A natural question you might have right now is: “If I don’t spend money at all, am I hurting the economy?” You could be. But lucky for us, the financial system allows us to use the money you’re not using.
Say you’re a person who hates society. You realize that when you spend money, you are giving people jobs to do, and that makes you upset. So you decide to be a scrooge; you buy a few things for yourself and bury the rest of your salary in your backyard. This way, you have money, and every worker and their families can starve. Muhahaha, right?
As much as I admire your commitment to principles, I’m afraid that you’re stupid. First, not spending money means you can’t get stuff (including my stuff). Seriously, have a life. Second, you could accumulate more money if you invested it for others rather than hoarded it for yourself. Do you hate people so much that you don’t want to turn your money into more money?
A bank is an institution trying to incentivize your greedy ass into helping others. When you put money in a savings account, your bank doesn’t keep it there. Your money is probably being lent to a successful small business trying to accumulate capital quickly, or a straight A student trying to attend college. Your savings become the bank’s investments. Yes, I know you’re thinking “Those bastards, how dare they use my money to help good, hard-working people?” But you get the principal and interest in return; so it’s not a complete loss.
Say you’re a genius hobo. One night, after you finish your typical hobo routine, you get bored and end up inventing something brilliant: a teleportation device that lets people move a whole foot from where they are. This is the toy that every mother will want to buy her child for Christmas. The problem is: your broke ass doesn’t have enough capital. You don’t have a table to present the product for sale, a store to put the table in, the ads to market the product, the machines for duplicating the product, the research and development to extend the displacement ability of the product from one feet to two feet or anything else that would help you sell your product better. Your genius means nothing, because you don’t have the money to actualize it into a business.
But someone else does have the money. And that someone else will give you their money if you can prove you are reliable. This will be difficult because you are a hobo right now. You’ll have to beg a few strangers, get loans from family or find one of those rare employers who can trust you, so you can slowly build the funds to start your business. Because of your poor reputation and lack of credit as a hobo, starting will take time.
However, once your business is running ten years from now, raising funds will be easy thanks to our financial system.
If you can show a bank or an investor that you’re a responsible adult, or maybe show them how well your business does in its first year, you can get a large loan easily. Through the money, you’ll be able to buy factories, set up an online store and hire a diverse set of employees in less than two years. Children from every state will have your toy by the Christmas after next Christmas. You’ll end up profitable, and able to pay back the loan in full.
The loan will have allowed you to accumulate capital faster, allowing your business to grow faster. If the financial system didn’t exist, those children might have had to wait another ten Santa visits before Santa got them your product. What a horrible childhood that would be.
Bottom line about the financial system: there are cases where we can’t earn money unless we lend and can’t spend money unless we borrow. The financial system improves economic welfare by transferring unused money from lenders to borrowers in a way that gives a return to the lender, speeds up project activity for the borrower and allows better products and services to be produced sooner for everyone else in society.
A common metaphor: The economy is a garden. The plants in this garden will grow, but it will grow much faster and more healthily if it had irrigation. The financial system is the irrigation.
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