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I often wonder how money is stored. It can't be just a number on a computer in a bank, right? Otherwise some Russian bank could just increase that number to wh

by TekMol 5y ago

I often wonder how money is stored. It can't be just a number on a computer in a bank, right? Otherwise some Russian bank could just increase that number to whatever they like. And say "Look, we own 100 Trillion USD. Now let's go shopping.". So I guess USD needs to be recognized by the US somehow? Could the US simply "void" all USD that are owned by Russia?

dcolkitt 5y ago
Let's just talk about USD specifically. (Other currencies work pretty similar, just with different central banks.) The "single source of truth" is the Federal Reserve. Member banks (about 10,000 US domestic banks) can hold reserves directly at the Fed. Any reserve bank can directly transfer Fed reserves to another member bank or to the US Treasury using FedWire. The Fed "creates money" simply by crediting a member bank's reserve. This is done in two ways, one is by paying interest on reserves. So if you're a member bank holding one million in reserves, the Fed simply bumps your balance up every night to reflect your interest payments. The other is by the Fed conducting "open market operations". When it wants to stimulate the economy by "providing liquidity" the NY Federal Reserve trading desk will buy treasury bonds and pay for them simply by crediting the balance of whichever member bank sold the bonds. Member banks themselves can "create money" in the form of demand deposits. If you have one million in your checking account at Chase bank, all you really have is a promise by Chase bank to give you or whoever you want to send money to one million dollars. Essentially money is created the same way the Fed creates money, your checking account is nothing more than a credit in Chase's database. However Chase's ability to create money is highly regulated and constrained. Banks have to conform to strict capital and leverage constraints. The OCC and other banking regulators will require that Chase hold enough assets in high enough quality to cover its deposit "liabilities". Some fraction of those assets will be dollars held as reserves at the Fed. Some will be bonds or loans, i.e. promises by other high-quality actors to pay dollars. Some of those assets could even be risky stocks, low quality bonds, commodities, etc. However the "risk-weighted" leverage ratio quickly scales up with risk. In exchange for this regulation, deposits held at Chase or other member banks are treated as equivalent to Federal reserve dollars. That's because if for some reason, Chase is unable to pay back its depositors when they demand their money back, the Federal Reserve will "create money" to meet the obligations. This is essentially why bank runs no longer exist in modern banking. Then there's the concept of "money markets", which is short-duration, high-quality assets that are essentially treated as "money-like". Often this tends to be short-term commercial paper from high-quality corporate issuers. A promise from Apple to pay $1.00 in 30 days is treated as "almost a dollar" by most of the market. In this sense, Apple can also "create money". But it's highly constrained, because it would quickly lose its credit rating or breach covenants in its longer-term bonds if it did so. Finally there's the concepts of "eurodollar deposits". These are dollar deposits held at non-American banks but denominated in dollars. For example you could hold $1 million dollars at Mitsubishi bank in Japan, and you have a claim against Mitsubishi to pay out dollars whenever you want. Mitsubishi is not an American bank, and therefore is not directly regulated or insured by the Federal reserve. In some sense this makes eurodollars slightly less safe than dollars held at domestic member banks. That being said Mitsubishi is regulated by Japanese banking regulations and implicitly insured by the BOJ (central bank of Japan). Mitsubishi will also make sure its dollar liabilities are never that large relative to its yen-assets. In the case of Mitsubishi failing, its highly likely the BOJ would bail them out by creating yen in the same way the Fed creates dollars. Some of that yen could be converted to dollars on the open FX market, and make the dollar depositors whole. Hence eurodollars are essentially just as safe as regular dollars as long as they're inside another high-quality banking system.
- pgwhalen 5y ago
  I have been learning (via books, podcasts, coursera, etc.) about what money is and how it’s created, both domestically and internationally, both in commercial banks and central banks; and let me just say this is a superb summary of all of that. Bravo!
- rowls66 5y ago
  > In exchange for this regulation, deposits held at Chase or other member banks are treated as equivalent to Federal reserve dollars. That's because if for some reason, Chase is unable to pay back its depositors when they demand their money back, the Federal Reserve will "create money" to meet the obligations. This is essentially why bank runs no longer exist in modern banking. This is not exactly true. Chase, like many other US banks, is regulated by the Fed, and deposits at Chase are insured by the FDIC (Federal Deposit Insurance Corporation). If Chase becomes insolvent, the FDIC will take over, pay depositors up to the FDIC insured maximum, and liquidate any Chase assets. The Fed is not required to do anything in such a situation. The Fed may choose to conjure up some new money and loan that new money to Chase, and as Chase is a systemically important bank, the Fed might well do that before the FDIC steps in, but they are not required to.
can16358p 5y ago
They do have physical cash reserves in central banks.
- pmontra 5y ago
  Which could be revoked by printing new money with a new design and giving them only to the friendly parties in replacement of the old ones. It's routinely done (Euro is on its second design) and old banknotes and coins are no more valid after some years (the first series of Euros doesn't have an end of life yet.)
  - tazjin 5y ago
    Which would significantly devalue the currency because you'd hedge your bets against not becoming unfavourable to whichever regime controls its issuance.
  - johannes1234321 5y ago
    not only are first series euros still valid, but you can still exchange pre-Euro currencies for the original rate. The purpose of the new series is just to keep up with counterfeit money, to include newer security measures. But yes, countries in the world have revoked currencies from time to time.
    - PTcartelsLOL 5y ago
      No, you can't. They were only valid for 20 years, and 20 years have passed since 2002.
      - ValentineC 5y ago
        > They were only valid for 20 years, and 20 years have passed since 2002. I'm trying to search for this, but I can't find anything about a 20 year validity.
      - johannes1234321 5y ago
        Shops aren't required to take the old local currencies anymore, but they can still be swapped. Here for instances the information if the German Bundesbank, where you can still swap with the official rate of 1.95583 DM/€. https://www.bundesbank.de/de/aufgaben/bargeld/dm-banknoten-und-muenzen/-/umtausch-von-dm-in-euro-599338 https://www.bundesbank.de/de/aufgaben/bargeld/dm-banknoten-u... (Currently there is a restriction of in person service due to corona, but if you trust mail it works, else you have to wait for that Corona restriction to be lifted) That exchange works without limits or anything.
dogman144 5y ago
Numbers on a computer paired with account balancing/settlement protocols, one example being: https://en.wikipedia.org/wiki/Nostro_and_vostro_accounts https://en.wikipedia.org/wiki/Nostro_and_vostro_accounts When people talk about the manual inefficiencies of finance, it's referring to all this happening in the backend behind the abstraction of quick/automated digital payments in fiat currency. It gets especially complex in international finance, hence SWIFT etc.
jaywalk 5y ago
It's mostly just numbers on a computer in a bank. There are regulations concerning what banks can do with those numbers, but it all boils down to people having faith in the system in the end. That's why bank runs can quickly lead to economic disaster.
- lxgr 5y ago
  > That's why bank runs can quickly lead to economic disaster. That is true, but arguably not a consequence of money being digital, but rather of fractional reserve banking. Physical vs. digital accounting is largely orthogonal to full/fractional reserve banking.
  - nradov 5y ago
    No that's not how it works. Bank runs are possible even with full reserve banking. If banks make any loans at all then obviously they don't hold enough cash to redeem all depositors. Regardless of reserve ratios, the only way to reliably prevent bank runs is with a central bank that provides liquidity upon request.
    - mohanmcgeek 5y ago
      > with full reserve banking. If banks make any loans at all These are contradictory. The banks with full reserve banking can't make loans from easily withdrawable deposits. They can do that only with term deposits that can't be withdrawn for a specific period
  - mohanmcgeek 5y ago
    > That is true Is it still true though? The Fed averted this through QE by buying assets of questionable value at the face value from the illiquid banks and providing them with enough cash.. didn't they?
MatteoFrigo 5y ago
> I often wonder how money is stored. The Bank of England published a summary of how modern banks work. See https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m... > It can't be just a number on a computer in a bank, right? It can and it is, see the BOE paper. > So I guess USD needs to be recognized by the US somehow? This is a complicated question that will start a flamewar, but basically, any bank in the world can create dollars out of thin air given adequate collateral. Read about "Eurodollars".
- ajross 5y ago
  > This is a complicated question that will start a flamewar, but basically, any bank in the world can create dollars out of thin air given adequate collateral. Read about "Eurodollars". This is true, but it's actually sort of a specious point. What a eurodollar deposit "really" is, is just a short contract. Your European bank takes your exchange and promises to give you back dollars when you ask for them. That they may not have them right now is just a technical detail. But the value of the dollar is still set by what the market is willing to pay for it. The bank going "short USD" is a risk it takes, not an inflationary pressure per se. So... sure. Foreign banks can create dollars just like brokerages can "create stock shares"[1]. Except, they really can't. They're just playing accounting tricks. [1] Or, more relevantly perhaps, how one crypto exchange can create wrapped tokens representing foreign coins. This capability was part of the exploit chain that led to the DeFi hack last month.
  - lokar 5y ago
    Exactly, they don't give you dollars, they give you a dollar denominated liability.
    - MatteoFrigo 5y ago
      Just to make sure we are speaking the same language: If I have $1 in a checking account in a US bank, do I have one dollar, or do I have a dollar-denominated asset of $1 face value, backed by a dollar-denominated liability of the bank?
mohanmcgeek 5y ago
> Russian bank could just increase that number to whatever they like. Money is an IOU from the bank. So that's what all banks do. But they'll need assets on the right side of their balance sheet.
- andrepd 5y ago
  > But they'll need assets on the right side of their balance sheet. [citation needed]
  - vishnugupta 5y ago
    https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m... "Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money." So on the asset is a loan made by the bank.
  - nradov 5y ago
    What kind of citation are you looking for? That's not a controversial issue, it's just the basic reality of how fractional reserve banking has always worked. I'm sure that was covered in your Econ 101 class so open up your old textbook.
- snovv_crash 5y ago
  Bit what if they didn't, and just changed some numbers in their database?
  - tintor 5y ago
    Then you have inflation, and rise of prices.
  - Aunche 5y ago
    If anyone suspects that, then everyone will try to withdraw their money from their account and they'd soon get exposed of fraud.
netsharc 5y ago
As far as I know they really are just numbers in databases, but if it's foreign currency, they can't just magic them out of the DBA's fingers. There probably are ledgers that have to agree with each other, e.g. if a Russian bank claimed it had those 100 Trillion dollars from a Cypriot bank, then the Cypriot bank would have to confirm it gave them that much, and then show everyone the source of that money. Which does make one wonder how easy it'd be for your trick to work. North Korea is a major printer of fake $100 bills, a piece of paper that's actually worthless but others are willing to trade $100 worth of goods and services, or exchange for a bank transfer. Until a bill is found to be fake and destroyed, I guess there really is $100 more in circulation, and when the last person found out the note is fake, in effect NK has robbed them out of $100.
- dmingod666 5y ago
  There was a huge company in china I think, taking loans by using gold bars as collateral.. for years, turned out they weren't gold
sb057 5y ago
Within the US banking system, all of that is, for the most part, kept in line with the Federal Reserve System and other regulatory apparatuses to keep everybody honest. Outside of the US, you run into so-called "eurodollars" (unrelated to the Euro currency) which is a complete mess of intertwined financial systems from across the planet that a lot of people smarter than me pin on being the cause of the European debt crisis.
lxgr 5y ago
> It can't be just a number on a computer in a bank, right? It really is, but to answer your second question, it's important to consider *which* bank. There's reserves (i.e. balances of banks at the Federal Reserve) and bank deposits (which really are just numbers in banks' databases). Having an account at the former is effectively what makes numbers in the database of the latter "real USD". > Otherwise some Russian bank could just increase that number to whatever they like. And say "Look, we own 100 Trillion USD. Now let's go shopping.". They could, but these assets/liabilities would not be backed by any reserves linked to the USD payment rails. Reserves are theoretically irrelevant (though practically regulated) as far as transfers between accounts of a single bank are concerned. But as soon as a second bank comes into the picture, i.e. for inter-bank transfers communicated via SWIFT or otherwise, all transfers will ultimately be backed by Fed account to Fed account transfers in the background. > So I guess USD needs to be recognized by the US somehow? Indirectly so, yes: What makes USD "real" is the ability to transact with the larger ecosystem of US and offshore banks that have a shared agreement on what "real" USD are. Practically, this means being connected either directly (via a Fed account) or indirectly (via a bank that itself does have a Fed account) to that system. > Could the US simply "void" all USD that are owned by Russia? Indirectly, yes: They can force every bank holding USD balances for embargoed beneficiaries to freeze these assets. Failing to comply could, in the absolute worst case, lead to that bank's Fed accounts being frozen as well (which would take away its ability to settle in USD with other banks).
- anonporridge 5y ago
  tl;dr, what makes electronic USD "real" is a system of consensus like bitcoin, except it's a node of 1 (the US Fed) with a handful of spokes (banks with Fed accounts) for scaling off that base node.
- thomasahle 5y ago
  I suppose what OP was arguing is, when bank A transfers to bank B, does bank B check with the Feds that the money from bank A is "real"? And is a transfer from A to B really a transfer from A's account at the Feds to B's? In that case, why would the US have to act "indirectly", threatening bank A not to work with bank B? They could simply deny any transfers to and from bank B's account at the Feds, which would make any transactions impossible?
majormajor 5y ago
This is similar to the "why are banks allowed to print money by issuing loans and I'm not?" confusion that sometimes goes around. Your internal balances are only good so long as the rest of the system trusts you. Magic up some fake balances and good luck getting the rest of the world to continue to take you seriously. "You want us to believe you've actually got that 100 Trillion? Show us?" How would this Russian bank spend these trillions? They can't cash out, because they don't actually have that much paper USD. Transfer it to another bank somewhere more reputable? How are you going to make those transfers clear? I invite you to open your own bank and print yourself ten million dollars out of the air. Good luck converting that number to cash or transferring it to anywhere else!
- 13415 5y ago
  I'm sure you're right in principle but have to point out that ten million dollars is peanuts, people have loaned more than that and not given back.
  - majormajor 5y ago
    You mean that "real" banks have issued loans of 10M+ and not gotten repayed by people/companies who went bankrupt or such? Certainly! Banks do their due diligence for a reason, but they don't always get it right. And a certain amount of "bad loans" is expected anyway. Part of the fees and interest they charge is to cover that. But that's very different than simply printing yourself 10 million dollars. Or even just ten dollars. It's also different from you starting a bank and saying you loan me 10 million dollars. I now have a statement saying I have 10M in your bank. I try to take that to a "real" bank to cash out. It's not gonna work.
    - andrewaylett 5y ago
      Unless, it seems, you call them "Tether". Which is one of the reasons why I remain unconvinced that Blockchain _actually_ enables a financial system requiring less trust than the current mainstream financial system.
vishnugupta 5y ago
> So I guess USD needs to be recognized by the US somehow? You could start here: https://www.federalreserve.gov/releases/h41/20220224/ https://www.federalreserve.gov/releases/h41/20220224/ H.4.1 is a really useful and important data set. For example, you can see that US Fed is holding T2.7$ worth of mortgage backed securities i.e., it's funding them. > Could the US simply "void" all USD that are owned by Russia? Beyond a certain threshold those USDs are typically stored as US Treasury bills because it's too risky to deposit billions of $$ in bank accounts. The risk of bank going under is real at those deposit levels. For anything more I highly recommend reading up Fed Guy blog [1]. It's one of the best sources of this information I've come across; he's extremely concise, no-jargon and explains the core principles really well. While at it, take a look at this BIS data[2]. tl;dr Russian residents owe ~B121$ to other countries' banks. [1] https://fedguy.com https://fedguy.com [2] https://stats.bis.org/statx/srs/table/b4?c=RU https://stats.bis.org/statx/srs/table/b4?c=RU
EarthIsHome 5y ago
> I often wonder how money is stored. In a computer account. Here's a 22-second clip[0] from a 60-Minutes interview with a former chair of the Federal Reserve talking about how money is lent to banks. Literally just numbers on a computer. "...We simply use the computer to mark up the size of the account that they have..." [0]: https://www.youtube.com/watch?v=hiCs_YHlKSI https://www.youtube.com/watch?v=hiCs_YHlKSI
- magpi3 5y ago
  How do banks do backups of this data?
RC_ITR 5y ago
USD are ultimately bearer notes, we've just built a bunch of trust-based infrastructure to enable transactions without moving physical currency. The key feature of this system (and what everyone is ignoring) is bank accounts that x/German bank has at y/Russia bank (this is also the actual means of transaction for SWIFT). So in your example, 'y bank erroneously says we have $100tn' would actually just mean 'y bank is willing to credit the account of x bank by $100tn.' If x bank then tried to pay y bank for a separate transaction with those fake $, then y bank is the loser anyway. EDIT: Put alternatively, 'making up' USD is a near equivalent to making a loan, which is sort of the core thing a bank does anyway.
beambot 5y ago
> It can't be just a number on a computer in a bank, right? And yet people question the utility of a decentralized, trustless, public ledger -- ie. blockchain.
- nradov 5y ago
  What is the utility? Sure it makes money laundering and buying illegal goods slightly easier than dealing in cash but otherwise what's the point?
  - beambot 5y ago
    Decentralized consensus & trust doesn't rely on banks and all the associated cost, complexity, obscurity, and gatekeeping that comes with them. With crypto: "Banks" can't unilaterally or fraudulently print more money, settlement is much faster & public / atomic, APIs are through transparent smart contracts rather than semi-structured SWIFT messages, and no need to rely on trust that funds are real compared to (say) Eurodollar derivatives -- i.e. many of the legacy hacks that others are talking about in this thread.
  - landemva 5y ago
    In part, one of the points is to disallow a country from forcing bank depositor bail-ins. Like 2013 in Cyprus. https://www.theatlantic.com/business/archive/2013/03/everything-you-need-to-know-about-the-cyprus-bank-disaster/274096 https://www.theatlantic.com/business/archive/2013/03/everyth... The country north of USA targeted a certain group and took their funds earlier this month. https://www.insurancejournal.com/news/international/2022/02/18/654901.htm https://www.insurancejournal.com/news/international/2022/02/...
- Hamuko 5y ago
  Which is not just a number on a computer, right?
  - TeeWEE 5y ago
    ITs a number of lots of computers that use crypto algorithms to decide what the True ledger is.. So it cant be edited like a row in a DB can. But yes. you're right.
csomar 5y ago
They can "print" as many USD as they want in-house. But in order to process transactions abroad, they need a US bank account. They can't print money in that. The US sanctions (freezing their US assets) has more effect, in that regard, than a SWIFT blockade. The US seems to be the interested party in this war, and Germany is much less enthusiastic about it. Remember, SWIFT is a Belgium company and the US has been hostile to European financial institutions lately.
nonfamous 5y ago
Some good answers above provide more detail here, but ultimately yes: money, for the most part, really just is a number on a computer. Here’s a good example: when you borrow $500,000 from the bank, the bank’s funds don’t go down by $500,000. The bank just creates that money out of thin air, by adding to the number in your bank balance. Eventually that number goes down as you repay the loan, so it all washes out in the end (modulo interest, defaults, etc). As an aside, that’s why low interest rates stimulate the economy: more loans are made, and more money is created, spurring more economic activity.
- caylus 5y ago
  > when you borrow $500,000 from the bank, the bank’s funds don’t go down by $500,000 While technically true, this is a bit misleading, because if you actually /do/ anything with the $500,000, that does in fact cause the bank's funds (i.e. reserves) to go down. If you withdraw it in cash, then the bank will have to give you some of the Federal Reserve Notes it has in its vault, and when they request more from the Federal Reserve, their account there will be debited $500,000. Or if you send it to someone at a different bank, then to settle the transaction your bank's balance at the Federal Reserve (or another intermediary bank) will go down by $500,000, and the other bank's will go up. This tends to average out if both banks are receiving deposits and making loans at equal rates, but if they become imbalanced the bank is at risk of its reserves falling below the requirements, which it must remedy or risk bankruptcy. You're right that low interest rates make it easier for banks to create money, though, because one option a bank has to remedy low reserves is to borrow them from another bank at an interest rate that the Federal Reserve can influence.
  - nonfamous 5y ago
    >> If you withdraw it in cash, then the bank will have to give you some of the Federal Reserve Notes it has in its vault And while that is indeed technically true, it only applies to money withdrawn as banknotes. Given that most of the economy is electronic transactions, that loan is to all extents and purposes real money created by the bank out of thin air (modulo capital requirements to back debt).
louloulou 5y ago
> Otherwise some Russian bank could just increase that number to whatever they like. And say "Look, we own 100 Trillion USD. Now let's go shopping." Yeah, they can, and do. This is what Eurodollars are. And why the World is continually on the brink of financial collapse whenever Dollars get too scarce.
shuntress 5y ago
Yes. It's a distributed shared ledger. If this hypothetical Russian bank attempts to add fraud to the ledger, it will cause a fork.
- magpi3 5y ago
  Shared with whom? The Federal Reserve?
baobabKoodaa 5y ago
> I often wonder how money is stored. It can't be just a number on a computer in a bank, right? Otherwise some Russian bank could just increase that number to whatever they like. And say "Look, we own 100 Trillion USD. A bank could easily create fake money into its own accounts, but it would have trouble transferring that money over to other banks. I wrote extensively about this topic here: https://www.attejuvonen.fi/money-out-of-thin-air/ https://www.attejuvonen.fi/money-out-of-thin-air/
- HWR_14 5y ago
  > A bank could easily create fake money into its own accounts, but it would have trouble transferring that money over to other banks. In fact, isn't that indistinguishable (mathematically) from paying interest? The bank's internal accounts all go from X to Y. In theory, the bank should made more money that that in total, so at any given point the sum of all accounts is less than the banks money and accounts recieveable (usually via loans). And the bank can provide that money to other people if needed. But if a bank paid 1000% APR on savings accounts, all that would happen is the bank goes belly up and a lot of those accounts won't be worth the numbers they claim to have.
agumonkey 5y ago
I know nothing but instead of one number, think transaction. To fake money you need to forge transaction with input from somewhere, this can be checked.
jaxrtech 5y ago
Well, it's a number in a ledger system somewhere (e.g. mainframe system, Oracle database, or what have you), with a lot of auditing, reporting, and procedures around changing that number. (Though, having an internal API to instantly get a new bank account number always seemed kinda funny to me). Slightly related, I'd have to find it again, but I recall there was at some point an assembly level hack on some Oracle database holding core banking in one country.
aryamaan 5y ago
Is there a book and/or more detailed resource (if entertaining too-- that's an icing...) anyone could share?
Suncho 5y ago
> It can't be just a number on a computer in a bank, right? It's two numbers in computers. It's a number in the computer of the bank that issued the money, and it's a corresponding number in the computer of whoever is holding that money as an asset. > Otherwise some Russian bank could just increase that number to whatever they like. And say "Look, we own 100 Trillion USD. Now let's go shopping." It's not possible for a Russian bank to pretend they're holding more USD assets than they really are. The issuing bank knows how much USD is in Russian bank's deposit account. The Russian bank can issue its own USD liabilities (i.e. deposits) which are IOUs for the USD reserves that the bank holds on the asset side of its balance sheet. If the bank issues too many USD liabilities, they risk suffering a bank run that drains their USD reserves and puts them out of business. > So I guess USD needs to be recognized by the US somehow? Not exactly. It's possible to have a USD-denominated deposit account at a bank that h deposits at banks in the US. Most of the USD-denominated instruments in the world are not directly recognized by the US. But the international monetary system is hierarchical. Every USD instrument is an IOU for another USD instrument. If you follow the chain of IOUs, eventually, you'll get to the Fed.

by TekMol 5y ago

dcolkitt 5y ago

Let's just talk about USD specifically. (Other currencies work pretty similar, just with different central banks.) The "single source of truth" is the Federal Reserve. Member banks (about 10,000 US domestic banks) can hold reserves directly at the Fed. Any reserve bank can directly transfer Fed reserves to another member bank or to the US Treasury using FedWire. The Fed "creates money" simply by crediting a member bank's reserve. This is done in two ways, one is by paying interest on reserves. So if you're a member bank holding one million in reserves, the Fed simply bumps your balance up every night to reflect your interest payments. The other is by the Fed conducting "open market operations". When it wants to stimulate the economy by "providing liquidity" the NY Federal Reserve trading desk will buy treasury bonds and pay for them simply by crediting the balance of whichever member bank sold the bonds. Member banks themselves can "create money" in the form of demand deposits. If you have one million in your checking account at Chase bank, all you really have is a promise by Chase bank to give you or whoever you want to send money to one million dollars. Essentially money is created the same way the Fed creates money, your checking account is nothing more than a credit in Chase's database. However Chase's ability to create money is highly regulated and constrained. Banks have to conform to strict capital and leverage constraints. The OCC and other banking regulators will require that Chase hold enough assets in high enough quality to cover its deposit "liabilities". Some fraction of those assets will be dollars held as reserves at the Fed. Some will be bonds or loans, i.e. promises by other high-quality actors to pay dollars. Some of those assets could even be risky stocks, low quality bonds, commodities, etc. However the "risk-weighted" leverage ratio quickly scales up with risk. In exchange for this regulation, deposits held at Chase or other member banks are treated as equivalent to Federal reserve dollars. That's because if for some reason, Chase is unable to pay back its depositors when they demand their money back, the Federal Reserve will "create money" to meet the obligations. This is essentially why bank runs no longer exist in modern banking. Then there's the concept of "money markets", which is short-duration, high-quality assets that are essentially treated as "money-like". Often this tends to be short-term commercial paper from high-quality corporate issuers. A promise from Apple to pay $1.00 in 30 days is treated as "almost a dollar" by most of the market. In this sense, Apple can also "create money". But it's highly constrained, because it would quickly lose its credit rating or breach covenants in its longer-term bonds if it did so. Finally there's the concepts of "eurodollar deposits". These are dollar deposits held at non-American banks but denominated in dollars. For example you could hold $1 million dollars at Mitsubishi bank in Japan, and you have a claim against Mitsubishi to pay out dollars whenever you want. Mitsubishi is not an American bank, and therefore is not directly regulated or insured by the Federal reserve. In some sense this makes eurodollars slightly less safe than dollars held at domestic member banks. That being said Mitsubishi is regulated by Japanese banking regulations and implicitly insured by the BOJ (central bank of Japan). Mitsubishi will also make sure its dollar liabilities are never that large relative to its yen-assets. In the case of Mitsubishi failing, its highly likely the BOJ would bail them out by creating yen in the same way the Fed creates dollars. Some of that yen could be converted to dollars on the open FX market, and make the dollar depositors whole. Hence eurodollars are essentially just as safe as regular dollars as long as they're inside another high-quality banking system.

pgwhalen 5y ago
I have been learning (via books, podcasts, coursera, etc.) about what money is and how it’s created, both domestically and internationally, both in commercial banks and central banks; and let me just say this is a superb summary of all of that. Bravo!
rowls66 5y ago
> In exchange for this regulation, deposits held at Chase or other member banks are treated as equivalent to Federal reserve dollars. That's because if for some reason, Chase is unable to pay back its depositors when they demand their money back, the Federal Reserve will "create money" to meet the obligations. This is essentially why bank runs no longer exist in modern banking. This is not exactly true. Chase, like many other US banks, is regulated by the Fed, and deposits at Chase are insured by the FDIC (Federal Deposit Insurance Corporation). If Chase becomes insolvent, the FDIC will take over, pay depositors up to the FDIC insured maximum, and liquidate any Chase assets. The Fed is not required to do anything in such a situation. The Fed may choose to conjure up some new money and loan that new money to Chase, and as Chase is a systemically important bank, the Fed might well do that before the FDIC steps in, but they are not required to.

can16358p 5y ago

They do have physical cash reserves in central banks.

pmontra 5y ago
Which could be revoked by printing new money with a new design and giving them only to the friendly parties in replacement of the old ones. It's routinely done (Euro is on its second design) and old banknotes and coins are no more valid after some years (the first series of Euros doesn't have an end of life yet.)
- tazjin 5y ago
  Which would significantly devalue the currency because you'd hedge your bets against not becoming unfavourable to whichever regime controls its issuance.
- johannes1234321 5y ago
  not only are first series euros still valid, but you can still exchange pre-Euro currencies for the original rate. The purpose of the new series is just to keep up with counterfeit money, to include newer security measures. But yes, countries in the world have revoked currencies from time to time.
  - PTcartelsLOL 5y ago
    No, you can't. They were only valid for 20 years, and 20 years have passed since 2002.
    - ValentineC 5y ago
      > They were only valid for 20 years, and 20 years have passed since 2002. I'm trying to search for this, but I can't find anything about a 20 year validity.
    - johannes1234321 5y ago
      Shops aren't required to take the old local currencies anymore, but they can still be swapped. Here for instances the information if the German Bundesbank, where you can still swap with the official rate of 1.95583 DM/€. https://www.bundesbank.de/de/aufgaben/bargeld/dm-banknoten-und-muenzen/-/umtausch-von-dm-in-euro-599338 https://www.bundesbank.de/de/aufgaben/bargeld/dm-banknoten-u... (Currently there is a restriction of in person service due to corona, but if you trust mail it works, else you have to wait for that Corona restriction to be lifted) That exchange works without limits or anything.

dogman144 5y ago

Numbers on a computer paired with account balancing/settlement protocols, one example being: https://en.wikipedia.org/wiki/Nostro_and_vostro_accounts https://en.wikipedia.org/wiki/Nostro_and_vostro_accounts When people talk about the manual inefficiencies of finance, it's referring to all this happening in the backend behind the abstraction of quick/automated digital payments in fiat currency. It gets especially complex in international finance, hence SWIFT etc.

jaywalk 5y ago

It's mostly just numbers on a computer in a bank. There are regulations concerning what banks can do with those numbers, but it all boils down to people having faith in the system in the end. That's why bank runs can quickly lead to economic disaster.

lxgr 5y ago
> That's why bank runs can quickly lead to economic disaster. That is true, but arguably not a consequence of money being digital, but rather of fractional reserve banking. Physical vs. digital accounting is largely orthogonal to full/fractional reserve banking.
- nradov 5y ago
  No that's not how it works. Bank runs are possible even with full reserve banking. If banks make any loans at all then obviously they don't hold enough cash to redeem all depositors. Regardless of reserve ratios, the only way to reliably prevent bank runs is with a central bank that provides liquidity upon request.
  - mohanmcgeek 5y ago
    > with full reserve banking. If banks make any loans at all These are contradictory. The banks with full reserve banking can't make loans from easily withdrawable deposits. They can do that only with term deposits that can't be withdrawn for a specific period
- mohanmcgeek 5y ago
  > That is true Is it still true though? The Fed averted this through QE by buying assets of questionable value at the face value from the illiquid banks and providing them with enough cash.. didn't they?

MatteoFrigo 5y ago

> I often wonder how money is stored. The Bank of England published a summary of how modern banks work. See https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m... > It can't be just a number on a computer in a bank, right? It can and it is, see the BOE paper. > So I guess USD needs to be recognized by the US somehow? This is a complicated question that will start a flamewar, but basically, any bank in the world can create dollars out of thin air given adequate collateral. Read about "Eurodollars".

ajross 5y ago
> This is a complicated question that will start a flamewar, but basically, any bank in the world can create dollars out of thin air given adequate collateral. Read about "Eurodollars". This is true, but it's actually sort of a specious point. What a eurodollar deposit "really" is, is just a short contract. Your European bank takes your exchange and promises to give you back dollars when you ask for them. That they may not have them right now is just a technical detail. But the value of the dollar is still set by what the market is willing to pay for it. The bank going "short USD" is a risk it takes, not an inflationary pressure per se. So... sure. Foreign banks can create dollars just like brokerages can "create stock shares"[1]. Except, they really can't. They're just playing accounting tricks. [1] Or, more relevantly perhaps, how one crypto exchange can create wrapped tokens representing foreign coins. This capability was part of the exploit chain that led to the DeFi hack last month.
- lokar 5y ago
  Exactly, they don't give you dollars, they give you a dollar denominated liability.
  - MatteoFrigo 5y ago
    Just to make sure we are speaking the same language: If I have $1 in a checking account in a US bank, do I have one dollar, or do I have a dollar-denominated asset of $1 face value, backed by a dollar-denominated liability of the bank?

mohanmcgeek 5y ago

> Russian bank could just increase that number to whatever they like. Money is an IOU from the bank. So that's what all banks do. But they'll need assets on the right side of their balance sheet.

andrepd 5y ago
> But they'll need assets on the right side of their balance sheet. [citation needed]
- vishnugupta 5y ago
  https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m... "Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money." So on the asset is a loan made by the bank.
- nradov 5y ago
  What kind of citation are you looking for? That's not a controversial issue, it's just the basic reality of how fractional reserve banking has always worked. I'm sure that was covered in your Econ 101 class so open up your old textbook.
snovv_crash 5y ago
Bit what if they didn't, and just changed some numbers in their database?
- tintor 5y ago
  Then you have inflation, and rise of prices.
- Aunche 5y ago
  If anyone suspects that, then everyone will try to withdraw their money from their account and they'd soon get exposed of fraud.

netsharc 5y ago

As far as I know they really are just numbers in databases, but if it's foreign currency, they can't just magic them out of the DBA's fingers. There probably are ledgers that have to agree with each other, e.g. if a Russian bank claimed it had those 100 Trillion dollars from a Cypriot bank, then the Cypriot bank would have to confirm it gave them that much, and then show everyone the source of that money. Which does make one wonder how easy it'd be for your trick to work. North Korea is a major printer of fake $100 bills, a piece of paper that's actually worthless but others are willing to trade $100 worth of goods and services, or exchange for a bank transfer. Until a bill is found to be fake and destroyed, I guess there really is $100 more in circulation, and when the last person found out the note is fake, in effect NK has robbed them out of $100.

dmingod666 5y ago
There was a huge company in china I think, taking loans by using gold bars as collateral.. for years, turned out they weren't gold

sb057 5y ago

Within the US banking system, all of that is, for the most part, kept in line with the Federal Reserve System and other regulatory apparatuses to keep everybody honest. Outside of the US, you run into so-called "eurodollars" (unrelated to the Euro currency) which is a complete mess of intertwined financial systems from across the planet that a lot of people smarter than me pin on being the cause of the European debt crisis.

lxgr 5y ago

> It can't be just a number on a computer in a bank, right? It really is, but to answer your second question, it's important to consider *which* bank. There's reserves (i.e. balances of banks at the Federal Reserve) and bank deposits (which really are just numbers in banks' databases). Having an account at the former is effectively what makes numbers in the database of the latter "real USD". > Otherwise some Russian bank could just increase that number to whatever they like. And say "Look, we own 100 Trillion USD. Now let's go shopping.". They could, but these assets/liabilities would not be backed by any reserves linked to the USD payment rails. Reserves are theoretically irrelevant (though practically regulated) as far as transfers between accounts of a single bank are concerned. But as soon as a second bank comes into the picture, i.e. for inter-bank transfers communicated via SWIFT or otherwise, all transfers will ultimately be backed by Fed account to Fed account transfers in the background. > So I guess USD needs to be recognized by the US somehow? Indirectly so, yes: What makes USD "real" is the ability to transact with the larger ecosystem of US and offshore banks that have a shared agreement on what "real" USD are. Practically, this means being connected either directly (via a Fed account) or indirectly (via a bank that itself does have a Fed account) to that system. > Could the US simply "void" all USD that are owned by Russia? Indirectly, yes: They can force every bank holding USD balances for embargoed beneficiaries to freeze these assets. Failing to comply could, in the absolute worst case, lead to that bank's Fed accounts being frozen as well (which would take away its ability to settle in USD with other banks).

anonporridge 5y ago
tl;dr, what makes electronic USD "real" is a system of consensus like bitcoin, except it's a node of 1 (the US Fed) with a handful of spokes (banks with Fed accounts) for scaling off that base node.
thomasahle 5y ago
I suppose what OP was arguing is, when bank A transfers to bank B, does bank B check with the Feds that the money from bank A is "real"? And is a transfer from A to B really a transfer from A's account at the Feds to B's? In that case, why would the US have to act "indirectly", threatening bank A not to work with bank B? They could simply deny any transfers to and from bank B's account at the Feds, which would make any transactions impossible?

majormajor 5y ago

This is similar to the "why are banks allowed to print money by issuing loans and I'm not?" confusion that sometimes goes around. Your internal balances are only good so long as the rest of the system trusts you. Magic up some fake balances and good luck getting the rest of the world to continue to take you seriously. "You want us to believe you've actually got that 100 Trillion? Show us?" How would this Russian bank spend these trillions? They can't cash out, because they don't actually have that much paper USD. Transfer it to another bank somewhere more reputable? How are you going to make those transfers clear? I invite you to open your own bank and print yourself ten million dollars out of the air. Good luck converting that number to cash or transferring it to anywhere else!

13415 5y ago
I'm sure you're right in principle but have to point out that ten million dollars is peanuts, people have loaned more than that and not given back.
- majormajor 5y ago
  You mean that "real" banks have issued loans of 10M+ and not gotten repayed by people/companies who went bankrupt or such? Certainly! Banks do their due diligence for a reason, but they don't always get it right. And a certain amount of "bad loans" is expected anyway. Part of the fees and interest they charge is to cover that. But that's very different than simply printing yourself 10 million dollars. Or even just ten dollars. It's also different from you starting a bank and saying you loan me 10 million dollars. I now have a statement saying I have 10M in your bank. I try to take that to a "real" bank to cash out. It's not gonna work.
  - andrewaylett 5y ago
    Unless, it seems, you call them "Tether". Which is one of the reasons why I remain unconvinced that Blockchain _actually_ enables a financial system requiring less trust than the current mainstream financial system.

vishnugupta 5y ago

> So I guess USD needs to be recognized by the US somehow? You could start here: https://www.federalreserve.gov/releases/h41/20220224/ https://www.federalreserve.gov/releases/h41/20220224/ H.4.1 is a really useful and important data set. For example, you can see that US Fed is holding T2.7$ worth of mortgage backed securities i.e., it's funding them. > Could the US simply "void" all USD that are owned by Russia? Beyond a certain threshold those USDs are typically stored as US Treasury bills because it's too risky to deposit billions of $$ in bank accounts. The risk of bank going under is real at those deposit levels. For anything more I highly recommend reading up Fed Guy blog [1]. It's one of the best sources of this information I've come across; he's extremely concise, no-jargon and explains the core principles really well. While at it, take a look at this BIS data[2]. tl;dr Russian residents owe ~B121$ to other countries' banks. [1] https://fedguy.com https://fedguy.com [2] https://stats.bis.org/statx/srs/table/b4?c=RU https://stats.bis.org/statx/srs/table/b4?c=RU

EarthIsHome 5y ago

> I often wonder how money is stored. In a computer account. Here's a 22-second clip[0] from a 60-Minutes interview with a former chair of the Federal Reserve talking about how money is lent to banks. Literally just numbers on a computer. "...We simply use the computer to mark up the size of the account that they have..." [0]: https://www.youtube.com/watch?v=hiCs_YHlKSI https://www.youtube.com/watch?v=hiCs_YHlKSI

magpi3 5y ago
How do banks do backups of this data?

RC_ITR 5y ago

USD are ultimately bearer notes, we've just built a bunch of trust-based infrastructure to enable transactions without moving physical currency. The key feature of this system (and what everyone is ignoring) is bank accounts that x/German bank has at y/Russia bank (this is also the actual means of transaction for SWIFT). So in your example, 'y bank erroneously says we have $100tn' would actually just mean 'y bank is willing to credit the account of x bank by $100tn.' If x bank then tried to pay y bank for a separate transaction with those fake $, then y bank is the loser anyway. EDIT: Put alternatively, 'making up' USD is a near equivalent to making a loan, which is sort of the core thing a bank does anyway.

beambot 5y ago

> It can't be just a number on a computer in a bank, right? And yet people question the utility of a decentralized, trustless, public ledger -- ie. blockchain.

nradov 5y ago
What is the utility? Sure it makes money laundering and buying illegal goods slightly easier than dealing in cash but otherwise what's the point?
- beambot 5y ago
  Decentralized consensus & trust doesn't rely on banks and all the associated cost, complexity, obscurity, and gatekeeping that comes with them. With crypto: "Banks" can't unilaterally or fraudulently print more money, settlement is much faster & public / atomic, APIs are through transparent smart contracts rather than semi-structured SWIFT messages, and no need to rely on trust that funds are real compared to (say) Eurodollar derivatives -- i.e. many of the legacy hacks that others are talking about in this thread.
- landemva 5y ago
  In part, one of the points is to disallow a country from forcing bank depositor bail-ins. Like 2013 in Cyprus. https://www.theatlantic.com/business/archive/2013/03/everything-you-need-to-know-about-the-cyprus-bank-disaster/274096 https://www.theatlantic.com/business/archive/2013/03/everyth... The country north of USA targeted a certain group and took their funds earlier this month. https://www.insurancejournal.com/news/international/2022/02/18/654901.htm https://www.insurancejournal.com/news/international/2022/02/...
Hamuko 5y ago
Which is not just a number on a computer, right?
- TeeWEE 5y ago
  ITs a number of lots of computers that use crypto algorithms to decide what the True ledger is.. So it cant be edited like a row in a DB can. But yes. you're right.

csomar 5y ago

They can "print" as many USD as they want in-house. But in order to process transactions abroad, they need a US bank account. They can't print money in that. The US sanctions (freezing their US assets) has more effect, in that regard, than a SWIFT blockade. The US seems to be the interested party in this war, and Germany is much less enthusiastic about it. Remember, SWIFT is a Belgium company and the US has been hostile to European financial institutions lately.

nonfamous 5y ago

Some good answers above provide more detail here, but ultimately yes: money, for the most part, really just is a number on a computer. Here’s a good example: when you borrow $500,000 from the bank, the bank’s funds don’t go down by $500,000. The bank just creates that money out of thin air, by adding to the number in your bank balance. Eventually that number goes down as you repay the loan, so it all washes out in the end (modulo interest, defaults, etc). As an aside, that’s why low interest rates stimulate the economy: more loans are made, and more money is created, spurring more economic activity.

caylus 5y ago
> when you borrow $500,000 from the bank, the bank’s funds don’t go down by $500,000 While technically true, this is a bit misleading, because if you actually /do/ anything with the $500,000, that does in fact cause the bank's funds (i.e. reserves) to go down. If you withdraw it in cash, then the bank will have to give you some of the Federal Reserve Notes it has in its vault, and when they request more from the Federal Reserve, their account there will be debited $500,000. Or if you send it to someone at a different bank, then to settle the transaction your bank's balance at the Federal Reserve (or another intermediary bank) will go down by $500,000, and the other bank's will go up. This tends to average out if both banks are receiving deposits and making loans at equal rates, but if they become imbalanced the bank is at risk of its reserves falling below the requirements, which it must remedy or risk bankruptcy. You're right that low interest rates make it easier for banks to create money, though, because one option a bank has to remedy low reserves is to borrow them from another bank at an interest rate that the Federal Reserve can influence.
- nonfamous 5y ago
  >> If you withdraw it in cash, then the bank will have to give you some of the Federal Reserve Notes it has in its vault And while that is indeed technically true, it only applies to money withdrawn as banknotes. Given that most of the economy is electronic transactions, that loan is to all extents and purposes real money created by the bank out of thin air (modulo capital requirements to back debt).

louloulou 5y ago

> Otherwise some Russian bank could just increase that number to whatever they like. And say "Look, we own 100 Trillion USD. Now let's go shopping." Yeah, they can, and do. This is what Eurodollars are. And why the World is continually on the brink of financial collapse whenever Dollars get too scarce.

shuntress 5y ago

Yes. It's a distributed shared ledger. If this hypothetical Russian bank attempts to add fraud to the ledger, it will cause a fork.

magpi3 5y ago
Shared with whom? The Federal Reserve?

baobabKoodaa 5y ago

> I often wonder how money is stored. It can't be just a number on a computer in a bank, right? Otherwise some Russian bank could just increase that number to whatever they like. And say "Look, we own 100 Trillion USD. A bank could easily create fake money into its own accounts, but it would have trouble transferring that money over to other banks. I wrote extensively about this topic here: https://www.attejuvonen.fi/money-out-of-thin-air/ https://www.attejuvonen.fi/money-out-of-thin-air/

HWR_14 5y ago
> A bank could easily create fake money into its own accounts, but it would have trouble transferring that money over to other banks. In fact, isn't that indistinguishable (mathematically) from paying interest? The bank's internal accounts all go from X to Y. In theory, the bank should made more money that that in total, so at any given point the sum of all accounts is less than the banks money and accounts recieveable (usually via loans). And the bank can provide that money to other people if needed. But if a bank paid 1000% APR on savings accounts, all that would happen is the bank goes belly up and a lot of those accounts won't be worth the numbers they claim to have.

agumonkey 5y ago

I know nothing but instead of one number, think transaction. To fake money you need to forge transaction with input from somewhere, this can be checked.

jaxrtech 5y ago

Well, it's a number in a ledger system somewhere (e.g. mainframe system, Oracle database, or what have you), with a lot of auditing, reporting, and procedures around changing that number. (Though, having an internal API to instantly get a new bank account number always seemed kinda funny to me). Slightly related, I'd have to find it again, but I recall there was at some point an assembly level hack on some Oracle database holding core banking in one country.

aryamaan 5y ago

Is there a book and/or more detailed resource (if entertaining too-- that's an icing...) anyone could share?

Suncho 5y ago

> It can't be just a number on a computer in a bank, right? It's two numbers in computers. It's a number in the computer of the bank that issued the money, and it's a corresponding number in the computer of whoever is holding that money as an asset. > Otherwise some Russian bank could just increase that number to whatever they like. And say "Look, we own 100 Trillion USD. Now let's go shopping." It's not possible for a Russian bank to pretend they're holding more USD assets than they really are. The issuing bank knows how much USD is in Russian bank's deposit account. The Russian bank can issue its own USD liabilities (i.e. deposits) which are IOUs for the USD reserves that the bank holds on the asset side of its balance sheet. If the bank issues too many USD liabilities, they risk suffering a bank run that drains their USD reserves and puts them out of business. > So I guess USD needs to be recognized by the US somehow? Not exactly. It's possible to have a USD-denominated deposit account at a bank that h deposits at banks in the US. Most of the USD-denominated instruments in the world are not directly recognized by the US. But the international monetary system is hierarchical. Every USD instrument is an IOU for another USD instrument. If you follow the chain of IOUs, eventually, you'll get to the Fed.