In this post I'm just going to pull together the foundation for understanding capitalism and comprehending where the economy has gone wrong, causing the current financial crisis, which continues to spread.
1. So remember, as you read in my previous tutorial postings, it is the poor people who "invented," or more accurately to say "discovered" capitalism, not the rich. If you read text books they all glom onto the "mechanisms" of capitalism (banks, monetary system, earning interest, etc) and make it look like that is the "beginning" of capitalism (and thus invented by and the tool of the rich). But that is not true because the principles of capitalism arose from the grassroots of poor people who lived "hand to mouth" in a subsistence way, which was throughout history the vast majority of people, when they individually were able to grow or build more than they needed for subsistence, called a surplus, and sold that surplus for cash.
2. Thus capitalism in its correct form arose from a society where the basics of survival, the "subsistence" part of the economy, were self provided, and not provided via capitalism or its tools. Here is what I mean. It is easy to think it was long ago that people grew their own food and built their own houses, shacks or huts, but that is not true: it is still within the memory of living people. Only fifty years ago much of the American population was still directly involved in agriculture on a personal basis. And people still had to build their own homes just before World War II. Let me use my stepfather's family as an example. While he recently died my step uncle who is in his 90's still lives and told me how he built his home (and how everyone did that), while we stood in his back yard and looked at that very home. He used the horses that my step grandparents had for plowing the fields on their farm to dig out the foundation of the house. My stepfather used to tell me and point out the very fields where he himself used to hitch up the horses and plow the farm. So, my step uncle continued in his explanation to me, when he married he had to build a home for his family (no longer living on the farm with his parents) so he used the horses to dig out the foundation and the cellar area, and then built his house by hand. What he did not know, being a young man, his father in law showed him. For example, he did not know how to miter corners properly, so his father in law taught him and helped him to do so properly. So you see, many older houses that young people see when they go to small towns are remainders of the time within memory when there were no real estate agents and no pre-built houses for sale for the vast majority of the country. So capitalism played no role in the provision of the "subsistence" part of the economy for the hundreds of years of history when capitalism was developed, first as a day to day reality and then later as a philosophy and economic concept.
3. So remember, capitalism developed when individuals who produced food for their own family's survival started to inch out of the "hand to mouth" mode and eventually grew more than their family needed, enabling them to sell the surplus for cash. It is the selling of surplus for cash that is "capitalism," pure and simple.
4. Now what did they do with the cash? They bought "extras" that helped in their subsistence. For example on the frontier they invested in improved metal tools that enabled better home and farm building and ability to grow and hunt food. People "invested" in their own "subsistence" using the cash. They would not dream of taking the cash to a "bank" (if one even existed) or "put their money to work earning interest." These were people who lived hand to mouth and they used their cash earned by selling surplus and put it back into improving their own lives. This is what poor people around the world in lesser developed countries still try to do, although much of that has been derailed and no longer works, because modernists and dreadful governmental systems have taken away from the poor the ability to maintain and grow their subsistence economy. Much more on this in future tutorials. But my point is that the tools of capitalism that everyone struggles with understanding today are not actual capitalism, since those tools did not exist at all when capitalism was "developed" by the normal day to day actions of the grass roots poor. Cash was "invested" back in the family in order to buy things they could not easily make themselves (such as metal tools) that continued to improve their subsistence. Cash was not saved or kept very long at all, say nothing of putting it in a bank, because there was always a dire need to use the cash to improve one and one's family's chances of subsistence and survival. Whether a cowboy out west or a farmer in the east, cash was quickly spent on the tools of one's survival and kept in a box, pouch, or under granny's mattress, not in a bank and certainly not laying around waiting for "interest" when there was a dire need for investing in the family's necessities.
5. This is how the "blue collar" professions developed. People who knew through subsistence how to make something for themselves (blacksmith, tool maker, etc) started to provide those services to other subsistence families in return for cash.