History of Finance

When Columbus discovered the New World in 1492, he found Native Americans who practiced a very simple economy that involved trading or bartering among themselves with the products of their hunting, fishing, or agriculture. However, most of the basic concepts that now make up our modern system of finance were already in existence in other parts of the world.

For example, Mesopotamia was using silver as currency by 2500 BC, and China was printing paper money by 1107. (China also was the first country to find out that printing too much paper money leads to inflation.) The ancient Assyrians used other forms of paper money, such as bills of exchange and promissory notes, which were a forerunner of our modern checks. Mesopotamia and China used futures contracts, in which commodities such as slaves or rice were sold for future delivery. Our modern futures exchange system is thought to be descended from medieval trade fairs in 12th century Venice. Commodities markets existed in Egypt, Arabia, and India as early as 1200 BC. Options contracts have been traced to the ancient Phoenicians, and an early form of a margin transaction to ancient Greece in 300 BC. Insurance, in the form of suretyships, was first mentioned in the Old Testament and was being used extensively by 3000 BC in Babylonia, where it spread to Phoenicia and was transferred to shipping. The concept of annuities can be traced to the ancient Egyptians, Hindus, and Chinese. An early form of banks existed in Athens by the 5th century.

All of these monetary concepts and others eventually came together in what became the United States of America to form one of the most profitable economies in the world. The United States' financial structure is based on a modified capitalist economic system in which the chief means of production (land, labor, and capital) are privately owned, while its products and services are bought and sold in free and competitive markets. Its economic base is a varied mixture of manufacturing, industry, technology, agriculture, and services.

Most financial transactions in the United States are handled through its banking system, which is regulated by both the federal and state governments. Only about 12% of payments in the U. S. are made with cash; the rest are made by checks drawn against bank deposits. Banks also accept deposits and make loans. A variety of other financial institutions, such as credit unions, insurance companies, and investment banks, can also make capital available for businesses as well as state and local governments and the U. S. Treasury. Stocks and bonds are bought and sold on organized stock exchanges, while many more securities are traded in over-the-counter markets.

Most of these institutions, as mentioned earlier, have been in existence in some form since ancient times. Three central national banks were established in the early years of the United States (in 1782, 1791, and 1816), but they all ultimately closed down due to the success of the many state banks that proliferated. Today, there are approximately 8,000 commercial banks that are insured by the Federal Deposit Insurance Corporation (FDIC). The first stock exchange in the United States was formed in 1792 when 24 supply brokers signed an agreement to trade securities on a commission basis outside 68 Wall Street in New York. This gathering re-named itself the New York Stock & Exchange Board in 1817.

Since finance involves many complicated issues, it is not immune to problems, such as inflation (a rise in prices coupled with a decrease in the purchasing power of money, caused by too much money in circulation), recession (an overall decline in the economy caused by a drop in spending, usually lasting about six months to a year), and depression (a more long-term, extreme form of recession).

Inflation has usually occurred in the United States in 15 – 20 year cycles, beginning in colonial times when each colony printed too much of its own currency in order to fund the Revolutionary War. The United States has also experienced several periods of depression, such as the five years following the Panic of 1837 and the Long Depression of 1873 – 96, but its worst was the worldwide Great Depression of the 1930s, which began in the United States after the collapse of its stock exchange in the Wall Street Crash of 1929. As for recessions, the United States is currently emerging from the Great Recession of 2008-2009 which, like the Panic of 1837, was sparked by speculative fever during a real estate bubble.

With an estimated five million people employed in it and more than 500 educational institutions in America educating students in business management or finance programs, the finance industry in the U. S. will hopefully emerge from the current crisis even stronger.