By: Nysha Gupta
We all know how gossip works at school, one person whispers something, it spreads to another, and before you know it the whole class is talking. That is basically how a commercial bank moves the money around, they are the ones passing it person to person. However every rumor needs someone to step in before it gets out of control. That’s the role of the central bank. They don’t gossip with you directly, but they set the rules and keep the drama from getting out of hand.
Commercial banks are the banks we actually deal with everyday. They are a financial institution in which individuals and firms can save their money or also obtain loans. In our rumor analogy, they are like the friends passing the message around. They don’t create the money themselves, but they keep it moving between people.
Central Banks are different because we don’t interact with them directly, instead they act as authority that keeps the whole system stable. They are the banks of the government which is responsible for controlling a country’s money supply, issuing notes, coins and setting the rules that commercial banks must follow. In our rumor analogy, they are the principal or teachers who don’t spread the gossip themselves but makes sure it doesn’t get out of hand. Without them the “rumor mill” can spill into chaos, with prices shooting up or banks running out of cash.
Why Teens Should Care
Even if you don’t think about banks much now, the decisions they make already affect your daily life. When prices rise and your favourite Starbucks order costs more than last year, that is inflation something central banks try to control. When you save up $100 and put it in the bank, the interest rate (set by the commercial banks) decides how much extra you will earn. When you or your family borrow money, like for a car, the bank’s lending rates will decide on how expensive that loan will be. So even if you don’t step into a bank building, what they do can change how much things cost and how much money you can keep.
Why it all matters
Without central banks, the whole money system could get out of control: prices could skyrocket and banks might run out of cash. On the other hand, without commercial banks, people wouldn’t have an easy way to spend, save or borrow money. Both of these banks are needed to keep everything running smoothly: commercial banks move money around everyday, while central banks make sure the rules are followed and the system is under control. Together, they are like the perfect balance between friends spreading gossip and teachers keeping it under control.
Money might seem boring at first, but it’s actually full of drama, just like the rumors that fly around school. Commercial banks are the friends passing the money along, letting us spend, save and borrow everyday. Central banks are the teachers behind the scenes, setting the rules and making sure nothing spirals out of control. Both are needed to keep the system running smoothly, so prices stay reasonable and banks don’t run into trouble. Next time you swipe your cards, you’ll know there’s a whole team working behind the scenes to keep the money gossip under control.