Thursday, March 6, 2014
Culture Nurture: Banking: The Summarized Genesis By: James U. Sy Jr.
The legal definition of a bank in the Philippines, as established in the General Banking Act, requires four elements for an entity to be considered as a bank under Philippine law. The institution must be 1) authorized by the Monetary Board (MB), the policy making body of the Bangko Sentral ng Pilipinas (BSP), 2) to engage in the lending of funds 3) obtained from the public through the receipts of deposits of any kind, and 4) all entities regularly conducting such operations. Thus, non-banking financial institutions (NBFIs), such as financing and lending firms, differ from banks because they lack at least one of these elements. The word bank was derived from the Latin word for “bench” since money lenders sat on benches in any Roman forum in the past. Thus, being bankrupt meant that the money lender’s bench was literally broken so he could no longer sit there anymore. Cognates for the Latin bank are the Spanish banco and the French banc, both of which also mean “bench” (Latin, Spanish, and French all came from the Romance family of languages). The concept of banking was already in existence for thousands of years. However, it was not exactly in the form that we know of today. As early as 2000 B.C. loans were recorded in the temples of Babylon. In Egypt and Mesopotamia, people kept their valuables in temples. Temples were sacred places under the protection of the Gods and were not likely to be robbed. Thus, they were safe depositories. However, since these valuables were not circulated within the community they served little value in improving the local economy. Furthermore, those who read the Bible will remember that Jesus Christ got angry because people were conducting business inside the temple. By the 12th Century, banking activities were recorded in Genoa and other Italian cities. In 1587, Banco della Piazza de Rialto, the first real public bank, was established in Venice. King Charles I of England was in great need of money in 1640 so he seized the deposits of city merchants worth 200,000 pounds of bullions which had been deposited with the mint for safekeeping. The merchants panicked and took measures by entrusting their valuables to the goldsmiths. Goldsmiths were individuals who made and/or sold jewelries such as gold. The goldsmiths of that era also lent money using their own funds. Due to the nature of their business, goldsmiths were usually the only ones who had a vault in their premises, making them the ideal keeper for the city merchants’ valuables. Goldsmiths issued receipts for the valuables entrusted to them and these receipts later became the medium of exchange, the first banknotes if you will, at least in Europe (The Chinese invented paper and unsurprising, were the first to use paper money). Then the goldsmiths started using the funds given to them for safekeeping to expand their lending businesses. As banking continued to evolve, elite banking families, such as the Fuggers, rose to prominence. They lent to noblemen like kings, queens, dukes, etc. It reached a time when these banking families in Europe became more powerful than the monarchs or kingdoms they lent money to. Utilizing their money, they started manipulating the political, economic, and financial environments. They subtly bought influence within the governments for control. These elite banking families destabilized existing monarchies if the king didn’t serve their purpose best. They paid people to cause trouble in the royal court or to cause a revolution, ultimately leading to the ouster of the king and the ascension of a new ruler whom they have control over. These elite banking families also stirred up unrest between nations, lending vast sums of money, usually to both sides, so that war could be waged. The weapons purchased by both sides were manufactured by the industrial wing of the banking-industrial cartel. Usually the outcome of a conflict was controlled by regulating the loan of money and the timing of the delivery of weapons. Sometimes artificial economic crisis was created by contracting/hoarding the money supply, leading for the population to clamor and lose faith in the government in power. The artificial economic crisis also served to increase interest from at least 12% to as high as 45%. These unscrupulous and unregulated banking practices that caused havoc to the ruling governments caused the creation of central banks in different nations to control the activity of a country’s financial system. The Riksbank of Sweden, the oldest central bank, for instance, was founded in 1656. In 1694, the Bank of England, considered as the first real central bank, was established as a joint stock company by an act of Parliament. It served as the model for most modern central banks. In the Philippines, the Philippine National Bank (PNB) (founded Jul. 22, 1916), a government-owned banking institution with headquarters in the old Masonic Temple along Escolta, Manila, served as a de facto central bank prior to the creation of the Central Bank of the Philippines (CBP), as mandated by Republic Act No. 265 (The Central Bank Act), and its formal inauguration and opening on January 3, 1949. The CBP was officially replaced by the Bangko Sentral ng Pilipinas (BSP) with the signing of Republic Act No. 7653 (The New Central Bank Act) by President Fidel V. Ramos into law on June 14, 1993. The explicitly stated primary objective of the BSP is the maintenance of price stability in the country.