Financial markets provide a mechanism for those with excess funds to purchase securities, such as stocks and bonds, issued by those who need funds. Moreover, financial markets provide prices for those stocks and bonds, so that we know whether to conceal or brag about or most recent purchases. Without money, the transactions that make up our daily economic routine would be unimaginably difficult, and saving and investing would be almost full-time jobs. Money, however, is more than just a lubricant which enables the economy to operate smoothly. Money also plays a key role in influencing the behavior of the economy as a whole and the performance of financial institutions and markets.
Banks play a particularly critical role in the economy.
Banks provide a place where individuals and businesses can invest their funds to earn interest with a minimum of risk. Banks, in turn, redeploy these funds by making loans. In this regard, banks are remarkably similar to other financial intermediaries, like finance companies and insurance companies, which also acquire funds from individuals and businesses and pass on these funds to other individuals and businesses. As it turns out, most of what we call money in the United States is represented by the deposits issued by banks. Consequently, banks serve as the principal caretakers of the payments system because we write checks on our bank accounts to pay for things we buy.