Economics Made Simple by Madsen Pirie

Author:Madsen Pirie
Language: eng
Format: epub
ISBN: ISBN: 978-0-85719-203-5
Publisher: Harriman House

Banks and finance

In a 1970s’ television commercial for a small town bank, a customer walked into the bank and confronted the manager. “I want to make sure that my money is safe,” demanded the customer. “Can I see it?”

“Of course,” replied the manager with a smile. “Follow me.”

He led the customer to the vault, twiddled the knobs of the combination, and swung open the huge, thick circular door. Beyond it lay not the expected vault packed with banknotes and perhaps gold bars. It led instead into the High Street.

The manager helped the customer through the door and into the street.

“See here,” he said, pointing to a hairdresser’s. “When Joe needed to expand his barber’s shop, we lent him the money to fit out an extra room. And here, when Ellen wanted to extend her diner to add extra tables, we put up the money she needed.”

The manager showed him other local businesses that had been similarly helped, then turned to the surprised customer and said, “So you see, your money is quite safe. It’s working for the community.”

IT MIGHT HAVE ONLY BEEN a TV commercial, but it expressed an important truth, one largely misunderstood by the general public. Banks do indeed have vaults, but they are largely used temporarily for money in transit, rather than for the safe storage of customer deposits. The money was stored instead in the High Street businesses to which it had been lent.

Banks are middle-men who deal in money. Other middle-men bring suppliers and customers together for items such as groceries or tailoring or kitchen appliances, but bankers do it with money. Their function is to act as go-betweens for those who want to invest money and those who want to borrow money.

Banks serve a highly necessary function, and have been with us a long time. Some forms of them are known to have been present in the ancient Persian and Phoenician empires. Their modern form seems to have started in the mediaeval Italian city states, where financiers sat alongside one another on a bench, called a banco, to transact lending and money-changing. The word may be derived from the older Roman word, bancu, giving a long heritage to sitting on benches to talk about money. People doing business have long needed money, and the bank was where they went to obtain it.

The bank is a business; its primary purpose is to make money. Like other middle-men, it does this by providing a convenience that customers think worth paying for. In ordinary High Street banking, called retail banking, the depositors want somewhere to put their money where it will earn something for them, but be safe while it is doing so. Those who want to earn higher returns, and are prepared to take the greater risks that usually accompany the prospect of doing so, go somewhere else; the High Street bank is not generally for them, even though some may offer specialist services to cater for that minority market.

The amount of interest banks pay depends

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