Banking 1

let's learn a little bit about just how a plain vanila Bank works so let's say that I'm an entrepreneur and I see a problem out there in the world you have all of these hardworking people they you know whatever they do doctors lawyers engineers construction workers whatever they might do they have they work they provide services to each other and they have savings right so they right now they're just you know whatever they're putting them they're burying it in their back yard so you know savings and they're just collecting there right that that that quote-unquote money is doing nothing they've they've provide some good they've provided some goods and services to someone else those people gave them something whether it's gold or a green piece of paper that essentially says this gold or this green piece of paper entitles you to some future goods and services and those people said oh that's a useful thing that I have let me just put it into my mattress so whatever the world there's this pool of savings and let's say there's this other pool of entrepreneurs and they have a bunch of really good ideas for projects they're like you know what if I could just get let me put this your projects or investments projects or investments investments so let's say you know let's say that there's some there's some other entrepreneur he says boy you know what I have no claims on any goods and resources but I have an idea I have an idea that if I could get a bunch of people to dig canals to the crops that we'll be able to grow more crops and grow it throughout the year and and we'll all be richer because we'll all have more food and that's that's a true good and service in its best sense but how am I going to get these people to build this ditch for me I mean I can I I could maybe promise them in the future that once all of this is done I can do something give them more food but that's not the way it works no one's willing to work for me unless they can feel very secure that they're going to get something in return so we have an interesting problem here you have a bunch of people who have already provided good and services to the world and the world has given them trinkets whether it's gold coins or paper money let's just say it's gold right and I want to make this point because everyone always talks about gold is if it's something special as if it's this as if it really represents wealth while paper money really does not represent wealth and that's just doctor there's nothing about gold gold is not useful other than the fact that it is pretty that's the only thing that makes gold useful actually it's pretty and it's hard to counterfeit paper money not so pretty but it has other advantages it's lighter and at least the paper money we use now is is not so easy to counterfeit so I always want to make that you know people always somehow feel that gold is is somehow better than paper money and then we'll talk about in the future about inflation and deflation and you know the fact that there is a constraint on how much gold can be produced but you can print money but we'll talk about that a little bit so in our modern world that savings are these green pieces of paper but let's say we're talking about you know some primitive culture and they're using gold so we perform a bunt a bunch of people perform a bunch of goods and services and they get these they get these little coins and these coins are essentially this society's way of agreeing if you have one of these coins in the future if you give this coin to someone else they'll do something for you and you know how much of that coin you have to give for them to do it based on supply and demand and price whatever these projects I say wow if I only had if I only had some way of convincing someone to dig a canal it would be hugely beneficial and it will create wealth or dig and dig irrigation ditches but how do I do that well if I had gold or if I had these little coins I could give these Peas coins to these people they would dig a dig the irrigation ditch and then I could charge I don't know people the service of using my or maybe you know I'll charge people access to water and then I could essentially generate a return but how do I do that well what if I could borrow some of these people right these people have these units of goods and services called a gold coin if I could borrow some of their money and use it to pay people that will that will essentially do the good and service or do the new project then I'll generate wealth and then I could share it with these people maybe in the form of some type of interest well you know it's it's very hard in a vacuum for these people to evaluate these projects and maybe these projects they don't require just part of the savings of one person they require the savings of a thousand people because it's a large project it's also hard for these people to evaluate who has a good project and it's hard for these people to evaluate who has savings in fact if I have savings if I'm if I've buried a bunch of stuff in my backyard or in my mattress I don't want to advertise it that's just going to make people come in and rob me so I'm a third entrepreneur and I see an opportunity for a business and I call that business a bank and so what is a bank going to do what is my bank when you do well let's just let's just talk about it from the bare-bones how am I going to start my business I'm actually I'm actually one of one of these entrepreneurs let's say I have some savings just to make it simple so I don't have to go into this pool so let's say I have a million gold coins of saving let's say it's a million dollars let me draw my balance sheet so let's say I have this is my balance sheet and balance sheets as you see they were useful even in primitive cultures so that's my balance sheet and let's say initially well let's say initially my balance sheet I drew but actually let me let me draw my initial balance sheet let's say my initial balance sheet is I put in a million let me just draw it I put in a million dollars of my gold coins so let's just say it's a million gold oh I'll say a million dollars just because we're used to been a million dollars and that could you could say of a gold coin is worth $1 so it's a million gold coins we know that that's not true anymore and I use that essentially to build this big structure of solid stone that looks really safe and Lynn really secure so I use it essentially just build a big vault right I'll do brown for the vault so this is my equity right and I use it to build a vault a big nice fancy looking building so I actually draw the building it has pillars in the front it really looks like something it looks like an old Greek or Roman temple and I think that's not that's not an accidental appearance so I build this nice-looking building that people would feel comfortable keeping their money and that could actually be safe for for safekeeping and I tell everyone look at I have this nice this nice big building instead of having your money insecure in your backyard or your bed why don't you put your savings in this building and if you ever need it you can come and get it and on top of that I'm going to pay you to keep your money with me so everyone says oh that's a good deal and Sal's trustworthy in that more than Sal that building looks even more trustworthy because it looks like a Greek temple so everyone puts their savings with me and let's say that that is I don't know let's say that that is ten million dollars of savings in my village have a fairly wealthy village so that's ten million dollars of deposits this is a liability for me right why is it a liability because I owe that to other people though they're giving it to me for safekeeping so this is my liabilities liabilities this is my equity if I had multiple if it wasn't just me if there was ten shareholders each of us would have one-tenth of this but at the time Allah this is a sole proprietorship so this is my equity this is my building so what I'm running a business here right I'm not doing this as some type of nonprofit or or charity work so what am I going to do with this ten million of deposits well I told people that they can take the money at any time if it you know I'm taking their money safe keeping if they put it in and then one day they can't get their money back they're going to be very suspicious of me so I have to keep some of the money set aside there's a lot you know this could be amongst three or four thousand people so in any given day not everyone's got hole or hopefully not everyone's going to pull their money out their money in but I need to keep some cash reserves in case people want their money back so I need to keep some of that 10 million in cash so let me do that in I don't know magenta so let's let me say I want to keep 10% of it in cash so I'm going to keep 1 million dollars in cash and then I have nine million dollars left that I can hopefully put to productive use and what I do with that 9 million dollars is I loan it out to people who have really good projects or investments so 9 million in loans that's an asset right I give that money to someone else they owe me 9 million dollars I'm essentially borrowing 10 million keeping 1 million aside and paying out 9 million dollars in loans and you know they could be a bunch of different projects I'll you know it's not they could be a hundred I'm not just giving 9 million dollars to one person I'm diversifying a bunch across a bunch of different projects so the natural question is how am I making money well these in these loans I'm hopefully putting them that you know build irrigation ditches or build factories or do whatever something that actually is an investment that creates more value than it needed to start up so I can actually charge interest and that interest should be a cut of that value that's being created so let's say that I charge 10% on this money so I'm charging 10% and just for the sake of it let's say I invest really well and no one defaults I'd do it this is I'm the first bank so I get all of the best investments so I'm getting 10% and for their money well you know these people not only do they get to keep their money in this nice safe deposit but I'm also paying them 5% I'm also paying them 5% so how much money do I make in a year well I'm I'm making 10% on this 9 million dollars so what is that that's nine hundred thousand dollars a year nine hundred thousand dollars a year I'm bringing in and how much am I paying out every year well five percent of ten million I'm paying out five hundred thousand dollars so interest income nine hundred thousand dollars interest expense five hundred thousand that Nets me four hundred and let's say I pay another I don't know 100,000 for salaries and for security guards and all of that so essentially I'm netting $300,000 so I'm netting $300,000 I'll do it a little more detail in the next video but if you look at a big picture I put a million dollars in and every year I'm making three hundred thousand dollars by providing the service by matching up the savings with good investments and everyone benefits the pie is getting bigger because these are real investments that are going to benefit my village and of course these people benefit because they get safekeeping for their accounts and their money is actually growing they're actually participating in this in this capital investment anyway see you in the next video