Banking and Finance Industry

Banking and Finance Industry, Part 1

Exploring the framework for a “Balanced Development” model

Ramses Rashidi

In the last article we talked about the speedy growth of the telecommunications industry and its impact on economic and social fragmentation. Here, we are going to further examine the fragmented nature of growth and development in the modern times. Specifically, we are going to focus on the banking and finance industry.

Money as a Symbol of Value

The invention of money, as an instrument to facilitate the exchange of goods and services, and to foster the development and growth of civilization, is the foundation of the banking and finance industry and goes back to as long as there is documented history. Money was created as a symbol of value. Whether we are looking at the cowry shells used in China, the huge stone-money of the pacific islanders, metals, commodities, gold or the coins and paper currency of the modern times, money has always been instrumental in shaping our cultural norms, personal attitude, social behavior as well as material dimensions of life. It can also be said that as our mindset and social conditions have changed, so has the nature and function of money.

Banking and Finance Facilitating Growth

The purpose of the development of the banking and finance industry some 5000 years ago was to facilitate the growth of the agrarian economy by depositing grains, harvest and tools in temples or palaces where they would be safe and a portion could be withdrawn as needed. Eventually the evolution of civilization, the expansion of trade, the difficulties of the barter systems, the development of transportation, and the use of precious metals and coins as the medium of exchange made it necessary to create financial institutions that would facilitate the safe-keeping and transfer of money as well as conducting transactions. In this regard Babylonians, Greek, Egyptians, Romans, Chinese and Persians were among the cultures that progressively developed banking and credit systems to facilitate trade.

Trade brought people together. Trade fairs in Europe greatly contributed to the growth of banking as merchants could receive notes (bills) of exchange in one region and use it in another. The development of “bills of exchange” made the transfer of large sums of money much easier. It’s also noteworthy to mention the role of religious institutions in defining the extent of banking and the prohibition on charging interest. Papal (Pope’s) bankers were very effective in raising funds for the development and expansion of Christianity and the Crusades.

Although paper money had been used commonly in China from the days of the Song Dynasty (960 AD), the development of printing press in 15^th century by Gutenberg and the issuing paper money in Europe put a new dimension to banking and finance. The paper money, basically a trust instrument, was adopted as a promissory note by the bank and backed by the government to pay the bearer upon demand. Now it was much easier to produce, circulate and retire money. With the development and growth of the London Royal Exchange, and the moneychangers in the 16^th century, the foundation of modern banking had been laid down. As trade and banking became synonymous, trading posts emerged as the banking centers. In the 17^th century, Amsterdam, as a major seaport and the crossroads of the worldwide trading network in Europe with extensive banking services, emerged as the global financial center which lasted until the industrial revolution. The prosperity attracted artists, writers, philosophers and scientists to the booming economy and the active social life of Amsterdam while the Dutch sailors started to explore the global waters to explore new territories, form colonies and find opportunities for trade.

Political Economy and its Impact on Development

In the 18^th century, around the time of the founding of United States of America, new theories in political economy started to take shape. Adam Smith’s “The Wealth of Nations” laid the foundation for “capitalism” and “free market economy” as a social system defining the rights of the individual and society to be free to produce, trade, and privately own and operate property and business for profit. The “capitalist” theory which was adopted by the founding fathers of America led to the massive development of banking and finance as private ownership and investment grew.

With the development of the industrial establishment, production practices, and the labor force in the 19^th century, a new class of rich industrialists started to emerge. Addressing the plight of the working class, Karl Marx in the “The Communist Manifesto” talked about the need for revolution to overthrow the capitalist social order. Communism focused on the mode of production, centralized planning and state control to ensure equity in the distribution of wealth.

Marxist thoughts made a profound impact on the global geo-political landscape of the 20^th century. Communism, adopted by Russia in the 1917 revolution and later by China in 1949, eventually brought about the polarization between the East and the West and the “Cold War”. The state-owned economy of these communist states stifled the growth of the private sector and lack of individual motivation and inefficiencies crippled the centrally-controlled financial institutions.

World War, Great Depression and another World War

The fast growth of the industrial age and the expansion of European powers, particularly Germany and Britain who were in search of resources and territory, led to military buildup and eventually to World War I which devastated the global and the European economies. The result was the rise of the US as the financial center of the world and the rise of communism in the East as mentioned before.

Following World War I, the 1920s were a time for economic activities in the U.S. Consumers purchasing goods and services, using cheap credit and low interest rates helped businesses to grow and expand. The buildup of debt and inflation was followed by the Federal Reserve Bank (US Central Bank) tightening the money supply and increasing the interest rates, which in turn decreased demand and sent prices falling, eventually leading to businesses and factories shutting down. With the public defaulting on loans, and banks going out of business, the investors started to panic, selling off their stocks and causing the market to crash in 1929, thus bringing about the “Great Depression” of the 30’s.

The “great depression” had a profound effect on the global economy. It devastated the industrialized countries and those that exported raw materials. International trade was cut down drastically and farming was hit hard as prices fell sharply. Meanwhile during this period, the U.S. Government focused on a massive buildup of its infrastructure and highways to stimulate the economy. The “Great Depression” ended with the onset of the war economy of World War II, beginning around 1939.

In the next article we will further examine the growth and development of the banking and finance industry and its future prospects.

Ramses Rashidi (ramses@cbdus.org) is the founder and director of Center for Balanced Development.

The center is a non-profit organization dedicated to providing resources and services to foster global balance in social, personal, ecological and economic development.