Banking History - A Century of Evolution Unveiled


Banks have evolved into an indispensable part of the global economy, but banking systems vary across countries.

The Evolution of Banks and the Differences in National Banking Systems

Nowadays, banks have become an indispensable part of our economic system, with ATM machines found worldwide and even in Antarctica. This year, it seems that banking has become a hot topic, but although banking business may sound simple, it has been quietly and rapidly changing, completely different from banks ten, twenty, fifty, or even a hundred years ago. Different countries, such as China and the United States, have also developed vastly different banking systems. These different banking systems largely shape the economic landscape of various countries and have countless connections with their governments.


The Origin and Evolution of Banks

To gain a deeper understanding of banks, we need to go back to history. As early as the 11th century, various gold coins existed in various European countries, and merchants often gathered on outdoor benches for Currency Trading. This bench is called "banco" in Italian, and later banks evolved from this term. However, modern banks can be traced back to Italy in the 15th century, when a bank was established and has a history of 551 years. It is the Siennamushan Bank. This bank not only has a long history but also has a large scale, with over 20,000 employees. One of the most important characteristics of early banks was their ability to issue bank notes, which could be used for transactions. In fact, these banks can use their own credit to issue currency, similar to ancient Chinese banks and Shanxi note banks, and they can also issue their own silver notes. 

However, having the ability to print money does not mean that banks can print money at will. At that time, banks attached great importance to credit because why were people willing to use bank bills for transactions? The reason is that they believe they can be exchanged for actual gold coins at any time. Although banks have the ability to print money, this does not mean they can indiscriminately issue currency. The main business models of these banks include deposit taking, lending, and investment. Banks earn profits through the price difference between these two aspects. In addition, they also charge transaction fees by providing various financial services such as payments, fund transactions, and asset management. Therefore, banks are actually intermediaries of resources, promoting social production and consumption through the management and allocation of resources.

The importance of banks

A bank is a resource intermediary responsible for allocating funds, which makes it a key player in the economic system. For example, suppose there is a milk tea entrepreneur who is skilled in making milk tea, but without bank loan support, he may need to work long hours and accumulate sufficient funds to open a milk tea shop. However, if the bank is willing to provide him with loans, he can achieve his entrepreneurial dream faster, and the bank can also earn interest, which is a win-win situation for both society and the economy. Banks release the production and consumption capacity of society through resource allocation, thereby promoting the development of the entire economic system. Although banks do not directly create value, they indirectly promote economic growth through resource mobilization.

The Relationship between Banks and Currency

The relationship between banks and currency is very close. Every bank loan is actually equivalent to creating a new currency. Banks continuously drive the flow of money by absorbing deposits, issuing loans, and investing. This is particularly important because the liquidity of money determines the amount of money in the entire economy. Banks play a crucial role in currency flows, and their decisions affect the entire economy. Therefore, the banking industry is an intermediary for resource allocation and the most critical part of the entire economic system.

Supervision and Risk of Banks

The banking industry has a strong cyclical nature. When the economy is good, they will lend heavily and make profits, but when the economy is bad, bad debts will increase, making life difficult for banks. The banking industry is also susceptible to systemic risks and therefore requires government regulation and support. However, different countries adopt different regulatory approaches, which is a bit like pruning a big tree. Each country has its own pruning style, ultimately forming different forms of banking systems. The banking systems of China and the United States are two typical different forms.

The Development of China's Banking Industry

The development of China's banking industry has gone through just a few decades, but it has condensed the evolution of the entire banking industry history. In the early days of the founding of the People's Republic of China, China adopted a planned economy model and did not require intermediaries to allocate resources. The government directly planned everything. At that time, there were mainly two banks in China, namely the Bank of China and the People's Bank of China. The former is responsible for foreign exchange and foreign trade, while the latter is responsible for almost all affairs, including money printing and commercial banking business, especially deposits and loans for enterprises and individuals. However, in reality, the business of commercial banks has not yet fully developed.

After the reform and opening up, China's banking industry has developed rapidly. China has established four major state-owned banks, namely the Industrial and Commercial Bank of China, the China Construction Bank, the Bank of China, and the Agricultural Bank of China, each responsible for different fields of business. This clear division of business allows banks to focus more on their respective fields, but it also leads to a lack of market competition and inefficient resource allocation.

Against the backdrop of excessive lending, China established 12 joint-stock banks in 1998, introducing a competitive mechanism. In addition, urban and rural credit cooperatives have also merged and upgraded into commercial banks, strengthening competition. State-owned banks have gradually been separated from policy tasks, and policy banks such as the National Development Bank and the Agricultural Development Bank specialize in undertaking government tasks.

The Characteristics of the US Banking Industry

Unlike China, the United States has adopted a completely different approach. The banking system in the United States began after the War of Independence, when each state had its own currency and no central bank. At the beginning of the 20th century, there were thousands of banks in the United States, but there was no central bank to regulate them. After multiple bank runs, the United States established the Federal Reserve System, also known as the Federal Reserve, in 1913 to stabilize the financial system.

The banking industry in the United States has been developing in a relaxed regulatory environment in the 20th century, with a mature Securities market. American banks have a high degree of marketization and securitization characteristics, allowing various financing channels. This flexibility brings huge potential returns, but it also leads to issues such as financial crises.

Recently, some countries have explored the edge of the banking system and found that after credit expansion, printing money, and reducing reserve requirements to a certain extent, the marginal effects have weakened, and the problem has gradually become apparent. This indicates that bank regulation needs to be constantly adjusted and improved to adapt to the constantly changing economic environment.

Different countries adopt different ways to regulate and manage their banking systems, which to some extent shape their respective economic patterns. China emphasizes a government-led and planned economy, while the United States places more emphasis on marketization and securitization, both of which have their advantages and limitations. Through continuous development and improvement, the banking industry will continue to play a crucial role in the stability and development of the economy.

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