Must Banks Borrow So Much?

The Phoenicians invented money—but why so little of it?

Johann Nepomuk Nestroy (1801 –1862), Austrian playwright

AS WE SAW IN CHAPTER 4, banks benefit the economy by taking deposits and making loans. Of these two activities, deposit taking is unique to banks. Loans can also be made by any other institution that has the capacity to assess the loan applicants’ creditworthiness and to monitor their performance. The concentration of banks on lending is due to the ready availability of funds from deposits.1

As we also saw in Chapter 4, banks provide depositors with important services, such as making payments and standing ready to provide cash at any moment. Because deposits are a form of debt, borrowing is an essential ...

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