eli5: How do banks store data for dollar amounts in their systems?


Do they store id numbers for each physical dollar that they store, or do they only store the current balance?

Do they need to store physical, paper money in their safes every time they change the balance?

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When you deposit a $10 bill into your bank account, the bank doesn’t actually store 10 physical paper bills. Instead, they store a number that represents your account balance, plus or minus any transactions that have occurred since you deposited the bill. So when you go to withdraw $10 from your account, the bank simply subtracts that number from your account balance and gives you the physical cash.

The bank doesn’t need to store physical bills because the number they store is all that’s needed to balance your account. Plus, if the bank ever needed to verify that a certain bill was in their possession, they could simply look up the number associated with that bill and compare it to the number they have stored.

There’s actually not that much physical cash out there. If you added up everyone’s bank accounts and other holdings, it would far exceed the amount of cash in circulation. The digital money is just as real as the physical money, they’re just two different ways to represent a dollar.

When you deposit a $100 bill in your account, the bank adds the physical bill to their inventory and credits (adds) $100 to your bank balance. From that point forward, that $100 bill and your bank account aren’t linked. The bank can give that bill to someone else when they make a withdrawal, and it has no effect on you or your account. When you spend that $100 using your debit card, no cash ever has to change hands, just a digital record that says $100 has been debited (removed) from your account and credited (added) to the store’s bank account.

Your balance is just a number. It’s probably an integer number of cents, but explaining why involves some Computer Science questions you didn’t ask.

There is not 1 physical dollar bill for every dollar represented in the system. That’d be really hard. Think about how interest works: the bank would have to mint coins and print bills to make up for it.

That does mean if people try to make huge withdrawals, a bank might not have enough cash on site to satisfy everyone. That’s why there are usually policies that to make a cash withdrawal above certain amounts, you need to make the request several days in advance. That gives them time to transfer the correct amount of cash to the location for you.

This also means if everyone tried to withdraw all of their cash from their bank at the same time, there likely isn’t enough cash in the country to do that. This is one of the things people who talk about “fiat currency” are worried about. They would rather systems where dollars are backed by some commodity like gold, and want the government to be forced to stockpile enough of that commodity.

But most people accept that if we have such a bad financial crisis people try to withdraw all of their cash, then bullets, alcohol, and food are going to be worth a lot more than gold, diamonds, and dollars.

Let’s first consider how banks worked before computers.

Let’s say you walked into a bank, handed them a $20 bill and said, “Put this in my account.” The bank will write down in a book that your account went from, say, $300 to $320. That $20 bill then goes in a big pile with the rest of the cash that the bank happens to have in their vault.

“Your” money is represented by the records the bank keeps in that book. If you withdraw money, the bank will first look at the the number they have in their book. They will only give you as much money as they have listed in that book. And when you do withdraw money, they just grab some from the big pile in the vault, and mark down in their book that your account went from $320 to $280, or whatever.

Back in the day, they kept track of money with plain old paper and ink. Today, we keep track with plain old computer databases. The databases aren’t anything special. The same information is tracked, but it’s on a hard disk instead of in a book.

When money needs to move “between” banks, the banks start by exchanging all the information about the transactions. If you and I are at different banks, and I send you $50, my bank reduces my account by $50 and your bank increases your account by $50. That just means your bank is now allowed to give you $50 more than they were before.

The banks don’t always have to exchange physical money, because other accounts are performing transactions. If some person at your bank happens to send $50 to someone at my bank, then from the bank’s perspective, they’re even. If roughly the same amount of money transfers in each direction, there’s no need to send physical cash.

Things don’t always work out entirely evenly, so banks do have to move physical money from time to time, but most of it is just, “Hey, Wells Fargo? Hi. It’s US Bank. I’m going to reduce Alice’s account by $100. You increase Bob’s account by $100. Cool? Cool. Thanks. Talk to you later.”

To answer your first question, no, in most situations banks do not store the serial numbers of bills. The dollar you deposit could easily be handed to them next customer when they make a withdrawal. Larger banks and financial institutions MIGHT keep track of sets of serial numbers when receiving newly printed cash before it’s processed in to the system, but even then at some point they stop tracking that money as it’s delivered to branch banks, put in to ATMs, given to customers, etc.