Learn about Banking 6: Bank Notes and Checks Video

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Learn about Banking 6: Bank Notes and Checks

Let's explore this notion of using something other than actual physical gold as a unit of exchange. So let me draw my balance sheet and I'm going to draw it a little bit neither this time. So I've build my building, my bank, my volt whatever you want to call it and then I used a 100 gold pieces to build it. So this is just my banks balance sheet, Bank of Sal. So it's a 100 gold pieces and when I say 100 gold pieces, this is equity hopefully you're familiar with it by now. But it's not like there is actually a 100 gold pieces anywhere anymore I took this 100 gold pieces paid the builders of my volt looking, temples looking bank and maybe they look to some place else and they just took those that gold with them. So I'm just saying I have a 100 gold pieces worth of a building. Maybe if I had to sell this, someone would give a 100 gold pieces for them and that’s why I say I have a 100 gold pieces worth of equity. Anyway, that’s not the point of this video. So I go, I tell everyone “Hey, you can keep your money safe or your gold safe with me”. So let's say that I don’t know citizen a. Citizen a, says “Well, this looks like a good bank and Sal you’ve in this village all your life and I trust you and your ancestors. So I'm going to deposit 500 gold pieces with you” so that becomes an asset in the bank, 500 gold pieces and I'm trying to write this neatly as possible. Got the width off a little bit but it think you get the idea, the width shouldn’t matter. The height kind of represents the quantity. So this guys, maybe he's my uncle, 500 gold pieces deposits in the bank. Because this volt that I built seems a lot safer and I say “Well, do you want it all in your checking account sir or would you like some cash back?” and he says “Oh, I need some cash, you know, to just transact everyday and to buy you know supplies or food etcetera. So why don’t you put 400 equivalent in my checking account” so let me draw that. Let me do the cash back first, so let's do say I do a 100 cash back first. So then I have this liability here of a 100, so it's a 100 gold pieces equivalent of notes outstanding, NO for notes outstanding and maybe I just hand them to 520’s for that as most ATM’s today do. But I just don’t want to get confuse things too much. Remember this is in my fictional world this aren’t necessarily dollars just yet. This are bank notes from The Bank of Sal saying that “Anyone who were to hand back one of this 20’s to me will get 20 gold pieces” that’s all it says. And they're hard and then I've slide them hard to afford just because I don’t want anyone printing this notes and then coming to me and getting my gold pieces I only want the ones that I printed coming back to me. But anyway, that depositor, so you got a 100 gold pieces of notes and that’s what I've drawn here and then the rest it will just stay in his checking account. So checking account, it's a liability for me, right. Because he can, he can at any point withdraw the checking account and get back 400 gold pieces. So 400 gold pieces for A’s checking account, A’s checking. Call it checking deposit, there's a bunch of ways you can write it but this is a liability for me, this are my assets, fair enough. Someone else who trust a says “Oh!” well I put this a let's call them person b so it's may if it's good enough for a it's good enough for b. So let me put my money in this bank account as well and I want to do similar type of transactions a, although maybe they don’t have this much money. So let's say that they have, I don’t know, let's say they have 200 gold pieces, so let me draw that on the left hand side, first. So 200 gold pieces from person b and its look like about 200, 200 gold pieces and they want half of it in cash and half of it as a checking deposit account, so let me do it like that. So let's see it's about half of it will be 100 gold pieces for this account. And then we also give him some cash. Which are essentially bank notes in our current universe and let's say he wants it all in 10 so we give him, so let's say 100 gold pieces, gold pieces equivalent notes is outstanding and I'm going to hand him—let's say he likes it all in ones, I don’t know, something he likes the weight of the money. Or he has to, I don’t know, what he does with the $1.00 bills, but a 100 times one gold piece denominated bank account. All right, I gave him a 100 of this, fair enough. So let's explore a little bit about how some transactions can occur with a and b. Let's say a need to buy an apple from b. So let's say, let me draw this up here, I don’t want to run out of space so I’ll draw it actually down here. So let's say I have person a and I have person b. So b has an apple, b has an apple that’s my drawing of an apple. And person a wants it and ask person b “How much is an apple cost?” and person b says “Well, an apple cost two gold pieces” so person a says “Well, that’s a little high but I'm hungry so I will give you two gold pieces for it but I’ll tell you what, you know, there's this new thing called the bank and I don’t have gold pieces and I think you know what it's all about, instead let me just give you this pieces of paper that the bank says at anytime I can go and trade for gold pieces”. So person b “Oh, that’s fair enough, I'm very familiar with that concept as well” so person a gives person b. So person a has, you know, maybe they broke—maybe some of this weren’t 20’s, maybe some of this we're $2.00 bills or something or let me just say, they we're $1.00 bills. So one gold piece note, one gold piece—actually let's just make it since he got five 20’s let's say he gives him a 20, he gives him a 20 gold piece note, I should draw it in green because that’s the color that I originally drew the 20 gold piece notes. And one of this, he hands one of this over to person b, b hands over the apple to person a. And he also hands over, he also hands over 18 of those $1.00 notes that he got. So $1.00 notes, right that that this we're, this notes here that person b got. Hands over 18 of these $1.00 notes, so times 18 and so in that fact that you had $2.00 note which switch hands and an apple was exchanged and what's neat here is couple of things one no gold ever had to exchange hands because gold is heavy and you don’t want to carry it about it around the bunch of gold. You're able to do very exact change in this situation and you could imagine a world where gold is worth, you know, 20 times that your smallest unit of exchange you want. So it would be very inconvenient to have to break up little gold coins. In this case there are smallest—our smallest unit of exchange is one gold, dollar bill whatever you want to call it but you could imagine, you could break this up. You could, this bank could issue, notes that are quarter of a gold piece. Or and eight of a gold piece and that’s a lot easier than actually cutting up gold pieces and then having to put them all back together. And of course these notes can then switch hands between people as the economy needs as it functions and the bank doesn’t have to worry about anything and the gold doesn’t have to be moved around, so everyone is happy. Well let's say that that person b actually wants to buy something large from person a and let's say person b wants to, let's say person b—person a is richer. So let's person a is buying something from b. So let's b is a home builder, all right, let me do that in blue. Let's say person b is a home builder and person a is going to get him to buy a house and get them to build a house for him. So he will say “Well, I’ll pay you 200 pieces to build a house, that’s a huge amount of money. I don’t like walking around with that, how about I write you a cheque?” and person b “Well, what is a cheque?” person a says is “Well, a cheque, I just write you a note that essentially instructs the bank to transfer that amount of gold pieces in my name to it being in your name” and person b “Says, well that sounds reasonable enough”. So person b gives person a, a home works for weeks to build a house and then person a writes b a cheque and now we're getting into the introductions to cheques. And the cheque will look something like this. Person a will fill out, you know, it will have a name there and he’ll say “200 gold pieces, please” and then a will sign it, a and probably date it, you know, 10 I don’t know 2008 and then give it to b. And then b can take it back to this bank, b can take it back to the bank and the bank will do the transfer and all the bank has to do is 200 gold pieces from here and put it there. So this is all the bank has to do really. Right now at 400 pieces in a’s name just take 200 of those and put them in b’s name. So now this is b, b’s new share, which would be 100 plus 200 so it's 300 gold pieces. And then a share has shrunk to just being this part right here. But notice didn’t have to do anything except a little bit of paper work, 200 gold pieces. And that was useful because you didn’t have to exchange caster. You know, we talked about gold being dangerous to keep at home because obviously someone could steal it and it's also inconvenient because it weighs a lot and it's hard to break up and carry around if you're doing a lot of it. But cash is the same thing these bank notes are also dangerous because someone can steal them and no ones keeping track of who has which bank notes. So they can—there's still something that’s very stealable but a check was nice because one you could write a very large amount. And also only if we're doing our authentication right, person a can write the cheque. So it's not like someone could, in an ideal world someone could not have stolen a’s cheque book and signed for him, because hopefully this bank has a signature on record and can recognized when a has written a bad cheque or maybe they’ll even check with a to say something is little bit suspicious. But anyway that’s an introduction to bank notes and cheques. In the next video I’ll talk about how we can use all of this notions to actually lend the money also without giving out any gold, see you in the next video.

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Let's explore this notion of using something other than actual physical gold as a unit of exchange. So let me draw my balance sheet and I'm going to draw it a little bit neither this time. So I've build my building, my bank, my volt whatever you want to call it and then I used a 100 gold pieces to build it. So this is just my banks balance sheet, Bank of Sal. So it's a 100 gold pieces and when I say 100 gold pieces, this is equity hopefully you're familiar with it by now. But it's not like there is actually a 100 gold pieces anywhere anymore I took this 100 gold pieces paid the builders of my volt looking, temples looking bank and maybe they look to some place else and they just took those that gold with them.

So I'm just saying I have a 100 gold pieces worth of a building. Maybe if I had to sell this, someone would give a 100 gold pieces for them and that’s why I say I have a 100 gold pieces worth of equity. Anyway, that’s not the point of this video. So I go, I tell everyone “Hey, you can keep your money safe or your gold safe with me”. So let's say that I don’t know citizen a. Citizen a, says “Well, this looks like a good bank and Sal you’ve in this village all your life and I trust you and your ancestors. So I'm going to deposit 500 gold pieces with you” so that becomes an asset in the bank, 500 gold pieces and I'm trying to write this neatly as possible. Got the width off a little bit but it think you get the idea, the width shouldn’t matter. The height kind of represents the quantity. So this guys, maybe he's my uncle, 500 gold pieces deposits in the bank. Because this volt that I built seems a lot safer and I say “Well, do you want it all in your checking account sir or would you like some cash back?” and he says “Oh, I need some cash, you know, to just transact everyday and to buy you know supplies or food etcetera. So why don’t you put 400 equivalent in my checking account” so let me draw that.

Let me do the cash back first, so let's do say I do a 100 cash back first. So then I have this liability here of a 100, so it's a 100 gold pieces equivalent of notes outstanding, NO for notes outstanding and maybe I just hand them to 520’s for that as most ATM’s today do. But I just don’t want to get confuse things too much. Remember this is in my fictional world this aren’t necessarily dollars just yet. This are bank notes from The Bank of Sal saying that “Anyone who were to hand back one of this 20’s to me will get 20 gold pieces” that’s all it says.

And they're hard and then I've slide them hard to afford just because I don’t want anyone printing this notes and then coming to me and getting my gold pieces I only want the ones that I printed coming back to me. But anyway, that depositor, so you got a 100 gold pieces of notes and that’s what I've drawn here and then the rest it will just stay in his checking account. So checking account, it's a liability for me, right. Because he can, he can at any point withdraw the checking account and get back 400 gold pieces. So 400 gold pieces for A’s checking account, A’s checking. Call it checking deposit, there's a bunch of ways you can write it but this is a liability for me, this are my assets, fair enough.

Someone else who trust a says “Oh!” well I put this a let's call them person b so it's may if it's good enough for a it's good enough for b. So let me put my money in this bank account as well and I want to do similar type of transactions a, although maybe they don’t have this much money. So let's say that they have, I don’t know, let's say they have 200 gold pieces, so let me draw that on the left hand side, first. So 200 gold pieces from person b and its look like about 200, 200 gold pieces and they want half of it in cash and half of it as a checking deposit account, so let me do it like that. So let's see it's about half of it will be 100 gold pieces for this account. And then we also give him some cash. Which are essentially bank notes in our current universe and let's say he wants it all in 10 so we give him, so let's say 100 gold pieces, gold pieces equivalent notes is outstanding and I'm going to hand him—let's say he likes it all in ones, I don’t know, something he likes the weight of the money.

Or he has to, I don’t know, what he does with the $1.00 bills, but a 100 times one gold piece denominated bank account. All right, I gave him a 100 of this, fair enough. So let's explore a little bit about how some transactions can occur with a and b. Let's say a need to buy an apple from b. So let's say, let me draw this up here, I don’t want to run out of space so I’ll draw it actually down here. So let's say I have person a and I have person b. So b has an apple, b has an apple that’s my drawing of an apple. And person a wants it and ask person b “How much is an apple cost?” and person b says “Well, an apple cost two gold pieces” so person a says “Well, that’s a little high but I'm hungry so I will give you two gold pieces for it but I’ll tell you what, you know, there's this new thing called the bank and I don’t have gold pieces and I think you know what it's all about, instead let me just give you this pieces of paper that the bank says at anytime I can go and trade for gold pieces”. So person b “Oh, that’s fair enough, I'm very familiar with that concept as well” so person a gives person b.

So person a has, you know, maybe they broke—maybe some of this weren’t 20’s, maybe some of this we're $2.00 bills or something or let me just say, they we're $1.00 bills. So one gold piece note, one gold piece—actually let's just make it since he got five 20’s let's say he gives him a 20, he gives him a 20 gold piece note, I should draw it in green because that’s the color that I originally drew the 20 gold piece notes. And one of this, he hands one of this over to person b, b hands over the apple to person a. And he also hands over, he also hands over 18 of those $1.00 notes that he got. So $1.00 notes, right that that this we're, this notes here that person b got.

Hands over 18 of these $1.00 notes, so times 18 and so in that fact that you had $2.00 note which switch hands and an apple was exchanged and what's neat here is couple of things one no gold ever had to exchange hands because gold is heavy and you don’t want to carry it about it around the bunch of gold. You're able to do very exact change in this situation and you could imagine a world where gold is worth, you know, 20 times that your smallest unit of exchange you want. So it would be very inconvenient to have to break up little gold coins. In this case there are smallest—our smallest unit of exchange is one gold, dollar bill whatever you want to call it but you could imagine, you could break this up. You could, this bank could issue, notes that are quarter of a gold piece. Or and eight of a gold piece and that’s a lot easier than actually cutting up gold pieces and then having to put them all back together.

And of course these notes can then switch hands between people as the economy needs as it functions and the bank doesn’t have to worry about anything and the gold doesn’t have to be moved around, so everyone is happy. Well let's say that that person b actually wants to buy something large from person a and let's say person b wants to, let's say person b—person a is richer. So let's person a is buying something from b. So let's b is a home builder, all right, let me do that in blue.

Let's say person b is a home builder and person a is going to get him to buy a house and get them to build a house for him. So he will say “Well, I’ll pay you 200 pieces to build a house, that’s a huge amount of money. I don’t like walking around with that, how about I write you a cheque?” and person b “Well, what is a cheque?” person a says is “Well, a cheque, I just write you a note that essentially instructs the bank to transfer that amount of gold pieces in my name to it being in your name” and person b “Says, well that sounds reasonable enough”. So person b gives person a, a home works for weeks to build a house and then person a writes b a cheque and now we're getting into the introductions to cheques.

And the cheque will look something like this. Person a will fill out, you know, it will have a name there and he’ll say “200 gold pieces, please” and then a will sign it, a and probably date it, you know, 10 I don’t know 2008 and then give it to b. And then b can take it back to this bank, b can take it back to the bank and the bank will do the transfer and all the bank has to do is 200 gold pieces from here and put it there. So this is all the bank has to do really. Right now at 400 pieces in a’s name just take 200 of those and put them in b’s name.

So now this is b, b’s new share, which would be 100 plus 200 so it's 300 gold pieces. And then a share has shrunk to just being this part right here. But notice didn’t have to do anything except a little bit of paper work, 200 gold pieces. And that was useful because you didn’t have to exchange caster. You know, we talked about gold being dangerous to keep at home because obviously someone could steal it and it's also inconvenient because it weighs a lot and it's hard to break up and carry around if you're doing a lot of it. But cash is the same thing these bank notes are also dangerous because someone can steal them and no ones keeping track of who has which bank notes.

So they can—there's still something that’s very stealable but a check was nice because one you could write a very large amount. And also only if we're doing our authentication right, person a can write the cheque. So it's not like someone could, in an ideal world someone could not have stolen a’s cheque book and signed for him, because hopefully this bank has a signature on record and can recognized when a has written a bad cheque or maybe they’ll even check with a to say something is little bit suspicious. But anyway that’s an introduction to bank notes and cheques. In the next video I’ll talk about how we can use all of this notions to actually lend the money also without giving out any gold, see you in the next video.

Transcription by: Scribe4you Transcription Services