Every intricacy of modern banking is an attempt to answer a fundamental question posed by capitalism: How do we get strangers to trust one another? Let's say Mary, a mother living in New York, wants to wire $1,000 to her son, David, who is studying abroad in Madrid. Upon order, the U.S. bank immediately debits Mary's account and puts the money on hold at the Federal Reserve, which waits to aggregate hundreds of thousands of daily transactions before sending them in a batch to the European Central Bank. The European Central Bank then dispatches the bundle and schedules the distribution of individual transactions to different local banks. After two to four days, David finds the equivalent of $900 appearing in his local account after the deduction of about 10% in administrative and exchange fees charged by every intermediary in the chain. The last time some real innovation occurred was in 1871, when Western Union—a telegraph company—introduced a proprietary system that achieves near real-time money transfer.
Tan E Guang Eugene (Mr.)
Associate Reseach Fellow
Centre of Excellence for National Security (CENS)
S. Rajaratnam School of International Studies
Nanyang Technological University, Block S4, Level B4, 50 Nanyang Avenue, Singapore 639798
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