A Primer on Banking, Past to Present

Feb 21, 2024 | Finconomics 101, No Bull Economics

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From its start with the European financial families, banking has been around for a long time. Sometimes it’s good to review the origin of a thing to better understand where we are today…

Primer on Banking

The Medici family started banking as we know it some 600 years ago by taking deposits in the European money centers while developing a reputation for safeguarding wealth. In turn, they took a portion of the deposits and lent them out for profit while also investing a portion for profit. They grew extraordinarily rich on the spread between what they paid depositors and what they earned on their loans & investments. The key was the trust they earned from their depositors whom the bankers, in turn, trusted not to withdraw their deposits all at once. The bankers learned how to make fortunes using other people’s money.

Eventually, the bankers gained tremendous influence among the elites & governments who they made loans to, and invested in. This bought the bankers protection, opportunity, and political power.

However, the risk to the bankers was always that some of their loans & investments would lose money, causing a run on their banks. This problem was solved by modern-day bankers who convinced their government clients to create central banks (the U.S. Fed was established in 1913) that could lend bailout money to the commercial banks & governments by printing & issuing fiat, paper currency backed by nothing more than the full faith of the central bank. As long as everyone remained confident in the integrity of the central bank that are run & owned by the bankers themselves, the game continued.

Indeed, there have been several U.S. bailouts since 1913, including the 2008 financial crisis and the 2020 covid scare & many believe a current crisis is brewing that will require another bailout because of underwater bond portfolios owned by the banks (a function of the Fed’s rapid interest rate hikes) and loans on commercial buildings that have tanked in collateral value because of the covid induced work from home trend (equating to possibly $1 trillion in losses according to Starwood Capital Group).     

Hopefully, the central banks (which are still fairly new in terms of the history of Western Civilization) will learn to become better managers of the fiat currency that they have been entrusted with, by acting to keep the governments in fiscal check. To this point, we are encouraged by Jerome Powell’s recent comment that it is past time for an adult conversation about getting the federal government back on a sustainable fiscal path!

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