What is the reason and purpose of banks? It’s an easy question really....

Banks have several reasons to exist, and they all have to do with the government wherein the bank resides. Banks fill a vital economic role, which explains why they are either government regulated or government owned in every country. In every country on this planet there is one immutable fact: banks exist at the pleasure of the government. While some countries regulate banks more heavily than others, NONE (I repeat, NONE) allow their banks to be ‘un-regulated’. . . End of story.
 
OK - so banks are regulated by their governments.... So what is the purpose of these regulations? Chiefly they fall into three categories. One, they allow the government to control the supply of money in the economy - by creating money and keeping it safe (notice I said ‘create money’ - I didn’t say ‘print money’). Two, they control the ‘source’ of their citizens money by acting as ‘clearing-house’ for financial transactions between parties. And finally three, they control the flow of the respective currency in and out of the country. I’ll expand on all of these categories later, but our object for now is to keep it simple.
Now if you ‘google’ banks, you’ll find a whole lot of propaganda about an array of ‘services’ that banks provide. But you shouldn’t confuse ‘services’ with ‘purpose’ or ‘function’. So if you boil all the noise away, you’ll find that their basic ‘function’ is to fulfill these roles in any country’s economy.

Looking at Wikipedia, it says that a main function of banks is to loan and borrow money. Well this leads us into my first category. What happens when a bank ‘loans’ money to someone (business or people). The bank doesn’t give you the currency (cash) when they loan money. They create an account (at their bank obviously) that makes some money available for you to buy something - the purpose of the loan. Even when you complete your purchase, that currency may not even leave the bank. An amount of money is transferred into the account of the entity from which you purchased the item - allowing them to pay their bills, etc., etc...

The result is that the economy has grown (by the amount of the transaction) and the supply of money in the country has increased. That bank just ‘created’ money..... Now this is normal operations and not something illegal or unethical. It’s all apart of Economics 101.
In this example, if the amount is to be paid to someone who has an account in a different bank, the two banks get together and clear this transaction between themselves. As I indicated in category 2, banks ‘clear’ transactions between themselves on a daily basis, and this is also nothing new or extraordinary. However, take some ‘cash’ into a bank and try to open a new account. If the amount is over $1000 or so, you’ll be required to prove where it came from, and if any further deposits are to be made, where they come from as well....
In category 3, where do you go when you are about to travel overseas? You go to the bank to get your money exchanged..... The alternative is illegal and I don’t encourage you to participate in anything like that..... Yet, the ‘rate’ at which your money is exchanged into the foreign currency, is ‘set’ by your bank. Plus any amount you ‘exchange’ is reported to the government, and you are only allowed to ‘exchange’ so much. So much for ‘free trade’ huh....

Next up... Let’s add a pinch of human nature to this soup.