Why Banking?

April 2, 2010

Why Banking?

Metal coins are convenient, but there is always the risk of theft. Storing gold and silver safely is a problem. Long ago goldsmiths and silversmiths needed to safely store gold and silver for their production of jewelry, tableware, etc. They found it profitable to store other people’s money as well, for a small fee. They would give the depositor of the money a receipt, a claim check with which he could reclaim his money at any time.

These receipts were soon circulating in the economy in place of coins. In time the receipts evolved into banknotes of fixed value which could be redeemed for, say, a pound of silver or an ounce of gold. Gradually the goldsmiths and silversmiths became bankers.

Banknotes were more convenient to carry than coins. Since then banks have developed other ways to facilitate payments, by check, debit and credit card, and electronic transfer of money. Banks act as go-betweens to lend the deposits of savers to borrowers.  Thus banking added another level of convenience to the use of money. Unfortunately, and perhaps unintentionally, their lending business developed into a form of counterfeiting. I’ve already covered that subject in previous blogs.

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