Why was interest ever paid on instant access accounts?

 
Reason for asking is that interest is earned for two reasons. First, the lender undertakes risk: the risk that the borrower may not return the money loaned. Second, the lender forgoes the right to spend the relevant sum of money.

But wait a moment: holders of instant access accounts undertake no risk in that they are protected by deposit insurance. And as to foregoing access to their money, they DO NOT forgo it: that’s why the accounts are called “instant access”!!

Of course it could be argued that holders of instant access accounts get next to no interest nowadays because of interest rates being at record lows. But that’s actually debatable: it can well be argued that interest earned by banks does actually cross subsidise or defray the cost of administering instant access accounts. So holders of those accounts do in effect still get a significant amount of interest.

But whatever the truth of the latter point, the above initial point that it’s curious that “holders” ever got any interest needs answering – unlike 95% of the human race, I have a nasty habit of asking fundamental questions…:-)

Well I suggest the explanation was set out (sort of) by David Hume 300 years ago when he said in his essay “Of Money” that politicians are always tempted to spend too much with a view to ingratiating themselves with voters, while collecting insufficient tax (for the same “ingratiating” reason). The result is that they have to borrow to make up the difference, and that forces up interest rates in general.

And that’s my provisional explanation for why holders of instant access accounts used to (and may still) get interest. But I’m not entirely sure I’m right.