eli5 How do governments track all currency (physical and digital) in order to always know the denominator (how much total money there is)?
In: Economics
There are [different measures of how much money exists](https://en.wikipedia.org/wiki/Money_supply). The total supply of money is not centrally controlled in the way that you might expect.
Banks can add to the total money supply themselves, since they create money any time they make a loan. Most of the money in your checking and savings account is actually loaned out or invested so that the bank can earn interest on your deposits. You deposit $1000 cash, the bank loans $500 to Sally, and now the total of your account and Sally’s is $1500, but that’s only backed by $1000 cash held by the bank.
When Sally spends the money she was loaned and other people deposit it into their accounts, the bank can lend out that money again, further increasing the money supply to large multiples of the amount of physical cash that exists.
This is why bank runs are problematic: banks don’t actually have all of that cash somewhere in a vault. Most of it has been loaned out or invested. They might only have a reserve of 10% or less in cash or safe liquid assets, depending on the type of account.
The risk is managed through regulation and the government provides insurance (e.g. FDIC) so that if the bank goes under, for example because of a bank run or because a lot of people couldn’t pay back their loans, the government will step in and make the bank’s depositors whole (usually by creating more money in the form of a loan to the bank).
The central bank can also influence the amount of money banks create by controlling the interest rate. When the interest rate is high, banks are discouraged from making low-interest loans, since they can earn more by depositing the money with the central bank. This raises the interest rate of all loans, effectively reducing the amount of money being created. When interest rates are set low, the opposite happens.
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