MAB - Banks and Our Economy
Banks and Our Economy
What is a Bank?
Banks are financial institutions that handle money for other people. Banks take money from their depositors and loan it to firms and individuals that need the money. Depositors are people who put money in a bank for safe keeping.
Banks are known as depository intermediaries because they take deposits from the public which can be withdrawn and use those deposits to lend to their customers. Intermediaries are known as the middle man or the go-between. Non-depository intermediaries, such as insurance companies, do not hold deposits which can be withdrawn. These financial institutions take money from the public for their services and invest it in businesses in order to make a profit.
How do banks make money? They pay depositors interest to get them to deposit their money, then they charge their customers a higher interest rate to loan them money. The difference between the two interest rates is the spread or the profit the bank makes. Here is a simplistic example: Saranna deposits $1,000 in the bank and receives 1% interest ($10) on her deposit. Shavon borrows $1,000 from the bank to pay his college tuition. Shavon's loan costs him 9% ($90) in interest. So the bank receives $90 and pays out $10 for a spread of $80 or 8% which represents profit for the bank.
Self Assessment
Try to answer the questions below as a review of the content for this lesson topic.
Why were there no banks in Colonial America?
Because the Bank of England would not allow them
Who created the first central bank in the U.S.?
Alexander Hamilton
Why was the Second National bank of the U. S. created?
To act as a clearinghouse for all of the different state currencies
What happened after the Second Bank dissolved? 
The Free Banking Era came in and many state banks started up.
What was the main source of speculation following the Civil War?
Railroads
Who were the Robber Barons?
Wealthy men whose businesses dominated the industry they were in. Men like Andrew Carnegie, John D. Rockefeller, and J. P. Morgan.
The Stock Market crashed and the Great Depression started.
What event brought the U.S. out of the Depression?
World War II
What was the main cause of inflation and ultimately recession in the 1970's?
Rising oil prices.
What is the cause of our current economic crisis?
Bank failures due to over speculation in mortgage loans.
IMAGES CREATED BY GAVS