Down The Rabbit Hole: Deposits

DOWN THE RABBIT HOLE: DEPOSITS

(Image from wikimedia commons)

INTRODUCTION

There is an episode in the series 'Paddington', in which the eponymous bear goes to his bank in order to withdraw five pounds. Upon receiving a £5 note, Paddington will not accept it because it is not 'his'. It turns out that he wants to receive the exact same £5 note that he deposited and he is most indignant when he is told that that particular slip of paper was probably burned.

We can all see the mistake Paddington made. In order to function as money, any unit of account must be fungible. That means a £5 note-indeed, any denomination- is functionally identical to any other £5, so it makes no practical difference to anyone if the £5 they withdraw is physically different from the one they deposited.

Nobody makes Paddington's mistake. But many people do hold mistaken beliefs regarding 'their' money and deposits.

(Paddington statue. Image from wikimedia commons)

A COMMON ASSUMPTION REGARDING DEPOSITS

What is a deposit? For most people, the earliest experience of becoming responsible for money is when our elders provide us with cash, which we either spend or put into a piggy bank. When we later take the piggy bank savings and open an account at our local bank, we commonly suppose that the bank will be like a giant piggy bank. Indeed, this supposition is encouraged. Banks often promote savings accounts using images of piggy banks. And what are you doing when you hand over money? You are 'making a deposit'.

That term 'deposit' makes it seem as if the bank is going to take your money and keep it somewhere safe. In an earlier essay ('A Brief History of Money') we saw how banking started when goldsmiths began charging customers for keeping their gold safely locked away in vaults. That kind of practice is what a deposit is supposed to be: a safe place in which to store one's valuables. So, when Paddington deposited £5, he like many folk would have assumed his money would be kept somewhere safe. Given that millions of notes might also have been deposited and given also the fungibility of money it was foolish to expect the exact same £5 would be later returned, but nevertheless that was his money the bank was looking after.

THE TRUTH

But, actually, that's not the case at all. Although it's called 'making a deposit' and that term makes it seem like banking is akin to piggy banking (i.e, somewhere to store your money), from the moment you hand over your money to the bank you relinquish legal ownership of it. Henceforth, that money becomes the property of the bank, who are free to spend it as they see fit.

If that is the case, then when Paddington checked the balance of his account and saw there was at least £5 in there, what was that if not a record of money in the bank's vaults? It was a record of the money that the bank owed to Paddington.

Now it should be obvious what you are really doing when you make a 'deposit'. You are lending the bank money, which they promise to repay upon request. But, if that is the case, then why isn't the act of handing over money to the banks called 'lending' rather than 'depositing'? It certainly causes a great deal of confusion, this weird terminology. According to a poll conducted by ICM on behalf of the Cobden centre, 74% of the public believed themselves to be legal owners of the money in their account.

TWO POSSIBLE REASONS

I can think of two reasons why the act of handing over money to banks is so incorrectly named. One reason may simply be that it is a vestige from the origins of banking, when people deposited gold in vaults for safe-keeping. I would make a comparison with 'atoms'. That word means 'indivisible' and it harks back to a time when it was thought that atoms were the fundamental building blocks of everything around us. Nowadays, we know atoms are made out of stuff like electrons, protons and neutrons and that there are yet more basic stuff like quarks. But the convention of calling aggregates of protons, neutrons and electrons 'atoms' stuck. Similarly, we may just call lending money to banks 'making a deposit' because it's a convention that has persisted from a time when people really did deposit money.

Another, more cynical suggestion would to say that it is in the bank's vested interest if people are generally unaware that money they 'deposit' is actually money they are lending. If this were generally known, more people would likely wish to know what, exactly, the bank wanted to borrow the money for; did they intend to use it in ways contrary to one's ethics? But, since most people don't realise that 'deposits' are really loans to the bank, they don't question what the banks are doing with that money.

Of course, that money could become invested in some worthy cause, such as a business venture that raises overall prosperity. But it is also possible that environmentalists are unwittingly funding the extraction of oil, pacifists are contributing to the manufacture of arms, and many other undesirable outcomes.

RESPONSIBILITY

Maybe the public should shoulder some of the blame, and actually learn what terminology such as 'deposits' actually means. But banks hardly go out of their way to let it be known that money you 'deposit' is actually a loan. Has any staff member ever explained that once you hand over your money it becomes the legal property of the banks, theirs to do with as they please? Nobody has ever been informed of such a thing to my knowledge. But, in other forms of lending, those who provide funds are informed about how that money is to be invested.

Furthermore, nowadays it's nigh on impossible to live without a bank account. If you have a job, for example, your employer won't pay your wages in cash but will instead credit your account. That of course means your wages are not your money, since it has become the legal property of the bank (you do, however, have a claim on the bank to repay that loan). It's really hard to avoid giving up one's money and transferring legal ownership of it.

CONCLUSION

The consequences of all this were summed up by Bernard Lietaer and Jacqui Dunne in "Rethinking Money":

"Despite helping to fund the loans, depositors have no say and little idea over the use of 'their' money...Because of a lack of transparency and depositor control the investment decisions of banks (and therefore society) are driven almost exclusively by the short-term profit considerations of bank employees. The effect of this is to decrease the cost of funding for certain industries over others, while ignoring society's preferences as to what is funded".

Now, it may seem like a Paddington-style mistake is being made. On a functional level, there is no difference between making a deposit and making a loan that's guaranteed to be refunded. Either way, you get your money back upon request. However, as we shall come to see as the meaning of words like 'loans' and 'debt' in the wonderland of banking terminology is made clear, this is not really how things work in the debt-based monetary system...

"The Zeitgeist Movement Defined"

"Modernising Money" by Andrew Jackson and Ben Dyson

"Cryptocurrency: The Future Of Money?" By Paul Vigna and Michael J Casey

"Rethinking Money" by Bernard Lietaer and Jacqui Dunne

"Debt: The First 5000 Years" by David Graeber

"Where Does Money Come From?" By Josh Ryan-Collins, Tony Greenham, Richard Werner, Andrew Jackson