The problem to be discussed in this chapter is how the specific structure of the Swedish banking system was shaped in the late nineteenth century, and how it developed in the first half of the twentieth century. Above all, however, we will try to explain the oscillations between two abstract constructions of banking ‘systems’, the extremes of retail and investment banking. Our approach is basically institutional, analysing the different influences on the banking system as constraints and possibilities for economic behaviour. In explaining specific banking behaviour, three main spheres of influence will be stressed, all formed and specified by the picture of reality held by the economic actors: (1) ideas and prototypes of banking systems imported from economically more advanced countries abroad, (2) mutual bonds and relations to the commodity sector of the economy and (3) mutual dependence on and relations to the state and the gradual change of governmental control within the banking system.

Traditionally, finance activities are characterized by two extremes, retail or consumer banking and investment banking. Retail banking is based on credit mediation, and it is carried out by ‘banking’ agents or institutions accepting deposits and providing loans for both consumption and investment requirements. To attract savings deposits it is necessary to pay interest, and often one has to pay a rate even for cash deposits. The income of a retail banking institution consists mainly of what is called net interest, that is the difference between lending and deposit rates. Another way of financing lending, which preceded and for a long period of time competed with banking based on deposits, was to issue banknotes for circulation.