Networks - From The Silk Road, Knights Templar to Wires

In our first two episodes, we traced the evolution from the barter system to commodity money, and from coins to paper currency. We also demystified the foundational aspects of payments, clarifying terms like currency, legal tender, and the concept of money itself.

Today's episode takes a slightly different route. We're shifting
our focus from coins and traditional money to concentrate on the networks that
underpinned their use. When we mention networks, we're not referring to the
internet. Instead, we're talking about ancient, pivotal networks that played a
significant role in shaping the world of payments as we understand it today.
It's easy to view payments as a linear progression, but the historical networks
were the real catalysts for change.

We're about to embark on a thrilling journey back in time, exploring the Silk Road, following the footsteps of the Knights Templar, and understanding the impact of the telegraph on wire payments. All of this is to gain a deeper understanding of the rich and intricate early history of payments. So, fasten your seatbelts and prepare for an exciting ride.......

Any questions / comments please let me know at bitesizepayments@gmail.com

Cheers

Paul

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Financial Technology Education

Transcript

SPEAKER_00: 0:00

Hello, dear listeners, and welcome back to Bite Size Payments, the podcast where I delve into the history of payments, how they work, and of course, who does what. In our first two episodes, we traced the evolution from the barter system to commodity money and from coins to paper currency. We also demystified even the foundational aspects of payments, clarifying terms like currency, legal tender, and the concept of money itself. In today's episode, I'm going to take a slightly different route. We're going to shift our focus from coins and traditional money to concentrate on the networks that underpin their use. When we mention networks, we're not referring to the internet. Instead, we're talking about the ancient pivotal networks that played a significant role in shaping the world of payments, as we understand it today. It's easy to view payments as a linear progression, but historical networks were the real catalysts for change. We're about to embark on a thrilling journey back in time, exploring the Silk Road, following the footsteps of the Knights Templar, and understanding the impact of the telegraph on wire payments. All this to gain a deeper understanding of the rich and intricate early history of payments. So fasten your safety belts, prepare for an exciting ride. I'm your host, Paul Tamala. I invite you to join me on this historical journey. If I were to ask you about networks, you might immediately think of your social circle, professional colleagues, or even the technology infrastructure that supports your home or office. But what exactly are networks? Well, at the core, networks are points of interaction between people and things. While a Google search might primarily yield results about computer networks, the concept of networks predates computer technology completely. They originally refer to the connection between people, as I say, objects, and of course, their knowledge. You might have heard of the term network effect, a fascinating concept, particularly relevant to platform-based businesses of today. The network effect effectively describes a phenomenon where the value of a service or product increases as more people use it. The internet is a prime example of this, of course. Modern platforms like Uber and Amazon are associated completely with this concept. However, it's crucial to remember that networks have always played a significant role in our society, even before these modern platforms existed. In this discussion, I'll focus on three examples of networks that have been instrumental in driving change, particularly from a payments point of view. Trade networks, for instance, have always opened up exciting opportunities, introducing exotic goods and services from far-flung places. A prime example of such a network is the Silk Road, which not only revolutionized trade, but it also necessitated the development of new payment systems and extending these payment systems. Now, let's go on a little walk down the Silk Road. The Silk Road was the equivalent of a modern superhighway in its time. While we often marvel at the internet and its transformative effects, the Silk Road was arguably even more impactful. This extensive network connected the East to the West, promoting trade and cultural interaction. Its name derives from the profitable silk trade that began during China's Hang Dynasty around 207 BCE. and continued until 220 CE. However, the Silk Road was more than just a pathway for silk. It was a bustling marketplace that transported a variety of goods, including spices, grains, fruits, vegetables, livestock, precious metals and gemstones. But beyond the tangible commodities, the Silk Road served as a channel for the exchange of art, religion, technology, language and even diseases. Consider the payment methods for all the goods that traversed the Silk Road. They weren't just limited to cash or coins. The Silk Road saw a diverse mix of bartering, commodity money, local currencies, bills of exchange, and even the early stages of banking and credit systems. The Silk Road played a significant role in spreading and standardizing money, including coinage, of course. As merchants journeyed across vast distances, bartering became less practical. leading to the rise in the use of portable, standardised forms of money. Transporting large sums of money over long distances was fraught with risks. To mitigate these, safer methods to facilitate larger transactions were developed, paving the way for banking systems, credit and financial instruments like bills of exchange. The Silk Road also contributed to the spread of paper money. It's convenient, particularly for large transactions and long-distance trading. and it led to its widespread adoption across various regions. But that's not all. The Silk Road also fostered economic independence among distant regions, promoting a rudimentary form of foreign exchange. Beyond just the goods, the Silk Road facilitated the exchange of ideas, influencing modern banking, trade, and payment systems. In essence, this ancient network of necessitated and facilitated the evolution of payment systems, many of which we still benefit from today. The legacy of the Silk Road extends from the food on our tables to the economic systems we operate within. The Silk Road is a major force, a major network, and its network effect is one of the byproducts of how money and payments became so widespread. Okay, so... That was the Silk Road. Now let's turn our attention to something different. It's still a network, still the network concept, but a very different one. Let's talk about the Knights Templar. Now, of course, you've heard of the Knights Templar, whether it's through films, Dan Brown's books, or of course, in my case, because of Monty Python. Anyway, let's talk about the Knights Templar. So the Knights Templar, well, it means so many things to so many people, but let's transport ourselves back to medieval times as we unravel the contributions of the Knights Templar to the early development of financial services, including the precursor of modern day correspondent banking. Who would have thought that? Founded around 1119, the Knights Templar, a medieval Christian military order, if that's even such a thing, had a profound impact on banking practices. Although they didn't invent correspondent banking in the form that we know today, they did lay the groundwork for its evolution, creating a system for the safe and efficient transfer of funds. During the Crusades, the Knights Templar accumulated significant wealth and influence. They set up a network of administrative centers across Europe and the Holy Lands, which played a crucial role in moving resources, troops, and of course, pilgrims themselves. One of the remarkable innovations was a system that allowed a pilgrim journeying to the Holy Lands to deposit funds in a Templar commandery in their homeland, and in return, receive a letter of credit. This letter of credit could then be presented at another commandery in the Holy Lands or elsewhere, enabling the pilgrim to withdraw their funds. This ingenious system minimized the risk of theft or loss during travel and streamlined financial transactions. Now, I don't really want to go into the details of what the Knights Templar did or didn't do, which battles they won, whether they were backed by the Pope and all those wonderful things. That's not the point. The point is that there was a network effect because of the travel requirements of the pilgrims to and from the Holy Lands, and perhaps moreover, not having to take big, heavy lumps of cash, which signposted to thieves that they could be robbed. They created this network to circumvent that, to make it safe, and to create this letter of credit methodology. So they created these commanderies. They kept safeguards of funds. They created letter of credits. They created currency exchange. And, of course, they created this concept of a loan and credit. Now, it's also true to say that the Knights Templar were so large and so powerful that, in fact, they were, for a great deal of their time, managing money. the wealth of several countries as well. So this is a very, very powerful network. Now, while the Knights Templar's financial systems weren't exactly the same as modern banking and payment systems, their innovations did lay the groundwork of the practices which we now would recognize in the banking industry. So the Knights Templar effectively created the concept of tokenization of money They created the concept of having a branch and a withdrawal system. They created much of the infrastructure because they were dealing with such vast amounts of money, typically for countries and what have you. So yet another layer created because of the network and the network effect brought change. Now we have a lot of infrastructure in place because of the Silk Road and because of what the Knights Templar gave us. So what next? Well, what next is something probably somewhat closer to home. So now let's switch to something, as I say, a little bit closer to home, the rise of the telegraph. So that's a network that we can kind of recognize. It's like a precursor in many ways to the Internet. Wire transfers as we know them today emerged from the invention and evolution of the telegraph system in the mid-19th century. And it began in 1844 when Samuel Morse successfully transmitted a message. I don't think it was do-do-do-do-da-da-da-dee-dee-dee. Or was that a police song? Or was it SOS? I'm not sure. Anyway, it could be both, I suppose. Anyway, he managed to transmit the message between Baltimore and Washington, marking a milestone in long-distance communication. The telegraph system's ability to transmit messages quickly across vast distances sparked the idea of leveraging this network for financial transactions as well. Western Union, a prominent player in the telegraph industry, recognized the potential and introduced the concept of money by wire in the late 19th century. This innovation enabled individuals to send money from one telegraph office to another, giving birth to wire systems. or wire transfers, I should say. The introduction of wire payments addressed the need for reliable and secure methods to transfer funds over long distances. Traditional methods like physically transporting cash or cheques were slow and carried various risks. Wire transfers provided then a fast and more secure alternative, enabling individuals and businesses to send money and settle financial obligations across regions. Moreover, the establishment of a centralized banking system such as the Federal Reserve in the United States played a crucial role in advancing wire transfers. In 1918, the Federal Reserve introduced the Fed Wire Fund Service, a real-time gross settlement system. This was groundbreaking and allowed member banks to electronically transfer funds in real time. The Fed Wire Funds Transfer streamlined the wire transfer process and set a new standard for efficient financial transactions. The introduction then of wire transfers really revolutionized the way that money was moved, facilitating economic growth and trade. While the term wire transfer is extraordinarily common in the United States, different terms were used in different regions. In Europe, countries like the UK, France, Germany, all adopted similar but specifically different systems for their countries. The telegraph system introduced a new form of network, an electronic network for payments, and it laid the foundation for the payment systems that we rely upon today. So three different types of stories all about networks and those networks and how they brought about massive change in the way we can trade, the massive changes, therefore, that we needed to make in payments. The Silk Road allowed us to trade over long distances and all that demanded. Knights Templar brought their administration, their tokenization of payments, letters of credit, security, etc. Then another type of network, one more akin to what we have today, the development of the telegraph, bringing electronic payments and effectively doing away with the need to transport cash. Again, Really not very dissimilar to the way we are today and all that that brings with the platformification of payment story. And again, that's another theme for another day. They all introduced different levels of infrastructure, whether it was the Silk Road, the Knights Templar or the wires. They introduced different levels of administration infrastructure. different levels that we could leverage. So now effectively we have a central infrastructure, we have branch networks, we have currency, we don't even need to physically move money around. But the key thing here is the network or the networks. And that's really what I wanted to get across in this podcast today. Because without these networks, we'd be nowhere. Without the networks and the infrastructure that each had to build, we wouldn't be able to have what we have today. These endpoints allow transactions to be processed, and today we can send payments just about anywhere, sanctions allowing. But it wasn't always so, and I hope that these examples have started to show how these layers have built up. We now have networks all over the place, and arguably too many, but again, that's for another podcast. But we also need to remember that banks have their own branches, their networks. And when they're joined up, those networks can join up around the world and we can move money anywhere we like. I hope through the course of the podcast and these three stories, I've been able to explain just how important the layers that they brought are and just how important networks are to payments. So let's call it a wrap for networks for now anyway. In the next podcast, I'm going to briefly introduce the various stakeholders, banks, merchants, processors, regulators, central banks, et cetera, and explain hopefully what they do and how the payment flows between all of them. But before I go, if there are any questions, anything you'd like me to clarify or go into more detail on, please do get in touch with me via bytesizepayments at gmail.com. Just before we I go, if I could ask one favor of you, that favor would be, if you've enjoyed the podcast, please tell a friend. Because word of mouth and your personal recommendation is by far and away to get the message out. It is by far and away the best network after all. Thanks very much indeed. Cheers.