Part 2: How Banks Make Money
Community + Content Marketing
In “Part 1: How Banks Make Money” we talked about how banks profit by operating under the “Fractional Lending” game.
In other words, banks “take the money that you deposit and miraculously turn it into 5 or 10 times more in order to lend this extra money to other people that might need loans. Then, they make interest on every dollar that you deposited AND every dollar that they created from the magic scanner. In this way, banks are making revenue from two sources.”
Maybe you’re thinking “Alright, banks lend out my money to people that need it. It’s these people that will pay interest fees on those loans. I won’t pay anything. I’m not really affected by this.”
Who Pays The Price When Banks Print More Money?
You do (we all do). Printing more money increases the supply that is circulating in the economy. The more money there is, the less value it holds because of supply and demand. As an example of this, if there are a ton of Ferraris in production they’d be cheaper to buy because there’s a lot of them available. And vice versa. If there are less Ferraris available, they hold more value and therefore become more expensive.
So when banks print all this extra money and inject it into the economy, the value of the $1,000 you deposit in the bank account actually goes down. If there is more money chasing the same amount of goods, then prices will rise. This is called inflation. Inflation makes the majority of people poorer because their money is a) losing value and b) losing buying power over time.
There Are Consequences To Printing (Unlimited) Money
In 2008, the President of Zimbabwe approved the decision to print unlimited amounts of money in order to pay for government expenses. It created a hyperinflation of 6.5 SEXTILLION % (that’s 22 digits). People were using a wheelbarrow full of cash just to buy bread. (Read more about it here.) Imagine how much cash would be needed to pay rent, medical expenses or a house?
And just recently, the U.S. Federal Reserve announced its willingness to print unlimited amounts of money to support the U.S. economy during the coronavirus crisis (read more about it here). If they go ahead with this, it begs the following questions:
- What will this do to the U.S. and global economy in the long-term? What will be the consequences of printing more money?
- What will this do to the value of the dollar? And what will be the impact to our personal wealth over the long-term?
- Who will be the real winners?
The problem is that as a society we are not particularly aware of the current money system and how it might be at a disadvantage for us. This might be because our school system doesn’t teach us about money so we just think of our current money system like we think of the Laws of Nature – it is what it is and will be what it will be.
But it’s exactly this mentality that makes it the perfect recipe for banking institutions to hold a monopoly. Understanding how and why our current money system works is essential to understanding the future evolution of money. And understanding our money system is the first step to protecting our personal wealth.
Can Bitcoin Protect Our Wealth?
Bitcoin is a digital currency that was created back in 2008. At the time, the minds behind it put in place a periodic protection against inflation called Halving.
Bitcoin was the first scarce digital asset without a centralized owner, like a bank or a politician. It’s scarce because its monetary policy is strictly set to 21 million coins. No more and no less. Its circulation isn’t being manipulated or controlled by authoritative figures.
Bitcoin’s monetary policy is ideal for market participants like you and I looking to protect our wealth from the powers that be. The reason being because Bitcoin levels the money playing field by limiting production of money and wealth so that the rich don’t get richer just by printing more paper money – a price that we must all pay in the end. Not the banks.
“Bitcoin is the beginning of something great: a currency without a government, something necessary and imperative.”
– Nassim Taleb, Statistician, former Trader and Risk Analyst
Learn more about how banks make money here:
How the banking system is making you poorer (without you finding out).
How banks keep you poor.
Written by: Ayelen Osorio
Writer, community + content marketing at Netcoins. Life's biggest enthusiast. Learn crypto with me.