The Control of Huge Money Supply - Essay Example

Teacher 11 January 2008 Banks and the Control of Money Supply Introduction The financial processes of any country, and the world on the whole, depend directly on the prosperity and availability of its banks. A bank serves as a personal finance centre for each individual but it also serves a major economic purpose by which it invests its own borrowed funds into certain businesses and organisations as it sees fit (Phillips 121-158). The centralisation of finance means that economic growth is primarily based on the existence of banks and therefore this where the supply of money for commercial and economic sectors comes from. Despite this clear relationship between money supply and banks, there are other factors that influence the control of national and international money supply and take away the full control of banks; these include personal account holders, foreign investors and various businesses and corporations. The Creation of Banks Ancient Babylonian records dating from the 18th century BC show that a rudimentary form of banking was established at that time (Leick 161). Although these early storehouses could not necessarily equate with modern banks, they did serve the purpose of storage of wealth in the form of grain, gold and other valuables. From these immense storehouses, people chose to lend and borrow based on agreements made on a person-to-person basis. Financial relationships such as these expanded in the following centuries and we can see evidence of basic banking centres from the Greeks, the Egyptians and Romans. As banking progressed, the idea of storing wealth became more complicated as people tried to decide of fair ways of paying back loans on various items (Smith 4). Seeds, which could reproduce and therefore become worth more in the end, would require an equal repayment that included interest; this was an idea that quickly took hold and has helped to define modern banking (Heichelheim 56). After the Roman Empire lost its power, banking actually became a derelict practise in most of Europe until centuries later. When it was revived in later years, banking gained the addition of one factor that would revolutionise it: hard currency (Butler et al 27). Currency became redeemable for actual products when prior to its advent, financial exchanges were completed with the end product already in hand (for example, gold exchanged for a certain amount of grain, or grain for eggs). Currency became the primary source of finance instead of a mere representation of ‘true’ finance; based on currency, interest rates and the need for people to store their wealth away safely, banks were conceived and have persevered until now. It is still to accomplish these basic financial goals that banks exists today and are virtually indispensable to companies, governments and individuals (De Macedo et al 88). Evolution of Banking and Financial Control Today, banks exist as financial centres in that they are payment agents, debt collectors, lenders and borrowers. Banks collect individual and company money in what is technically a borrowing agreement on the part of the bank; the money is then used to invest in various industries and may be collected by the lender (the customer) at any time. Similarly, customers can borrow money from the bank on the stipulation that they agree to pay interest on top of the borrowed amount. Customers can ask their bank to pay bills from the credit amount in their accounts, or they can negotiate credit lines and retirement savings funds if they wish. This basic modern method of banking is generally credited to the influence of the London Royal Exchange, founded in 1565 (Michie 134). The Royal Exchange was responsible for the evolution of the term banker, but also for a now defunct hierarchy among the moneylenders themselves, determined by the customers they dealt with. The top moneylenders dealt with heads of State, while the next ranking dealt with city officials; the bottom rung of moneylenders were responsible for dealing with the general public in what are still known as pawn shops. Here, items of varying values could be exchanged for hard currency and acted as a sort of storehouse for personal valuables in many cases (Smith 820). Although pawn shops still exist today, they are not financially on par with the abilities of a bank; banks have extended their services and financial influences to all classes of society, all businesses and virtually any person or organization that deals with money in any way (Bogart 238). In the later 17th century, the financial centres of Western Europe were Amsterdam, London and Hamburg (Sayers 305-306); people would gather in these cities to await cargo ships, sometimes from faraway countries like India, and purchase goods directly off the boat. To do this, people would buy currency vouchers from the banks and use these to trade for the shipped goods; the prices were always fluctuating because of irregularity in schedules and an element of surprise in the actual goods that had been delivered (Fleet 50). Up until this point, financial control and banks functioned under State control where once they had been governed by the Church; in the century that followed, however, Capitalist economic systems would see that financial control was less strictly controlled by banks and was placed in the hands of individuals and, above all, businesses (Wellisch 20-24). Aside from opening up financial supply control to active businesses nationwide, capitalism also meant that the economy was more open to foreign investment (Robinson 67). Because of this change in economic structure, it became possible not only for the individuals of a country to have more influence over the nation cash flow, but foreign investors allowed for further economic growth and the establishment of an international market economy that was actually dependent on centralised banking (Maxfield 163). Now as a consequence of years of Capitalism we see a banking system that largely influences financial transactions however that is not fully in control of them. Other Factors of Financial Control Aside from banking institutions, which include retail, investment, combination or regional organisations like Islamic banks, the control over money supply in any modern country is also affected by personal finance, foreign investment and by large companies and corporations (Khorshid 15-16). Although personal banking seems like a small factor in comparison to the economy of an entire region or country, the fact is that the investment choices of the individual are cumulative and they do have a lasting impact on national finance and economy (Kwok et al). Bank account holders have the option of using their money, or their credit lines, to invest in companies of their choice in either the hope of financial gain or the further development of a product or foreign economy. Personal expenditure such as this does not have to occur based on bank permission, and although many investment options are made available through the bank there is no way for a bank to control the investments of its individual customers. Through personal choice, individual account holders are responsible for the supply of money to other countries, to specific businesses and even to political parties. Although the account holder has no way to restrict the investments of the bank they use, they do have the ability to make personal investments in any way they see fit (Butters and Bollinger 290). These smaller amounts of money account for a fittingly small influence over the national money supply chain, however personal finance does have an impact overall. Foreign investment is a significantly larger factor in the money supply, and although banks are issued in the transfer of money they, again, do not have the ability to choose the investments. Foreign businesses and even governments can show specific interest in other local economies that currently lie outside their sphere of political and economic influence; to integrate one economy with another requires significant investment on the part of one country into another (Rothgeb 101). Through foreign direct investment, the creation of trans-national corporations is possible whereby a parent company creates or takes over an existing company in another country (Bowman 64). Funds from the corporation are channelled to the country of the parent company and investor; aside from any expenses on location including wage payments. Essentially, since like personal finance, foreign investment is controlled by the whims of individuals or individual companies and not by the interests of any banks involved, this practise accounts for a large portion of non-bank financial control. On a national level, the financial investments and other transactions by businesses and large corporations have arguably the most influence over money supply after the banks themselves (Ferran 134). The reason for this is, as with the decentralisation of finance in the 18th century, Capitalism (Keezer et al 141). Businesses run in Capitalist countries work under very little government control and therefore are able to spend and earn freely. It is large companies with equally large incomes that have money available for investment, often to the same degree as do banks. These large amounts of money might be used to invest in foreign economies, in local small businesses or any number of industries; aside from straight forward investments, however, corporations are often approached by non-profit organisations for purposes of sponsorship (Moingeon and Suenen 134). Unlike banks, corporations are capable of large cash donations to organisations they feel are worthwhile or economically viable in the long run. While a bank can issue large loans out that must be repaid with interest, a corporation may often choose to offer free financial support to any number of people, institutions or organisations such as universities or environmental protection agencies. Not only is it good publicity for the corporation, but the receiving organisation gets the funds required to continue its services or research. Conclusion When what we would recognise as a bank was first created, it was maintained first by the Church and later by the government or ruling monarch. Tight control was maintained over the money supply in this way, however with the onslaught of Capitalism that control would be lost to personal financing, foreign investment and the huge influence of businesses and large corporations. Money supply is governed by many factors now, however the bank remains the financial centre for individuals, businesses and governments alike. References Bogart, Ernest L. Economic History of Europe, 1760-1939. London: Longmans, Green and Co., 1942. Bowman, Scott. The Modern Corporation and American Political Thought: Law, Power, and Ideology. University Park, PA: Pennsylvania State University Press, 1996. Butler, Brian, Butler, David and Isaacs, Alan (eds.). 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Westport, CT: Praeger Publishers, 1996. Sayers, R.S. Banking in Western Europe. Oxford, England: Clarendon Press, 1962. Smith, Roy C. and Walter, Ingo. Global Banking. New York: Oxford University Press, 1997. Read More