Banks

How the ‘Banking System’ Started and Developed Over the Decades

There’s no doubt that the banking system of today has become one of the most systematic, organized, and secure ways to upkeep money. But before it developed to what it is now, the banking system has its humble beginnings. Let’s travel back in time and trace the history of the world’s banking system.

Goldsmiths ‘Thing’

The concept of keeping one’s valuables started all in medieval Europe. Since goldsmiths are always dealing with valuable commodities, they built tough vaults to keep all their items. At first, the purpose of the vaults was just to safeguard the goldsmiths’ properties, but as time passed by, it got another purpose. People in the community found out that the vaults used by the goldsmiths are indeed tough and they eventually rented these to secure their own money. Since then, goldsmiths in Europe started to accept deposits from people who wanted a safer way to store their money. 

From Safekeeping to Lending

The number of people who rented the goldsmiths’ vaults skyrocketed in just a few months. And later on, the goldsmiths discovered that there’s a major discrepancy between the deposit and withdrawal statistics. They observed that a lot of people just wanted to deposit their money and did not consider withdrawing the funds anytime soon. With this situation, the goldsmiths thought of engaging in another business- lending. They just basically used the depositors’ idle money and lent it to other people and earn based on the agreed interest rate.

Creation of Central Banks

To prevent unscrupulous people from engaging in the banking business, different countries all over the world started to build their respective central banks. Basically, the role of the central bank is to control and monitor all the people who are engaged in any banking activities. At the beginning of the 20th century, almost all countries operate their own central bank.

 

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