New Worlds: Banking

(This post is part of my Patreon-supported New Worlds series.)

Back in the first year of this Patreon, when we discussed money matters, I mentioned that carrying around large sums of metal coinage is generally undesirable. It’s inconveniently heavy, and it’s a temptation to robbers; anybody who’s read or watched a Robin Hood story has probably encountered at least one instance of Robin and his Merry Men holding up a rich merchant or a tax collector in order to make off with the coin the target is carrying. This was a very real danger, and while not carrying cash didn’t necessarily make you safe — remember, in a pre-industrial world, everything down to the clothes on your back was potentially valuable enough to be worth stealing — it was certainly a good idea to avoid doing that whenever possible.

Enter the bankers.

There are a bunch of purposes banks can serve, some of which are now semi-obsolete, some of which are new, and some of which have continued as a core part of their purpose from time immemorial. Protecting money and other valuables has not remotely gone out of fashion — and the arms race on that front is impressive. Once upon a time, all you really needed for that was some thick walls, a strong lock, and a trustworthy guard with a weapon at the door. Now we have intricate heist stories where one or more plucky thieves clean out a vault after overcoming locks, passwords, biometrics, motion sensors, pressure sensors, heat sensors, and more. So long as physical objects remain valuable, we’ll have a need for places to keep them safe.

But “keep money safe” was only the earliest function of a bank. Over the ages, they also have provided a variety of ways to use money without actual cash being involved. Paper money is sometimes called “banknotes” because it was issued by private banks, and was a marker for the actual money held in their vaults; this is the “representative money” that came up several years ago in this Patreon. Checks (or cheques) are, after a fashion, individualized instances of this: when I write one out to pay for my karate classes, I’m backing that slip of paper with the money I have in my checking account, and authorizing my bank to hand the relevant sum over to the recipient’s bank. Nowadays the security is provided by the printed check plus my signature; in the past it might have been a wax seal, imprinted by a signet ring.

Of course, at no point in a normal check transaction does any actual cash change hands. The head of my dojo doesn’t have to go to my bank, hand over my check in exchange for a stack of bills, go to their bank, and deposit the money. My checking account is a virtual thing, made up of numbers in a computer system. I can, if I want to, trade some of those numbers for dollar bills . . . but if too many people do that at once, bad things happen. Because the bank holds vastly more money than it does cash — in fact, our whole financial system does. As of 2005, physical currency in the United States made up less than ten percent of the entire money supply, taken in its broadest definition.

We got to this point precisely because banks do a lot more than just hold currency. I’m not going to attempt (yet) to dive into the vast sea that is the world of investment, speculation, and other commercial games, but the shift from the dry land of “valuable substances in fixed quantities” to that sea has played a non-trivial role in creating the modern world. It used to be that the primary source of wealth was land: the crops it produced, the livestock and wildlife it supported, the minerals that could be extracted from it, and so forth. But that wealth has an upper limit, whereas the wealth created by commerce can grow and grow and grow — and also shrink catastrophically, as we see in financial collapses. (As an aside, this shift also underpins a large part of the decline of aristocracy worldwide, because their wealth and status was traditionally based on land ownership.)

A virtual approach to money isn’t entirely a new thing, though. The need to conduct transactions without vulnerable travelers carrying large amounts of currency means that people have long found ways to “pay” each other with things other than cash. These could be individual promissory notes — forerunners of the checks mentioned above, and heavily dependent on the “trustworthiness” sense of the word “credit” — or circular letters of credit issued by larger institutions, allowing the bearer to withdraw money from a correspondent (i.e. allied) institution somewhere else.

One version of this is still widespread in the Islamic world, and used by non-Muslims as well in those regions. Hawala is an informal system wherein one person gives a sum of money to a hawaladar (broker) at home, along with some kind of password. The hawaladar communicates this password to their counterpart in the destination city, and the payer does the same with the payee. Then the payee can go to the second hawaladar and receive their money, as if it had been sent from one city to the other — usually with some small commission deducted. The debt now exists between the hawaladars, who can zero out their balance with transactions in the other direction, or with some kind of later trade, whether of cash or some other valuable compensation like a service.

If you’re thinking that in some ways this echoes the pre-monetary economy, where debts aren’t always repaid in kind, you’re not wrong. And like that economy, hawala depends heavily on social networks and trust: nobody’s going to pay out on the word of a stranger or someone known to renege on their end of the bargain. (Unlike a pre-monetary system, though, hawaladars do keep organized records of their transactions.) But there’s a point at which the same is true of our entire commercial economy, with all of its virtual money, its checks and credit cards, its investments and pieces of paper that hold no innate value. It all relies on trust: in people, in businesses, in banks, in countries. We regulate and codify as much as we can, with things like credit ratings and interest rates . . . but in the end, trust is the foundation this whole edifice stands on.

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New Worlds: Banking — 9 Comments

  1. Pingback: New Worlds: Banking - Swan Tower

  2. I hadn’t heard of that password thing. Reminds me of a whole category of problems and how they were solved by pre-bureaucratic states, things like “how did Athens or Rome know who was a citizen?” Recent reading led me to think that the answer was “they were more bureaucratic than we might think, with lots of things written down that naturally wouldn’t have survived to us”.

    I’ve read that e.g. early Sumerian or Egyptian money was like bank accounts in grain, though this raises the questions of “how did that work in practice” and “how do we know?”

  3. A Middle Eastern tale:

    A man left his valuables on deposit with another while he traveled. When he came to ask for them back, he got a denial and a beating. But a trickster offered to help and told him to go ask for his valuables back at a certain time. Then the trickster dressed up as a woman with servants and came to the other man, saying that a wealthy woman wanted to leave her valuables with him while she traveled. The man came, and the other man handed them over.

    Then a “messenger” came to the “woman” and said that the reason for traveling was no longer in effect. So the trickster pulled back, and then ripped off the disguise and danced in the street with the man who had got his valuables back. The other man stared, and then he started dancing to. When asked why, he said, because he had thought he had known every way to trick someone, and now he knew another.

  4. Two side notes on banking, in particular the European premodern variety:

    (1) Especially and most obviously in English — but not only in English, nor only in Common Law — there are two kinds of property before the adoption of the printing press: Real property (land), which has severe restrictions on its transfer, and personal property (basically everything else, including money), which… ordinarily does not. This has some linguistic descendants, too, in that land is the only “real” property; this was a huge social basis for landed gentry snubbing merchants and industrialists. (Until the 1830s one had to own land in one’s own name and right producing a certain income to be eligible to vote in England, about the equivalent of $35,000US(2005) in present purchasing power as of 1819.)

    (2) Until well after Napoleonic times, becoming a “bank” required explicit permission of the sovereign. Which had some interesting side effects in the tug of war between sovereigns in debt to banks and the banks themselves; it was one of the subsurface causes of the Seven Years’ War, for example.

    • The thing about real vs personal property was that leasehold was personal property. So they wiggled out of the courts for real property by having John Doe sue for his leasehold.

    • The whole voting rights thing is definitely going to come up later. I didn’t know that about needing royal permission to become a bank, though! My familiarity with the origins is mostly via the more informal thing of people banking with goldsmiths in London — but in an era where a “bank” as a formal institution wasn’t really a thing yet.

  5. Fascinating, Marie. I hadn’t known about Hawala. And the whole world economy is now based on trust in our institutions, which trust is rapidly becoming very fragile. Phew….

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