Since most money are just electronic with no real bank note behind them, what stops some bank from just adding Billion dollars for their accounts and use it for trading? If the answer is in some form of government regulation/oversight.. what about banks in high-corruption countries who still trade with ‘west’?
Are all electronic money traceable to some central bank/state who send it to the circulation?
In: Economics
Accounts are kept in a “double entry system” and each financial entity keeps a record of their accounts which include transactions with other entities. Banks, in particular, also have to keep an account with the Central Bank (the Fed in the USA). For ELI5 purposes, these entries in these accounts have to balance. Meaning one cannot simply add a number to one account, it needs a corresponding balancing entry. And since some (many) of these accounts have their counterparts in another entity, these entries need to match.
Simple example: If bank A owes bank B $1000 dollars. Bank A records this as a $1000 borrowing from bank B while bank B records this as a $1000 loan to bank A. Neither party can simply adjust the balance on their own account since their counterpart accounts won’t match.
Because of these independent systems, with many parties involved all keeping track of each others transactions, it is not simple to “add money to my account” – it would be fairly quickly discovered as a mismatch and the offending entries highlighted.
Latest Answers