Lending over the Years
Since the first coins were created, banks have been around. Ancient empires also required a system that would allow them to trade and distribute their wealth. Banks have been instrumental in this process, just like they are now. Over the years, various crises and bank panics led to the establishment of more regulations. The industry continues to evolve today with more and more banking services and lending now available online.
Early lending was as simple as the barter system. The limitations of the barter system eventually became very problematic when people started moving from one town to another as their store of bartered value changed. Eventually, various types of coins and metals were created to provide a convenient store of value for trading.
In Ancient times, wealthy individuals used temples to store their coins, in addition to using them as the locations in which they conducted business much like a bank today.
Banking and loans have served an important role in economic growth and development for centuries. One of the functions of banking was to provide stability providing liquidity to business owner during hard times.
Governments have used the financial system since it was created to grow their countries. Easy access to credit led to rulers becoming extravagant and carrying huge debts. Countries fighting over money’s value and exchange rates continue to this day to lead to conflicts and wars.
In the U.S.’s earliest days, there was no central bank. Banks were free to create and distribute their own currencies, and banknotes. These currencies that they issued would become worthless if the bank were ever to fail. A single bank heist could destroy a financial institution and its customers, and a cyclical cash crunch could cause the system to fail at any moment.
The US Treasury Department created a national bank was established in 1863to ensure that banks could still operate successfully even during difficult times.
The national bank was able to create a uniform currency by backing its notes with Treasury securities. This allowed banks to establish a liquid market and push out the competition by taxing the state’s less regulated financial institutions.
Most of the country’s economic activities were transferred to the national banking system, which means that regular banking services, such as corporate finance and loans, were no longer handled by the central bank. Throughout the 1920s, merchant banks expanded their international reach and became even more powerful
Due to the large amount of capital that companies needed to finance their operations, the amount of money that banks could provide was not enough. Corporate financing was then raised through bond offerings and initial public offerings.
The success of offerings helped boost a bank’s reputation and allowed it to ask for more capital. During the 1800s, many banks demanded that they be involved in the boards of companies that were looking for capital.
Despite the success of these offerings, it was still difficult for Americans to get loans or other banking products. Merchant banks did not advertise, and they often refused to provide credit to the common people.
The collapse of the shares of a copper trust in 1907 triggered the Bank Panic. J.P. Morgan was able to convince the major Wall Street players to use their capital and credit to prevent the panic. The end of an era and the birth of the Federal Reserve occurred during this period.
Despite the Fed’s existence, the political and financial power of the country remained concentrated in Wall Street. When the First World War started, the US became a global lender. By the end of the conflict, it had surpassed London as the financial center of the world. After the war, the government started to put pressure on the banking industry. It demanded that all countries pay back their war loans.
New laws were then enacted to help restore confidence in the banking industry and prevent the financial crisis from happening again. One of these laws was the Glass-Steagall Act, which prevented commercial banks from taking advantage of their customers’ deposits.
The banking industry was able to survive the Second World War due to the actions of the Federal Reserve and the various financial maneuvers that were carried out during the war. These operations created large companies and prompted mergers and acquisitions.
The US banking industry finally reached a point where it could provide the average citizen with reliable and reasonably priced credit. With the introduction of mortgage lending and deposit insurance, people had more confidence in the system.
The rise of online banking was the most significant development that occurred in the financial industry during the late 20th century and the early 21st century. It started during the 1980s and eventually took off during the mid-1990s during the height of the internet boom.