Dario
5
All posts from Dario
Dario in Stack That Money,

How do banks make money?

While watching television, listening to the radio or just reading newspapers one word is constantly being repeated, "bank“.

It seems like every other person is in some kind of debt to the banks, so you can ask yourself two questions:


1. How do banks make so much money?
2. Where does all the money come from?

To find an answer for the first question, we must reflect on the past at the root of the cause. More specifically, we must look at the first bankers. 


In the past one of the most common currencies was gold and those that were affluent had a lot of it, since gold is not made out of paper it was pretty problematic for them to carry it around. So people stored gold in the vaults and in return they got receipts and first banks came into existence. 


Very shortly after the first banks were created bankers created loans with interest. Soon after that bankers realized that not everyone withdraws their gold all the time and that they can use that for their own gain so bankers provided people with loans for more gold than they actually had in their vaults. 


This makes you question, how is that even possible? How can that even work?


Let's return to today's world, for example lets say you stored 10000 dollars in a bank which must always have 5% of its money in the reserve. The bank will store 500 dollars in the reserve and loan 9500 dollars to a person who for example wants to buy a car. 


The seller now gains 9500 dollars from the person who purchases the car. Seller stores 9500 dollars into a bank which puts 475$ in the reserve and loans 9025 dollars to someone else and the process continues.

Banks would not make much or any profit if they provided loans without interest. 


If one central bank controls all other banks and if these other banks loan more money to people than there is in the circulation within them. That means that it is impossible for people to pay off the interest simply because that amount of money does not exist.
When people can't pay off their debts, banks will take their properties as an alternative to money. 


Money is just a piece of paper which represent the value of labor or some items, but only by itself it is not worth more than toilet paper.
Bankers know very well that money is not worth anything but many people fail to understand that. Because of that bankers can easily get hold of their properties which have a very real value.


Now we can start thinking about the second question: Where does all the money come from?


If you need, take a look at our money storing and loaning example. It all makes sense, right? 


But what if I tell that from that starting amount of 10000 dollar bank can generate 100000? I bet the first word in your mind would be: nonsense. 


It is possible because on paper the person who first stored 10000 dollars is treated like he still has his money stored in the bank. Because even if that money was loaned, eventually it returns to the bank by someone else and as an addition to that people must pay interest which create pure profit for the bankers. That is how banks make money almost quite literally from nothing

.
Today it is easier for banks to make a profit because of technological advancements, for example, in United Kingdom 97% of the circulating money is digital while only 3% circulating money is in physical form.

In order for our society to function banks need to treat their clients with respect and care, not like a livestock as many seem to be doing.
Clients on the other hand, need to know and understand rules set by contracts and respect them instead of whining around about their debts when they are the ones responsible for taking them in the first place.