Banking Part One: Origins and Purpose

Touching on the history of banking and its role in the economy.
by Gene DeNardo
(libertarian)
Friday, January 9, 2009

"He who tampers with the currency, robs labor of its bread."..........Daniel Webster

Banking is not inherently necessary for human survival. Banking has never been a primary function of any economy and can only exist after a surplus has been created by the working sectors of the economy. Preoccupation with banking and the financial process is always to the detriment of the productive sectors. The fall of many empires can be traced to cultural obsession with banking rather than production.  

It is the productive sectors that provide the surplus product that is necessary for banking to exist at all. When our ancestors stopped wandering around and became more firmly attached to specific geographic areas, we learned to grow food rather than relying completely on catching it!

As we became more adept at farming, a benevolent season might produce a surplus, more than we required for immediate use. If we couldn’t trade away what we had for another product we had a use for, we had a surplus on our hands.  

This surplus could be handled in different ways. It could be stored and later used for consumption or trade. It could be returned as seed stock to the next season’s field. It could be later traded when the market wasn’t as saturated from recent harvest. All are examples of storage of surplus by the producing farmer, which is the origin of "self-banking".

If storage space were limited, the producer might store his product outside the boundaries of his own property. He entrusted someone else to care for the product. This was a form of intermediary banking. Storage remains one of the primary functions of banking, although true storage has become relished to history.

In Egypt and Mesopotamia these storehouses were common. It was also common to issue receipts for the product and eventually a system of transfer was developed. A farmer could "pay" someone with his surplus by issue of a note from the storehouse. Thus, bankers also were accounting and transferring ownership of what they were entrusted to care for.

Eventually people began to use items to represent what they were trading, rather than the actual good. Obviously, this is a more convenient method of exchange. Precious metals have been considered valuable from early times and the transition to using gold or silver was a natural one. While "notes" are representative of stored value, precious metals are primary "mediums of exchange". They possess value in and of themselves which is acknowledged in common transactions.

The goldsmith was responsible for forging and weighing gold for his customers. Gold being heavy and cumbersome was often left under the care of the goldsmith, just as agricultural surplus was in the past. The owner was given a note showing ownership and could use this for trade, as well as the actual gold.

At some point in a moment of moral weakness,  the goldsmith noticed gold would stay in his vaults, even while changing ownership. He began issuing notes of his own or loans based on his customers deposits. In other words, he entitled himself to theoretical ownership of his customers gold in order to draw profit. While this would initially be considered a competitive disadvantage {if his customers actually knew about it}, it eventually evolved into our contemporary system of coercive banking; fractional reserve banking.

The word bank originates from the Latin word "banco", which means bench. The Roman bankers would set up benches in public areas to practice their trade, which in a large part consisted of exchanging different monies or coins. This was "money-changing" or exchanging and is still practiced in banks in the form of currency exchange.

Boats and boat trips are expensive. Whether Europeans sailed to the Far East for legitimate trade or to their ordained colonies for "free trade" {that would be free in the sense they stole rather than paid for the goods}, most often some sort of financing was needed for the trip. Royalty often put up the funds, as they and pirates were the most common beneficiaries of the returning loot, but bankers also were frequently involved in the transaction. This may be when "financing" was developed, as traders often needed funded now for repayment with interest in the future. As you can imagine, risk, interest and rewards were all very high!

Banking is based on the storage of surplus value that is produced by the productive sectors of the economy. When the surplus, or an accepted medium that represents the surplus, is stored for future use, a bank has been established.

Accounting is an obvious byproduct of the banking system. Issuing notes to designate ownership of stored value is a natural outgrowth of the accounting system. A developing market for these notes would simply be a result of free exchange. The efficiency of a system of notes would outweigh the possibility of fraud and deception that the same system makes possible. The use of precious metals and other valuable commodities as a medium of exchange would counteract and keep in check the inflationary and fraudulent potential of the note by constantly referencing "real" value to notational value.

Banking problems occur when force is applied from outside the system to remove the competitive nature of banking and to eliminate the free choice that consumers and creators of the value itself {the productive classes} naturally have. After all, banking without guns have very little control over who walks through their doors and hands them money, just as goldsmiths before had no coercive authority over their customers.

It is the alliance of the holders of force, those that forcibly control the population through possession of arms and legal entitlement to those arms, and those who hold the value created, the money, of the population that allow finances to control production and the productive sector. Without force, banking and finance serve production. Only force can invert this relationship. 

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©2009 Gene DeNardo, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Friday, January 9, 2009
Last modified: Saturday, October 23, 2010

The views expressed in this article are those of Gene DeNardo only and do not represent the views of Nolan Chart, LLC or its affiliates. Gene DeNardo is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.

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