If I give my bank a $20 bill then $20 appears on my account. Doesn’t this mean that there’s now $20 physical + $20 electronic = $40 in circulation?
In: 4
Sort of, but it’ll reverse out when somebody later withdraws that $20 from a cash machine or bank somewhere. The bill sitting at the bank isn’t circulating.
The amount of currency in circulation is *hugely* larger than the amount of cash in circulation.
The bank has an amount of digital currency saved; you give them a physical $20 in exchange for a digital $20.
You give me 20 bucks for safekeeping, I write down in my notebook that you gave me $20.
I’m a bank.
When you want to buy stuff, instead of giving them 20$, you just gives a piece of paper that says you owe them 20$. They come see me. I give them 20$, you no longer have 20$ in my notebook.
That’s a cashed check.
Instead of the merchant giving me the check, they go to their dude with the notebook that safekeeps their money (i.e., their bank) and give them the check. That dude comes see me. I give him the 20$, he writes in his notebook that the merchant has 20$, I write in mine that you don’t have it anymore.
That’s a deposited check.
A debit card is the same but electronically automated.
A credit card is that instead of giving me money beforehand, I send you a bill every month telling you how much money you spent and now owe me.
Online banking is just a website that allows you to see what I wrote in my notebook.
A bank is basically just a big spreadsheet that is a list of account numbers and ammount of dollars that belong to that account. When you deposit $20 in physical currency the bank basically takes the currency and adds it to their stockpile of physical currency and then updates the spreadsheet to say “this person has an additional $20 Bucks in his account.”
There’s not really any what you would think of as a digital currency. Just a ledger saying how much money each person has.
Maybe a way to look at it is that your bank statement is really just a complicated IOU. It is a statement from the bank saying how much money they owe you. You give them a twenty dollar bill, they now owe you that twenty back. In a sense, you don’t have that twenty anymore, and there is still only a single $20. What you have is a promise from the bank to pay you $20 if you ask. If you go to the bank, you can ask for your money back… they give you your cash, and your statement goes to zero (they no longer owe you anything).
In theory, the bank holds the $20 note in trust for you.
You deposit it, your account goes +$20, and the bank puts that note in a safe with your name on it.
When you decide to spend your $20 in a shop, the bank then take that $20 out of the safe, and hand it over to that shop on your behalf.
The trick is that this isn’t just done on a small scale like this, the bank does it en-masse. So rather than keeping a separate safe for every customer, the bank dumps all of the physical money into a metaphorical swimming pool, and just notes in a ledger that $20 of it belongs to you.
That money is then used collectively – if someone wants to withdraw $10,000 from the bank then they may empty a large percentage of the cash pool, but at the same time a lot of people will just be leaving their money in the bank and not needing it in cash form, and the pool gets replenished from other deposits happening all of the time.
When you buy things and move money around it would obviously be awkward if the bank had to shift bundles of cash every time, but it is worth remembering that money flows both ways. So when you pay a shop $20, your bank sends an IOU to the bank that deals with the money, who themselves are also sending out IOUs to the banks of the suppliers they are buying merchandise from, renting a shop from and so on.
Because money is flowing around so quickly, we can cancel a lot of it out. You spent $20 in a shop, but at the same time someone that banks at the same place as the shop may have spent $20 with a shop banking at your own bank – so each bank owes the other a $20 note, and when you combine those transactions together each bank has the correct amount sitting in their vault.
Computers make this a lot easier of course, as it allows banks to easily tally up where their customers have spent money, and then allows banks to easily communicate between each other to keep the amounts correct.
Every so often this may end up a bit out of whack and one bank will need to transfer some physical currency to keep everything straight, but that is done in the background on a much, much larger scale.
Obviously this is a bit of a simplification, but should give some idea.
Nope. The bank basically takes it out of circulation, and credits your account with an equivalent digital amount.
If you take a close look at your paper money, each should include a statement that they are “LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE” , which is generally located to the left side of the portrait on the front face of the bill.
You can think of a bank account as an early payment for a future debt, so depositing money in this manner is a legitimate transaction, provided the physical cash is retained by the bank. Most of the money being used day to day is digital, not cash consequentially.
Latest Answers