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

Your bank account isn’t just a number that says “Zemvos has 5$”.
It’s a record of all incoming and outgoing transactions, to get the balance you just add them all up.
For every transaction there has to be an equal and opposite transaction in the other persons account.
I.e. if your account has an entry “received 1$ from Jim”, Jims account will have an entry “send 1$ to Zemvos”.
Now a bank could ofcourse just add an unmatched transaction to an account. But (at least in theory) they get audited regularly and the unmatched transaction will be found and the bank punished.