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hook The author generates interest in a familiar topic by promising there's more than meets the eye. The author then adds dramatic tension and promise of a counterintuitive payoff with the phrase "it may shock you."		Sahil Bloom @SahilBloom · Aug 26 Banking 101 Banks are a critical feature of the modern economy. But most people don't understand how modern banking actually works. Spoiler Alert: It may shock you. Here's Banking 101! 👇👇👇 https://t.co/M5XGedwtWS
mechanism narrative After setting up a mystery in the hook, the author explains the basic premise of banking. Situating it in history not only provides valuable context, but also achieves a storytelling effect that livens up the explanation.		Sahil Bloom @SahilBloom · Aug 26 1/ First, a bit of history. Most historians believe the earliest forms of banking began to appear around ~2000 BC in ancient India, Assyria, and Sumeria. Ancient Greece and Rome expanded upon this legacy. But banking transitioned into its more modern form in Renaissance Italy. https://t.co/OyqmqCDP5t
	Sahil Bloom @SahilBloom · Aug 26 2/ In its most basic sense, the business of banking is very simple. Take money from depositors (deposits), pay them interest. Lend money to borrowers (using deposits), receive interest. As long as the interest received exceeds the interest paid, the bank is happy / profitable.
	Sahil Bloom @SahilBloom · Aug 26 3/ Historically, banks would maintain sufficient "reserves" (cash/metals) to give depositors their money back on request. This is prudent, but limits the ability to create credit and thus may stifle investment in an economy. So called "fractional reserve banking" changed that.
	Sahil Bloom @SahilBloom · Aug 26 4/ Fractional reserve banking allows banks to only maintain a fraction of deposits in their reserves. If the reserve requirement is 10%, a bank with $100 in deposits only has to maintain $10 in reserves. To illustrate the beauty (and the beast!) of this system, here's a story.
use case narrative The author describes a hypothetical situation that illustrates how modern banking can benefit both creditors and lenders. The use of concrete details and simple numbers brings what could be a dry explanation to life.		Sahil Bloom @SahilBloom · Aug 26 5/ Imagine you arrive in a new town in California during the gold rush. You get off the train with $1,000 in your pocket (and boundless ambition!). You head over to the new CA Savings Bank and deposit the money into a bank account. You are happy. https://t.co/UHyDzw9u48
	Sahil Bloom @SahilBloom · Aug 26 6/ CA Savings has a 10% reserve ratio, meaning it has to maintain 10% of your deposit in its reserves. It places $100 in its reserves and lends the remaining $900 to Judson Adam, who uses it to buy gold pans. The gold pan seller, Josiah Smith, deposits the $900 into CA Savings.
	Sahil Bloom @SahilBloom · Aug 26 7/ CA Savings places $90 (10% of $900) in reserves and lends the remaining $810 to Jeremiah Black, who uses it to buy wheelbarrows. The wheelbarrow seller, Johnson Campbell, decides to keep the cash in his pocket. Let's take a step back and look at what has happened here.
	Sahil Bloom @SahilBloom · Aug 26 8/ Your original deposit of $1,000 at CA Savings started this chain, but there is now $2,710 of "cash" in circulation. You: $1,000 at CA Savings Josiah: $900 at CA Savings Johnson: $810 in pocket The fractional reserve banking model enabled the creation of credit/dollars.
	Sahil Bloom @SahilBloom · Aug 26 9/ That is mostly a good thing. Judson and Jeremiah received loans that allowed them to spend, invest in equipment, start businesses, hire, etc. The fractional reserve system enabled credit creation, which in turn sparked growth. So that is the beauty. What about the beast?
use case narrative The author describes a hypothetical situation that illustrates how modern banking can harm both creditors and lenders. As in the previous example, the use of concrete details and simple numbers brings the explanation to life.		Sahil Bloom @SahilBloom · Aug 26 10/ Say there is an earthquake. You get nervous, so you ask CA Savings for your $1,000 back. Well, they only have $190 of it (10% reserves from the $1,900 in deposits received). They have to call in their loans (and halt any new lending) to meet your withdrawal. This is bad.
	Sahil Bloom @SahilBloom · Aug 26 11/ If the bank is unable to call its loans to meet withdrawals, it may be insolvent. Panic ensues. Credit contracts. The economy slumps. The system can quickly unravel. This is a highly simplified example - closed system, very few depositors and loans - but the basics hold.
payoff The next tweet neatly ties together the counterintuitive lessons from the two hypothetical stories--hopefully creating that sense of "shock" referenced in the first tweet. The following two tweets credit the author's sources of inspiration, and the phrase "So that was Banking 101" ties the final tweet back to the first tweet.		Sahil Bloom @SahilBloom · Aug 26 12/ So you see, the modern fractional reserve banking system is both beauty and beast. It enables the creation of credit, which may drive investment and growth. But it also opens the door to rapid contractions, which tend to be self-fulfilling as panic begets more panic.
	Sahil Bloom @SahilBloom · Aug 26 13/ I was inspired to do this primer after reading a great thread from @coloradotravis. As he points out, the system relies on banks actually lending. If they aren't lending, dollars are dying. Thanks to @RaoulGMI @SantiagoAuFund for sharing it! https://t.co/Fg0Fs6OcJx
	Sahil Bloom @SahilBloom · Aug 26 14/ So that was Banking 101! The intention of this was to hit on the VERY BASICS of modern banking. Stay tuned. One could write an entire book on the nuances of this topic (and many people have!). I highly recommend following @RaoulGMI @SantiagoAuFund @coloradotravis for more.

hook
The author generates interest in a familiar topic by promising there's more than meets the eye. The author then adds dramatic tension and promise of a counterintuitive payoff with the phrase "it may shock you."

Sahil Bloom @SahilBloom · Aug 26

Banking 101 Banks are a critical feature of the modern economy. But most people don't understand how modern banking actually works. Spoiler Alert: It may shock you. Here's Banking 101! 👇👇👇 https://t.co/M5XGedwtWS

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mechanism narrative
After setting up a mystery in the hook, the author explains the basic premise of banking. Situating it in history not only provides valuable context, but also achieves a storytelling effect that livens up the explanation.

Sahil Bloom @SahilBloom · Aug 26

1/ First, a bit of history. Most historians believe the earliest forms of banking began to appear around ~2000 BC in ancient India, Assyria, and Sumeria. Ancient Greece and Rome expanded upon this legacy. But banking transitioned into its more modern form in Renaissance Italy. https://t.co/OyqmqCDP5t

[Tweet image. If not displayed, your browser may be blocking content from Twitter. Try turning off content blocking to view images on this page; on Firefox this can be done by clicking on the shield just to the left of the URL and turning off Enhanced Tracking Protection for this site only.]

Sahil Bloom @SahilBloom · Aug 26

2/ In its most basic sense, the business of banking is very simple.

Take money from depositors (deposits), pay them interest. Lend money to borrowers (using deposits), receive interest.

As long as the interest received exceeds the interest paid, the bank is happy / profitable.

Sahil Bloom @SahilBloom · Aug 26

3/ Historically, banks would maintain sufficient "reserves" (cash/metals) to give depositors their money back on request. This is prudent, but limits the ability to create credit and thus may stifle investment in an economy. So called "fractional reserve banking" changed that.

Sahil Bloom @SahilBloom · Aug 26

4/ Fractional reserve banking allows banks to only maintain a fraction of deposits in their reserves. If the reserve requirement is 10%, a bank with $100 in deposits only has to maintain $10 in reserves. To illustrate the beauty (and the beast!) of this system, here's a story.

use case narrative
The author describes a hypothetical situation that illustrates how modern banking can benefit both creditors and lenders. The use of concrete details and simple numbers brings what could be a dry explanation to life.

Sahil Bloom @SahilBloom · Aug 26

5/ Imagine you arrive in a new town in California during the gold rush. You get off the train with $1,000 in your pocket (and boundless ambition!). You head over to the new CA Savings Bank and deposit the money into a bank account. You are happy. https://t.co/UHyDzw9u48

[Tweet image. If not displayed, your browser may be blocking content from Twitter. Try turning off content blocking to view images on this page; on Firefox this can be done by clicking on the shield just to the left of the URL and turning off Enhanced Tracking Protection for this site only.]

Sahil Bloom @SahilBloom · Aug 26

6/ CA Savings has a 10% reserve ratio, meaning it has to maintain 10% of your deposit in its reserves. It places $100 in its reserves and lends the remaining $900 to Judson Adam, who uses it to buy gold pans. The gold pan seller, Josiah Smith, deposits the $900 into CA Savings.

Sahil Bloom @SahilBloom · Aug 26

7/ CA Savings places $90 (10% of $900) in reserves and lends the remaining $810 to Jeremiah Black, who uses it to buy wheelbarrows. The wheelbarrow seller, Johnson Campbell, decides to keep the cash in his pocket. Let's take a step back and look at what has happened here.

Sahil Bloom @SahilBloom · Aug 26

8/ Your original deposit of $1,000 at CA Savings started this chain, but there is now $2,710 of "cash" in circulation.

You: $1,000 at CA Savings
Josiah: $900 at CA Savings
Johnson: $810 in pocket

The fractional reserve banking model enabled the creation of credit/dollars.

Sahil Bloom @SahilBloom · Aug 26

9/ That is mostly a good thing. Judson and Jeremiah received loans that allowed them to spend, invest in equipment, start businesses, hire, etc. The fractional reserve system enabled credit creation, which in turn sparked growth. So that is the beauty. What about the beast?

use case narrative
The author describes a hypothetical situation that illustrates how modern banking can harm both creditors and lenders. As in the previous example, the use of concrete details and simple numbers brings the explanation to life.

Sahil Bloom @SahilBloom · Aug 26

10/ Say there is an earthquake. You get nervous, so you ask CA Savings for your $1,000 back.

Well, they only have $190 of it (10% reserves from the $1,900 in deposits received).

They have to call in their loans (and halt any new lending) to meet your withdrawal.

This is bad.

Sahil Bloom @SahilBloom · Aug 26

11/ If the bank is unable to call its loans to meet withdrawals, it may be insolvent. Panic ensues. Credit contracts. The economy slumps.

The system can quickly unravel.

This is a highly simplified example - closed system, very few depositors and loans - but the basics hold.

payoff
The next tweet neatly ties together the counterintuitive lessons from the two hypothetical stories--hopefully creating that sense of "shock" referenced in the first tweet. The following two tweets credit the author's sources of inspiration, and the phrase "So that was Banking 101" ties the final tweet back to the first tweet.

Sahil Bloom @SahilBloom · Aug 26

12/ So you see, the modern fractional reserve banking system is both beauty and beast. It enables the creation of credit, which may drive investment and growth. But it also opens the door to rapid contractions, which tend to be self-fulfilling as panic begets more panic.

Sahil Bloom @SahilBloom · Aug 26

13/ I was inspired to do this primer after reading a great thread from @coloradotravis. As he points out, the system relies on banks actually lending. If they aren't lending, dollars are dying.

Thanks to @RaoulGMI @SantiagoAuFund for sharing it!

https://t.co/Fg0Fs6OcJx

Sahil Bloom @SahilBloom · Aug 26

14/ So that was Banking 101! The intention of this was to hit on the VERY BASICS of modern banking. Stay tuned. One could write an entire book on the nuances of this topic (and many people have!). I highly recommend following @RaoulGMI @SantiagoAuFund @coloradotravis for more.