The Bank Investor’s Handbook by Nathan Tobik

1 WHAT IS A BANK?
So first things first. What is a bank?
As typical members of society most of us have had experiences with a
bank on one or more levels. For some it’s a matter of using a bank for a
savings account and/or a checking account. Others use banks to obtain
financing in order to purchase a home or a car. In fact, it’s very hard for a
consumer to get by in today’s world without interacting with a bank in some
fashion.
Even though one might have experience using a bank it doesn’t mean
they understand how a bank works or the role it plays. To assume such
understanding would be like assuming that riding in an airplane makes one
an expert on aviation.
If money is the lifeblood of an economy then banking is the heart that
keeps that blood pumping. Banks in their most basic form are simply
financial intermediaries that help people who have money (depositors) find
people who need money (borrowers). It’s obviously more complicated than
that, but bear with us for a moment. It’s necessary to dig the foundation of a
house before one chooses the wainscoting.
H YPOTHETICAL E XAMPLE
Let’s imagine a world without banks for a minute. To maintain our
focus on simplicity we will assume this world has no institutional
alternatives to banks (there are loan shark associations, but we won’t go
there).
In this mythical non-banking world let’s pretend we own and run a
small retail store. Perhaps it sells hardware, home goods or groceries. It
doesn’t really matter. Customers come into our shop and purchase goods
with cold, hard cash since in our world without banks there are no checks,
debit cards or credit cards.
Without a bank we have to keep all of the cash from each day’s sales
somewhere in our store. Suddenly, with this large and growing pile of cash
we become a prime robbery target. So we install a safe in the back room,
but we’re always worried about storing our cash.
When the time comes to purchase inventory to re-stock our store we
need to take cash from the safe and somehow get it safely to the vendor.
Maybe we hire a courier or deliver it ourselves. It’s one thing if the vendor
is located in town, but it becomes quite problematic and costly if the vendor
is out of the area. In addition, without cash on hand we simply can’t
purchase any inventory unless the vendor personally decides to extend us
credit. However, the proverbial chickens will eventually come home to
roost and our issues with moving cash will not disappear.
Now, let’s imagine our business is successful and we decide we’d like
to expand. Once again, the only way to pay for such growth is from cash on
hand. We would need to save up for our expansion ahead of time or expand
at a snail’s pace (if that’s even possible) paying workers periodically as and
when money trickles in to our store.

The Bank Investor’s Handbook by Nathan Tobik