Definition of Banking



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.

About the author

Mark McCracken

Author: Mark McCracken is a corporate trainer and author living in Higashi Osaka, Japan. He is the author of thousands of online articles as well as the Business English textbook, "25 Business Skills in English".

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