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 create money from nothing every time they make a loan due to fractional reserve banking. [https://corporatefinanceinstitute.com/resources/knowledge/finance/fractional-banking/]

The bank has 1000$ of your money and loans 100,000$ to someone else meaning that the bank just lent 99,000$ that the bank never had. Then, whoever borrowed the money spends the money to acquire real resources like real estate. The borrower just bought something of value with nonexistent money that the Bank just created from nothing by flipping some bits. This is how ALL Western banks operate.