As 2014 is the centennial of the first year of operation of
the Federal Reserve System, we thought it appropriate to start off the New Year
with a brief dissertation on commercial and central banking, and how they are
supposed to be used — as opposed to how such banks are being used or, more
properly, misused these days.
To understand banking, we have to understand money. Most simply put, money is anything that can
be accepted in settlement of a debt. It
can take any form, and consists of anything that somebody will take in exchange
for something else.
In other words, all money is a contract, just as (in a
sense) all contracts are money. As such,
money consists of offer, acceptance, and consideration — “consideration” being the inducement to enter into
a contract, the thing or things of value being exchanged.
What has value?
Obviously, accumulated wealth — “past savings” — has value. Everybody understands that. Promises also have value, even if they
involve wealth that doesn’t even exist yet.
People can enter into contracts promising to deliver
something in the future, and that promise has a present value, even if what is
promised doesn’t exist. It only has to
exist when the promise falls due. These
promises — “future savings” — can be used as money.
Thus, all money consists of either past savings or future
savings.
Now that we know everything there is to know about money, we
can understand banks.
There are two basic types of banks. These are 1) banks of deposit, and 2) banks
of issue. There is also a (sort of)
third type of bank, central banks, which are banks of issue for banks of issue,
a bank for banks.
We will look at banks of deposit today.
A bank of deposit is just what it sounds like. Someone (or a lot of someones) deposit money
in a bank. The bank lends it out to
other someones, charging a fee (interest) for this service. The bank takes interest on the loans it
makes, and pays interest on the deposits it takes.
That’s pretty much it.
We’ll look at banks of issue in the next posting in this series.
#30#
