Comments on: We used to support all of our dollars with gold, is there now a paper dollar behind every electronic dollar in the economy?

Question: We used to support all of our dollars with gold, is there now a paper dollar behind every electronic dollar in the economy?

nameless.k — Mon, 10 Sep 2007 21:19:54 -0800

We used to support all of our dollars with gold, is there now a paper dollar behind every electronic dollar in the economy?

Help me settle a bet: are there billions of paper dollars being physically moved between financial institutions? Would we have enough paper cash to go around if everyone withdrew all of their assets and paid off all their loans?

By: pompomtom

pompomtom — Mon, 10 Sep 2007 21:26:01 -0800

No. Absolutely not.

You may want to look into the credit creation process. Basically, lenders create money in our system by borrowing and lending on the basis of what liquidity is likely to be necessary (generally down to a legislated minimum)... this is far less than the amount required if, for example, every depositor turned up and said "I want my money back".

By: MayNicholas

MayNicholas — Mon, 10 Sep 2007 21:27:04 -0800

I found the on the U.S. Treasury web site:

The law requires that each Federal Reserve bank hold collateral that equals at least 100 percent of the value of the currency it issues. Most of that collateral is in U.S. Government securities owned by the Federal Reserve System. It also includes gold certificates, special drawing rights or other "eligible" paper. Eligible paper can be bills of exchange or promissory notes, and some foreign government or agency securities obtained by the Federal Reserve.

By: paulsc

paulsc — Mon, 10 Sep 2007 21:28:20 -0800

"... Would we have enough paper cash to go around if everyone withdrew all of their assets and paid off all their loans?"
posted by nameless.k to work & money (1 comment total) [add to favorites] [!]

Not even close.

By: Kololo

Kololo — Mon, 10 Sep 2007 22:11:29 -0800

You may find some of the answers to this question to be illuminating or relevant. (I asked that linked question a few months ago, it's nice to know i'm not the only one who doesn't know anything about this topic.)

By: Heywood Mogroot

Heywood Mogroot — Mon, 10 Sep 2007 22:27:41 -0800

This graph from Wikipedia illustrates the growth in the various money supplies in the US.

M0 = cold, hard cash
M1 = M0 + checking accounts
M2 = M1 + savings accounts
M3 = M2 + bigger stuff

IIRC there's under $1T of cash (M0) that has been printed.

By: absalom

absalom — Tue, 11 Sep 2007 04:27:19 -0800

We wouldn't. What you're talking about (everyone withdrawing their cash) is called a Bank Run and the results are generally pretty ruinous. I'd second reading that Credit Creation link above.

By: beagle

beagle — Tue, 11 Sep 2007 05:56:46 -0800

Thirding the Credit Creation link. Though there is a vigorous dispute going on behind that article, the basic points are correct in describing how lenders essentially make up money out of nothing by means of the multiplier effect of the reserves they need to hold. That created money is backed by nothing other than the reserves on deposit at the bank, and the reserves are backed by nothing other than Treasury securities, which are IOU's backed by nothing except the creditworthiness of the United States government. No gold, no paper money is behind any of it.

By: kuujjuarapik

kuujjuarapik — Tue, 11 Sep 2007 07:41:52 -0800

This answer from the Straight Dope might help you.

By: TheOnlyCoolTim

TheOnlyCoolTim — Tue, 11 Sep 2007 09:20:22 -0800

This graph from Wikipedia illustrates the growth in the various money supplies in the US.

M0 = cold, hard cash
M1 = M0 + checking accounts
M2 = M1 + savings accounts
M3 = M2 + bigger stuff

Funny part is the government stopped publishing M3 numbers recently. They claim it was not a useful measure, others claim that the numbers were getting scary.

By: Kadin2048

Kadin2048 — Tue, 11 Sep 2007 11:34:39 -0800

No. Among other reasons, fractional-reserve banking means that there is more capital floating around in people's bank accounts than there are in banks' reserves.

It's quite easy to see how this works: if you deposit $100 into your account, your balance sheet will say $100. Assuming the bank only has to keep 10% reserves, they can then turn around and loan somebody else $90, by crediting it to their account (quite probably in some other bank, but for now we'll assume there's only one bank around).

They can repeat this process, loaning 90% each time. So from the second person's deposits, they can loan out $81. In theory, from the original $100 cash deposit, they can have $333 on their books as liabilities.

As long as there isn't a run on the bank, where everyone suddenly wants their bank balance in cash, most people never realize that the money in their bank account isn't backed up by dollars (or gold) in a vault somewhere; it's essentially backed up by your neighbor's house, or the small business down the street, or anyone else that the bank loans money to.

Although this system takes a lot of flack from the gold bugs and anti-fiat-currency people (with some merit), it's one of the key aspects of capitalism. But when you first learn about it, it's pretty nerve-racking. I'm impressed on a daily basis that it works at all.

By: mhum

mhum — Tue, 11 Sep 2007 15:03:00 -0800

For reference, you can look here for the actual figures.

As of July 2007, there is $758.4B in currency floating out there. Compare that to $1,365.2B in M1, $7,256.9B in M2, and $7,569.6B in MZM (M2 - time-deposits + institutional money market funds).

In other words, there are between 1 and 9 "electronic" dollars out there for every paper dollar, depending on how you count "dollars in the economy".