You work after school and earn $200 per week. On payday, you take your check to
the bank and cash it. You put part of the money in a savings account and you
put the rest in a checking account. After a number of months, you decide to
purchase a car, using your money in savings plus interest and a loan from the
bank.
This situation seems normal enough, but this commonly utilized chain is more
complex than it would appear on the surface. It also raises some important
questions. How are banks able to take money and make loans? Do banks always
have enough currency in their vaults to cover the deposits? If not, where does
the currency go? How do banks get money in the first place? These questions
will be addressed in the following SparkNote.
In the SparkNote on money and interest rates, we learned
that there is less currency in the economy than is necessary to fund all of the
purchases that occur in a given period of time. This means that bills must
change hands many times to make the economy turn. In effect, there is much more
wealth in the economy than there is currency to cover it. How is this wealth
created? Furthermore, how much more money moves through the economy than there
is currency to cover all transactions? This SparkNote will cover the topic of
banking. Banks fit into the economy in a number of ways that are not
necessarily apparent. We will go over these intricacies and some that are
particular to the American banking system.
