When you buy something online or with a credit card, what happens to the physical money that the transaction represents? Are there just trucks of money being carted around to different banks? Does the number I see on my bank about even represent real, physical cash?
In: Economics
There isn’t physical money for the vast majority of money that exists in the works. It’s all just electronic transactions.
You should think of cash as “physical” money. The only reason a 1-dollar bill is worth one dollar is because the US government says “this is worth one dollar”.
In the case of a credit card transaction, your bank reduces X dollars from its account sheet and another bank adds the same amount of dollars to its account sheet.The only thing that matters is that the total amount of dollars is the same.
Long story short: no, your account balance does not represent real-world cash. In fact, if everyone tried to withdraw their balance all at once, banks would go broke before even like half of them were completed (see: [bank runs](https://en.m.wikipedia.org/wiki/Bank_run)). So, when an online purchase happens, the banks don’t need to transfer money around; they both just need to change the numbers in the relative accounts. Of course, there are checks to make sure people don’t change numbers without valid transactions, but for the most part bank accounts do not represent bank funds.
There is no real physical money involved here. There are only credits and debits.
Banking is done on many different levels and the majority of the transactions occur between a small handful of very large commercial/business banks. But there’s still no bucketloads of cash and coin. It’s just data.
(Source: My partner works in FiTech. I’ve had to learn more about debits and credits and messages and ingoing and outgoing than I ever thought I’d need to know, just in order to discuss his work with him.)
There is no physical money. Just the distribution of electronic 1s and 0s between the computers of financial institutions. In fact, over the last 10 years, the US Bureau of Engraving and Printing has printed fewer bills than in decades past because of the increase in purely electronic transactions.
When you use a credit card, you are creating currency. The bank honors the payment to the retailer, while your bank account balance stays the same. When you pay off your credit card, you are destroying the currency that you created.
In a sense, the bank is issuing a loan to the retailer and you’re paying back the loan when you settle your credit card bill.
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