Before we discuss the money systems prevailing over most of the past millennium, let’s make the distinction between a money system and a financial system. Nearly all money systems today are entangled with banking and finance. So, it’s worth spending a few pages to be clear about what are the functions of banking-finance, and what are monetary functions.
The money system is about what will be money – What money system will be used? Who creates and extinguishes money? What will be the token? How will it be created? Who will give the money of choice the imprimatur of trust and stability. Who will put it in and take it out of an economy? How will they do that?
Banking, on the other hand, is about financial services: safe storage of your money, secure transfer services, keeping accounts of all the transfers, serving as an intermediary between savers and borrowers, and investment packaging. It is helpful to keep banking and monetary functions distinct, because the service of money creation and the bank services do not need to be provided by the same entity in a system. That’s just the current choice we have made.
A basic deposit bank fills several functions.
A bank takes deposits and stores your money for you. Typically you have two basic choices: a checking, or transaction account, or some kind of long-term savings like a certificate of deposit (CD). In a transaction account your money is available on demand. In a CD, you commit to letting the bank keep your money for a specified period of time. A bank keeps accounts of the money you have stored.
A bank transfers your money for you when you buy or sell and provides security for these transfers. You write a check, use a debit card, or give online instructions, and the bank takes care of transferring money from your account to the seller’s account, no matter where the seller banks. A bank keeps records of your transfers in and out of your account.
The bank takes money from savers and loans it to borrowers. When you put your money into long-term savings (a CD), you are loaning your money to the bank, knowing it will turn around and loan it out to someone else as an investment and share the profits with you. The bank’s role is due diligence: appraising risk and credit worthiness. These bank loans earn interest for the bank and the saver.
A traditional investment bank fills another function.
Intermediary for investors and investments
An investment bank gathers funds from those who have money to invest, and invests in new enterprises that carry varying levels of risk. The investment bank’s job is due diligence in researching and reporting the level of risk, and in matching investors with appropriate levels of risk.
And, just like money system options, either of these banking options can be privately owned or government owned, unregulated or regulated – depending on the values of the community choosing them.