When you transfer money from one bank to another, are they just moving virtual bits around? Is anything backing those transfers? What prevents banks from just fudging the bits and “creating” money?
In: 1559
Banks create money from nothing every time they make a loan due to fractional reserve banking. [https://corporatefinanceinstitute.com/resources/knowledge/finance/fractional-banking/]
The bank has 1000$ of your money and loans 100,000$ to someone else meaning that the bank just lent 99,000$ that the bank never had. Then, whoever borrowed the money spends the money to acquire real resources like real estate. The borrower just bought something of value with nonexistent money that the Bank just created from nothing by flipping some bits. This is how ALL Western banks operate.
Money used to be a representation of gold and the mint had enough gold to back all of it. That didn’t last long.
The South Park episode [Pinewood Derby](https://www.imdb.com/title/tt1397944/) is probably the simplest way anyone has ever been able to explain how money is simply a concept that we all just agree has value.
Nothing. Literally nothing. You just explained banks. They are giving you virtual money that they promise to provide when challenged.
However they don’t have all the cash on hand to supply all their “so called money”
Quite simply, they make money out of nothing. That’s it. They just promise that it’s good!
Fun fact the federal reserve does the same thing with gold now that we don’t have a gold standard
This reminds me – one of my friend’s parent is a MAGA nut job talking about having all of their cash converted into gold “when US goes digital like China.” I asked if he realizes when he uses an atm or debit card at a gas station there is not a little cubby-hole filled with his money and a little guy running back and forth taking his dollars and moving it to the cubbyhole filled with the gas station’s money.
This probably shows my age, but when I was in high school the accounting teacher said “someday all banking will be is computers transferring numbers back and forth.” Barring the currency backing up the numbers, this is basically how we live today.
I actually know this one! Caveat: My background is in European (SEPA) Banking. While I believe the fundamentals will be similar everywhere, I can’t promise it works exactly that way everywhere (eg in the US).
When money is sent from your account, the sending bank writes it on a long list of all transfers they do in this sending window. When the sending time comes, they send the list to the clearing bank, who then takes all the rows to Bank X from all the files it received, puts it into a single list and sends it to Bank X for crediting to their customers. This is the clearing (=exchange of information) part.
Next comes settling. The clearing bank looks at all the transfers made from Bank X to Bank Y and from Bank Y to Bank X and nets them. So Bank X sent 100m to Bank Y and Bank Y sent 30m to Bank X? Then Bank X actually sends 70m to Bank Y.
Been doing wire and ach/direct deposits for years now. If you have two banks that aren’t affiliated with each other, the originating deposit goes to the US Treasury for verification before it goes to the end bank. Thats why you can’t “fudge” anything.
You asked three questions.
Yes, they are just moving virtual bits around between accounts.
No, there is nothing specifically backing those transfers. They’re just moving numbers around in software.
The explicit job of a bank is to create money. The Federal Reserve requires member banks (basically all banks in the US) to maintain a minimum of 10% of deposits with the Fed. So that means that as long as the total amount of the loans a bank originates does not exceed 10 times their total deposits, they can essentially create new money through loans without having to have someone deposit the equivalent amount of money first.
And technically they can just create it, but it gets corrected, unless it’s called Quantitative Easening. Bankese for “making money”
My account was credited $1100 when it should have only been $110 from a check j cashed. This was corrected within 48 hours but for that small time, it was in my account.
Banks have to be audited externally by internationally recognized auditing firms like KPMG, so every month or so, each bank has to submit the audit reports to the central bank to check.
It’s impossible to create more money at the destination from the source, because banks use double-entry banking systems (such as Oracle FLEXCUBE and Temenos) that make absolutely sure that the credit and debit amounts are exactly equal. This kind of banking system runs data integrity check every night to make sure that everything are perfectly balanced.
Transferring money between banks usually goes through the central bank’s clearing house. This means the banks have deposit reserves held at the central bank. Basically, the central bank is a bank for banks. Each bank has banking accounts at the central bank, so money transfers are moving from one account to another.
Source: Banking IT expert here.
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