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
When you transfer money from one bank to another, the bank actually transfers money from their own account at the central bank to the account of the bank that holds the account you’re sending money to. So they would need to have sufficient balance to cover these transfers.
For example, bank A and bank B both have an account at the Federal Reserve. Your account is at bank A, your friend’s is at bank B, and you want to wire $1k to your friend. So you tell bank A to wire the $1k to your friend’s account at bank B. Bank A checks that your account has the money and deducts it, then forwards the request to the Federal Reserve. The Federal Reserve checks that bank A’s account has sufficient money, and transfers $1k from bank A’s account to bank B’s account, with a note of your friend’s account number. Bank B receives this deposit, and credits your friend’s account per the note on the transaction.
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