.
In most modern societies, however, the value of the coin is greater than the value of its material. In this case the money takes on an agreed upon value, not related to the value of the metal, taking on the characteristics of a token. This is also the case with bank notes, or paper money. The actual paper is virtually worthless, but it’s capable of representing a large denomination (ie. $1000) based on an agreed upon value. The value is created by simply printing it, which is how money is created by banks.
In England, around the 16th century, Goldsmiths worked with gold while also providing the service of keeping gold safe for those who wished to deposit gold with them. Upon depositing or banking the gold, the goldsmith would issue a receipt or deposit slip as proof of deposit, which could be used to redeem this gold in the future. When the depositor needed the gold to pay someone else, he would return to the goldsmith, present the receipt, and pay with the redeemed gold.
As people grew more comfortable with the reliability of these gold banks they began trading the deposit slips or bank notes to settle debts, rather than take the extra step to revisit the banks, and withdraw the gold for exchange, only to have the merchant redeposit the gold. Since the notes were considered to be “as good as gold” the notes became the objects of trade.
As so few people were actually returning to withdraw their deposits, banks found that they could give out deposit slips in excess of their actual reserves. At this point banks became the creators of money, since they could create value beyond what they kept in their vaults. The value of the notes were kept high based on the belief that banks were able to honour all withdrawals. If there was a run on the banks, they would not be able to return gold to everyone that requested it, and that would lower the value of bank notes.
Being that most countries have abandoned the gold standard, banks are no longer required to produce gold upon request. Bank notes are now entirely a function of public confidence.
If you’re interested I getting a more in depth rendition of banking history, please lake a look at The Money Masters. It’s available On youtube. It’s about 3 and a half hours long, so do your best to stay with it.