Inception of Modern Banking

Inception of Modern Banking 

Bank of England is recognized as the father of modern bank. In 1695, it became the first bank to issue banknotes, these banknotes were given as a loan and promised bearer the value of the note, this structure of issuing banknotes is still active and widely used around the world.

England’s dominance in seaborne shipping and introduction of industrial revolution gave birth to many banks around the world more over in London.

By 1745, standardized printing of notes began, notes ranging from £20 to £1,000 were issued, and till 1855 notes without name of payee and cashier’s signature were introduced.

18th century saw a surge in bank services like cheque, overdraft, clearing facility, security deposits. Royal bank of Scotland introduced the overdraft facility in 1728.

This was the time many new schemes and different banks were getting introduced, such example was Merchant banking firm in London in late 18th century, which dominated the world of banking for next century.

Different types of Bank Emerged

Just like merchant bank building societies, mutual savings bank, postal saving system were introduced, each of them had a different goal and were targeted at different parts of society.

Building societies were the financial institutes which was owned by its members in a mutual relation. The society members had a goal or common interests, like sports, religion, art, etc. each member paid a small monthly subscription amount, then these funds were used to finance like building a religious structure or financing artists

Mutual saving bank also emerged at same time was focused toward low-income group, because of industrial revolution a large amount of worker population developed. These institutions allowed individual to operate their bank account on low balances, earn interest and invest in long term fixed rate assets. Soon these institute were brought under regulation of government body.

In 1861, Great Britain introduced postal saving system for low income group who could not access banking services, it was a method to promote saving among low income group.

During these time banks were only in cities and people from rural background had to keep their money in their homes, because of postal saving system, a person had a facility to fix his/her saving for given time at fix interest rate.

Later, many new services were involved like money transfer, long term security deposit. Impressed by this model of involving people from rural background into banking system, many countries from Europe and North America implemented this model.

Great Depression of 1930s

Preceding the Great Depression of 1930s, bank followed a very narrow margin of 10%, when market crashed and depositors demanded their money back from banks, they had no money to return as companies whom they lend their money had declared bankrupt.

Many banks had to declare default and a lot of assets were lost, as banks were not giving out new loans, construction and other activities freeze, this created a snowball effect which brought recession along with it. As many as 9,000 bank failed during 1930s.

The U.S established the Securities and Exchange Commission in 1933 and separated investment banking from commercial banking. This became a norm for future banking system to follow and avoid situations like 1930s ever again.

International Institutions

The International Monetary fund (IMF) and World Bank came into existence during world war 2, at the same time a huge surge in technology was spreading across the world, during these time banks started to invest in technology and systems like SWIFT payment network, ATM, electronic payment system emerged and made banking more accessible to people.

Also in 1971, Gold standard was discarded which had stacked monetary system on the fixed quantity of gold. After 1980s a new era began were banks were deregulated and allowed to access capital markets like never before.