ELI5- how exactly do ‘bankers’ become the richest people around(Jp Morgan, Rockefeller, rothschilds etc.), when they don’t really produce anything.
In: 17100
In addition to the answers about how interest works on legitimate lending, they also generate additional income via a practice called ‘fractional reserve lending’.
Say you deposit 10 dollars in the bank, but that bank’s ‘reserve’ (the fraction of your money they need to have available for you to withdraw) is only 50%. That means the bank can then loan out the other 50% of your funds to someone else, and collect interest on that loan. In this way, they effectively ‘create’ money. There are now $15 in the bank/in circulation (your $10, plus the $5 they loaned out to another of their customers), even though only $10 of that actually ‘exists’.
In the simplest terms, bank has money and loans you $100 if you promise to pay back $105. Repeat this on a nationwide out global scale and they make money without producing anything.
Where do they get their money? Bank says if you give them your $100 to hold for you they’ll return $101 in a year. They loan this money and get back 105, give you back 101 and get $4 in the process.
Step 1: have a lot of money already.
Step 2: let someone borrow a bit of that money, but make sure they pay you back **more** than they borrowed.
Step 3: repeat.
Loans are basically if you made an entire company the ones who are working to pay you
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Even big companies like ones the size of IBM or Microsoft might take out small loans to fund day to day expenses for projects instead of having a high input and high output corporate bank account.
Though the more tangible example is GE, while maybe GE has enough cash on hand to avoid it, it’s much more likely that a company like that making windmills would take a loan to buy the raw materials for a windmill, then pay back the loan over time.
Projects costing a few million dollars over 10 years, those companies don’t usually have 10 years worth of materials and costs stockpiled.
Most corporations would have their “savings” money in stocks to mitigate inflation and maximize profits.
So instead of raiding that fund you get a loan against it or other means of credit. Then use that to find the company till payday arrives.
Have you ever paid interest on a loan?
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