Hello all!
Here is an article from many years back. Still fairly accurate.
Enjoy
Robert.
Q: What are banks for?
A: To make money.
Q: For the customers?
A: For the banks.
Q: Why does bank advertising not mention this?
A: It would not be inline with business-correctness. But it is mentioned by allusion to their reserves of $400,000,000,000 or thereabouts. That is the amount of money they have made.
Q: Out of their customers?
A: I suppose so.
Q: They also mention Assets of $700,000,000,000 or thereabouts. Have they also made that?
A: Not exactly. That is the sums they use to make money.
Q: I see. And they keep it somewhere in a safe?
A: Not at all. They lend it to their customers.
Q: Then surely they no longer have it?
A: No.
Q: Then how come it’s an Asset?
A: They maintain that it would be, were they to get it back.
Q: But they surely have some money in a safe somewhere?
A: Yes, usually $700,000,000,000 or thereabouts. This is what’s called Liabilities.
Q: But if they've got it, how can they be liable for it?
A: Because it isn't their money.
Q: Then how come they have it?
A: It has been lent to them by their customers.
Q: You mean customers lend their money to banks?
A: Effectively yes. They put money into their accounts, so that way they lent it to the banks.
Q: And then what do the banks do with it?
A: They lend it to other customers.
Q: But you said that the money they lent to other people was their Asset?
A: Yes.
Q: Then Assets and Liabilities are the same thing?
A: You can't really say that.
Q: But you've just said it! If I put $100 into my account the bank is liable for paying it back, so it's Liabilities. But they go and loan it to someone else, and he is liable to have to pay it back, so it's an Asset. It's the identical $100 isn't it?
A: Yes, but....
Q: Then it cancels out. It means, doesn't it, that banks do not have any money at all?
A: Theoretically......
Q: Never mind theoretically! If they don’t any money, where do they get their Reserves of $500,000,000,000 or thereabouts??
A: I told you. That is the funds they have made.
Q: How?
A: Well, when they lend your $100 to someone and they charge him interest.
Q: How much?
A: It depends on the Bank Rate. Say five and a-half percent or thereabouts. That's their profit.
Q: Why is it not my profit? It is my money?
A: It's the assumption of banking practice that.........
Q: When I lend them my $100 why don't I charge them interest?
A: You do.
Q: You don't say. How much?
A: It depends on the Bank Rate. Say half a percent.
Q: Rather greedy of me, to say the least.
A: But that's only if you're not going to draw the funds back out again.
Q: But of course I'm going to draw the money out again! If I did not want to draw it out again I could have buried it in the garden!
A: They wouldn't like you to draw it out again.
Q: Why not? If I keep it there you say it's a Liability. Wouldn't they be glad if I reduced their Liabilities by removing it?
A: No. Because if you remove it then they cannot lend it to someone else.
Q: But if I wanted to withdraw it they'd have to let me?
A: Certainly.
Q: But let’s suppose they've already lent it to another customer?
A: Then they'll let you have some other customer’s money.
Q: But suppose he wants his also....and they've already let me have it?
A: You're being deliberately obtuse.
Q: I think I'm being acute. What if everybody wanted their money all at once?
A: It's the speculation of banking practice that they never would.
Q: So what banks bank on, is to not having to meet their commitments?
A: I wouldn't say it that way.
Q: Reasonable. Well, if there's nothing else you think you can tell me....?
A: Nothing much. Now you can go off and open a banking account!
Q: Just one last question.
A: Yes?
Q: Wouldn't I do better to go off and open up a bank?