History of Finance and Financial Systems

Introduction:

Today, it would be difficult to survive for a few days without money, but most people kept livestock and grew their own food before the Industrial Revolution. They also tended to live in family homes that had been passed down through the generations. As towns grew in size, most people were given money to spend on necessities like food and shelter. Consumers have access to a bewildering array of essential and non-essential goods in today’s capitalist society. Payment methods include cash, electronic money, and legally binding contracts.

Previously, only the wealthy were concerned with investing money, but now money is treated as a commodity (much like sheep and goats were in agrarian societies several hundred years ago), and all citizens must understand it. In this article, we will discuss finance and how the financial system has evolved.

Origin of Financial system

The early Sumerian financial transactions were codified in the Babylonian Code of Hammurabi. This governed land ownership, agricultural labor employment, civil obligations, land rental, and credit. Creditors, for example, had to wait until after the harvest to demand repayment from a farmer, and crop failure due to storm damage would cancel the interest due on a loan for that year. 

In the Sumerian period, the customary rate of interest for a barley loan was 33. 33 percent per annum, and for silver, it was 20 percent per annum. The Code of Hammurabi established the following legal maxims in the Babylonian period 1900-732 BC, which lasted for more than 1200 years: 33. 33 percent per annum for grain loans and 20 percent per annum for silver loans.

The Old Testament contains several directives and references to loans, property purchases, and debts. Many of these are concerned with protecting the poor and preventing unequal wealth distribution. A collateralized loan is described in Deuteronomy 24:10-13 as follows: “Do not go into your neighbor’s house to get what he is offering as a pledge when you make any kind of loan to him. Remain outside and wait for the man to whom you are lending the money to bring the pledge to you. Do not sleep with the man’s pledge in your possession if he is poor. Return his cloak to him before sunset so he can sleep in it. Then he will thank you, and it will be considered a righteous deed in the eyes of the LORD your God”.

The first official coinage was minted in Lydia during the seventh century BC, and it was made of a mixture of gold and silver. From the sixth century BC to the first century AD, there were six types of loans in Greece: 

1. Personal or productive loans, similar to a bank loan to a small business
2. Mortgages backed by real estate
3. Municipal loans 
4. Endowments that have been invested and are paying a specified rate of return
5. Loans to industry and commerce – these were most likely short-term speculative loans
6. Personal and miscellaneous loans can have interest rates as high as 48 percent per month

Genoa emerged as a major sea power and trading Centre around the time of the First Crusade, and its fairs drew traders from all over the Mediterranean. To address the issue of different currencies, a forum was established to arbitrate the use of exchange rates. On the third day of each fair, a representative body of recognized merchant bankers would convene to determine the exchanges that would take place. Each banker proposed a rate, and after some deliberation, a vote was held to determine the currency exchange rates. Other medieval fairs later adopted similar practices. During the Middle Ages, bills of exchange were developed to transfer funds and make payments over long distances without physically moving large quantities of precious metals. For more information, see Smith. Thirteenth-century Italian merchants, bankers, and foreign exchange dealers developed the bill of exchange into a powerful financial tool, allowing short-term credit transactions as well as foreign exchange transactions.

Central banking

The history of the central banking industry dates back to the 17th century, when the first Central Bank, the Swedish Riksbank, was founded. It was established in 1668 as a common stock bank and chartered for loans of government funds and the purpose of trade clearance. Several decades later, the Bank of England, the most famous central bank of the day, was also founded to acquire government debt as a joint-stock company. Similar purposes were later established in Europe for other central banks, but some have been established to address monetary disarray. For example, Napoleon established the Banque de France in 1800 to stabilize the currency after the paper money hyperinflation in the French Revolution and to support state finance. Whilst those early central banks were also private companies involved in banking activities, they helped finance the debt of the government. Because the banks held other banks’ deposits, they became banks for bankers, facilitated transactions between banks, and provided other banking services. Because of their large reserves and their extensive corresponding bank networks, they were the repository for most banks in the banking system. These factors made them the last resort lender in the face of a financial crisis. In other words, they have been willing to provide their correspondents with emergency cash in times of financial distress.

Early stock exchanges

The movement of Jews across Europe is responsible for much of the early history of commodity
and financial exchanges. Jewish communities throughout Europe had close family and religious ties, forming a powerful network through which trade and commerce could be conducted. The brothers Francis and Diego Mendez, for example, were such merchants, with the former based in Lisbon and the latter in Antwerp.
Diego had a habit of obtaining vast monopolies on Indian produce from the King of Portugal. During the 15th and 16th centuries, the mass movement of Jews from Spain and Portugal resulted in the establishment of commodity and financial exchanges in Antwerp, Amsterdam, London, Paris, and many other major cities around the world. Because of the massacres and conversions of 1391 and 1497, many Jews fled Spain and Portugal. By the early 16th century, a sizable number had settled in Antwerp, where they were engaged in international and domestic trade, banking, and finance.

The Antwerp exchange was founded in 1460 to facilitate commodity trading and settlement. The exchange has a “pagadder” tower, which is a lookout tower built onto wealthy merchants’ houses in Antwerp overlooking the Schelde River. They could look out over the river from these towers and see when their ships arrived knowing this information ahead of others could be used to their advantage when making deals involving the safe arrival of goods. 

The world’s first purpose-built exchange was built in 1531. The statement “The practice of merchants from all countries and languages” is emblazoned across the fade. Antwerp quickly became Europe’s international financial capital, particularly as a secondary market for national bonds. This exchange, however, did not have any stocks listed.

The Amsterdam Stock Exchange

When Antwerp’s importance declined, the Jews relocated to Amsterdam, which became known as “the Dutch Jerusalem” during the 17th century. They were vital to large trading companies such as the Dutch East and West Indies Companies, where they traded commodities such as coral, sugar, tobacco, and precious stones. 

The Amsterdam Bourse only traded wheat, herring, and species during the 16th century. However, in 1602, the world’s first public company, the VOC (the Vereenigde Oost-Indische Compagnie or United East India Company), was established, and shares began to be traded. The Amsterdam Exchange was founded for this purpose and thus became the world’s first stock exchange.

Other early financial centers: London

Gresham proposed in 1565 the construction of a Royal Exchange modeled after the Antwerp Exchange; Queen Elizabeth I opened the building in 1570. Following William’s overthrow of King James II in 1688 (known as the Glorious Revolution), many of the speculative practices practiced in Amsterdam were also adopted in England.

Outside of the Amsterdam bourse, Dutch investors and speculators traded British securities at various locations in London, including the Royal Exchange and Exchange Alley, where curb and coffeehouse trading took place.

New York

Wall Street got its name in the 17th century, when it served as the northern boundary of the New Amsterdam settlement. It was built as a defense against neighboring English colonists. Only picket and plank fences denoted plots and residences in the colony in the 1640s. However, the Dutch West India Company later reinforced the stockade with the assistance of African slave labor. 

To prevent attacks from various Native American tribes, a strengthened 12-foot wall was built, and surveyors laid out Wall Street along the lines of the original stockade in 1685. The British colonial government demolished the wall in 1699. There was a buttonwood tree at the foot of Wall Street in the late 18th century where traders and speculators would gather to trade informally. The Buttonwood Agreement, signed in 1792, formalized the traders’ association. This is where the New York Stock Exchange got its start.