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"It's A Wonderful Life" and the Financial Services Industry:
Over at Money Law, Marie Reilly has an interesting post on the movie "It's A Wonderful Life" (click on link to view) and the history of the financial services industry. An excerpt:
  At the beginning of the 19th century, there was no banking as we know it. Rich people needed safekeeping services to store gold or other forms of wealth, and banks provided secure vaults. The first depositary savings bank is thought to be the Philadelphia Savings Fund Society, established in December of 1816. It launched an industry that profoundly changed the American economy.
  Savings and loans emerged as small businesses that accepted cash deposits from customers and made loans to borrowers in the community. During the nineteenth century, as urbanization and wage income grew, savings and loans encouraged wage earners to save. They replaced extended family as a source of capital. And all in the nick of time to finance the rapidly growing consumer sector. A wage earner needed finance to acquire the "American Dream" consisting of big ticket items like a home and a car. The connection between savings and loans and the emerging consumer middle class was more than skin deep. As a regulatory matter, savings and loans were "of the people" in a way that banks were not. Depositors controlled the investment strategy deployed by savings and loan management. In contrast, equity investors, usually with no connection to the deposit community (e.g., Mr. Potter), controlled the management of banks.
Chris Bell (mail) (www):
...a distinction largely preserved today in the Credit Union / Bank distinction.
12.22.2007 6:15pm
A. Zarkov (mail):
"At the beginning of the 19th century, there was no banking as we know it."

The Italians can claim the oldest bank in the world, Monte dei Paschi of Siena (1472). They even gave us the word for bank, banco, literally a bench. When one of these went insolvent, the bench was ceremoniously broken, or bancorupto from which we get our modern word, bankrupt. These early banks had many features we associate with modern banking: double entry bookkeeping, letters of credit, and book entry for money thereby eliminating the need to physically transport precious metal. The Medici bank facilitated trade between London and Venice by providing foreign exchange conversion and the assumption of risk. They charged fees for these services, but not a discounted basis because the Catholic Church forbade the charging of interest. In modern parlance they did forward contracts. They also provided insurance for shipping.

I don't really see how anyone can say there was no banking before the 19th with the most literal use of the phrase "as we know it."

Pop quiz on banking. State the difference between a commercial bank and an investment bank in one short concise sentence. Extra credit for comments on the repeal of the Glass-Steagall Act.
12.22.2007 7:08pm
Curt Fischer:

I don't really see how anyone can say there was no banking before the 19th with the most literal use of the phrase "as we know it."


Perhaps you are letting your expertise on financial and legal matters cloud your perception of "we"? I have no such expertise, and I thought of banks as a place where you go deposit your money and start checking accounts. And, if I wanted to buy a house, I would probably go to a bank to get a loan. Did that kind of consumer banking exist prior to the 19th century?

Plus, although I can't really justify it, when I read the full post on Money Law, I somehow assumed that the discussion was limited to America.


Pop quiz on banking. State the difference between a commercial bank and an investment bank in one short concise sentence.


Tradition.


Extra credit for comments on the repeal of the Glass-Steagall Act.


Thanks for the hint; made for interesting Googling and led to my *guess* above.
12.22.2007 8:33pm
byomtov (mail):
While it's true that there was no widespread consumer banking until relatively recently, Zarkov is correct (it hurts to write that) that banks offering commercial banking services have been in existence for many centuries.

It is interesting how old many financial innovations are. There were futures markets in Lisbon in the 14th century, IIRC.
12.22.2007 10:16pm
A. Zarkov (mail):
"And, if I wanted to buy a house, I would probably go to a bank to get a loan."

I think the 15 or 30 year fully amortized loan at a fixed interest rate started in the 20th Century. But I've heard that ancient Rome had mortgages of some kind.

"State the difference between a commercial bank and an investment bank in one short concise sentence.

Tradition."


Not quite. There are many answers, but the one I like is: commercial banks assume credit risk, while investment banks assume market risk. However the use of derivatives has really blurred that distinction. With the repeal of Glass-Steagall, the two kinds of banks are now free to play in each other's sandbox. The problem here is that a commercial bank will sometimes make a bad loan as a bribe to get the more lucrative investment banking business. The deregulation of the financial services industry has allowed the pre 1930s abuses to come back.
12.22.2007 11:57pm
Apep (mail):
There were quasi-consumer banks, they just never became widespread, as you appear to have noted. The most important point about banking is that it has never been limited to a certain locale. On those unhappy occasions when it has been, it usually fails. Thus, the history of banking is typically international in scope.
12.23.2007 11:49am