May 2, 2013 admin

From caves to computers – 10 financial innovations


It is thought that basic trade – the simple exchange of goods – existed from the time that earliest humans first learned to communicate with one another. Trading then would likely have consisted of the bartering of tools, food, skins and basic commodities between neighbouring family units. This is a far cry from today’s internet based banking and sophisticated investment and credit products. This article looks at ten financial innovations which changed the world.

In the beginning – commerce

Our ancestors would have bartered basic commodities from prehistoric times, but commerce as we know it today – the exchange of goods and services over long distances – is clearly a more recent development. However, historian Peter Watson dates the existence of long-distance commerce to as far back as 150,000 years ago. There is evidence that some of the earliest traded commodities were flint and obsidian, substances used to make primitive tools.

Greasing the wheels – money

While the original form of trade would have been barter – the direct exchange of goods – the invention of money greatly simplified and promoted trade.

The first objects used as money were commonly available objects which, besides having an intrinsic value, were also acceptable to people as a medium of exchange for other goods and services. This type of money is called “commodity money” and examples from history are numerous, including cattle, pigs, salt, rice and seeds. In medieval Iraq, bread was used as an early form of money while the Aztecs used cocoa beans as money.

Coining it – metal coins

Ultimately, everyday commodities, such as cattle, are inconvenient as a store of value for commercial trades due to their inconsistent quality, their indivisibility and because they are easily perishable. As soon as mankind discovered metal, this was used to make utensils and weapons previously made of stone. Due to metal’s relative advantages, such as the ability to easily calculate its value, its divisibility, and its ease of transportation and beauty, it became the main standard of value and medium of exchange.

Originally, metal was used in its natural state as a medium of exchange but later it was fashioned into practical shapes, called coins, each having definite form and weight, and receiving marks indicating value. This development made transactions faster and easier.
The first coins seem to have been manufactured separately in India, China, and around the Aegean Sea (situated between Greece and Turkey) between 700 and 500 BC. Probably, the first historic character to have his effigy appear in a coin was Alexander the Great around the year 330 B.C.

Pressing on – paper money

Development of the banknote began in China during the 7th century AD. Before the use of paper, the Chinese used coins that were circular, with a rectangular hole in the middle. Several coins could be strung together on a rope. Merchants in China, if they became rich enough, found that their strings of coins were too heavy to carry around easily. To solve this problem, coins were often left with a trust- worthy person, and the merchant was given a slip of paper recording how much money he had with that person. If he showed the paper to that person he could regain his money.

In the 13th century, Chinese paper money became known in Europe through the accounts of travelers, such as Marco Polo. Polo’s account of paper money during the Yuan Dynasty is the subject of a chapter of his book, The Travels of Marco Polo, titled “How the Great Kaan Causeth the Bark of Trees, Made Into Something Like Paper, to Pass for Money All Over his Country.”

The use of banknotes issued by private banks as legal tender has gradually been replaced by the issuance of banknotes controlled by national governments. Until recently, government-authorised currencies were forms of representative money, since they were partially backed by gold or silver and were theoretically convertible into gold or silver.

A risky business – insurance

Insurance is one of the oldest financial innovations, predating paper money (and even coinage) by some margin. The first methods of redistributing risk are thought to have been practiced by Chinese traders as long ago as the 3rd millennia BC, who when travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel’s capsizing.

The first recorded written insurance policy dates back to about 2000 BC, with evidence found that the Babylonians developed a system whereby if a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender’s guarantee to cancel the loan should the shipment be stolen.

Bank on it – banking

The history of banking is said to have begun around
2000 BC in Assyria and Babylonia, when merchants made grain loans to farmers and traders who carried goods between cities.

Banking, in the modern sense of the word, can be traced to the rich cities of Florence, Venice and Genoa in medieval and early Renaissance Italy. The word bank was borrowed from the Italian banca meaning “bench” or “counter”. This is because benches were used as desks or exchange counters by Florentine bankers.

Share and share alike – companies and stock exchanges

Size tends to count in business; in modern times, companies dominate economic life in the global economy. However, entities which carried on business and were the subject of legal rights were found in ancient Rome and in ancient India. The innovation of joint ownership made a great deal of Europe’s economic growth possible following the Middle Ages. The technique of pooling capital to finance the building of ships, for example, made the Nether- lands a maritime superpower.
The development of stock exchanges – markets where shares are traded – gave companies access to finance from vast numbers of investors. Unofficial share markets existed across Europe through the 1600s, where brokers would meet in or outside coffee houses to make trades. The Amsterdam Stock Exchange, created in 1602, became the first official stock exchange when it began trading shares of the Dutch East India Company.

The plastic revolution – credit cards

The concept of a card, and more particularly a plastic one, functioning as money is relatively new in the history of money. The idea of issuing a card which could be used to purchase goods on credit from a multiple of vendors is said to have been thought out when a forgetful New York banker, having forgotten to bring cash with him, found himself unable to pay for his meal at a restaurant.

At the end of the meal, Frank McNamara discovered that he had forgotten his wallet (ironically, in the words of a future competitor, he had “left home without it”) and he had to call his wife to bring him some cash. The story goes that McNamara came up with a new idea – a credit card that could be used at multiple locations. McNamara and his dining companions decided to form a new company – the Diners Club. The innovative part of the new concept was that the Diners Club would be a middleman between the vendor companies and their customers. Instead of individual companies offering credit to their own customers, the Diners Club was going to offer credit to individuals for many companies (and then bill the customers and pay the companies).

Automatic for the people – the Automatic Teller Machine

By the mid-20th century the scale of banking had progressed to the extent that most economically active adults had a banking account. The idea of self- service in retail banking developed through inde- pendent and simultaneous efforts in Japan, Sweden, the United Kingdom and the United States.

Luther Simjian has generally been credited with developing the first automatic teller machine. His machine (which didn’t dispense cash) was first in- stalled in 1960 in New York’s First National City Bank (now CitiBank). It allowed customers to pay utility bills and get a receipt without a teller. In 1967 a Barclays Bank branch in North London introduced the first cash dispenser; it used paper vouchers bought from tellers in advance.
Today, estimates place the number of ATM’s in use worldwide at over 2.2 million: approximately 1 ATM per 3000 people in the world. ATM’s are found on every continent including Antarctica, which has one on its McMurdo Station.

Commerce in the Information Age – online banking

Today, internet banking is an enormously popular form of retail banking. Surprisingly though, the first form of computer based retail banking was offered as far back as in 1981 by four of New York’s major banks (Citibank, Chase Manhattan, and two others) using the “videotex” system. If a customer had a terminal, monitor and a phone line he could access the banking system, by using a numeric keypad to send messages down the phone line to his bank. However, these banking services never became popular (except in France and the UK).

Stanford Federal Credit Union was the first financial institution to offer modern online internet banking services to all of its members in October 1994. The popularity of internet banking has since grown exponentially to the extent that in some countries banks exist which offer only online services.

Over time, mankind has progressed from the basic bartering of stone and food to being able to transfer- ring intangible wealth by tapping on a keyboard. Who knows what the future will bring from here and what innovations await us?

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