Misconceptions around Banking - Banking 101 (Part 1)

http://www.positivemoney.org/
There's a lot of confusion about how banks work and where money comes from. Very few members of the public really understand it. Economics graduates have a slightly better idea, but many university economics courses still teach a model of banking that hasn't applied to the real world for decades. The worrying thing is that many policy makers and economist still work on this outdated model.

In this video course we'll discover how banks really work, and how money is created.
But first, to clear up any confusion, we need to see what's wrong about the way that most people think banks work.

Public Perception of Banking Number 1: The 'Safe Deposit Box' - 0:42

Public Perception of Banking Number 2: The Middle-Man - 2:58

--------------------------
If you'd like to translate this video into other languages, please let us know. We'll send you the transcript with timecodes.
Email: mira[at]positivemoney.org

--------------------------
SUBSCRIBE to Positive Money UK's videos:
http://www.youtube.com/subscription_center?add_user=PositiveMoneyUK

Like us on Facebook http://www.facebook.com/PositiveMoney
Follow us on Twitter http://www.twitter.com/PositiveMoneyUK
Follow us on Google+ http://www.positivemoney.org.uk/googleplus

Positive Money is a not-for-profit research and campaign group. They work to raise awareness of the connections between our current monetary and banking system and the serious social, economic and ecological problems that face the UK and the world today. In particular they focus on the role of banks in creating the nation's money supply through the accounting process they use when they make loans - an aspect of banking which is poorly understood. Positive Money believe these fundamental flaws are at the root of - or a major contributor to - problems of poverty, excessive debt, growing inequality and environmental degradation. For more information, please visit: http://www.positivemoney.org/

Animation by Henry Edmonds

__________________________________

There's a lot of confusion about how banks
work and where money comes from.

Very few members of the public
really understand it.

Economics graduates have a slightly better
idea, but many university economics courses

still teach a model of banking that hasn't
applied to the real world for decades.

The worrying thing is that many policy makers
and economist still work on this outdated model.

Over the next hour we'll discover how banks
really work, and how money is created.

But first, to clear up any confusion, we need
to see what's wrong about the way that most

people think banks work.

Public Perception of Banking Number 1: The
'Safe Deposit Box'

Most of us had a piggy bank when we were kids.
The idea is really simple: keep putting small

amounts of money into your piggy bank, and
when a rainy day comes along, the money will

still be sat there waiting for you.

For a lot of people, this idea of keeping
your money safe sticks with them into adult life.

A poll done by ICM on behalf the Cobden
Centre found that a third of the UK public

still believe that this is how banks work.
When they were told that actually the bank

doesn't just keep your money safe waiting
for you to return and collect it, they answered

"This is wrong -- I haven't given them
my permission to do so."

So this idea that the banks keep our money
safe is a bit of an illusion.

Your bank account isn't a safe deposit box.
The bank doesn't take your money, carry

it down to the vault and put it in a box with
your name written on the front. And it doesn't

store it in any digital equivalent of a safe
deposit box either.

What actually happens is that, when you put
money into a bank, that money becomes the

property of the bank.

That's right. The money that you put into
the bank isn't even your money.

When your salary gets paid into your account,
that money actually becomes the legal property

of the bank. Because it becomes their property,
the bank can use it for effectively anything

it likes.

But what are those numbers that appear in
your account? Is that not money?

In a legal sense, no. Those numbers in your
account are just a record that the bank needs

to repay you some money at some point in the
future.

In the accounting of the bank, this is recorded
as a liability of the bank to the customer.

It's a liability because the money has to
be repaid at some point in the future.

This concept of a liability is actually very
simple -- and very important if you want

to understand banking. Just think of it like
this: if you borrowed £50 from a friend,

you might make a note in your diary to remind
you to repay the £50 in the near future.

In the language of accounting, this is a liability
from you, to your friend.

So the balance of your bank account doesn't
actually represent the money that the bank

is holding on your behalf. It just shows that
they have a legal obligation -- or liability

-- to repay you the money at some point in
the future.

Whether they will actually have that money
when you ask for it is a different issue,

but we'll talk about that later.

Public Perception of Banking Number 2: The
Middle-Man

Now the other two thirds of the UK public
have a slightly better understanding of how

banks really work.

These people think that banks take money from
savers and lend it to borrowers. The Cobden

Centre poll that we mentioned earlier asked
people if they were worried about this process:

around 61% of people said they didn't mind
so long as they get some interest and the

bank isn't too reckless.

This idea of banks as middle-men between people
with spare money and people who need to borrow

money is very common. In this idea, banks
borrow money from people who want to save

it, such as pensioners and wealthy individuals,
and they then use that money to lend it to

people who need to borrow, such as young families
that want to buy houses or small businesses

that want to invest and grow.

The banks in this model make their money by
charging the borrowers slightly more than

they pay to the savers. The difference between
the interest rates makes up their profit.

In this model, banks just provide a service
by getting money from people who don't need

it at the time, to people who do. This implies
that if there's no-one who wants to save,

then no-one will be able to borrow. After
all, if nobody came to the bank with savings,

then the bank wouldn't be able to make any
loans.

It also implies that if the banks lend far
too much far too quickly, then they'll eventually

run out of money to lend. If that was the
case, then reckless lending would only last

for a short time, and then the banks would
have to stop once they ran out of people's

savings to invest.

That means it's good for the country if
we save, because it will provide more money

for businesses to grow, which will lead to
more jobs and a healthier economy.

This is the way that a lot of economists think
as well. In fact, a lot of economics courses

at universities still teach that the amount
of investment in the economy depends on how

much we have in savings. But this is completely
wrong, as we'll see shortly.

Let me point out that, so far, we haven't
talked at all about where the money really

comes from. Most people just assume that money
comes from the government or the Bank of England

-- after all, that's what's written on
every £5, £10 or £20 note.