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Foreign hi, I'm Andy Tempte, and welcome to the Saturday Morning Muse. Start your weekend with musings that are designed to improve financial literacy around the world. Today is July 5, 2025. Last week we discussed the history of promissory notes and paper money. Building on our lessons focused on the history of money and trade, we found that, like early coins, paper currency represented a debt to be paid and possessed many of the same characteristics as coins, namely that all currency has velocity and flows through an economy. The more times currency is used in transactions, the more economic activity there is. All else the same. Sometimes this activity is called turnover. We ended last week's lesson with an introduction to fiat money. The money we use today that's backed solely by trust and confidence in the issuer. Here in the United States, the issuer of the currency that you have in your pocket is the United States government. We learned that prior to 1971, the US dollar was backed by and was convertible into gold at a predetermined this was called the gold standard. Today, the US Dollar is backed only by the full faith and credit of the US Government. Put plainly, the currency that you hold only has value because of a trust relationship between economic participants, you and me, and the issuer, the U.S. government. Your money represents a promise and hence the link between the first promissory notes and today's currency. Now, to really understand the evolution of paper currency from promissory notes to the present, we need to introduce the concept of banking. Why? Because historically, paper currency has been backed by promises made between individual traders through promissory notes. Promises made between governments and citizens, like we learned about last week with the Tang Dynasty's flying cash, and promises made between individuals, businesses and banks. We're going to learn that banks issued currency historically. But what is a bank? A bank in its most simple form is defined as a financial institution that receives deposits from savers, makes loans to borrowers, and manages transactions. So let's pause and expand on the three main components of the definition. First, a deposit is a quantity of money that is placed into an account at a financial institution for safekeeping, investment, or to make another financial transaction. In our modern economy, there are many types of deposit checking, savings, money market certificates of deposit, or CDs, retirement, payroll sweep, and the list goes on. We will take a deep dive into each of these account types in later episodes. Second, a loan is a financial transaction where a financial institution advances a sum of money to a borrower. You can borrow money for a car, a house, a boat, businesses, debt consolidation, Education. And the list goes on again. We'll deep dive into each of these types later. And third, is a transaction. A transaction in a banking context is any kind of deposit loan, money transfer, payment or investment. Banks facilitate or manage transactions for a fee. And we'll talk a lot more about how banks make money in the future. But for now, what's important to know is that the typical bank can earn a significant proportion of their revenue from transaction fees. So what are the characteristics of a bank and bankers by extension? Well, first, banks are intermediaries. They connect savers and borrowers. Second, banks offer security. They offer secure environment to store money and other valuables. They also work diligently to identify and prevent fraud. Third, banks are facilitators. Remember the velocity of money and how money flows through an economy? This is primarily handled through banking relationships. All modern economies are supported by a healthy banking sector. Banking is ubiquitous today and they're literally everywhere, both physically and digitally. Bank branch locations are seemingly on every street corner and you likely have an app on your smartphone that allows you to make banking transactions at any time of the day or night. Next, banks are profit seeking. A bank is a business that makes money through transaction fees and the interest it charges on the loans. It makes net of what it pays to depositors. And this is known as the interest rate spread. The interest rate spread is the difference between the rate the bank charges and receives for lending money to borrowers and the rate that it pays pays to savers or depositors. Loan rates are almost always higher than deposit rates. Things have to be really weird in the economy for it to be the other way around. Next, bankers provide advice to depositors and lenders. And finally, bankers are risk managers. They continually manage the risk profile of the bank. Banks can get themselves into all sorts of trouble when they make loans to under qualified borrowers. If borrowers default on their loans, then the bank loses. If depositors want their money, bank and the bank doesn't have it, then trust falls, depositors panic and a bank run can occur. We'll talk about bank runs in a later episode. Probably talk about It's a Wonderful Life, that Christmas movie that loads of people watch around Christmas. There are bank runs in that movie. So what's the modern lesson? Next week, as promised, we're going to introduce a few examples of the original bankers. The OGs, the Knights Templar, the Medici family and the bank of England. But what I want to leave you with today is this modern lesson. We said it earlier in the episode, but a healthy economy depends on a healthy banking sector. A wonderful example of this is the Great Recession of 2008 and 2009. This global economic downturn was caused primarily by the collapse of the United States housing market between 2006 and 2007. In the early to mid 2000s, housing prices increased dramatically, fueled by low interest rates, financial deregulation, and the resulting easy credit, meaning that receiving a loan and borrowing was easier, all else the same. During this period of rapid growth, banks shirked their duty as risk managers and lent money to borrowers who had poor credit and couldn't afford to repay their loans. When home prices began to fall as the real estate market cooled, these quote unquote subprime borrowers defaulted in large numbers and banks found themselves holding bad loans. A major mortgage lender, Lehman Brothers, they declared bankruptcy in September of 2008, which helped exacerbate a global recession that lasted well into 2009. Now, we're still feeling the effects of the Great Recession today, primarily in the housing market, where the supply of homes is less than the demand. During and after the Great Recession, home builders significantly cut back production of new housing units. And we're still trying to catch up today. So until next week, I wish you grace, dignity and compassion. My name is Andy Tempte. This is the Saturday Morning Muse. You can find the show on all the major streaming services as well as out on YouTube. Please like subscribe, rate and most importantly, share this public good with your friends, your family, your colleagues and your neighbors. The show is produced by Nicholas Tempte and we'll see you next time on the Saturday Morning Museum.