Posted: August 11th, 2010 by Gadget42
Several of my friends insert the two letters “st” in the middle of the word, to express the view that bankers make up a large, organized criminal class. Here, I’ll follow the principle that people are innocent until proven guilty, and check some of the evidence, but meanwhile leave those letters out.
At root, a bank means a safe place to keep cash. All who are engaged in trade, including the many who sell their labor by the month, have to manage a cash flow; chunks of it come in, other chunks go out, and there has to be some way to manage it all while keeping a “float.” (And yes, also while keeping afloat.) Cash management differs from investing or saving; if one can set a little aside for rainy days as people did before government sold the fiction that the Nanny State would take care of all that, such money is often not touched from one quarter to the next; it sits there doing useful work as capital for productive enterprises, while yielding interest and growing into a nice nest egg for retirement. That was how things worked, before government ruined it all; it’s how the American economy grew so strong.
Cash can be kept under the mattress, but then (a) any burglar knows where to look first and (b) how does one pay creditors who are distant? Those are the kinds of problem to which bankers brought solutions.
Those solutions ought not to be undervalued. First came the bank draft and letter of credit, then came the check. The deal is simple: leave your cash float with us, and you can order transfer to any payee you wish, anywhere, and it will be done within (usually) two days. And it’s done free! Think about it, that’s a pretty amazing service–yet we’ve taken it for granted for a century or so. The cash is safe, yet moves very easily upon command. It’s as safe, at least, as the bank where it’s deposited; if that should be robbed or mismanaged, there’s a potential problem, but that’s what insurance is for.
Then later, in the 1960s I recall, came the credit card and later yet, the debit card. There were a few missteps when the former was invented; some banks were so eager to get them used that they mailed out thousands of them, to anyone with a bank account and a pulse. That widespread invitation to dishonesty has not been repeated. There were a few pious protests from pulpits; one Methodist I remember thundered that civilization would crumble when people lived on such ubiquitous credit; he was about right, but half a century too early and inaccurate in his target. The credit card per se did not produce the current meltdown; government printing presses were needed for that, and pulpits seldom shake to the sound of anti-government preaching. It can undermine one’s 501(c)(3) status.
On the contrary, the credit card restored some balance to the community. Previously, everyone working in a job expended his labor (for a week, two weeks or a month) without pay, and then got paid in arrears. In effect, he was lending value to his employer. By using a credit card, however, he could spend the money he was earning (but had not yet been paid) at once, instead; employers could still enjoy the loan of the value of his labor, but he no longer needed to be the one lending. He was restored rather closely to a daily cash basis, being neither a lender nor a borrower, because for one month (or 25 days, depending on the card’s terms) he could spend his money, using the card, free of interest! When we think about it, that’s really some trick, an amazing deal.
Bankers deliver many other goodies, at low or zero charge. Those plastic cards can be used anywhere, worldwide! – another amazing feat. Then there are travelers’ checks, without which it’s said to be unwise to leave home; sign one upon purchase, then sign it again anywhere in the world upon cashing it and the money is there, in any form locally preferred. The risk of loss is even borne by the banker. These are all very valuable conveniences. It would be feasible to carry enough gold in a money belt to fund a foreign tour, yes; but suppose some malefactor nicks the belt while one swims off the Costa del Sol? Suppose one runs short; how does one pay for that last, romantic restaurant meal? Suppose one succumbs to an impulse to buy a Lamborghini and ship it home from Italy? – few belts are that thick. Yet your friendly local banker, perhaps after a phone call or two, can arrange the needed credit. All he asks is that you keep your cash in his safe–and that if you want a loan, prove that you don’t really need it.
So far, I’d say, pretty good; and we’ve not even considered the value of bankers to business, moving much larger sums across the world at a button’s touch and converting one government fiat currency to another at the market rate that instant. So let’s allow that bankers are useful, enabling the wheels of commerce and consumption to spin.
The Flip Side
There is one, first because bankers are not philanthropists but businessmen, motivated by profit, and nobody here should question that. Consider the credit card. Pay within the 25-day “grace period” and the user is not charged interest, true; but the retailer is charged a fee. That fee may be worth it, to him, because by making a purchase easier he can expect more purchases to be made; but once almost everyone uses such cards, equilibrium is restored and the level of trade is the same, other things being equal, so who gains and loses? – the banker gains his 2% or 3%, the retailer passes on that extra expense to the customer as higher prices, so all that happened, net, is that we are all paying a little more for what we buy, in exchange for the convenience of buying it with plastic; and some of that increase is going to the banker in profits, for providing it. Is that a good bargain? Maybe. Put that way (and it’s accurate) it’s less obvious. Above, I said that the monthly-paid employee was being enabled to spend sooner than if he had to wait for pay-day–but now we see that it wasn’t free, after all.