Where is my money stored?
February 4, 2009 8:16 PM Subscribe
Is most money just numbers on a computer screen? Or do banks actually have cash in their vaults to back up the "digital" money.
I ask because I never see the actual paper or coin money I have - everything is direct deposited and then I use a debit card. I wonder if there is actual paper and coin money enough to match all the money we have that we never physically see or touch.
I ask because I never see the actual paper or coin money I have - everything is direct deposited and then I use a debit card. I wonder if there is actual paper and coin money enough to match all the money we have that we never physically see or touch.
No, most number is simply promises to pay, rather than actual gold, silver, or even paper and coin.
posted by zippy at 8:29 PM on February 4, 2009
posted by zippy at 8:29 PM on February 4, 2009
Even before computers, it was just entries in ledger-books. If the bank kept 100% of all deposits around, they wouldn't have any money to lend out— the bank is betting that everyone won't try to withdraw at the same time. It's been this way since the dawn of the modern age and our whole system is based around it.
posted by Electrius at 8:29 PM on February 4, 2009
posted by Electrius at 8:29 PM on February 4, 2009
I always wondered about this... exactly what stops them from just pretending they have more than they do? On the surface it would be as simple as just tweaking a few numbers in their computer systems, but there must be some sort of check on that, or regulation or something... right?
posted by marble at 8:31 PM on February 4, 2009
posted by marble at 8:31 PM on February 4, 2009
Everything they do has a counterparty. You are a counterparty, the loan recepient is a counterparty, etc. The counterparty has a strong incentive to make sure the bank isn't "making things up."
posted by Pants! at 8:37 PM on February 4, 2009
posted by Pants! at 8:37 PM on February 4, 2009
marble, I'm an auditor (sometimes) for a big-4 SEC audit firm. Amongst other things, we regularly review ledgers for accuracy. We also review computer systems to make sure that transactions are passed correctly, and that systems are configured not to allow tampering. We will sometimes literally trace money through a company as it moves from AR to internal accounts to AP and back out the door. So, in short, yes, there are checks to make sure that banks are telling the truth.
In reality, the situation is a bit more complex - we take samples of ledgers to determine how much we need to check to have confidence that the true story is being told. In the end, a lot of it comes down to the notion of "materiality". If a bank lies and says they have $5 more than they do, it's not a big deal. That tiny amount of money isn't material to the bank's operations. If they lie and say they've got $5 million more than they do, that also might not be a huge deal if the bank is big enough. If they say they've got $5 billion more than they do, that means it's probably part of a larger system that, were confidence in it to fail, would have a huge impact on the company's statements.
Confidence in the entire system basically relies upon the fact that nobody has enough power to fool everyone in a way that can't be traced. The computer system developers implement certain security "controls" (checks, logs, etc) that are designed to be fairly robust, but they don't have access to the computers that store the real numbers. The people that have access to the real numbers don't have access to grant themselves the ability to change or bypass those security controls. The people who grant such accesses are watched very closely, and there are certain types of activities that cannot be performed without changing the code (and it gets far more complex than that, even). It's a kind of "chain" or "loop" of trust that depends on many, many people, and the odds of everyone in the chain be corrupt are vanishingly small.
posted by TheNewWazoo at 8:43 PM on February 4, 2009 [9 favorites]
In reality, the situation is a bit more complex - we take samples of ledgers to determine how much we need to check to have confidence that the true story is being told. In the end, a lot of it comes down to the notion of "materiality". If a bank lies and says they have $5 more than they do, it's not a big deal. That tiny amount of money isn't material to the bank's operations. If they lie and say they've got $5 million more than they do, that also might not be a huge deal if the bank is big enough. If they say they've got $5 billion more than they do, that means it's probably part of a larger system that, were confidence in it to fail, would have a huge impact on the company's statements.
Confidence in the entire system basically relies upon the fact that nobody has enough power to fool everyone in a way that can't be traced. The computer system developers implement certain security "controls" (checks, logs, etc) that are designed to be fairly robust, but they don't have access to the computers that store the real numbers. The people that have access to the real numbers don't have access to grant themselves the ability to change or bypass those security controls. The people who grant such accesses are watched very closely, and there are certain types of activities that cannot be performed without changing the code (and it gets far more complex than that, even). It's a kind of "chain" or "loop" of trust that depends on many, many people, and the odds of everyone in the chain be corrupt are vanishingly small.
posted by TheNewWazoo at 8:43 PM on February 4, 2009 [9 favorites]
I should add that what I wrote is purely internal - it's to prevent companies lying outright. In combination with what Pants! has said, the system is pretty robust.
posted by TheNewWazoo at 8:44 PM on February 4, 2009
posted by TheNewWazoo at 8:44 PM on February 4, 2009
There are reserves banks are required to hold. They may choose to have a higher reserve than required as a precaution. If banks don't meet the reserve requirements they will require a loan from the fed reserve, they will be charged interest on the overnight loan, and this will continue daily until the banks are able to meet the reserve requirements without borrowing.
The main reason the bank may choose to keep in reserve more than what is required is in instances of people losing their mind, think difficult economic times when everybody wakes up and realizes "oh noes! my money's not safe anywhere except under my mattress!", so that the sense of panic is slightly alleviated.
If banks have to scramble to come up with your money ASAP (which it only has a fraction of on hand, and the rest has been loaned out to Joe) then that creates even more panic and it's just an ugly cycle.
posted by ttyn at 8:49 PM on February 4, 2009
The main reason the bank may choose to keep in reserve more than what is required is in instances of people losing their mind, think difficult economic times when everybody wakes up and realizes "oh noes! my money's not safe anywhere except under my mattress!", so that the sense of panic is slightly alleviated.
If banks have to scramble to come up with your money ASAP (which it only has a fraction of on hand, and the rest has been loaned out to Joe) then that creates even more panic and it's just an ugly cycle.
posted by ttyn at 8:49 PM on February 4, 2009
Only a very small percentage of the total "money supply" floating around in the economy at any given time is backed up by paper dollars in vaults. (You may find the money supply article on Wikipedia enlightening. Cash is known as "M0" in money-supply terms.)
There are a lot of really good (and some really bad) explanations of fractional reserve banking around, and I don't want to go through a whole one here, but basically ... the majority of your checking or savings account is not backed up by bullion or dollar bills or even Federal Reserve notes — the majority of it is backed by your neighbors' mortgages, and other debt obligations (loans the bank has made).
If you think about it, you will quickly realize it has to be this way if the bank is to pay you interest on your deposit. If they were just taking your money and stuffing it in a vault (a "100% reserve" bank), they'd have to charge you for the privilege just as they do for safe-deposit boxes. In order to get any return at all, the money has to be lent out at interest. Once that happens, there's a risk of loss. It's a small risk if it's pooled among all depositors at a bank (pre-FDIC banking), or all depositors in a country (post-FDIC banking), but it's still there.
This may be getting a bit far from your question, but I think it's germane: someone once told me that "banking and insurance are two sides of the same coin." When you deposit money in a bank, you accept some risk — you're letting the bank take your money and play with it — but in return you get a reward. When you go to an insurance company, you pay a premium in order to have the insurer take some risk off your hands. In either case, you can really look at the transaction as the buying and selling of risk. Unfortunately, many people don't understand this aspect of modern banking, and are unpleasantly surprised when they first discover fractional-reserve, and begin to understand that banks really are not quite the "money warehouses" that they perhaps naively assumed them to be.
(Some of the less-naive critics of fractional-reserve banking argue that the fractional-reserve system mixes two functions that ought to be separate: demand or transactional banking, which exists solely to facilitate and clear financial transactions; and lending, which matches people with resources to invest with other people seeking capital to put to use in some way. In the past 50 years or so the trend has been towards a mixing of those two functions, and you can get quite an argument going among economist-types over whether that's a good idea or not.)
posted by Kadin2048 at 9:01 PM on February 4, 2009 [3 favorites]
There are a lot of really good (and some really bad) explanations of fractional reserve banking around, and I don't want to go through a whole one here, but basically ... the majority of your checking or savings account is not backed up by bullion or dollar bills or even Federal Reserve notes — the majority of it is backed by your neighbors' mortgages, and other debt obligations (loans the bank has made).
If you think about it, you will quickly realize it has to be this way if the bank is to pay you interest on your deposit. If they were just taking your money and stuffing it in a vault (a "100% reserve" bank), they'd have to charge you for the privilege just as they do for safe-deposit boxes. In order to get any return at all, the money has to be lent out at interest. Once that happens, there's a risk of loss. It's a small risk if it's pooled among all depositors at a bank (pre-FDIC banking), or all depositors in a country (post-FDIC banking), but it's still there.
This may be getting a bit far from your question, but I think it's germane: someone once told me that "banking and insurance are two sides of the same coin." When you deposit money in a bank, you accept some risk — you're letting the bank take your money and play with it — but in return you get a reward. When you go to an insurance company, you pay a premium in order to have the insurer take some risk off your hands. In either case, you can really look at the transaction as the buying and selling of risk. Unfortunately, many people don't understand this aspect of modern banking, and are unpleasantly surprised when they first discover fractional-reserve, and begin to understand that banks really are not quite the "money warehouses" that they perhaps naively assumed them to be.
(Some of the less-naive critics of fractional-reserve banking argue that the fractional-reserve system mixes two functions that ought to be separate: demand or transactional banking, which exists solely to facilitate and clear financial transactions; and lending, which matches people with resources to invest with other people seeking capital to put to use in some way. In the past 50 years or so the trend has been towards a mixing of those two functions, and you can get quite an argument going among economist-types over whether that's a good idea or not.)
posted by Kadin2048 at 9:01 PM on February 4, 2009 [3 favorites]
Mystery of Banking (.pdf) is a pretty fun (300+ page) read about economics and banking.
posted by ttyn at 9:01 PM on February 4, 2009 [1 favorite]
posted by ttyn at 9:01 PM on February 4, 2009 [1 favorite]
The main reason the bank may choose to keep in reserve more than what is required is in instances of people losing their mind, think difficult economic times when everybody wakes up and realizes "oh noes! my money's not safe anywhere except under my mattress!", so that the sense of panic is slightly alleviated.
If banks have to scramble to come up with your money ASAP (which it only has a fraction of on hand, and the rest has been loaned out to Joe) then that creates even more panic and it's just an ugly cycle.
This is what is going on in that scene in It's a Wonderful Life, right?
posted by Night_owl at 10:25 PM on February 4, 2009
If banks have to scramble to come up with your money ASAP (which it only has a fraction of on hand, and the rest has been loaned out to Joe) then that creates even more panic and it's just an ugly cycle.
This is what is going on in that scene in It's a Wonderful Life, right?
posted by Night_owl at 10:25 PM on February 4, 2009
This is what is going on in that scene in It's a Wonderful Life, right?
Yes, although that was compounded by Uncle Joe losing a wad, wasn't it? But yes, that scene is a bank run, common in the great depression, and now almost unheard of due to FDIC insurance.
posted by bystander at 11:27 PM on February 4, 2009
Yes, although that was compounded by Uncle Joe losing a wad, wasn't it? But yes, that scene is a bank run, common in the great depression, and now almost unheard of due to FDIC insurance.
posted by bystander at 11:27 PM on February 4, 2009
You need to see "Money as Debt." It's a great little documentary on, available on google video. . . .
(I'm so struck by this question. . . We used to be on the gold standard . . . where money represented gold, and now the paper that used to represent that doesn't even (95%) even exist itself!)
posted by No New Diamonds Please at 1:35 AM on February 5, 2009
(I'm so struck by this question. . . We used to be on the gold standard . . . where money represented gold, and now the paper that used to represent that doesn't even (95%) even exist itself!)
posted by No New Diamonds Please at 1:35 AM on February 5, 2009
(I'm so struck by this question. . . We used to be on the gold standard . . . where money represented gold, and now the paper that used to represent that doesn't even (95%) even exist itself!)
We went off the gold standard because we were getting to the point where there wasn't enough gold to support the demand for $. And it's distortive- it's like setting the price of televisions by pegging it to the price of houses. The price of televisions now doesn't rise and fall on its own accord as the television industry waxes and wanes, it is forced to ride the fluctuations of the housing market.
posted by gjc at 7:00 AM on February 5, 2009 [1 favorite]
We went off the gold standard because we were getting to the point where there wasn't enough gold to support the demand for $. And it's distortive- it's like setting the price of televisions by pegging it to the price of houses. The price of televisions now doesn't rise and fall on its own accord as the television industry waxes and wanes, it is forced to ride the fluctuations of the housing market.
posted by gjc at 7:00 AM on February 5, 2009 [1 favorite]
This is a neat little slideshow that details the different forms of money out there and their relative sizes.
But the short answer is "no", there's not actually a paper bill lying around for each and every "dollar" in the system.
posted by losvedir at 7:51 AM on February 5, 2009
But the short answer is "no", there's not actually a paper bill lying around for each and every "dollar" in the system.
posted by losvedir at 7:51 AM on February 5, 2009
I wonder if there is actual paper and coin money enough to match all the money we have that we never physically see or touch.
No and computers have nothing to do with it. Previous to computers this was just done with ledgers by hand. This led to a lot of clerical error. Information systems are just a better way of managing this. The US and most western nations got off the gold standard in the 30s. It didnt make sense then and it doesnt make sense now.
Trading money as a commodity is how it works now. Why shouldnt it? There's nothing magical about money. Its just a thing with value. Markets determine value.
So I think you are confusing two very different things:
1. Information systems.
2. Gold standard or physical versions of money.
You can have 2 without 1. Its just done on paper. You can have 1 without 2. Im sure there's some currency pegged to some precious metal market out there. Im sure they use computers.
Money has always been a fiction of sorts. Its also convenient. Instead of lugging gold and donkeys and other things of value, you just lug cash. Or lug around nothing. Let the bank's computers figure it out for you. The idea is that the money you have can be turned into goods or exchange for different money.
There are checks and balances with accounting. You cant just add a million dollars to my checking account. Even if you could then somewhere someone must have given me a million dollar check. Somewhere someone must be out 1 million if I gain 1 million. If that cant be proven then that's really the same as printing up bills in your basement. You can do it, but its fraud, and there's a good chance you'll be caught.
Also, you can demand physical money for your bank balance at anytime. If Bill Gates wants his money in bills then his bank will ask the federal reserve to print out bills.
posted by damn dirty ape at 8:16 AM on February 5, 2009
No and computers have nothing to do with it. Previous to computers this was just done with ledgers by hand. This led to a lot of clerical error. Information systems are just a better way of managing this. The US and most western nations got off the gold standard in the 30s. It didnt make sense then and it doesnt make sense now.
Trading money as a commodity is how it works now. Why shouldnt it? There's nothing magical about money. Its just a thing with value. Markets determine value.
So I think you are confusing two very different things:
1. Information systems.
2. Gold standard or physical versions of money.
You can have 2 without 1. Its just done on paper. You can have 1 without 2. Im sure there's some currency pegged to some precious metal market out there. Im sure they use computers.
Money has always been a fiction of sorts. Its also convenient. Instead of lugging gold and donkeys and other things of value, you just lug cash. Or lug around nothing. Let the bank's computers figure it out for you. The idea is that the money you have can be turned into goods or exchange for different money.
There are checks and balances with accounting. You cant just add a million dollars to my checking account. Even if you could then somewhere someone must have given me a million dollar check. Somewhere someone must be out 1 million if I gain 1 million. If that cant be proven then that's really the same as printing up bills in your basement. You can do it, but its fraud, and there's a good chance you'll be caught.
Also, you can demand physical money for your bank balance at anytime. If Bill Gates wants his money in bills then his bank will ask the federal reserve to print out bills.
posted by damn dirty ape at 8:16 AM on February 5, 2009
(I'm so struck by this question. . . We used to be on the gold standard . . . where money represented gold, and now the paper that used to represent that doesn't even (95%) even exist itself!)
The real economy is made out of useful things we trade with each other - i will give you 2 chickens if you will fix the leak in my roof, kind of thing. We put value in "gold" or "copper" only as something in which to place these promises over time - if I can't fix your roof until next week, and actually I'd rather trade the two chickens to Joe down the street for some apples, it's easier if we have some universal stand-in. Metal coins were widely used because they don't decay and can be imprinted with an image that shows they're "official".
That the coins themselves became thought to be worth something is actually pretty funny. They were originally meant just to stand for promises to one another, but they're shiny, they're hard, they started to seem valuable themselves - hence that whole "root of all evil" thing, as we started to want money for money's sake, not in order to fix our roofs or get another chicken.
The same story happened with paper - was just meant to stand in for the gold, and then eventually comes to seem to have value itself. But all along, the only thing that is actually worth something is the promise of the other person.
posted by mdn at 10:59 AM on February 5, 2009
The real economy is made out of useful things we trade with each other - i will give you 2 chickens if you will fix the leak in my roof, kind of thing. We put value in "gold" or "copper" only as something in which to place these promises over time - if I can't fix your roof until next week, and actually I'd rather trade the two chickens to Joe down the street for some apples, it's easier if we have some universal stand-in. Metal coins were widely used because they don't decay and can be imprinted with an image that shows they're "official".
That the coins themselves became thought to be worth something is actually pretty funny. They were originally meant just to stand for promises to one another, but they're shiny, they're hard, they started to seem valuable themselves - hence that whole "root of all evil" thing, as we started to want money for money's sake, not in order to fix our roofs or get another chicken.
The same story happened with paper - was just meant to stand in for the gold, and then eventually comes to seem to have value itself. But all along, the only thing that is actually worth something is the promise of the other person.
posted by mdn at 10:59 AM on February 5, 2009
0. Coins used to be made out of semi-precious metals, and in ancient Rome, laws were passed to prevent you from skimming off the edges of the coin - do that to enough coins and you could make a few bucks.
1. Until Nixon took us off the gold standard, the dollar was tied to the price of gold - if you brought a dollar's worth of dollars to Fort Knox, they would give you a dollar's worth of gold. Dollars are now backed by "The full faith and credit of the United States" (instead of gold) and are "Legal tender for all debts public & private" (e.g. it's money because the government says it is. see: Fiat Currency, Bretton Woods)
2. Banks can only operate by not having 100% reserves on hand. They make money by loaning your money out. (See "It's a Wonderful Life" for an example of this in action.) They can only loan your money out by not keeping 100% of it in their vaults.
a. You deposit $100.
b. The bank loans out $90 of it to Joe at 10% interest.
c. You get 2% interest on your checking account.
d. The bank pockets the 8% difference.
This is why checking accounts bear no interest - that money is very liquid and you can withdraw it right way, and why CD's bear a lot of interest - you're not allowed to withdraw that money so they can depend on it being there to loan out.
3. How much money a bank is required to keep on hand is determined by the Fed. This is how the Fed controls the money supply.
a. You deposit $100 in the bank.
b. $90 is loaned to Fred the farmer to buy a tractor. The tractor dealer deposits it in his bank. Now $190 has been deposited in the bank and $90 loaned out.
c. John takes out a $81 loan to buy a car. The car dealer deposits that money in their bank and now $271 has been deposited in the bank and $171 loaned out.
d. etc. etc.
As you can see, small changes in the money a bank is required to have on hand has major changes in the money supply. Bump it up to 12% and your $100 becomes + $88 + $77 = $265 instead of $271. Across the whole landscape of the economy, this is huge.
This may freak you out, but it's really the same as your $1 going to buy a pack of gum, and that $1 going to pay the store owner's electric bill, and that $1 going to pay the electric company's employee's wages & that $1 being spent by that employee to buy a pack of gum.
4. Since the dollar was taken off of the gold standard, there's no reason for the banks to keep physical bills on hand, except to hand out at ATMs.
5. There's plenty of legal voodoo banks can do to invent money where there shouldn't be money without just adding zeros to bank accounts.
The recent documentary series (which I haven't yet watched) called "The Ascent of Money" may be of interest to you. You can watch it online on PBS.org.
posted by Muffy at 1:14 PM on February 5, 2009
1. Until Nixon took us off the gold standard, the dollar was tied to the price of gold - if you brought a dollar's worth of dollars to Fort Knox, they would give you a dollar's worth of gold. Dollars are now backed by "The full faith and credit of the United States" (instead of gold) and are "Legal tender for all debts public & private" (e.g. it's money because the government says it is. see: Fiat Currency, Bretton Woods)
2. Banks can only operate by not having 100% reserves on hand. They make money by loaning your money out. (See "It's a Wonderful Life" for an example of this in action.) They can only loan your money out by not keeping 100% of it in their vaults.
a. You deposit $100.
b. The bank loans out $90 of it to Joe at 10% interest.
c. You get 2% interest on your checking account.
d. The bank pockets the 8% difference.
This is why checking accounts bear no interest - that money is very liquid and you can withdraw it right way, and why CD's bear a lot of interest - you're not allowed to withdraw that money so they can depend on it being there to loan out.
3. How much money a bank is required to keep on hand is determined by the Fed. This is how the Fed controls the money supply.
a. You deposit $100 in the bank.
b. $90 is loaned to Fred the farmer to buy a tractor. The tractor dealer deposits it in his bank. Now $190 has been deposited in the bank and $90 loaned out.
c. John takes out a $81 loan to buy a car. The car dealer deposits that money in their bank and now $271 has been deposited in the bank and $171 loaned out.
d. etc. etc.
As you can see, small changes in the money a bank is required to have on hand has major changes in the money supply. Bump it up to 12% and your $100 becomes + $88 + $77 = $265 instead of $271. Across the whole landscape of the economy, this is huge.
This may freak you out, but it's really the same as your $1 going to buy a pack of gum, and that $1 going to pay the store owner's electric bill, and that $1 going to pay the electric company's employee's wages & that $1 being spent by that employee to buy a pack of gum.
4. Since the dollar was taken off of the gold standard, there's no reason for the banks to keep physical bills on hand, except to hand out at ATMs.
5. There's plenty of legal voodoo banks can do to invent money where there shouldn't be money without just adding zeros to bank accounts.
The recent documentary series (which I haven't yet watched) called "The Ascent of Money" may be of interest to you. You can watch it online on PBS.org.
posted by Muffy at 1:14 PM on February 5, 2009
Yes - this isn't about gold standards, or money conspiracies. It's not any more rational to base economic value on on the perceived value of shiny metal.
posted by Pants! at 9:44 AM on February 6, 2009
posted by Pants! at 9:44 AM on February 6, 2009
This is why checking accounts bear no interest - that money is very liquid and you can withdraw it right way
At least in the U.S., Regulation Q says that checking accounts cannot earn interest, period.
If you have a "checking" account that earns interest, it's not really a checking account. It's typically a "negotiable order of withdrawal" (NOW) account, which operates similarly from a user's perspective but is slightly different from the bank's.
True checking accounts are "demand accounts," meaning that the entire balance is, or at least should be, available to the depositor at any moment they wish. This is totally different from a savings account, where your ability to withdraw funds is more limited.
Until fairly recently, it wasn't uncommon to have to go to two separate banks if you wanted a savings account and a checking account: you'd go to a commercial bank for the checking account, and a savings-and-loan for the (usually passbook) savings account.
Typically, commercial banks did not do a lot of home mortgage lending, while S&Ls specialized in it.
(Determining whether all this crossover has been a good or bad thing will be left as an exercise for the reader.)
posted by Kadin2048 at 1:11 AM on February 8, 2009
At least in the U.S., Regulation Q says that checking accounts cannot earn interest, period.
If you have a "checking" account that earns interest, it's not really a checking account. It's typically a "negotiable order of withdrawal" (NOW) account, which operates similarly from a user's perspective but is slightly different from the bank's.
True checking accounts are "demand accounts," meaning that the entire balance is, or at least should be, available to the depositor at any moment they wish. This is totally different from a savings account, where your ability to withdraw funds is more limited.
Until fairly recently, it wasn't uncommon to have to go to two separate banks if you wanted a savings account and a checking account: you'd go to a commercial bank for the checking account, and a savings-and-loan for the (usually passbook) savings account.
Typically, commercial banks did not do a lot of home mortgage lending, while S&Ls specialized in it.
(Determining whether all this crossover has been a good or bad thing will be left as an exercise for the reader.)
posted by Kadin2048 at 1:11 AM on February 8, 2009
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posted by SpecialK at 8:20 PM on February 4, 2009