The Real Secret Life of Money

From listening to politicians bashing banks and wall street investment houses one might think that when money goes into a bank it becomes the luxury of the idle rich. The facts are quite otherwise. Money going into banks and investment banks always does much more to create jobs and to stimulate economic activity than any alternatives including spending it on non capital goods and letting politicians spend it saying they are somehow great investors in our future. Money has a secret life once it is deposited into a bank. It goes to work immediately. Even if the bank has to keep the money to satisfy reserve requirements it tends to be reinvested very short term for some kind of interest. Interest. When banks start hoarding money and don't invest it often that is because the federal reserve or other central bank has pushed interest rates down to zero or near zero. Then there really is no reward for taking much risk with cash and a bank may be prudent to sit on cash instead of putting it to use. That happens very rarely usually only after a major financial panic where banks start to behave overly conservatively fearing a possible repeat situation. Most money goes directly into the economy that exists at the time. It goes to work. Government officials and politicians are always making the argument that they can better spend money that is passively sitting stashed away in bank vaults where it does nothing other than keep the rich getting richer. That simply is not true. Money has an active real secret life once deposited in a bank. The famous scene and song sequence in Disney's Mary Poppins show children forced to make a decision between depositing an old large size British Penny into a bank run by stodgy rich old men or giving it to an old women selling cracked corn in rolled up newspaper cones to feed the pigeons. The movie seems to favor feeding the bird and so does Mary Poppins. The secret life of the penny deposited in the bank is that it would have a real future there for the children's benefit even though not very much money. Giving it to the women feeding the dirty urban London pigeons outside of St Paul's Cathedral would temporarily get the pigeons fat so that old lady could quietly later trap one and have it for dinner. She has a good business selling bird food with real benefits including being able to deposit some of the pennies she gets in the bank herself for her own benefit. One has to assume the old lady has to go out and buy the cracked corn as an expense of business. The rolled newspaper is probably free discards she finds. Disney could have learned the lesson himself because when he went to build Disneyland in Anaheim California he went so deeply in debt it could have been the end of his enterprise. Had more people fed the birds and not put their pennies in the bank where would Disney have been able to go borrow money when he really needed to? Money in banks may not be the most fun place to put it as in the movie but it has a real life there where even the worst run banks should have a little respect just for trying.

Money in the bank is not exactly what a lot of people think it is. Bank Robbers often find that robbing a bank is not nearly as lucrative if successful as the fantasy. Sometimes there is more cash in an ATM machine than behind the counter in a bank branch. Money is deposited, withdrawn and exchanged at banks on a regular basis but usually very limited quantities are available without giving most bank branches advance notification. Few People need a lot of cash with all the ATM , Plastic credit cards and Internet banking options we now have. People who might need the most cash in day to day business dealings might actually be those who rarely visit a bank because they are in a black or gray market cash only business like drug smuggling or drug distribution. There are a few business that only take cash but not too many any more. The main reason for only taking cash for a legitimate business might be to avoid high credit card and debit card commissions and fees paid to banks for the luxury of being able to take plastic.

The only money in your local bank is likely to be cash on hand for immediate withdrawal and sometimes some extra cash stashed away in vaults although this cash is also not likely to be the government required reserves. People tend to believe that money is stashed and stored physically in banks . People tend to think about money in the bank being something like the old Little Rich Richie comic books where the multi-millionaire kid goes into his home vault which is the size of some people's houses and he goes swimming in hundred dollar bills. The only banks that keep cash money on hand like that are on Hollywood game shows. It is true that government tends to want banks to have high cash reserves but even that does not lead to large vaults full of money. Thanks to plastic ATM Debit cards , checks, credit cards banks may actually be keeping a lot less cash on hand then they once used to. With the advent of encrypted on line money, pay-pal and on line banking money in the bank is becoming nothing more than digital tabulations in memory storage. When it does get locked away it may actually becomes something other than money. To see what people think about money all you have to do is watch them vote for politicians who tell them that government can do a better job of investing money than allowing the wealthy to merely keep it locked away in bank vaults. The public tends to have that perception because banks are one of the primary places one goes besides the ATM machine to get cash. It is only logical that people depositing money into their bank account and particularly the rich with all their excess cash savings should mean that banks are full of money. At any one moment a bank may have less than 1 percent of all of its deposits and reserves in cash form available for withdrawal behind the tellers or hidden away in vaults. With the growth in the use of credit cards, debit cards, checks and new Internet forms of money there is even less need for any money to ever enter a bank. An automatic teller machine can spit out script with a encrypted code on it that is as good as cash money at any check out counter with a compatible scanner. I already wrote the article that money does not exist. It no longer needs to exist. It never did. It was derived originally from barter transactions where no money was in the deal. Money just made it possible to conduct third and forth party barter transactions in small unit increments so one could get a credit for half a gallon of milk being sold as easily as the a gallon and three quarters of milk. That is why you can make change from money at least modern day representations of money.

The point being made is that money is not a physical thing but is just an accountable means of making an exchange transaction. Barter never really disappeared but instead became more precise because of the incremental break down of money into discrete units of assigned value. In a barter transaction you might have to trade a half of a water melon for three oranges because that might be the only way to make change. Money facilitates paying for three oranges for 33 cents each and then allowing the seller of the water melon to buy a whole water melon for $1.98. Being a medium of exchange can make virtually anything money.

What is the difference between a bank and the US treasury? As it happens more often the banks will be loaning the US Treasury Money than the reverse. Sure the US treasury can just print money. Everyone also knows it has more debt than any other institution on the planet. The Treasury and Federal reserve regularly borrow money from banks and sometimes in dangerous times of financial panic they may need to loan money in reverse back to banks. The federal reserve also tends to lend money to banks at lower rates than they can lend it out for that is because the banks have a particular power in the economy that the federal reserve and treasury don't have. In the last major financial crisis the federal reserve could have just opened it's lending window to all companies and individuals for a limited period of time instead of putting the banks first. The way the fed was designed was to be a bank for the banks and the central administration bank of banks which is why it never occur ed to the bureaucrats working there to open the lending window to the public as an emergency measure. At the time they also played favorites and refused to lend money to Lehman brothers favoring their competition which did seem a bit too political for some of us mere spectators.

Even in the market panic and crash banks clearly had financial power that no one else in the economy had, The theory that TARP funding to even banks that did not need it would strengthen the system just by having reserves on hand. TARP was the ultimate interest free loan that banks could fantasize about except that it had a few too many government strings attached to it.. Banks only partly deserved their bad reputation before and after the panic and crash. We really can not do without banks nor can we rely on government to be a state monopoly bank as opposed to some other viable banking alternative. Banks looked horrible at the time of the crash but they had competition that was doing quite well no one paid attention and had a lot of big banks been left to fail other banks would have quickly grown up to take their places. It is hard to say if the TARP bail out was really successful or not because there was so much misinformation about the actual state of banks at the time. Even the real estate loan market , although bad, was not entirely bad. The panic and crisis was worse than reality. Part of it was the necessary exaggeration to make short sellers rich really quick . When banks get no respect there is often an ulterior motive. It is true that a lot of banks got over extended in an obviously over extended real estate lending market. They got that way because they relied on a little slogan the government created that the full faith and credit of the United States of America would back up loans by certain companies that the government created to buy up and repackage existing loans. Banks made the mistake of believing the claim and then borrowing and lending full faith and credit paper that was guaranteed by the federal government. It seemed like an easy way to eliminate risk for banks. It turned out to be a horrible mistake based on an illusion and a free lunch scheme cooked up by crooked politicians. Banks took most of the blame and the worst of the political scoundrels got re-elected and promoted to seniority and controlling positions in the government.

Then when the smug foreign banks started to collapse faster than the American Banks the Europeans started to blame the American banks for their own problems that had nothing to do with American anything but the same kind of bad public financial policy being pushed by the new political goons in high office. All these years you have gone to the bank and assumed it was only safe because the government has the banks guaranteed under a required FDIC insurance plan.. We just saw a federally insured housing market collapse and learned nothing. The feel good FDIC insurance maybe better than the alternative but since the last round of failures was due in part to government policy it seems that banks themselves need a little more respect all by themselves.

Money does not sit in a bank doing nothing it almost immediately is put to work as no one else can. Banks have enormous capital --most of it borrowed money. There are examples of private banks that only have private money. The biggest banks thens to be banks that borrow far more money from far more people. That capital is not owned by bank shareholders but by depositors. Depositors thus have a limited interest in the bank and are paid accordingly. The depositors are also supposed to have more safety and protection than shareholders do in the limited liability scheme of their ownership of shares of the companies. Think twice when you hear a politician saying he or she wants to stick it to the banks , force them to loan money to the government or to people who they wont give loans to etc. If you are a depositor at a bank you don't want your bank being run for the benefit of the government because you are as much at risk as the depositor as the bank is as a registered corporate entity by the state.

The secret life of money in banks is quite and usually regularly pays interest and dividends. Unlike the real loud self selling life of politiicians banks and the life of money is a seemingly quiet and even secret business.