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TeachMeFinance.com historic definition... Banking -- Banking is a business which seems to be as old
as civilization. Money lenders and the payment of usury are
mentioned in the Bible and in other ancient literature, but
banking in its modern acceptation is by many believed to be an
evolution that has been the natural outgrowth of industrial
development and the establishment of civic order.
Not many centuries ago each man was in a large degree his
own defender and protector. To narrow the illustration to
London, for instance: To travel in safety in the streets of that
city after nightfall it was necessary to go armed and in company.
The carrying of valuables was an extra invitation to
attack. Goldsmiths, who of necessity had to keep on hand
large stocks of the precious metals, took special precautions
for the safe keeping of their property and people acquired the
habit of depositing money with them, paying for the privilege
in order to secure the increased protection. Gradually the goldsmiths learned that all the people who
had so deposited money did not call for it at once and
they began to lend out the surplus on their own authority.
They found also that if a man wanted to discharge a debt he
found it more convenient to give his creditor an order for the
money on deposit than to come in person and carry away the
gold, imposing upon the creditor the necessity of returning the
gold for deposit in his name.
Thus, the system of a transfer of credits by means of checks
grew up. It was not only safer, but more convenient. In
making loans, likewise, the goldsmith, now become a banker,
learned merely to put the loan on his books as a credit to the
borrower, against which the latter could draw his order or
check precisely as if he had deposited the actual money; or
the goldsmith gave his own note or promise to pay to the
borrower. The latter passed it on and it became a circulating
medium wherever the credit of the goldsmith was good.
Modern banking is simply a development of this system.
The function of a modern bank is to accept for safe keeping
and make legitimate use of the money of its customers. This
money and its own paid-in capital it makes the basis of loans,
on which it charges interest in accordance with the laws under
which it is chartered. These loans may take the form of actual
money, but as a rule they are merely credits against which the
borrower is privileged to draw. They are entered on the
books of the banks as "deposits." In 'practice these "loans"
and "deposits" have been found so nearly to counterbalance
each other that only a small percentage of actual money is
required to transact the larger affairs of business.
In retail transactions, for the payment of employees, and in
small daily affairs of life actual money is used, but for all other
business the transfer of credits by means of bank checks and
bills of exchange is the universal rule. In other words, banks
have become the principal mechanism of exchange. To what
an extent bank checks have supplemented actual money as a
medium of exchange, thus making possible the wonderful business
activity of the present day, can best be judged by studying
the figures of the operations of the various clearing houses
and the relation which the actual money in the vaults of the
banks bears to the total transactions recorded.
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Copyright © 2007 by Mark McCracken, All Rights Reserved. 
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