How Banks Work
Ancient Moneylenders
The first banking system appeared in Babylon in around 1,800 B.C.
Moneylenders gave loans to people or kept part of sellers’ cargo safe while they travelled about selling valuable things like precious metals, salt, gems and spices.
Leaving some of their goods “on deposit” meant they didn’t have to travel with all of their goods packed on camels.
The moneylender would give the seller a note for what was left in safekeeping. They also charged the seller for the service, usually a small portion of what they were keeping safe from thieves.
New Banking
When the Roman Empire collapsed, almost all trading stopped and the moneylenders disappeared. Banking reappeared in the 12th and 13th century in Italy. English banks started up in the 1600s.
A bank is a business like any other business except that it deals in money. A bank holds money for individuals, businesses, and governments.
Like all businesses, it has to make money too, and it does this by charging interest on any money that is loaned out.
Banks are very important to a country’s economy because they help money be exchanged for services and help businesses start up and survive.
Banks use the money that individuals and companies deposit to give loans for the purchase of homes, cars, furniture, farms, and businesses.
For this service, they charge interest to the borrower. The interest is a percentage of the loan.
Governments also borrow money from banks to equip the country with what it needs to wage war, such as ships, planes, armaments, and soldiers’ wages, etc.
Types of Accounts
Checking Accounts
People use checking accounts so that they don’t have to go to the bank to get their money. It makes it easy for them to make purchases.
The bank charges a fee to have a checking account – one more way the bank makes money. Today, most people use a debit card instead of a check to buy something.
Savings Account
This used to be a good way to save money because the bank would pay you interest for the privilege of using your money.
Today, the interest the bank pays on savings accounts is almost zero, unless you have an extraordinary amount in the account and you promise not to use it or need it for a certain length of time.
Credit Accounts
The bank will allow you to make purchases on your credit card all month and charge a very high interest rate.
The banks are counting on people not being able to pay off the account within the month so that they can charge more interest.
They are hoping you can never pay what you owe and will keep buying and buying.
It is so much easier than finding the cash to make your purchases and most people buy more than they need and buy things they really don’t need at all.
Quiz Time!
Questions
What service did a moneylender provide?
Why did travelling sellers use moneylenders?
What is a deposit?
What is interest?
Name three types of accounts that banks provide.
Answers
Moneylenders held goods for the seller and kept those goods safe from thieves.
Travelling sellers could leave some of their goods with a moneylender so they didn’t have to take all their goods with them to sell and they could return to get more.
A deposit is an amount of money that you give to the bank to hold in your account until you need it.
Interest is a percentage that the bank charges for lending money.
Three types of accounts are: checking, savings, and credit card.
