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?

Question

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

Answer 1

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.