As expected, the UK’s Independent Commission has provided a thorough analysis of the deficiencies of the banking system and of proposals for reform. It plunges straight into the current debate, but does not discuss in any depth the purpose of banking.

Historical accounts of the origin of banks vary a great deal. Some locate them in ancient Egypt. On another view “modern banking” began in 12th-century Genoa. But I found most interesting the account in Money, a History (1997), edited by Robin Williams. This is designed to accompany the British Museum’s collection of monetary artefacts and has very few doctrinal axes to grind. Its first mention of bankers relates to fifth and fourth century BC Athens. These developed from money changers exchanging foreign for Athenian coins from benches set up in the Agora or market place. They soon added a facility of safe deposit boxes. They then began to lend money, typically at 12 per cent interest. The best known of these early bankers was Passion, a former slave, who died an extremely wealthy man in 370BC. Nevertheless he “was nearly ruined early in his career when he was sued by a disgruntled client, and we hear of many other banks going broke”. Plus ?a change!

The further development of banking can be divided schematically into the following stages: 1. Bankers discovered that they could usually safely lend out a portion of what they had on deposit without fear of all their depositors together asking to withdraw their funds. 2. They then presumably first lent out actual coins and then substituted promissory notes, although the distinction is not made clear in the accounts I have seen. 3. Eventually they discovered that they could lend more than the sums they originally had on deposit. Fractional reserve banking, as it was called, was possible if most of the banks engaged in this practice together, so it did not much matter if money “created” by one bank was deposited with another.