Samuel Pepys kept his money in gold bars and buried it in the back garden when the Great Fire of London threatened his house in 1666. It is generally supposed that the advent of modern banking, by allowing consumers to keep their money in a safe place without charges, has greatly increased the efficiency and reduced the costs of the economy. Yet a combination of “funny money†monetary policies and the aggressive marketing and pricing strategies of the major banks bring this central function of banking into increasing question. Pepys’ gold bars look increasingly attractive, and not just as an inflation hedge.
There appear to be two factors driving the banks’ move towards ever more inventive fee systems. One is the attempt to boost the profitability of consumer banking through aggressive marketing. The recent Wells Fargo scandal, in which 5,300 consumer bankers have been fired for opening accounts for customers who had not requested them, and a $185 million fine imposed on Wells Fargo appears to be only the tip of the iceberg.
My own local bank has just been taken over by a large regional bank, Keybank, which has announced that it will impose charges on inactive accounts, thus forcing account-holders to pay to store their money with it. Needless say I shall withdraw my modest account, and find another bank that treats my hard-earned money with proper respect.
Providing a safe home for depositors’ money is the central function of banking. In return the bank is able to use that money for profitable but only moderately risky loans and investments. Keynesian theorists who regard the central function of banks as providing loans have it exactly back to front. Providing loans is an ancillary function of banks, that can lead to profits but is secondary to their function as a safe haven for deposits. The stimulus to the economy from loan provision is very limited compared to the stimulus from providing the safe haven.
As for services, they are mere add-ons to the other functions of banks, and should not be allowed to govern the institution’s strategy or operations. The focus on marketing that modern banks have acquired, and the modern economists’ focus on bank lending as the be-all and end-all of a successful economy are both wrong. After all, most bank loans are to unproductive sectors such as the government or housing, hence add very little economic value.
