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?
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The key concept to start this off with is that we all owe money to and are owed money by everyone else when we buy or sell a service or good. Banks are the clearing houses for us. We use banks because we all accept their promise to pay. When you transfer money the bank debits your account (you have less credit on account with the bank) and they credit the person you are transferring to an equal amount.
If this transfer is between banks they will settle in real time on an aggregate basis eg Bank A owes Bank B $50, Bank B owes Bank A $60 so in total Bank B owes Bank A $10. That “money” is a credit issued to Bank A as a note endorsed by the other bank (there is interest on this). This note is an asset for Bank A which can use it as money to fund lending or settle debts.
Note the concept is similar in most countries. Most central banks have done away with the need for banks to maintain balances with them.
The concept of cash is that it the paper notes or “money” are good for credit with the government which everyone and every business accepts as payment.
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