There are a lot of electronic money transactions nowadays. My “paycheck” gets electronically transferred from my employer’s bank account to my bank account, from where it is electronically transferred to merchants I do business with.
My question is, is there traditional cash (in the form of dollar bills) somewhere that is associated with all this electronic money? Or is there some currency in circulation that just begins and stays electronic?
Well, there are the various virtual currencies (Everquest, World of Warcraft, MTGO’s tickets, etc) that can be transferred back and forth in much the same way as real currencies are traded on the private market. Is that what you mean?
I was trying to mean U.S. Dollars, but I see how I wasn’t very specific. That is an angle I hadn’t thought of when pondering this question, though.
I think this is how banking works:
I believe there’s no paper involved with electronic funds transfer or check cashing. First consider the case where both parties have the same bank. In that case, it’s easy for the bank to modify the account balances of the parties and transfer the ability to withdraw currency without moving a pile of bills from one box to another.
If the two parties have different banks, the Federal Reserve comes into play (I think). Each bank effectively has a checking account with the Feds. When I cash a check drawn on a different bank, my bank’s federal reserve account increases by the amount of the check and the other bank’s account decreases.
If a lot of people withdraw money from a bank and the bank runs low on paper currency, the bank can get more currency by withdrawing from its Federal reserve account.
In summary, paper currency is shipped around only when people actually withdraw money. Electronic transactions merely change who has the right to ask for cash.
That’s my understanding as well.
So, does the Federal Reserve actually have in a vault somewhere the cash represented by the bank’s checking accounts? Or do they just print the money as needed for real withdrawals, and release new money into circulation by just crediting those accounts?