How does banking work in capitalism, and would it be different under socialism?

[Kukulofori]

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[SEKT]

There will be no banking work. That is the difference.

[Schrödinger's Cat]

Realize that by socialism you're covering a large perspective of ideologies. Defining a uniformed cause for banking would just be impossible, since socialism is an organic institution. Mutualists like myself see credit unions and mutual banks taking over and handing out loans to worker cooperatives for an interest rate that only covers the basics of commerce (1%). Other socialists see banking as frivelous since they want to do away with money in favor of energy accounting or some other egalitarian tracking system.

As for banking under capitalism, I recommend researching the Federal Reserve and fractional reserve banking. As a basic point, the Fed (or some other Central Bank, depending on where you live) creates fiat money - which is just money that has nothing to back it other than the government guarantee that it works. Fractional reserve banking is the creation of money from private banks. Say you want a loan from the bank of a $1,000. Do you know how much money the bank really has? No. So banks exploit this fact by giving you more money than they actually have. They create money out of thin air. Just type a number next to your number and whalla, a loan is created (the government somewhat restricts it, if lucky). However, you have to pay the bank real money in the form of interest for the fake money they're producing.

[DesertShark]

As for banking under capitalism, I recommend researching the Federal Reserve and fractional reserve banking. As a basic point, the Fed (or some other Central Bank, depending on where you live) creates fiat money - which is just money that has nothing to back it other than the government guarantee that it works. Fractional reserve banking is the creation of money from private banks. Say you want a loan from the bank of a $1,000. Do you know how much money the bank really has? No. So banks exploit this fact by giving you more money than they actually have. They create money out of thin air. Just type a number next to your number and whalla, a loan is created (the government somewhat restricts it, if lucky). However, you have to pay the bank real money in the form of interest for the fake money they're producing.

This seems ridiculous...how was something like this allowed to start? Is this why we are in the finical crisis we are in now?

[Schrödinger's Cat]

It came about when gold was regularly used as a means of exchange indirectly (notes - money, basically). Goldsmiths (bankers) realized that at any one time the possibility of all or even a good sum of clients pulling their money was slim, so they just lied about how many notes they had. This new money would then be used for investing, creating, and hiring - however, when people came to redeem their money, the banks didn't have enough.

[Comrada J]

You pay for money, you pay the extra bit by working hard then they pocket the credit made, it's like another tax and reason why you shouldn't take out a loan unless it's absolutely necessary. It's no surprise that this recession happened when we were using such a crazy system.

[Decolonize The Left]

I have addressed many facets of this question is two separate threads. Neither are very long, and I have attempted to be as simple and straight-forward as possible in my explanations. You can find them here:

What is Banking? (http://www.revleft.com/vb/banking-t91434/index.html)

Third World Debt (http://www.revleft.com/vb/third-world-debt-t92454/index.html)

I hope this helps.

- August