The story of banking and Money is inextricably linked. As money became complex, banks and their activities followed suit. Banks possess a pivotal place in the evolution of money. They have evolved into such large systems that without their existence of money, and financial system is unimaginable. There are three other important factors in the evolution of Money: International Trade, Technology, and the movement of people. We will discuss these topics later on.
Modern Money and Banks
Modern money, or as we call it, “$”, “£”, “€”, or “¥”, represents a complex system of unit measurement, store of value, transfer of value, and prediction of value. As the currency system is very difficult, the platform [Banks] through which the system operates is also complicated. Banks enable people, organisations, and societies to easily transfer money from one party to another. However, one may wonder if the currencies are printed by central banks such as the Bank of England or the Federal Reserve Banks. Then, what is the role of the Bank? Nevertheless, the banks ensure the provision of money to everyone as we know and understand it. Banks over the years have acquired abilities such as:
- Know all about individuals and organisations through collecting hard financial information about us.
- Enjoy our trust as custodians of money. They look after the money of every member of the society as current cash, savings, or other deposits.
- Lend to all deficit agents assuming responsibility for counterparty default.
- Act as clearing and collection agents for every transaction taking place in the economy.
Are Banks important in the story of Money?
| Money is measured as. 1. Monetary base: equals Money in Circulation + Banks’ Reserve held at the Central Bank. 2. M1: equals Coins + Currency + Demand Deposits + Travellers’ checks. 3. M2: equals M1 + Savings Deposits + Time Deposits + Certificates of deposit + Money Market Funds. Therefore, if you look closely, the job of the central Bank almost finishes when they print the money. After that, the banks collect money from people and transmit it back and forth between people, firms, and even the central banks. Therefore, banks become an agency of money through which money is transferred and stored, creating new balances. Complex hmm! I bet it is. |
History of Money tells us that the essence of money has always been the same, but it has always changed in its form, circulation, availability, accessibility, and underpinning value. From being arrows, sheep, and Yelps to gold, silver, and paper, the face of money may have changed the story is still the same. However, you may notice money in its early form did not require “an omnipotent” party such as banks to be a clearing agent. Who would like to be the custodian of “Sheep”, “arrows”, or “Grains”, or “metals including gold”. Such a party will always be at risk of theft and robbery.
However, money took more “Non-Perishable” and “Easily Mobile” forms such as paper. We witness the emergence of parties such as Goldsmiths and Eventually Bankers. These parties established a system of communication, recognition, and trust such that their written promissory notes and requests for balance transfer become unquestionable. Ordinary people and businesses who struggled to transfer money across cities, countries, and even parties can now obtain a letter of credit from such parties and convert it into money anywhere.
Plastic Money: Old wine, new Bottle
| Credit and debit cards are nothing but a promissory note issued by a bank that the holder of these cards at the time and place of their choosing can access a pre-agreed amount of money (i.e., £1,200). However, depending upon the nature of the transaction, banks may act as a clearing agent, verification agent, balance provider, or payment infrastructure. Banks and credit card agencies run and operate the infrastructure underpinning this system, but how they function determines the availability, accessibility, and circulation of money in our modern society. |
Banks and money are just Twin Siblings
Banks and money are twin siblings who do not live without each other. Now, let’s understand why this is so. Money in our modern society is a very agile commodity. It facilitates payments and transactions at an unprecedented speed and, infinitesimally, small values and spread worldwide. Therefore, banking must complement this new shape and form of The 24/7 Money. Therefore, banks are central to the story of Money; as money evolves into different forms, banks and financial services also develop to complement that shape. This evolution is so intertwined that distinguishing money from banking services often takes more work. I leave you with two questions:
1. When you borrow money from the Bank, do you get cash or just a bank account showing some balance?
2. What does a + or – balance mean on your bank account and credit card? I can tell you for sure that money is never negative.
Banks and Payment Technology
This new form requires banks to be giant technology firms that can facilitate payments and transactions whenever, wherever, and however, they are needed.
Initially, our payment relied heavily on Automated Clearing House (ACH) technology developed in 1974. This system was built on a time lag, where the transaction was batch-processed once daily; however, lately, it has been increased to three times daily. In these processes, transaction information is transmitted from originating parties to receiving parties through medium or Central banks or a clearing house. The Society for Worldwide Interbank Financial Telecommunications (SWIFT) messaging system allows banks to facilitate transactions at the global level. It was established in 1973 to enable democratic nations to transmit money between themselves and allow the growth of international trade.
One common thing in both technologies is that they were designed to handle the money or, in other words, transactions made by people that are large in volume, low in frequency, and tolerant towards systemic lags. However, modern consumers view money as a unit of account transferable in small quantities to places it needs to be.
One can conclude that banks in the money puzzle are the “Invisible Hand” that helps and strives to make money available wherever and whenever we need it. They can do so because of their large balance sheets, centuries of established networks and trust.
References
- Hill, J. (2018). Fintech and the remaking of financial institutions. Academic Press.
- Cetorelli, N., Mandel, B. H., & Mollineaux, L. (2012). The evolution of banks and financial intermediation: Framing the analysis. Federal Reserve Bank of New York Economic Policy Review, 18(2), 1-12.
- Greenbaum, S. I., Thakor, A. V., & Boot, A. W. (2019). Contemporary financial intermediation. Academic press.
- Cetorelli, N., McAndrews, J., & Traina, J. (2014). Evolution in bank complexity. Forthcoming Version of Evolution in Bank Complexity, Economic Policy Review, 20(2).
