Category: Banks

Initially “capital” referred to goods that were produced not for consumption but for the production of other goods and that were not used up in the production of those other goods. The machinery used in the production of a consumable good was capital. Increasing capital is the key to growth. The fact that the production…

The logic implied by the existence of the stock market seems unassailable. Companies need financing to start or expand their operations. People want to invest their surplus funds in a way that promises a better return than a savings account or government bond even if there is an element of risk involved. A market for…

The simplest theory of how the market sets prices seems to assume that the producer can know what kind of sales volume to expect at every price level. He adjusts his level of output to insure that sales will maximize his profit. If he can’t make a profit selling widgets, he just closes up shop…

Adam Smith saw wealth creation as “the combination of materials, labour, land and technology in such a way as to capture a profit (excess above the cost of production).” This idea hinges on “profit,” which, of course, depends on market pricing. [see Profit] Persuading people to pay more for a widget than it costs to…

Wikipedia explains that Gross Domestic Product is “a monetary measure of the value of all final goods and services produced in a period of time (quarterly or yearly).” Exactly how it is calculated – what it includes and what it ignores – is very complex. Clearly just from the simple definition of GDP, the output…

Banks themselves maintain accounts at the Federal Reserve Bank. This facilitates clearing drafts on one bank that have been deposited in another, and it makes it easier for banks to borrow money. Often if one bank’s reserves temporarily fall below the required amount, it can borrow the money to make up the shortfall via a…

One particularly interesting alternative to conventional banks is the “commercial credit clearing exchange” or “local exchange trading system.” Merchants in an area create a virtual local currency for doing business with each other by accepting payment in multilateral credit accounts. An example is Sardex. In 2008 when the ripple effect of the global financial crisis…

Banks have changed radically over the past 50 years. In the classical model banks functioned as “intermediaries” channeling savings into investments via loans. The Banking Acts of 1933 and 1935 prohibited checking accounts from paying interest on their deposits and limited the interest that could be paid on time deposits or savings accounts. In 1970…

In the traditional system a bank could “fail” if it lent money and all of its original depositors withdrew all of their money. In theory because the bank has lent some of the money to others, it does not have enough on hand to “cover” all the deposits. Banks were required to maintain a certain…

When a bank “uses” some portion of the money deposited in various accounts to make loans, all of the account holders are still entitled to withdraw all their money. It is supposed to be available to them at any time, and it is in fact counted as part of the total money in circulation in…