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

Banks are actually allowed to just create money. That’s how the money system works. Banks need only a certain amount of actual hard, physical money in their vaults and they can then lend out a certain amount more than that. In a lot of countries a bank only has to have 10% of its money in physical form compared to its loans. The rest is just numbers in a spreadsheet. This is known as Fractional Reserve Banking.

However, in response to your question in a more narrow way, what would a bank get by giving you extra money in your account? This could happen by accident, and I’m sure it has, but there’s going to be a trail. Money doesn’t just get created from nothing (yes, even going by the first paragraph here it’s created in a loan with a fraction of that loan existing as physical money in a vault). Banks have to report their money to the taxman, government, etc.