The Key Role Banks Play In Our Economy, Mohamed El-Erian and Danielle DiMartino Booth July 15, 2018

Guests: Mohamed El-Erian and Danielle DiMartino Booth
The Roman Empire eventually died of course but many of its banking policies and practices lived on. One, unfortunately, was that of government taking out loans during hard times, often with the king setting the terms. Now, this led to countless cases of wasteful government spending that led to crippling debt, but thank goodness that this problem no longer exist.

It’s funny, but another major evolution of banking came along in Britain in 1776 courtesy of Adam Smith, whose invisible hand theory paved the way to modern day capitalism. Money lenders and bankers could now limit the states involvement in the banking sector and the economy as a whole, along for competitive banking industry. Smith’s idea took off in the New World but they weren’t immediately successful. The average life of a state charter retail bank in the beginning was only 5 years, after which any notes they’d issued had become virtually worthless.

Compounding the problem that there was still no such thing as deposit insurance meaning that if your bank was robbed your money was simply gone. In light of all these problems, Americans increasingly begin to mistrust banks. Then treasury secretary, Alexander Hamilton changed the game again by establishing a national bank that would accept member bank notes at par, to help them through hard times.

Eventually, this national bank created uniform national currency and set up a system through which national banks backed up their notes by purchasing treasury securities and essentially creating a liquid market. With the national bank established and the industry more stabilized, large merchant banks emerged that specialized in business loans and corporate finance. As they grew larger and more powerful many of these merchant banks transform their international connections into political power.

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