One of the key components of modern banking is the introduction of paper money, which emerged in Europe in 17th century, and Sweden was again the first country where it made its debut. Paris followed Sweden in issuing paper currency in 1719. Slowly the idea started gaining the ground that bank notes be brought into a wider circulation it stemming from the need to expand the supply of currency in higher quantum to the precious metals used hitherto as security deposits by the banks when the paper currency was issued in the first place. As these paper currencies had the backing of the government reserves and were issued by the national banks, the government took a view to impose a temporary ban on the right of the holder of a note to exchange it for silver. As governments of the time took it upon themselves to become the issuer of the paper currency, the danger of bankruptcy became a thing of the past, and in its place inflation made its debut in the world of finance. Gradually countries the world over started shifting to paper currency as the medium of exchange and the authority to issue the paper currency rested with the national bank of the country. The exception is UK where the Financial Services Authority licences banks and some commercial banks, such as the Bank of Scotland, issue their own bank notes in competition with the Bank of England, UK government’s central bank. With the advent of Adam Smith the banking industry experienced growth in quadratic proportions.
Banking industry all over the world went on a growth curve that was characterized by regulations, controls, liberalisation etc., depending upon the political situations of the times. A significant watershed in the history of banking was experienced in 1980 resulted in an effort of deregulation and privatisation of the government owned financial institutions around the world. The reason for the same was the realization on the part of the governments all over the world that the financial systems would perform better if they are managed by the private sector. Once this decision was arrived at, large companies developed themselves as private bankers and started established branches outside the country from which they operated.
The business of banking assumed operations of global proportions during the 1980s and 1990s. It arose on account of generation of demand from companies, governments and financial institutions. The expansion of the financial sector in the private sector was also owing to the buoyancy of the market conditions as also on account of he bullish trends being experienced in the market the world over.
By: Suman Rai