Page 15 - Book4E

CHAPTER 2
History of Banking
Unlike credit unions, banks are owned by private individuals, governments, or a combination of individual and government interests together. All banks, regardless of country, are subject to government regulations and supervision. In the simplest terms, a bank is a financial go-between that exchanges money for lending, safeguards money, and guarantees loans.
Many banking functions such as safeguarding funds, lending, guaran- teeing loans, and exchanging money can be traced to the early days of recorded history. Banking, as we know it, first appeared in the 1600s. Goldsmiths in England who took care of gold belonging to others noticed that the owners only ever took with them a small amount of the gold they had in storage. The goldsmiths began loaning out the stored gold to people who promised to repay it with interest. After awhile, the goldsmiths used paper certificates to represent the gold instead of the actual gold. The total value of the certificates in circu- lation was greater than the actual amount of the stored gold because using the certificates allowed the goldsmiths to loan more money than they actually held in the gold reserve.
Two of these early banking practices are still part of the present-day system: 1.) a bank loans out more money than it has in its reserves. The ability to do this played a big part in Western industrialization and is still important for economic expansion, and 2.) the money depos- ited in a bank is more easily converted to cash than the bank’s own investments and loans. Using this deposited money to fund loans, the
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