why do we pay banks?

I've wondered the same thing. Not only does someone ask you to hold the money, but you can use it all you like so long as you promise you'll be able to give it back in total when they ask for it.

You just brought up another good point. The banks could not give back all the money to everybody if that were the case. The do not have it. If everybody wanted their money back, the federal government would have to help them out. Then you and I would have to pay higher taxes to make up for it.

Pretty good racket, eh?

Banks (once upon a time; long, long ago in a galaxy far, far away) sold convenience and peace of mind as a way to get people to hand over their caysh.

It just wasn't prudent to carry all that dough around with you, or keep it stuffed in your mattress or buried in a Mason jar by the back porch. You could get robbed, or burgled.

Of course, banks were also the only source of credit for a long time as well, and it was much easier to get that credit if you had an account at the bank. Nobody needed checks until people had bills to pay. The evolution of credit as an economic engine led banks to introduce checking accounts as an easy way to pay one's installments. That led to the kite: defrauding banks and people out of real money by playing games with checks. Did you see Catch Me If You Can? Frank Abignale went to work for the FBI catching check kiters after he was arrested and today owns a business consulting financial institutions on their funding security.

And a legitimate game played by debtors called "float" is being erased these days by creditors, who take your check and turn it into a electronic transaction so that they can get their money in 24 hours rather than 4 or 5 days.

Back in the beginning again, rather than charging you, the banks paid you. Now they only do that if you give them a lotta benjamins. You can of course still get a passbook savings account as a bank. (I wonder what they pay these days? The interest on my Bank of America Money Market account -- how's that for a fancy name for a plain old savings account? -- pays .77%. Not even one percent annually.)

Fees came later, in order to offset expenses with something other than profits gained from interest earned on investments the bank made with your money. And as EFT moved gradually into the mainstream, banks pushed ATM cards as a way for you to save money on bank fees -- the theory being that they would be able to employ less staff. Of course, if you venture outside their network, you'll pay a hefty price for the privilege -- whoops, the conveeenience.

Banks introduce new products and pay the first users a little interest to get people to try them, then when they catch on they start charging for them. Are you doing online banking yet? You will, and eventually you'll be paying for it.

There was -- and is -- consumer resistance to overcome every step of the way. Resistance to the concept of banking, the concept of credit, to the banks' various instruments and, naturally, to their fee schedules. Just as the moneychangers got a toehold in the late 1920's, along came The Great Depression, which eventually (through no small amount of schmoozing between bankers and politicians) begat the FDIC to give Americans reassurance about the security of the industry. (Buffalo alludes to the fees associated with that peace of mind.) And just as there were once (still?) people who said, "Ill never carry a credit card just to pay for my groceries," so your grandparents said," I'll never just give my money to somebody to hold for me."

As an aside, did you know that as recently as the late 1970s that the only place you could get a home loan was a Savings and Loan?

When S&Ls were deregulated in the '80s, and subsequently thereafter quickly defrauded into extinction, was when that game changed.

The illustrious Senator from Arizona, John McCain, nearly got swirled down the drain in that scandal (remember the name Charles Keating?).

He has refurbished his reputation quite nicely since.

But I digress...

S-I-L-V-E-R-A-D-O

A few years ago, the bank I was using had a promotion trying to push their debit cards. For a one-time $1 fee, you could have a debit card which would change your life or some such. I didn't bite.

A few months later I was in the bank on a "casual Friday" and all of the tellers were wearing jeans and matching t-shirts. The t-shirts were celebrating the fact that 5 million debit cards were now in use. I was thrilled that I hadn't contributed to the bank's cause.