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Studying for a test? Prepare with these 8 lessons on Money, banking and central banks.
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Video transcript
Lets learn a little bit about how just a plain vanilla bank works. So lets say that I'm an entrepreneur and I see a problem out there in the world you have all of these hard working people whatever they do: doctors, lawyers, engineers, construction workers whatever they might do They work they provide services to each other and they have savings so right now they're burying it in their backyard savings and they're just collecting there that "money" is doing nothing 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 piece of green 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 matress" or whatever. In the world there's this pool of savings and lets say there's this other pool of entrepreneurs and they have a bunch of really good ideas for projects they're like "y'know what, if I could just get..." let me just put this here projects or investments so lets say y'know lets say that there's some other entrepreneur and he says "boy y'know what I have no claims on any goods and resources but I have and 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 throughout the year and we'll all be richer because we'll all have more food and 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 maybe promise them that in the future that once all of this is done I can do something or 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 are going to get something in return" So we have an interesting problem here You have a bunch of people who have already provided goods and services to the world, and the world has given them trinkets whether it's gold coins or paper money lets just say it's gold and I want to make this point because everyone always talks about gold as if it's something special, as if it really represents wealth while paper money really does not represent wealth and that's just not true there's nothing about gold gold is not useful, other than the fact that it's 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 not so easy to counterfeit People always somehow feel that gold is somehow better than paper money and we'll talk in the future about inflation and deflation and 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 in a little bit. So in our modern world, savings are these green pieces of paper but lets say we're talking about some primitive culture and they're using gold so a bunch of people perform a bunch of goods and services and 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 how much of that coin you have to give for them to do this is based on supply and demand and price. These projects, I say "Well 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 irrigation ditches but how will I do that? Well if I had gold, or if I had these little coins I could give these coins to these people they would dig the irrigation ditch and then I could 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's coins