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The banking system is very complicated, and most people don't really understand it. To get to grips with it you need to understand that money isn't really anything at all apart from trust. Anything can be money. Banks actually create money out of thin air. When they loan out money this isn't money saved up in a vault somewhere from savers. The IOU becomes the money. If a bank gives you a loan, all they do is add say 5,000 onto your account. They offset this with the IOU that you owe them, which on paper is worth the amount of the loan.
Very little money is in physical currency. Almost all money is debt, created in this way. This debt is in most cases just numbers in a computer. So most of the money in an economy is just numbers in a computer (or in the old days numbers on a sheet of paper in the bank). Banks are integral to the modern economy, as they are the ones creating the money. This is why some may argue that they should be nationalised.
To better understand how banks create money, take a £10 note. Lend it to a friend, in return for a £10 IOU slip of paper. Suddenly, the amount of money is doubled. The IOU is worth the same as the bank note.
But you can then go further. You can lend the IOU slip to someone, in return for another IUO slip, as it is worth £10. Most banks would lend out maybe 20* times the initial £10 deposit. In fact, the £10 hard current is actually an IOU from the central bank. All money is in effect an IOU.
People may argue that this is ridiculous, however it has proven a very effective system to promote growth and capitalism. Rather than people sitting on assets, the monetary value of these assest is used to allow other people to gain assets themselves. It can be argued that much human advancement in the last few hundred years has only been possible with advancements in banking.
*http://en.wikipedia.org/wiki/Fractional_reserve_banking
The banking system is very complicated, and most people don't really understand it. To get to grips with it you need to understand that money isn't really anything at all apart from trust. Anything can be money. Banks actually create money out of thin air. When they loan out money this isn't money saved up in a vault somewhere from savers. The IOU becomes the money. If a bank gives you a loan, all they do is add say 5,000 onto your account. They offset this with the IOU that you owe them, which on paper is worth the amount of the loan.
Very little money is in physical currency. Almost all money is debt, created in this way. This debt is in most cases just numbers in a computer. So most of the money in an economy is just numbers in a computer (or in the old days numbers on a sheet of paper in the bank). Banks are integral to the modern economy, as they are the ones creating the money. This is why some may argue that they should be nationalised.
To better understand how banks create money, take a £10 note. Lend it to a friend, in return for a £10 IOU slip of paper. Suddenly, the amount of money is doubled. The IOU is worth the same as the bank note.
But you can then go further. You can lend the IOU slip to someone, in return for another IUO slip, as it is worth £10. Most banks would lend out maybe 20* times the initial £10 deposit. In fact, the £10 hard current is actually an IOU from the central bank. All money is in effect an IOU.
People may argue that this is ridiculous, however it has proven a very effective system to promote growth and capitalism. Rather than people sitting on assets, the monetary value of these assest is used to allow other people to gain assets themselves. It can be argued that much human advancement in the last few hundred years has only been possible with advancements in banking.
*http://en.wikipedia.org/wiki/Fractional_reserve_banking
