why do we need banks in our society
People are angry you can understand that. б They see that the problems have largely been caused by the banks and are saying Б hey let s return to full reserve banking where a bank has to have all the money before lending it to you. That way there can t be any problem. Others are saying Б hey we don t need banks. Just look where they ve got us! I understand these positions and have some sympathies. But I want to consider the effects of either of these two. Suppose banks couldn t write loans unless they had all the money. Let s assume that the Central Banks do not print money willy nilly so consider to start with the definition of money. It is, in effect, a means of storing your labour. People say that time is money. No, money is time Б or rather time multiplied in some way by what is called value, which is a rather nebulous concept since the value is dependent on the market worth. We can go round in circles on this one or I could write a whole load of equations down filled with integrals and the like. So an example. You dig a hole in the ground for a farmer and get paid. The farmer can t sell the hole in the ground so it is not valuable even to the farmer next door. It only has value to the farmer and he needs it for drainage not to have it would mean his livestock would die. End of. If you take the money you have earned to the market and use all of it to buy food, some of that food may rot before you can eat it. б So you use a bit to buy food and keep the rest somewhere Б under the mattress, in the bank, wherever. Maybe you pay some rent, buy some shoes for the kids etc. Either way, the money represents your labour which you turn into goods and services over time. Inevitably two things happen. Firstly the hole you dug fills with water because it rained afterwards or some such event which means that your work was not perfect so it may have to be drained or re-dug. Secondly the food you buy is also imperfect and you end up wasting some of it, your kids wear out their shoes. You see the way this is going? Once you spend the money, you can t get it back. Just as work is not conserved and is not reversible, neither is money. The world is full of people who imagine that money is some constant. It never has been and it is always being wasted. Get used to the idea. Therefore to promote economic activity, money needs to be created all the time or the economy stagnates.
This is just to cope with the continuous waste of money. б It is as if money is a bastion against entropy Б that process which is always increasing and is a measure of disorder. If we do nothing, the bridge will fall down. Where does the incentive to keep the bridge repaired come from? Unfortunately we cannot do it just for love Б it doesn t feed our family or put a roof over our heads so we would go cold, hungry and soon die. No, we do it for money. As a society we have to do work to keep going. Maybe we do too much these days and live on the high wire. But doing too little is more dangerous Б society will stagnate. The upshot of all this is that money needs to be created continuously. A mechanism for this perhaps not the only one and clearly not perfect Б is fractional reserve banking. This means that there is discipline that work will be done and that the lender is solvent enough to be able to create the money in the first place Б that enough real cash is available if required for people to hold in their hands. Full reserve banking is a recipe for recession, stagnation, deflation and everything that goes with it. Worse, as it implies a conservation of money, it means there is little room for newcomers and most money will remain inherited. There will be no abundance, no room for the entrepreneur who creates wealth, no room for new ideas and work. In the same way, doing away with banks is just an extreme version of full reserve banking. You can use credit unions, Zoppa, building societies, or store your money under the bed but none of these can
generate the money that will rebuild that bridge, educate your child or otherwise make for progress. Because, by agreement, only banks can create the money. This is the hold they have over us. As a society, we need to have a hold over the banks, which is why I have proposed the so that they pay for this privilege. We needed this hold years ago but hey Б it s not too late! б D you want to let them get away with another hundred years of plundering? A bank is a financial institution which is involved in borrowing and lending money. Banks take customer deposits in return for paying customers an annual interest payment. The bank then uses the majority of these deposits to lend to other customers for a variety of loans.
The difference between the two interest rates is effectively the profit margin for banks. Banks play an important role in the economy for offering a service for people wishing to save. Banks also play an important role in offering finance to businesses who wish to invest and expand. б These loans and business investment are important for enabling economic growth. Offer customers interest on deposits, helping to protect against money losing value against inflation. Lending money to firms, customers and homebuyers. Offering financial advice and related financial services, such as insurance 1. Safety of deposits Banks are seen as a secure place to deposit money. It would be impractical and risky to keep all your savings as cash under your bed. In medieval times, people would often pay early banks (e. g. Knights Templar) to keep their money and assets safe. It also saves people worrying about money. In the UK, commercial banks are guaranteed by the as a lender of last resort. Therefore, consumers see them as safe places to deposit money. 2. Interest on deposits Commercial banks pay interest on deposits. For current accounts, this may be very low, but for saving accounts, the interest rate can be significant. In a period of inflation, interest rates on deposits are very important for maintaining the real value of your savings. For example, if inflation is 4% then keeping cash will see the value of savings decrease in value. However, if the bank is paying an interest rate of 6%, then the real value of your savings will increase. For some customers, such as pensioners, interest payments on their bank savings can be an important source of income. Current account (checking account in the US) This bank account enables easy and quick access to money. A customer can withdraw the money at a moment s notice and will have features, such as debit card and cash points. The interest rate on current account tends to be very low because the bank needs to keep sufficient to meet the demand of customers to withdraw. Savings account (time deposit account) Savings accounts typically have limits on the amount of money that can be withdrawn at once. Often banks require a certain notice of (e. g. seven days) to pay money requested. This enables banks to pay a higher interest rate as the bank needs less liquidity. 3.
Loans A bank can become more profitable by using a percentage of its deposits to lend to other customers. If a bank pays 2% on bank deposits but lends money to firms and consumers at 6%, then it can make a bigger profit on its deposits. A bank just needs to keep sufficient liquidity to meet the demands of customers to withdraw money. Different interest rates on different types of loans. Bank lending varies from unsecured personal loans to secured mortgage lending. Unsecured lending tends to be at a higher interest rate because of the risk factor. Secured mortgage lending is at a lower rate, but can be over 30 years or more. Personal loan In this case, the bank may make a loan to be paid back over a few years. б This loan may be unsecured against any assets like a house. Personal loans could be for a big purchase like a car or specifically to help fund a career or educational improvement. Business loan A loan for a firm to invest and expand their business. Mortgage This is a special type of loan, where the bank advances a loan to purchase a house. Usually, the customer will need to pay a deposit on the house, e. g. 10% of the loan. The bank legally owns the house until the borrowers have finished paying back the mortgage payments over a period of 20-40 years. Interest rates on mortgages tend to be relatively low because the loan is secured against the value of the house. However, on a 30-year mortgages, home-buyers will typically pay more interest than the total cost of the house. Overdraft. A bank can agree on an overdraft with customers. This allows them to borrow money in the short term quickly and conveniently. However, the amount allowed tends to be quite small. 4. Other features Banks can also give other features to consumers, such as: Methods to make international payments. Increasingly banks offer electronic transfer of money through systems such as BACS Offering special offers to customers, including arranging travel insurance. Increasingly many current accounts come with a range of extras, such as free travel insurance, free membership of the AA Banking in the UK is a very profitable enterprise because there is a lack of competition. The market is dominated by the and in particular the big 5 banks. Related This entry was posted in. Bookmark the.
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