5/31/2020

In 1904 at the age of 31, Amadeo Peter Giannini was a successful fruit-and-vegetable merchant in San Francisco. One day, he got into a shouting match with the head of a local bank about its reluctance to make small loans to individual borrowers. Afterwards, Giannini founded the predecessor to Bank of America (originally calling it the Bank of Italy).

Less than two years later, a devastating earthquake struck the bay area. The only reason that Bank of America survived was because Giannini reacted quickly after seeing fires head towards his physical retail banking location in the aftermath of the earthquake. He loaded the bank’s $80k of hard assets (gold and cash) into wagons, cleverly hiding the valuable assets under crates of oranges to protect them from looters.

Consumer retail banks originated as a physical place to store and protect physical money. Giannini did this exceptionally well by successfully protecting his bank’s physical capital (the deposits of individuals that trusted Giannini to protect their money) during the aftermath of the earthquake.

Giving your savings to a bank is a way to mitigate the risk of theft. Plus, if you have more than even a tiny amount of money – even if you aren’t concerned about theft – carrying it around with you is relatively impractical. Banking services outsource security and storage of monetary value. Banking services offer peace of mind for individuals who don’t want to have to carry a physical representation of their entire net worth around with them.

Fast forward to 2020. We kind of just use banks because we “always have” and sort of have to use them.

JP Morgan Chase is a diversified financial services company. 50% of the company’s revenue comes from its large retail bank. JP Morgan Chase’s retail bank makes money the same way that Giannini did with Bank of Italy / Bank of America in 1904. JPM takes deposits from individuals (promising to keep their money safe, today benefitting from some additional help from the Fed in the form of FDIC insurance) and then uses the multiple trillions in capital from deposits to extend mortgage loans, auto loans and credit card loans to other individuals.

And that’s basically it.

Store money for people and make money by loaning it out. The bank makes the spread between the savings rate it offers and the interest rates that individuals pay on the loans. 50% of JP Morgan’s business model is premised on offering individuals a safe place to store their money.

But this is confusing.

This is confusing because I have never seen or touched a gold bar. I’ve never been paid in anything but dollars. And, furthermore, I haven’t been paid in cash dollars since I was mowing lawns in high school. I don’t even carry cash in my wallet anymore. I don’t really need anyone to hold onto cash or gold bars for me.

Physical money is out. Virtual money is in.

Correct me if I am wrong, but it feels like when I give my money to JP Morgan today, I am really just saying that I think they are the best virtual ledger company. Like the best company at organizing things in lists and not messing the lists up. And the best at keeping track of all of this virtually. And the best at being really responsive when I want to talk to a customer service representative. Joe has $101. Nick has $30. Julia has $240. Etc.

Consumers continue to use JP Morgan because they have a strong brand. But philosophically that brand comes from the fact that over the last 100 years, you could trust JP Morgan to hold onto your gold bars for you while you were off living your life (the bankers want you think it’s complicated but it’s note).

The funny thing is that ANY blockchain is just as good as JP Morgan at maintaining a virtual ledger. In fact, a large enough blockchain maintained by a decentralized network is almost certainly better than JP Morgan at maintaining a virtual ledger. And by using a Trezor or Ledger wallet, it’s possible for anyone to store virtual currency maintained on a virtual ledger in an incredibly secure way (just as secure as with a bank). Plus, I can choose to either “hedge” national institutional risk by exposing myself to bitcoin or have the option to buy and hold stable coins which are pegged to the U.S. dollar instead.

So why do banks exist?