Development of banknotes

21 Feb

Development of banknotes

Although the Bank of England is generally credited with issuing the first widely circulated banknotes in the Western world, the Stockholms Banco (Bank of Stockholm, founded in 1656 and the predecessor of the current Bank of Sweden) is known to have issued banknotes several decades before the Bank of England’s establishment in 1694, and some authorities claim that notes issued by the Casa di San Giorgio (Bank of Genoa, founded in 1407), although payable only in Italy, were widely circulated in the Western world. Paper money has a longer history in Asia, with its earliest known usage in China in the 9th century, when merchants’ “flying money,” a kind of draught or bill of trade, was eventually turned into government-issued fiat money. The government abused this new financial tool as a result of the 12th-century Tatar war, and China won credit not just for the world’s first paper money but also for the world’s first known episode of hyperinflation. Following a series of similar incidents, the Chinese government ceased printing paper money and delegated the task to private bankers. China had evolved a unique and, by many accounts, successful bank money system by the late nineteenth century, consisting of paper notes issued by unregulated local banks and payable in copper currency. However, in the early twentieth century, the system was damaged, first by government demands on banks, and then by the decision to centralise and nationalise China’s paper currency system.

The creation of bank money boosted bankers’ capacity to provide credit by reducing the number of times their customers needed to withdraw money. With the rising usage of bank money, bankers were able to take advantage of the law of large numbers, which enabled withdrawals to be countered by new deposits. Banks were restricted from providing credit beyond their means by market competition, and each bank held up cash reserves, not just to satisfy occasional coin withdrawals but also to pay interbank accounts. It became standard practise for such notes or checks to be cleared (that is, returned to their sources) on a regular (usually daily) basis, with the net amounts due being settled in coin or bullion; it became a standard practise for such notes or checks to be cleared (that is, returned to their sources) on a regular (usually daily) basis. Beginning in the late 18th century, bankers discovered that setting up clearinghouses in major cities to manage nonlocal bank money clearings and settlements allowed them to take advantage of more opportunities for “netting out” offsetting items, that is, offsetting gross credits with gross debits, leaving net dues to be settled with specie alone (coin money). Clearinghouses foreshadowed modern organisations like clearing banks, computerised clearinghouses, and the Bank for International Settlements. Other financial developments, such as the introduction of bailment and bank money, improved transaction efficiency and aided the industrialization process. Indeed, many economists, beginning with Scottish philosopher Adam Smith, have credited banks with playing a critical role in boosting industrialisation.

But thanks to technology, we barely have to even use banknotes these days and most people prefer going cashless, so hop on the wagon and start to use internet banking services Malaysia.

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