January 4, 2018

Marketing and finance are the cornerstones of a successful business. You might protest and say that, first, you need a good product, but there are countless examples of products that were successful, solely, from marketing, like the pet rock, in the 1970’s. Moreover, marketing is not only the collaborator of finance but is also finance’s coconspirator. Indeed, marketing is more important to the financial industry than finance, itself, something that people outside of the financial industry fail to grasp.

Perception is more important that reality, for what we perceive is real to us. In that regard, from the very bottom of the financial system, money and banks, there is a need to shape perception. Paper money was developed by Italian goldsmiths, in the Middle Ages (actually, China experimented with it as early as circa 900 A.D., but the experiment failed). As gold was, then, the major medium of exchange, people would sometimes need a place for safekeeping, and the goldsmiths kept it for them, in their vaults. In return, gold receipts were issued, and those became accepted as legal tender. Moreover, those same Italian goldsmiths became the first banks and the precursors of modern banking, so-called fractional reserve banking. They discovered that, as keepers of gold and issuers of gold receipts, they always had more gold in their vaults than was needed to redeem receipts to those looking to make withdrawals. Given that, they mad loans by writing more receipts for more gold than they have in their vaults, and that is the essence of modern fractional reserve banking.

In modern banks, most of the money that is deposited is in demand accounts, from which money can be withdrawn at any time. Demand accounts and other restricted savings accounts are on the liability side of the banks’ balance sheets. Then, banks make loans by making book entries into accounts for people borrowing money, and money is created, in the system. Moreover, there is a mismatch in the maturity structure of the assets and liabilities, in that deposit can be withdrawn, almost anytime, while loans, the assets, usually have longer-term maturities. In order to keep this house of cards from crashing down, confidence must be engendered in the depositors, which is tantamount to shaping perception, which is what marketing is. When people lose confidence in a bank, and panic causes a so-called run on the bank, whereby all or a large number of the depositors, all at once, demand that the bank return their money, it can result in bank failure because no fractional-reserve bank could fill all of its depositors’ requests, at once, since, in the normal course of the fractional reserve banking business, banks do not keep a reserve equal to one hundred percent of deposits.

Design also enters the picture, in finance, even at this basic level of banks. Banks offer a safe place to keep your excess cash and to get it out on demand. What actually underlies most banking products are put and call options of …