That's What I Thought...
columnist: Gene DeNardo

Topic: Economics
Banking Part One: Origins and Purpose

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Touching on the history of banking and its role in the economy.

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by Gene DeNardo
(centrist liberal libertarian)
Friday, January 9, 2009

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

Society has in the past and if things keep going the way they have been lately, may exist without banking in the future. 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. We have allowed banking and the resultant finance sector to dominate our economy over the last one hundred years and this allowance by its nature necessitates weakening the primary sectors of the economy. Many powerful empires have fallen emulating this model.

Banking is rooted in surplus and this surplus grew out of ancient agriculture. When we stopped wandering around and became more firmly attached to specific areas, we learned to grow food rather than existing only by catching it! As we became more adept at farming, a benevolent season might produce a surplus, more than our immediate family and clan members could consume. If we couldn't immediately trade away what we had for a different food or product, 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".

When it became necessary for the sake of convenience or safety, the producer began to store his product outside of his property. He entrusted someone else to care for the product and this was the origin of intermediary banking. Storage remains today the primary function of banking, although you would never know by examination.

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 as the medium of exchange was a natural one.

The goldsmith was responsible for crafting and weighing gold for his customers. Gold being heavy and cumbersome was often left under the care of the goldsmith. The owner was given a note showing ownership and could use this for trade. As time passed 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. The dubious practice of fractional reserve banking was born and eventually came to dominate our modern world.

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 a skill practiced in banks.

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. Power and money or gold go hand in hand and bankers have never strayed far from either. 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!

We have seen how the surplus created by the working of the economy enabled banking. The fundamental job of the banker is storage of this extra product. Accounting would naturally accompany this task. Accounting and exchanging different valued monies would also be a natural outgrowth of the trade. Since debtors gravitate towards wealth and the banker has an inside line on its location, brokering credit-debt fits the job description. But, we must draw the line somewhere!

The creation of money is a source of power and control in any society. If we examine history we find there are two requisites for money creation. The money producer must have extraordinary power and must already be extremely wealthy. It seems being surrounded by money or riches convinces the common people that the money just created was already in existence; at least they believe it for a time. And being in power gives you the force to convince them when they begin to lose faith. Average citizens end up behind bars when they try to copy these actions. It really does take money to "make" money.

Bankers have performed admirably through time with one major exception, and it is a very major exception. They have time and time again taken it upon themselves to be the money makers. If they are not appointed to do this, they will try and figure out a way to appoint or anoint themselves, depending on the application. They are often successful. In Part Two of this article, we will look at simple ways to remedy our "modern" banking situation. No special rules and regulations are needed, the laws of society are adequate and in place, they just need to be adhered to.

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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: Friday, January 9, 2009

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