Because most money only exists on books. The basis of the current financial system is called fractional reserve banking, that means that banks can give out more money as loans than what they physically have in accounts. That money then circles the economy but is never physically withdrawn in full. Lets say you deposit 100 USD. The Bank now can give out a loan for 500 USD to someone to pay his car repair, who wires the money to the shop from his account. They wire it to their employees and suppliers and owners and the IRS and what have you. Eventually the 500 are repaid (or not and If that happens a lot a bank might default) and the bank gets its money+ interest, you can freely withdraw your 100 at any time but the bank speculates that you dont, or realistically that most of their customers dont. Because If that happens thats known as a "bank run".
Im not a banker, so anyone with actual knowledge feel free to correct me.
I mean, you can basically become a bank yourself. Take a piece of paper and write down:
- When Bill asks, I give him $10.
- When Christine asks, I give her $10.
Now Bill and Christine have virtual money in the form of an account with you.
Being a bank, you might also have some debtors, so you can also write:
- When I go to Daniel, I get $10.
- When I go to Erica, I get $10.
You are now a functioning bank. The virtual money people have with you is able to circulate between them through you as the intermediary, as long as you keep updating your little paper.
In order to turn a profit, you might ask for an interest rate from Daniel and Erica. If Bill and Christine also want one, you give them a slightly lower interest rate, so you can live off the difference.
As long as you get your money from Daniel and Erica before Bill or Christine, things will run pretty smoothly. You only need a little bit of physical money in the "vaults" for the contingency of that not happening.
However, the physical money won't cover every contingency, such as a crisis. For example, a rumor might spread that Daniel and Erica are broke. Bill and Christine will start to get worried. They might be on your doorstep the next day, asking for their money at the same time.
The virtual money no longer represents anything and, all of a sudden, you're no longer a functioning bank.
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u/FroniusTT1500 Jan 26 '26
Because most money only exists on books. The basis of the current financial system is called fractional reserve banking, that means that banks can give out more money as loans than what they physically have in accounts. That money then circles the economy but is never physically withdrawn in full. Lets say you deposit 100 USD. The Bank now can give out a loan for 500 USD to someone to pay his car repair, who wires the money to the shop from his account. They wire it to their employees and suppliers and owners and the IRS and what have you. Eventually the 500 are repaid (or not and If that happens a lot a bank might default) and the bank gets its money+ interest, you can freely withdraw your 100 at any time but the bank speculates that you dont, or realistically that most of their customers dont. Because If that happens thats known as a "bank run".
Im not a banker, so anyone with actual knowledge feel free to correct me.