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An institution which handles other people’s money both to their advantage and to its own profit.

Historically, the bank has grown out of basic community needs. Firstly, it provided a safe place to store valuables, secondly. a source from which to borrow money for specific purposes and/or periods and, thirdly, the means of settling debts without having to carry large amounts of money from place to place.

At one time these needs were met by goldsmiths with whom people would leave their gold and other valuables for safekeeping. Gradually, these trustees began to realize that the quantity of gold, etc., left with them would not all be recalled at once and that they could safely lend part of it to others for short periods at a profit. Conversely, the depositors came to realize that the receipt given by a reputable goldsmith was increasingly becoming as good as the gold itself and that a debt to another pcrson could be satisfied merely by handing over the receipt. Loans began to be issued in the form of receipts, and hence we have, in embryo, the emergence of the modern banking system.

Although such a practice was prima facie both illegal and immoral, it did provide a very valuable spur to the growth of trade by substituting credit for cash and, by thus increasing the rate at which business was transacted, it certainly speeded up the rate of economic growth. In time, and after much legislation, the present banking system emerged. It was nonetheless true that until relatively recently, when the obligation to give gold to the face value of a pound note was abolished, the country’s economic wealth rested on a needle-point of faith. Should all notes be presented at the banks for conversion into gold at the same time then the nation would be totally bankrupt and the banks barely able to pay a fraction of the face value of their debts represented by the notes in issue.

Reference: The Penguin Business Dictionary, 3rd edt.