1. That’s a great, simple explanation!

  2. Jonathan says:

    This is indeed a simple explanation – it ignores fractional reserve banking (and probably a lot of other stuff that I don’t know much about). But the bank doesn’t just loan out the money that is deposited in banks – it can loan out some googlable multiple (something like 10 times) of the amount deposited. Therefore if you deposit $1,000 in the bank at 2% interest, the bank can turn around and loan out $10,000 at 5% interest.

  3. This is one of the most entertaining descriptions of how banks work that I have ever heard. When I was a kid I could never figure out how banks made money and why they existed. I figured it out eventually, but the clincher on the lesson was really getting a mortgage. Nothing quite like paying the bank for a few years to help you realize how they stay in business!

  4. A great simple, step by step explanation of how Banks work – and it is easy to see how they are currently “Not” working so well in our country (UK) at the moment.

    Maybe I should forward this to Downing St?

  5. Merchant Account says:

    This is a very neat and simple way of how bank works. I can make my 5-year old son understand how the system works with this explanation. Just days ago, I have read how a bank earns so much by selling a mortgage loan. I would of course leave this out when I explain to my little boy. It gets complicated when you go to the details.

    Best regards,

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