A bank is a financial organization where people
deposit their money to keep it safe. That’s only part of how a
bank works, though. A bank is a business like a video store, a
restaurant, or a skating rink. The business needs to make enough money
to pay the people who work there and the cost of things like
electricity, paper, and even paper clips. If you look at the diagram
below, you will see an example of how a bank earns enough money to
stay in business.
for a bank to stay open, it needs to get a lot of people to put their
money in it. Each bank tries to make THEIR bank look better than all of
the others by offering services that some other banks might not have.
Another way to get more people to put their money in the bank is to pay
them interest. Interest is extra money the bank gives you to keep your
money there. This means that you earn money on every dollar you put
into the bank.
diagram on the left, we made a simple picture to show you how this
works. Let’s say that you put $1.00 in your savings account in the
bank. The bank will loan your dollar (along with lots of other people’s
dollars) to people who want to buy a house, car, boat, or start a new
business and don’t have enough money to do it on their own. When those
people start to pay the money back, they PAY interest that is higher
than what you will EARN on your dollar. Let’s say they pay the bank $1.10 for every dollar
they borrowed. When this comes to the bank, they use five cents of the
interest on every dollar to pay their employees as well as for office
supplies, etc. That leaves your dollar plus five cents ($1.05). The bank
puts that five cents into your account and loans out your dollar again.
They do this over and over so money goes in and goes out of the bank
every day. This flow of money makes it possible for you to
withdraw money when you need it
without the bank going
to choose from are:
Commercial banks: These
banks get permission from the government to handle your money.
Originally these were only for savings. People
would save their money there and the bank would loan
out the money to people wanting to buy a home.
Savings and loan
associations: You save your money, they loan it out
and make money with it.
Credit unions: In
order to ‘belong’ to a credit union, you need to be
a member. Credit unions are made up of people who
work for the same company or kind of job, like
teachers. When this bank earns money, the
members get a share of it.
To find out
how to choose a bank,
different kinds of banks. There are national banks, state banks, and
central banks. The Federal Reserve Bank is the United States government’s central
bank. The Bank of England
is England's central bank.
A State bank has gotten state permission to
handle your money. Some banks use the word ‘State’ in their name
and others do not.
A national bank has been
given permission to be a national bank from the federal government.
These banks have the U.S. Department of the Treasury to make sure that
the bank is being run properly. Banks that are national banks have the
word national in their names. For example: Smithburg National Bank.
What is a
Reserve watches over banking and money in the United States and is
called a central bank. There are 12 Federal Reserve banks located
around the United States. This is where the United States government
money and bank money from all over the United States is handled. These
banks are spread out across the U.S. in the following cities:
New York, NY
Kansas City, KS
St. Louis, MO
San Francisco, CA
The Federal Reserve:
Decides how much money
circulation. If there is
too much money in circulation, the Fed (as people call the Federal
Reserve) may tell the banks to charge more
interest or keep more money in
‘reserve’ which means the banks
keep more money from being loaned. People won’t borrow money if it is
going to cost them a whole lot in interest. When this happens, there is
less money in circulation because the banks are holding onto it in
reserve so the
down. If the economy is already slowing down, the Fed can tell the banks
to stop keeping so much money in reserve and lower the interest rates
for people that want to borrow. People like to borrow money when the
interest rate is low so more loans are made. This puts more money into
Watches over banks to
be sure they are following all of the rules. The Fed also makes sure
that the banks are working well and are not in
Decides how much paper
money and coins there are in circulation. The Fed can keep a reserve of
cash—money that won’t be spent.
Is the bank of the
United States and takes care of all government checking accounts.
Is where checks go so
that they can be sent back to the writer’s bank. For example: If you
wrote a check from Bank A and sent it to a company that deposited it
into Bank B. Bank B would send the check to the Federal Reserve which
sorts all of the checks that are sent to it. The Federal Reserve then
sends it back to its original bank, Bank A. Then Bank A would okay the
check and pay out the money. It sounds like this would take a long time
but it is actually quick and only takes a day or two to do.
The Federal Reserve earns
money in the same way that regular banks do: by charging
interest. A major difference between the Federal Reserve and
regular banks is that YOU can’t put your money in it or borrow money
from it. Regular banks can put money in, take money out, and
borrow from the Federal Reserve, but you can't.
The Federal Reserve is
the main or central bank for the United States. It is the most
important bank in the country. There are central banks all around the
world. Here are a some:
Bank of Australia
Brazil: Central Bank
People’s Republic of
People’s Bank of China
Canada: Bank of Canada
Russia: Bank of Russia
Egypt: Central Bank of
United States: U.S.
What Bank is larger
than a Central Bank?
banking system around the world is connected. Many nations belong to
multilateral development banks where countries deposit money that is
meant to help other countries. They do this by loaning money at low
interest rates for projects that will help people in other countries
with projects they can’t afford on their own. These are called
‘developing’ countries. These banks will also give money as grants
which means as a gift that doesn’t need to be paid back. Some of these
international banks are:
European Bank for
Reconstruction and Development
Asian Development Bank