Banking 1 | Money, banking and central banks | Finance & Capital Markets | Khan Academy

Let’s learn a little bit
about just how a plain vanilla bank works. So let’s say that I’m an
entrepreneur and I see a problem out there
in the world. You have all of these
hardworking people– whatever they do– doctors, lawyers,
engineers, construction workers– whatever
they might do. They work, they provide services
to each other and they have savings, right? So right now, they’re
just– whatever. They’re burying it in
their backyards. And they’re just collecting
there, right? That “money” is doing nothing. They’ve provided some goods and
services to someone else. Those people gave them
something, whether it’s gold or a green piece of paper, that
essentially says, this gold or this green piece of
paper entitles you to some future goods and services. And those people said, that’s
a useful thing that I have. Let me just put it
into my mattress. There’s this pool of savings
and let’s say there’s this other pool of entrepreneurs
and they have a bunch of really good ideas
for projects. They’re like, you know what? If I could just to get– let me
put this here: projects or investments. Let’s say that there’s some
other entrepreneur and he says, boy, you know what? I have no claims on any
goods and resources, but I have an idea. I have an idea that if I could
get a bunch of people to dig canals to the crops, that we’ll
be able to grow more crops throughout the year and
we’ll all be richer because we’ll all have more food and
that’s a true good and service in its best sense. But how am I going to get these
people to build this ditch for me? I mean, I could maybe promise
them in the future that once all of this is done, I can do
something, give them more food, but that’s not
the way it works. No one’s willing to work for me
unless they can feel very secure that they’re going to
get something in return. So we have an interesting
problem here. You have a bunch of people who
have already provided goods and services to the world and
the world has given them trinkets– whether it’s gold
coins or paper money. Let’s just say it’s
gold, right? And I want to make this point
because everyone always talks about gold as if it’s something
special, as if it really represents wealth, while
paper money really does not represent wealth. And that’s just not true. There’s nothing about gold. Gold is not useful other than
the fact that it is pretty. That’s the only thing that
makes gold useful. Actually, it’s pretty and it’s
hard to counterfeit. Paper money– not so pretty, but
it has other advantages. It’s lighter, and at least the
paper money we use now, is not so easy to counterfeit. I always want to make that–
people always somehow feel that gold is somehow better
than paper money. And we’ll talk in the future
about inflation and deflation and the fact that there is a
constraint on how much gold can be produced, but you
can print money. But we’ll talk about that
in a little bit. So in our modern world that
savings are these green pieces of paper, but let’s say we’re
talking about some primitive culture and they’re
using gold. So a bunch of people perform a
bunch of goods and services and they get these
little coins. And these coins are essentially
this society’s way of agreeing– if you have one of
these coins in the future, if you give this coin to someone
else, they’ll do something for you. And how much of that coin
you have to give for them to do it? It’s based on supply and demand
and price, whatever. These projects– I say, well
if I only had some way of convincing someone to dig a
canal, it would be hugely beneficial and it will
create wealth– or dig irrigation ditches. But how do I do that? Well, if I had gold or if I
had these little coins, I could give these coins to these
people, they would dig the irrigation ditch and then
I could charge people the service of using my– or maybe
I’ll charge people access to water and then I could
essentially generate a return. But how do I do that? Well, what if I could borrow
some of these people, right? These people have these units
of goods and services called a gold coin. If I could borrow some of their
money and use it to pay people that will essentially do
the goods and service or do the new project, then I’ll
generate wealth. And then I could share it with
these people, maybe in the form of some type of interest. Well, it’s very hard in a vacuum
for these people to evaluate these projects. And maybe these projects, they
don’t require just part of the savings of one person, they
require the savings of 1,000 people because it’s
a large project. It’s also hard for these people
to evaluate who has a good project. It’s hard for these people to
evaluate who has savings. In fact, if I have savings, if
I’ve buried a bunch of stuff in my backyard or in my
mattress, I don’t want to advertise it. That’s just going to make
people come and rob me. So I’m a third entrepreneur and
I see an opportunity for business and I call that
business a bank. And so what is a bank
going to do? What is my bank going to do? Let’s just talk about it
from the bare bones. How am I going to start
my business? I’m actually one of these
entrepreneurs. Let’s say I have some savings,
just to make it simple so I don’t have to go
into this pool. So let’s say I have a million
gold coins of savings– let’s say it’s a million dollars. Let me draw my balance sheet. And balance sheets, as you see,
they were useful even in primitive cultures. So that’s my balance sheet. Let’s say my initial balance
sheet is– I put in a million dollars of my gold coins. I’ll say a million dollars
just because we’re used to that. You could say a gold coin is
worth a dollar, so it’s a million gold coins. We know that that’s
not true anymore. And I use that essentially to
build this big structure of solid stone that looks really
safe and really secure. So I use it essentially just to
build a big vault, right? So this is my equity, right,
and I use it to build a vault– a big, nice, fancy
looking building. So I’ll actually draw
the building. It has pillars in the front. It looks like an old Greek
or Roman temple. I think that’s not an accidental
appearance. So I build this nice looking
building that people would feel comfortable keeping their
money in– and that could actually be safe for
safekeeping. And I tell everyone, look, I
have this nice big building. Instead of having your money
insecure in your backyard or your bed, why don’t you put your
savings in this building and if you ever need it, you
can come and get it? And on top of that, I’m going
to pay you to keep your money with me. So everyone says, that’s
a good deal and Sal’s trustworthy and, more than Sal,
that building looks even more trustworthy because it
looks like a Greek temple. So everyone puts their
savings with me. And let’s say that that
is $10 million of savings in my village. I have a fairly wealthy
village. So that’s $10 million
of deposits. This is a liability
for me, right? Why is it a liability? Because I owe that
to other people. They’re giving it to
me for safekeeping. So this is my liabilities. This is my equity. If it wasn’t just me, if there
was 10 shareholders, each of us would have 1/10 of this. But this is a sole
proprietorship so this is my equity. This is my building. I’m running a business
here, right? I’m not doing this
as some type of nonprofit or charity work. So what am I going to do with
this $10 million of deposits? Well, I told people that
they can take the money out any time. I’m taking their money
as safekeeping. If they put it in and then one
day they can’t get their money back, they’re going to be
very suspicious of me. So I have to keep some of
the money set aside. This could be amongst 3,000
or 4,000 people. So at any given day, not
everyone– hopefully not everyone’s– going to pull
their money out or put their money in. But I need to keep some cash
reserves in case people want their money back. So I need to keep some of that
$10 million in cash. So let me do that in magenta. Let me say I want to keep
10% of it in cash. So I’m going to keep $1 million
in cash and then I have $9 million left that
I can hopefully put to productive use. And what I’d do with that $9
million is I loan it out to people who have really good
projects or investments. So $9 million in loans. That’s an asset, right? I give that money
to someone else. They owe me $9 million. I’m essentially borrowing $10
million, keeping $1 million aside, and paying out
$9 million in loans. There could be a bunch of
different projects. There could be 100. I’m not just giving $9 million
to one person. I’m diversifying a bunch
across a bunch of different projects. So the natural question is,
how am I making money? Well, these loans– I’m
hopefully putting them to build irrigation ditches or
build factories or do whatever, something that
actually is an investment, that creates more value than
it needed to start up. So I can actually charge
interest and that interest should be a cut of that value
that’s being created. So let’s say that I charge
10% on this money. And just for the sake of it,
let’s say I invest really well and no one defaults. I’m the first bank so I get all
of the best investments. So I’m getting 10%. And for their money, these
people, not only do they get to keep their money in this
nice, safe deposit, but I’m also paying them 5%. So how much money do
I make in a year? Well, I’m making 10%
on this $9 million. So what is that? That’s $900,000 a year
I’m bringing in. And how much am I paying
out every year? Well, 5% of $10 million–
I’m paying out $500,000. So interest income– $900,000. Interest expense– $500,000. That nets me $400,000. And let’s say I pay another
$100,000 for salaries and for security guards and
all of that. So essentially, I’m
netting $300,000. So I’m netting $300,000. I’ll do it in a little more
detail in the next video. But if you look at it big
picture, I put a million dollars in and every year, I’m
making $300,000 by providing this service– by matching
up the savings with good investments. And everyone benefits. The pie’s getting bigger
because these are real investments that are going
to benefit my village. And of course, these people
benefit because they get safekeeping for their
accounts and their money is actually growing. They’re actually participating
in this capital investment. Anyway, see you in
the next video.

100 thoughts on “Banking 1 | Money, banking and central banks | Finance & Capital Markets | Khan Academy

  1. Because the investment banks were convinced that their models were based on "predictable" events therefore lowered their regulatory equity (or artificially increased its value). This is solely an indication of a simple banking model. When you mix the different types of banks it is nearly impossible to understand the risks. Wall Street resembled more of a (dark) hedge fund than a traditional bank, which could be acceptable but much more volatile – and riskier for the depositors.

  2. I'm with you all the way but gold is used in a lot of gadgets and modern/advanced technology. It really might end up being our most valuable resource in the future in more than one way.

  3. People like gold better than paper money because you cannot print a virtually infinite amount of it. So you cant really inflate it as easily as paper money.

    If you put your paper money in the bank, and they inflate money, the value of your money drops.

    Example: $20,000 in 1950 is equal to $191,247.46 today

    See how much money was robbed from your savings because of inflation? You lost the value of what is today $170,000 because of inflation

  4. If you don't understand that let me explain:

    Say you put in the value of what is worth $191,247.46 today (which was actually $20,000 paper bills back then) into your savings in 1950 or even just put it under your mattress

    Then today, you take it out and look at it, its only $20,000 in paper bills. You know how much thats worth today? $20,000

    Thats what inflation does, it robs the people who save their money

    Thats why people like gold, its impossible to inflate it indefinitely without alchemy

  5. If anything gold should increase value over time, because the population will continue to increase while the amount of gold stays constant

    Once they dig up all the gold out of the earth, thats all they got. The price of gold dramatically increases because of the limited supply.

  6. Hey what about Education Loan?
    Banks do not put interest on Education loan.
    Is d Bank doing some kind of Philanthropist work?

  7. That's one thing I definitely agreed on with the Occupiers. The Emergency Economic Stabilization Act was toxic to the free market.

  8. He is trying to illustrate the concept of banking in general. Doesn't have to be current banking system. This is the first video. Later on he will get into details.


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  10. Hahaha stopped listening after he said there's no difference between paper notes and gold. Money must be scarce. Paper notes do not have that limitation and the govt/bankers take advantage of it at the expense of you. Go ahead Khan keep stacking paper promises.

  11. To make money using click bank use following steps-

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    Spend $100 you will end making about $10,000 to $20,000

  12. To make money using click bank use following steps-

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    That is all what everyone is doing to make money with Click bank

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  14. lol, "let's say a gold coin is worth a dollar, we know that's not true anymore ".. yup thanks to the banks that is .. lol

  15. lets say it was the 1st bank….you started with 10m
    i.e 10m = 1m(reserve) + 9m(loan) + 900K(interest)
    => 10m = 10.9m
    where will the .9m come from?

  16. Uhh clown -_- gold not useful? gold is useful as a semi conductor in electronics. It's not heavily used in electronics because it's so expensive. Redo this video.

  17. Debt Securities – Corporate Bonds
    Bonds are promissory notes, IOUs if you will, issued by a corporation or government to its lenders. They are usually issued in multiples of $1,000 or $5,000. The standard, or par, is $1,000. The bond indenture specifies the amount of interest to be paid at intervals, over a specific length of time and the principal, (or original loan amount), to be repaid on the maturity date. A bondholder is a creditor; a shareholder is an owner. -Investopedia

  18. He doesn't write with a mouse, he uses a type of touch pad that reads the movements of a pencil so he's making drawing motions on something that looks like a touch pad that regular laptops have but then bigger.

  19. It still surprise me, how a lot of people have no idea about Monezilax System (search on google), despite the fact that lots of people make a large amount of money online because of this system. Thanks to my work buddy who told me about Monezilax System, I've start making some BIG Cash from the internet.

  20. Hey! Thank you for this helpful video. By the way, I notice lots of people keep on talking about Monezilax System (just google it), but I'm not sure if it's good. Have you tried using Monezilax System? I have heard some extraordinary things about it and my cooworker earn a ton of money with it, but he refuses to tell me: (

  21. Hey There! Thank you for this useful video. By the way, I hear a lot of people keep on talking about Monezilax System (search on google), but I'm not sure if it is good. Have you thought about Monezilax System? I have heard some great things about it and my cousin earn crazy amounts of money with it, but he refuses to tell me: (

  22. It's always great to watch these videos as they are always an educational experience. Many people only have experience with their banks through checking, savings, or some retail investment products. This video shows that there is so much more to banking.

  23. It is not a mouse. Sal uses a stylus with a touch screen board to do all the writings watch?v=vmtgz95ZBbE
    skip to 02:22 in that video

  24. I think he's showing a simplified structure to give a foundation or edifice to further topics. He's mentioned this bank is a theoretical "first bank" for a "primitive culture." Therefore, no electronics, dental, space, medical or other industries use it for this demonstration.

  25. Gold is only pretty and hard to counterfeit? A flower is pretty and hard to counterfeit too, but those are not the only properties of gold, not even the most interesting ones. Gold is stable, does not spoil, it has multiple uses including jewelry, electronics, medicine, optics, etc. It is arguably the most useful metal of all. One important factor in favor of gold as money is the scarcity which gives it the high value. If gold was as common as some other metals, you would see it used everywhere.

  26. What you said about gold, that it's 'just pretty' is not true at all. It has MANY applications in electronics, computers, dentistry, medical purposes, space travel, status symbols (jewelry), glass making and gold gilding (gold has the highest malleability of all metals). I'm watching this to get some more perspective on both the monetary system as well as the banking system (which I still think is a major scam today), but what most people don't seem to get is that a gold standard or any other way of backing a currency is crucial when it comes to currencies. Thousands of fiat monetary systems have failed throughout history, they never workout out, they always crashed back to zero. Do your own proper research!

    I would appreciate any feedback on this by the way 🙂

  27. Another problem is that banks don't only lend money to entrepreneurs, but also people who don't really need it to let's say who just want a fancier car or something. That's ok as long as they are able to pay it back, but the banks lend a lot of money to a lot of people of which they know they won't be able to pay it back. Again, feedback would be appreciated, I like to keep learning 🙂

  28. Um, dude, gold has intrinsic value other than being pretty and hard to counterfeit.  Wow.  You didn't think to research that?  Besides, being hard to counterfeit is not some mild property of money – it is of paramount importance to an economy. 

  29. What He says is true and very true about gold. Gold have value because made it to be… beside that it's nothing, nothing at all.

  30. He's Completely wrong about Gold. Gold has intrinsic value, will outlast ANY Government and it's paper Currency, it doesn't rust or disintegrates, and it has industrial use. As well as being pleasing to the eyes. It's a tangible Globally Standardized asset…unlike paper fiat which is backed by…Nothing.(credit)

  31. Hi I have question for u if you can help me pls I can't understand the different between the drawing bank and drawee if I want to pay a chq to my friend I'm the drawer and my friend payee my bank is X and my friend bank in Y which bank is drawing bank & drawee???

  32. Idk if it has already been mentioned but there's definitely a difference between gold and dollars. Gold is far more stable as a substance than paper meaning it will last much longer before deteriorating into nothing, also gold is one of the best conductors so it actually has practicality.

  33. How about fiat currencies always crash and you use gold to hedge against inflation since your paper dollars return to their intrinsic value to 0.

  34. Thank you for the info. And I agree with you on that about perverts and peso files and we people are supposed to protect our children form that.

  35. hahaha if you could go back in time you would see why gold is real money, and dollars are not. Nice try sal

  36. its nice to have someone who knows how to explain all this confusion, i mean the fractional banking system and how it really works in lay mans terms

  37. Oh my gosh. Don't get me wrong, it's so great to have someone explain all this stuff, but this video is so so slow paced. I mean who cares if it's a million dollars or a million gold coins. All this hesitating and very slow style ruin the whole video. :/

  38. The main thing about gold is that people agree that has value and you cannot print gold out of nowhere that is why is so valuable with respect to paper money. You could mine gold, but the amount you can mine is limited which is not true of paper or digital money.

  39. There is an error in this video. The bank is not lending its customer's deposit its creating new money as loans and adding it to its deposits.

  40. but gold is useful. electronics, aerospace, jewelry etc. fiat currency is just information based on debt that needs someone else to be in debt that needs to be paid by debt and continues forever. A debt based system will always make a person, business or nation have to default or go bankrupt because you can't forever service more debt with debt. Gold and silver became a currency standard because it's a precious metal that can stand the test of time where my food or services I can provide will die. Some how we have done a double think about "money" that seen gold as just a pretty trinket that was easy to trade instead of that it could store your economic value over a long period of time.

  41. Do you guys think the author of this video doesn't know what gold does, in this video he's talk about what financially gold does

  42. I thought you were going over fraction reserve banking in a different video? I wouldn't have watched the whole thing if I'd known you were discussing it now.

  43. So far I have found these videos help reaffirm current knowledge and in some cases to learn something new but this video clearly needs to be updated. It provides the romantic FANTASY version of how banks operate. In reality:

    1) loans create deposits not the other way around
    2) ***banks issue new money (i.e. credit also known as magic digital keyboard money) when loans are issued… this is how the vast majority of money in the economy is created. Among other obvious benefits, like controlling where money is allocated, banks are the primary beneficiary of the nations seignorage
    3) ***banks destroy money when loans are repaid
    4) Technically bank "deposits" are loans to the bank
    5) Technically bank "loans" are securities purchases by the bank in the form of a promissory note

    The lions share of loans by large banks today (over 80%) are NOT used for productive things like manufacturing improvements and new factories etc they are used to purchase of existing assets… i.e. real estate and securities and often for the banks own purposes. The large banks serve their respective head offices not the communities in which they operate and they rarely provide financing to small or medium size companies.

    Please consider using a small regional bank or credit union in your area as most of them still serve their respective communities i.e. the money they manage generally stays in and circulates within the community they operate in.

  44. Thanks.

    Taking this class now and want to just get a B at this point and move on. Like that you keep it basic, I don't necessarily want to be an economist, but the entrepreneur example did peak my interest.

  45. Its too slow and the presentation is jarring. The 25 or so videos exhaustively covers the topic thats good but the presentation is frustratingly unattractive unappealing

  46. Bank 🏦
    0:20 Savings
    1:04 Entrepreneurs (projects/investments)
    2:18 Gold “it’s pretty”
    3:18 Goods and services and payment for those.

    5:30 Balance Sheet
    1 million to build a bank (solid safe Greek Temple looking building)

    10 million invested
    9 million in loans (charge interest to bring in more money as interest income)
    1 million left on hand in case people want their money back

  47. Ok, this doesn’t make sense to me. Let’s say for learning purposes that I’m the only existing bank. I get 10mil in deposits, I lend 9mil and hang on to 1mil. That’s a balanced financial statement.

    Now the part that doesn’t make sense to me. If I’m the only bank in my fictional world and we have a balanced financial sheet, how is the borrower able to pay me 10% in interest? Where is that money coming from? If he borrows it from someplace else, wouldn’t they operate on the same principle, with a fee in interest? That would put him in perpetual debt, would it not?

  48. I have a question:- So when a person from Bangladesh makes a Bond in Bangladeshi Taka, and then decides to live in USA (America), can that money be withdrawn from USA by that person? I really need help in this. I would truly appreciate an answer from an expert. Thank you

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