The Truth about Banks

5 things that banks would like you to believe
plus the things they DON'T tell you.

Myth 1

"YOUR MONEY IS SAFE IN A BANK"

But it is not safe if too many customers want to take out their money at the same time. In fact, banks are allowed to lend out much more money than they keep in their reserves. If only a few customers want to take out money at the same time, this is not a problem. However, if a lot of people all want their money back at the same time (because the bank is in financial trouble, for example), the bank simply does not have enough money to give people.

Myth 2

"BANKS LEND MONEY"

Yes, but they also create the money that they lend to people.

This is how it works: One person deposits one dollar in the bank. The bank puts this dollar into its reserves; but the bank is also allowed to create another dollar to 'match' the dollar it was given. (So now there are two dollars, where there was only one dollar before). The bank lends the second dollar to another person. Later this person must repay the dollar they borrowed, and pay interest on the loan. The bank counts this money as part of its reserves - and can use it to create more money to make more loans. And so on.

 

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CREATE: Make something that did not exist before.

DEPOSIT: (v) to put money in a bank account. (n) an amount of money put in a bank account.

RESERVES: Money that banks put aside to be available when it is needed - for example, when people want to take their money out of the bank.

REPAY: to pay back money you have borrowed.

Myth 3

"BANKS PROVIDE MONEY FOR DEVELOPMENT"

A lot of people think that banks in the North help developing countries by lending them money. Not true. The banks themselves make a lot of money by doing this, and they keep the developing countries in debt. When banks make the loans, they create huge amounts of new money, and charge the developing countries interest on the loans. (See number 1.) The developing countries, therefore, have to pay the banks more money than they borrowed. They cannot refuse to repay the money, because the banks will not give them new loans - which they need because they are so poor and they have so many debts.

IN THE NORTH: Most rich countries are in the northern parts of the world. Many poor countries are to the South. So sometimes THE NORTH is used to mean rich and developed countries. (Map showing the 'North' and the 'South')

Myth 4

"THE FINANCIAL SYSTEM WORKS"

For the banks, yes! But not for most of us. Our modern financial system depends on debt: Most of the new money in the world is not created by governments, it is made by banks. In Britain, for example, only 3% of new money is produced by the government (in the form of new coins and notes); the other 97% is created by banks, when they make various kinds of loans. Banks need people to be in debt in order to make their huge profits.

 

If you DEPEND ON something, it is necessary: you cannot do without it.

Myth 5

"THERE IS NO ALTERNATIVE TO THE SYSTEM WE HAVE NOW"

That's not true! There are alternatives to the system we have now. One example is called 'social credit'. This would reduce the amount of money that banks create by making loans. Instead, governments would create money by giving credit (to themselves, local governments, organisations and so on) for socially useful programmes. The result? Less money would be borrowed from banks, so the banks would make less profit and have less power.

 

ALTERNATIVE: another way of doing something.

CREDIT: The opportunity to borrow money.