Sunday, July 17, 2011

Studying Banking with Jack

A $1,000 loan goes from a bank to Borrower "B."
Mr. "B" now spends the $1,000 somewhere, presumably within the economy.
Whomever he spent it with has got to put it somewhere. When that person puts it in a bank, it goes -- I'll suggest -- to the same bank. This means that...
The bank has loaned out some of its deposits, and then those deposits came right back to the bank.
What would it signify, should this bank now lend that that $1,000 out again?
Better go to a diagram now. We'll start with the depositor of that first $1,000, whom we did not mention yet:
depositor  arrow> ;bank  arrow> ;loan customer  arrow> ;spent on somebody who makes a deposit  arrow> ;bank  arrow> ;2nd loan customer .............etc.
We can see here how that money is continuously circulating in the economy.
It goes from one person to another.
As it does so, the bank both earns interest, from the loan customer, and it pays interest, at a marginally lower rate, to the saver. Twice.
The bank now has two savers and each of them think the 1,000 is theirs.
If both now withdraw their savings they would have two thousands dollars.
They had better not try to do that!

And the bank had better not tell anybody the truth about what they do everyday!

After all, money is only a symbol, created by someone, that symbolically "stands for" our willingness to accept that.  It is humanity's "trust."
And bankers, correctly, call this "trust" (like in "trust and savings bank," right?)

In one another.

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