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A bank is a financial institution, that keeps current accounts for its customers. Banking includes, but is not limited to activities as:

History of BankingEdit

The first banks were probably the religious temples of the ancient world.

See also: History of money and banking in the US

BanknotesEdit

Main article: Banknote

Banks issue banknotes. Historically, they were money substitutes, that the bank was prepared to exchange free of charge against money proper.[1] With paper money, a banknote is a promise to the same amount of paper money.[2]

Fractional Reserve BankingEdit

Main article: Fractional reserve banking

If a bank would not expand its reserves, it could lend only the money of its savers and its own capital. It would be simply a financial middleman. To stay profitable in a free market, it would have to stay within narrow boundaries, determined by its savers. For example, if the bank receives credit for 5%, it would be suicidal for it to lend it for less. Since its savers are willing to part with the money for a time, it cannot demand much higher rates to its debtors or its savers could lend it directly.

But Fractional Reserve Banks can produce money substitutes essentially for free and give credit at better rates.[3]

LendingEdit

Contemporary commercial banks combine two essentially different functions. First, they serve as intermediaries between savers and investors. Banks issue a debt instrument (bonds or commercial paper) to lend the funds to economic agents that need financing. As financial intermediaries, banks pool and channel existing savings. This implies specific risks (credit, interest, currency, etc.) that banks may be willing to bear wholly, to manage partially or to hedge completely. Because the loans that banks make come from actual wealth that is only transferred from one individual to another, one can speak of real credit. Real credit is the foundation of capital accumulation and economic growth.

Second, banks act as fractional-reserve depository institutions. This means that they are legally obliged to keep in reserves only a (very small) fraction of money that is deposited with them. The rest of the money can be used for granting credits, i.e., to create an additional deposit that is made available to the receiver of the credit. In addition to channeling existing savings, banks are creating deposits that they lend out. Since such deposits are not brought about by existing savings, one can speak of bank credit. It is precisely their ability to create bank credit through new deposits that makes banks specific and different from other companies. The capacity to create deposits implies the capacity to increase the supply of media of exchange, for deposits are used as media of exchange.[4]

See also: Inflation

External linksEdit

ReferencesEdit

  1. Ludwig von Mises. "11. The Money-Substitutes", Human Action, online version, Chapter XVII. Indirect Exchange, referenced 2009-06-29.
  2. Jörg Guido Hülsmann. "The Ethics of Money Production", online version, Chapter 12. Paper Money p.162, referenced 2009-06-30.
  3. Jörg Guido Hülsmann. "The Ethics of Money Production", online version, Chapter 13. The Cultural and Spiritual Legacy of Fiat Inflation p.180, referenced 2009-07-15.
  4. Nikolay Gertchev . "Securitization and Fractional-Reserve Banking", Mises Daily,posted on Thursday, November 12, 2009, referenced 2009-11-14.

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