You’re reading Economic Forces, a free weekly newsletter on economics, especially price theory, without the politics. You can support our newsletter by signing up here: One thing that banks do is allow you to take physical currency and deposit it into an account you have with them. You hand them a $100 bill and the bank credits your account $100. They also let you come back whenever you want and get your $100 back. You can wait one week or one year or five minutes. When you show up and ask for your $100, they hand you a $100 bill (or five $20 bills or ten $10 bills, you get the point). In short, when you deposit that hundred-dollar bill, the bank creates a $100 liability. In order to make good on that liability, they keep some $100 bills on hand in case you show up.
When A Dollar Isn't a Dollar
When A Dollar Isn't a Dollar
When A Dollar Isn't a Dollar
You’re reading Economic Forces, a free weekly newsletter on economics, especially price theory, without the politics. You can support our newsletter by signing up here: One thing that banks do is allow you to take physical currency and deposit it into an account you have with them. You hand them a $100 bill and the bank credits your account $100. They also let you come back whenever you want and get your $100 back. You can wait one week or one year or five minutes. When you show up and ask for your $100, they hand you a $100 bill (or five $20 bills or ten $10 bills, you get the point). In short, when you deposit that hundred-dollar bill, the bank creates a $100 liability. In order to make good on that liability, they keep some $100 bills on hand in case you show up.