A bank is a business that takes in deposits and makes loans. A bank does not keep each deposit in its own box. A deposited bill is mixed with other cash, the balance is recorded by computer, and much of the money is lent out. Banks act as go-betweens for people who save and people who want to borrow, and without savers' deposits, banks would have little or no money to lend. A bank may pay savers 3 percent and charge borrowers 8 percent, and the 5-point gap goes to the bank. Charging interest on loans is one of its main ways to make money, while banks pay depositors just enough interest to stay competitive with one another and attract savers.

Someone who borrows from a bank pays interest, which is the price of using someone else's money, and a bank that pays 3 percent interest a year adds $3 to $100 kept in a savings account for a year. Borrowers pay the bank interest, and the bank passes a small part of what it earns to savers. Loans that seem risky carry more interest, and lenders also check whether borrowers can repay before they lend. Interest rates on loans rise when many people want to borrow and banks have little money to lend, and they fall when the reverse is true. Interest rates on loans may be fixed, staying the same, or variable, moving up or down over time.

The money in a bank belongs to its depositors, not to the bank's owners, so bankers have a special duty not to take big risks with loans. Banks fail when managers make poor choices, such as growing too fast or lending too much of one kind. They also fail when changing economic conditions stop borrowers from repaying loans. An example in a Federal Reserve Bank booklet describes a bank closed by regulators after it lent heavily to energy companies and energy prices fell.

There are several kinds of banks: commercial banks, savings banks, savings and loan associations, cooperative banks and credit unions. The first savings banks were founded in the early 1800s to give workers with little money a secure place to save. The savings and loan associations and cooperative banks of the 1800s helped factory workers and other wage earners become homeowners, using deposits to make home loans. Credit unions began in the 1800s as a way for people shut out of ordinary lending to borrow in emergencies, using a pool of members' savings. Starting a bank means applying for a charter from a state banking commission, and the United States has a dual banking system, so founders may choose a state charter or a federal one.

Before the Civil War, the nation's currency was coins and notes issued by state-chartered banks. Rules varied by state, and a note from one state was often accepted in another only at a discount, if at all. The National Banking Acts of 1863 and 1864 were wartime laws meant to help finance the Civil War and to create a stable, uniform currency. Banks rarely keep gold or silver in their vaults, and today's paper money and coins are backed by the full faith and credit of the U.S. government.

The Federal Reserve, called the Fed, is the central bank of the United States, a bank for other banks and a bank for the United States government. The Federal Reserve Act was signed on December 23, 1913, and the panic of 1907 had spurred the monetary reform movement that led to it. The Federal Reserve System has 12 Federal Reserve Banks, each serving its own district. The Fed's jobs are guiding the economy's money and credit, supervising banks, keeping the financial system stable and running payment systems. The Fed does not print paper money. The Bureau of Engraving and Printing, part of the Treasury Department, prints it and ships it to the Federal Reserve Banks.

The Federal Reserve does not lend money to private borrowers, but it sometimes lends to banks when the need arises. Its discount window lets banks borrow from Federal Reserve Banks after signing legal agreements and pledging collateral. Before 2020, Federal Reserve rules required banks to hold reserves: 0 percent on a small slice of checking-type balances, 3 percent on the next band and 10 percent above that. Reserve requirements were cut to zero on March 26, 2020, ending any Federal Reserve rule that banks hold a set share of deposits in reserve (as of November 2026).

If a bank lends someone 100 pounds and credits their account, new money has been created. When the loan is paid back, that electronic money is deleted, per the Bank of England (as of October 2019). Most money in the economy is created by banks when they make loans, not by printing presses at the central bank, according to the Bank of England (as of October 2019).

The U.S. had 12,427 commercial banks in 1900, 30,291 in 1920 and 23,769 at the end of 1930. In the 1920s hundreds of banks a year were suspended, and in 1930 about 1,350. Bank trouble came well before the 1929 stock market crash. Before federal deposit insurance, bank runs were common: at the first hint of trouble depositors lined up to withdraw money, and only the first few in line might get theirs. Even healthy banks sometimes failed in those days, when rumors made depositors panic and withdraw their money. In November 1930 a series of bank crises turned a typical recession into the beginning of the Great Depression.

Bank suspensions totaled under 1,000 a year in 1921-1928, began rising in 1929, peaked in 1933 and fell near zero after the banking holiday. On March 4, 1933 all twelve Federal Reserve Banks kept their doors locked, and banks in 37 states closed or limited withdrawals. The crisis began to ease on March 9, 1933, when Congress passed the Emergency Banking Act. Member banks in Federal Reserve cities could reopen on March 13.

After thousands of banks closed in the Great Depression, Congress created the FDIC in the Banking Act of 1933, also called the Glass-Steagall Act, which was signed on June 16, 1933. The act separated commercial banking from investment banking. Commercial banks that took deposits and made loans could no longer underwrite or deal in securities. The deposit insurance part of the act was the most controversial at the time, and it was included at the insistence of a congressman who had the interests of small rural banks in mind. Bank failures fell from about 4,000 in 1933 to 62 in 1934.

The 1933 law set a basic coverage of $2,500, effective January 1, 1934, in a Temporary Fund paid for by bank assessments. In 1934 the basic coverage rose from $2,500 to $5,000. As of November 2026, FDIC insurance covers $250,000 per depositor, per insured bank, for each ownership category, and deposits in one category at one bank are added together. It covers deposit accounts such as checking, savings, money market deposit accounts and certificates of deposit, but not investments such as stocks, bonds, mutual funds or annuities, even if a bank sells them.

The FDIC usually pays insured depositors within days of a bank closing, often the next business day, with a new account at another bank or a check. As of November 2026, no depositor has lost a penny of FDIC-insured funds since the FDIC was founded in 1933.

Words to know

• collateral: pledged property
• reserves: money held back
• charter: bank's permit
• suspended: stopped operating
• securities: tradable investments