Money and Banking

Welcome to Money Matters. Since this is Lesson 1.1, I’m going to assume you’re new to the exciting (I promise) world of economics, finance, and most importantly for our immediate purposes, money and banking.

We’ll start at the beginning, and get to the bottom of what money is, and why it’s so important in our society. A long time ago, before the concept of money arose (in the Kingdom of Lydia in 1000 BC), people bartered - this means they traded goods they had or services they were good at, with goods or services that they wanted. Makes a lot of sense, right? If I have cows and I want bread, I’ll trade some of my cows for some of someone else’s bread. But let’s bring that concept to the modern-day. If I want a subscription to a music streaming service like Spotify, my cows are no good. The leader of Spotify probably doesn’t need any. So instead, we as a society think of something better - we all agree to make something else that is valuable enough that both the Spotify guy and I want, and we’re willing to trade our goods and services for. That “thing” is cash and coins, commonly known as currency - and in the US, the currency is dollars. It’s important to remember that although people in the US agreed on dollars to be the medium (aka the thing) of value, other countries have different currencies - Mexico has pesos and Russia has rubles.

If you have one near you, take a dollar bill in your hand. Let’s imagine where it’s been since it came into your hand. Maybe you got it as change from a grocery store. The grocery store may have gotten it from a customer, who got it from their work, who got it from another business, and so on. Trace it back enough and you hit the Treasury, an institution of the federal government whose job is to create, or mint all the dollar bills and coins in the US. It’s also their job to make sure there’s a stable amount of currency in the country, meaning they can’t print too much or too little - in a later article we’ll get into why that is.

You’re on this website, so I think you’re smart enough to know that people get paid money for work, and that this money is important to handle your daily necessities. And it’s also extremely important that, after getting your necessities like food, water, and shelter, you don’t spend the rest of the money you earn but save it at a bank instead. What happens to your money then?

Rapper 21 Savage on his way to the bank. We’re excited for his upcoming album “Financial Responsibility”

Banks, just like Walmart and Microsoft, are companies. This means, when you’re saving your money at a bank, you’re contributing to their business - in a wonky way, you’re a customer. When banks take your money, they’re not just keeping it locked away in a secret vault like the opening scene of The Dark Knight like you might have believed. They take that money and loan it out to other customers, who, for the privilege of getting that loan, pay the bank interest. For example, if Jeff saves $100 at his local Bank of America, they might loan that $100 out to Lisa. Lisa eventually pays back that $100, plus $20 in interest. At the end of the day, the bank has made a profit of $20. It might seem like Jeff gets the short end of the stick here. What is he getting for giving the bank his money? First of all, banks act to keep money safe - if you lose a mattress stuffed with $100, it’s gone, but if a bank loses your $100, they’re still legally required to pay you. Second of all, for the privilege of holding your money, banks will pay you interest, but it won’t be as much as they charge people for a loan. To go back to that above example, while the bank makes $20 off Lisa, they might pay you $2 of interest. Banks drive a hard bargain, but we can’t live without ‘em.

That’s all for today. Next up, we’ll talk about value. Make sure to complete the activity linked in our curriculum below for extended practice!

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Three topics to explore if you found this article easy (from easiest to most difficult): investment banks, fractional banking, quantitative easing.

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"Rapper 21 Savage holding stacks of cash." townsquare.media/site/625/files/2016/11/21-Savage-Hold-Stacks-of-Cash.jpg?w=980&q=75.

Curriculum: Curriculum (activity found on page 11 & 12) - https://youth.handsonbanking.org/wp-content/uploads/2019/08/InstructorGuide_MiddleSchool.pdf

Wells Fargo Bank. "Money and Banking." Hands on Banking Instructor Guide, 2013.