Let’s Start a Bank

About this programme by Peter Day

Banking is a bit of a mystery, and that’s how bankers like it. One of the starting points of banking was when people in a physical sort of business, such as 16th century gold merchants, realised that there was business to be done by lending stuff rather than selling it.

They discovered that bits of paper backed by guaranteed assets tucked away in a vault could as potent as the gold itself in making other transactions possible.

And then they discovered that creditors seldom asked for their money deposits or gold back all at the same time. They could lend more than they had on deposit, in other words. The banking mystery had begun.

Except that from time to time all the creditors did come in to demand their money back. And if the money wasn’t there, this created a run on the bank. This happened periodically, but just irregularly enough for banks to be regarded as sound most of the time.

And so the mystery spread. With the coming of the industrial age, banks financed businesses... and banks were created by businesses who threw off surplus cash and lent it out in local communities.

Waiting

But it took a long time for banks to discover quite how popular loans could be. Even in the USA the credit card was a post WW2 invention; it did not come to other places until the 1960s.

Then - in the words of the Access card advertisement in Britain - it promised to “Take the Waiting out of Wanting”, stepping over what had been a significant psychological threshold in the public attitude to borrowing.

Germany took decades longer to take to consumer credit. One reason Europe has a hefty 500 euro note is that Germans like using cash for large transactions, still being wary of credit cards.

Meanwhile banks were getting bigger and bigger, all over the world, and the old strict distinctions between banks and investment houses and stockbrokers and even insurance companies were breaking down.

Banks began to take their personal customers almost for granted and branch out into huge new international adventures by playing markets with their own money rather than lending out for other people to make businesses with.

Principles

And so many banks - a vital part of the financial system, too important to a national economy to be allowed to fail - transformed themselves into casino gamblers taking huge trading risks to justify the bonuses they were paying to their traders.

And when these huge new entities failed, as they have done over the past two years, they were still deemed to be too big to fail because they were still also banks with public business to be done and a public role to be maintained. Failure would have been the normal way of dealing with gamblers who bet on the wrong horses so ignorantly and consistently.

With this in mind, it may be a good time to think about starting a bank from scratch, built on different (maybe old-fashioned) principles, a bank based on lending and borrowing and financing enterprise and endeavour.

And that thought is the starting point for this programme: let’s start a bank.

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