Banks – What is their purpose?
Banks – Their purpose? (part 2)
Continuing on with our discussion on the purpose of banks.
What happens when you deposit money into a bank? First, the money is recorded (usually by computer) and added to your account. It is then placed into the vault. At various times during the day, money is removed from the vault and taken to a second bank. This bank, unlike the first, does not serve individuals. It is a “banks’ bank,” usually a branch of the Central Bank of the country. The first bank is able to make deposits, withdrawals, and take out loans from the second bank (Central Bank).
When you walk into a bank to withdraw money or to take out a loan, the reverse of the process outlined above occurs. If the first bank does not have enough money in the vault to cover the withdrawal or the loan, the first bank goes to the second bank and withdraws money. If the first bank does not have enough money in its account at the second bank, then it must take out a loan at a lower rate of interest than the loan that it will eventually give to the individual borrower. In this way, a bank is able to accept deposits, honor withdrawals, and make loans without having to maintain all of the deposited cash on hand in the vault.
So think about what’s been happening lately with the credit crunch. Banks have not been willing to loan each other money. So you can see where they have created a true bottleneck at that point in the banking process. I wonder, to myself, why respective governments don’t just force them to do so. Wouldn’t that make more sense than pumping untold public monies into the market?
In the next edition we will be looking at how banks make money and where money actually comes from, should be good.
4Quan
Warrior for Truth
Professor (things that make you go Hmm..)