In one form or another, banks have been around for thousands of years. But why did they form in the first place and how have they changed over the centuries? This article provides a brief overview of the history of banking to help you think through the present and future roles of banks in your personal financial journey.
How did banking begin?
Humans have been trading goods and services since the dawn of time. Banking as we understand it today, however, began when currencies, like gold, were first minted. Minted currencies enabled wealthy individuals to protect and accumulate money like never before.
In the ancient Roman empire, wealthy individuals would often store their wealth in religious temples for safe keeping, since temple workers were presumed to be trustworthy. These were likely the earliest banks of the Western world.
How does banking work?
Even during these early years, banks were understood as financial intermediaries. Banks eventually moved away from temples and into their own established buildings, but many of the basic services stayed the same: easier storage, protection of wealth, and loans.
Banks served states as well as individuals. According to Investopedia, "Ancient empires also needed a functional financial system to facilitate trade, distribute wealth, and collect taxes. Banks were to play a major role in that, just as they do today."
Financial institutions would eventually come to pay customers interest for storing money in their vaults; on the flip side, qualified customers could also borrow loans at interest, a practice most of us are familiar with. Many modern banks fund mortgage and business loans to help customers afford larger expenses and, in turn, promote economic growth.
Changes in modern U.S. currency
In 1913, Congress established the Federal Reserve Bank, or "the Fed." The purpose of the Fed was to "provide the nation with a safer, more flexible, and more stable monetary and financial system." For decades, the value of the U.S. dollar was tied to physical gold. But in the 1970s, the Fed replaced this "gold standard" for a model called "fiat money," a term used to describe a currency established purely by the order of a government.
This shift away from gold provided banks more flexibility to create value for more customers. For example, as long as a customer agrees to pay back a mortgage loan in U.S. dollars, that loan needn't be tied to actual gold. With the advent of cryptocurrencies, many banks continue to discuss the implications of fiat money for modern life. That discussion is too big to address here, but you can read more about it in our related article.
The digital revolution
The internet revolutionized banking, although it wasn't until the mid-1990s that online banking services became widespread in the U.S. Since then, banking has undergone a rapid digital transformation, enabling customers to manage their ﬁnances from home, on the go, virtually anywhere with an internet connection.
Today, banks continue to transition their services online. This reduces the number of occasions customers need to visit a physical branch or sign a paper document.
The future of banking
The digital revolution in banking has caused some to wonder whether all banking will eventually be automated or run by artificial intelligence. We seriously doubt it. Why?
Like we saw with the earliest banks of the Western world, banking has always been about trust and security. Artificial intelligence and digital technology can certainly help with security in banking, but trust can only happen between human persons. Various banking services will continue to be automated going forward, but not all.
In fact, the need for human-to-human trust is why Plains Commerce Bank enthusiastically embraces digital advancements in the banking industry; we think the future of banking can be both mobile and local—technological and community-focused. When used properly, new banking technologies can help us stay even more connected to the people and resources that help us thrive. Of course, the future is always uncertain. Whatever it brings, Plains Commerce Bank will be there to help support you however we can. Want to join us? Open a new account online or contact a banker today.