What is a Bank?

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.
In order 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.
Bank interest diagram

In the 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 broke.
Some banks to choose from are:

	Commercial banks: These banks get permission from the government to handle your money.
	Savings banks: 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.

     There are 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.

The Federal 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:

	Decides how much money is in 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 economy slows 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 the economy.
	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 financial trouble.
	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:

The whole 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: