As mentioned earlier, banking dates back to the second millennium BC, although there is evidence suggesting that banking could be much older. The first banks were probably royal granaries. They were built to collect, store, and distribute a kingdom’s surplus grain. They also lent grain, apparently to farmers and traders.
Modern banking began in Renaissance Italy and spread gradually across Europe. Early banking centers included Florence, Hamburg, Amsterdam, and London. The first central bank, the Bank of London, was founded in 1694. The U.S. Federal Reserve was created in 1913, and the European Central Bank was created in 1998. By the time you read this, the world’s most important bank might be the People’s Bank of China in Beijing.
Banks have come a long way since the dawn of commerce, and the story of banking is still unfolding. Despite the passage of time, however, the basics of banking have remained surprisingly unchanged. Here’s a brief definition of banking from the 10th edition of Principles of Money, Banking & Financial Markets:
Banks provide a place where individuals and businesses can invest their funds to earn interest at a minimum of risk. Banks, in turn, redeploy these funds by making loans.1
It doesn’t get much simpler than that. As we know, however, banks also serve an important role in maintaining a nation’s money supply. Banks also create money by using their excess reserves to issue loans. ...