6 - Commercial Banking

Summary

Commercial banks make an important contribution to the functioning and development of an economy. They permit individuals and businesses to make payments and settle debts; they “create” money and influence the money supply, the level of aggregate demand and prices in an economy; and they influence the character of production by lending or not lending to certain sectors, or by lending to them in inadequate amounts, which in turn influences economic development. This chapter tries to determine the impact of commercial bank lending on the character of production in, and thus on the economic development of, CARICOM economies. But before doing so, it looks at the growth of formal commercial banking in CARICOM, which exhibits many of the structural features of the sectors discussed in previous chapters and thus imposes similar constraints on the region's economic development.

Growth of Formal Commercial Banking in the Caribbean

Modern-day commercial banking has a long history. Its origins nay be traced to the medieval goldsmiths although individuals performed similar activities in Mesopotamia and Greece during the first millennium. In preindustrial Britain merchants, tax-collectors, retailers, innkeepers and members of the legal profession performed modern-day commercial banking functions, acting as intermediaries between those who had surplus funds to lend and those who wished to borrow. Many rural and urban banks emerged in eighteenthcentury Britain and provided funds for that nation's industrialization. Prominent among British banks was the Bank of England, which received its charter in 1694 and which was given the right “not only of receiving money on deposit from the public and lending this at interest, but also of making loans in paper” (Ashton [1955] 1964, 178). Britain had a formal banking system by the eighteenth century, which Phyllis Deane said was one of the advantages with which Britain entered upon the First Industrial Revolution (Deane 1965, 168).

Although they were incorporated into the international economy in the seventeenth century, the British Caribbean colonies never had a formal commercial banking system until the nineteenth century; and, one reason it might have taken so long to get established was that the enslaved people, who were by far the largest segment of the population, had no need for the services of commercial banks.