Wednesday, August 22, 2007

Demand Deposit (5) - Modern Banking

What applies to gold coins applies to all forms of money. I get my salary paid into a bank because I do not want to carry around a whole lot of notes and coins. I put it there for safekeeping. I also use the bank because it provides an easy way of making payments to other people, by cheque or electronic transfer.

I am very clear about one thing. My money belongs to me, even when it is in the bank. I want to be able to spend it whenever I want. My cash in the bank is my asset. It does not belong to the bank. Therefore the bank should not record my cash on its balance sheet as an asset, even if also records a liability to me. My cash does not belong to the bank

This is the heart of the problem with the modern banking system. Banks claim ownership of the cash that has been deposited by their customers. They record this cash as an asset on their balance sheet. They treat the cash as if they owned it. This is problematic because the cash now has two owners. I think that I own it and the bank acts as if it owns it. When two people think they own the same asset, problems always follow.

4 comments:

Ted M. Gossard said...

Ron, Do they do that, or better put, do they rationalize (perhaps) doing that, because they are doing a service in keeping and safeguarding our money (with FDIC, here, protection up to a limit)?

Anonymous said...

Well this is just another of the inconsistancies in America. It is the same with homeownership. You mortage a house and call yourself a home owner.. but the bank owns it in reality, until they get their money.
K.Thomas

Ted M. Gossard said...

You're so right, K. Thomas. Sadly.

RonMcK said...

Ted
Insurance does not change morality. I have contents insurance that covers me for theft, but that does not make theft of things from house morally right. The strange things is that some burglars now justify themselves by saying that its okay to steal from richer people, because they have replacement insurance, so they will end up with new appliances than the ones stolen. Maybe they learnt this twisted logic from the bankers.

The other problem is that that banks do not just record your money as their asset. They also feel free to lend it to someone else. So they cannot say they are safeguarding it.