Does Total Digital Money Equal Total Physical Money?

General
1

Note: The following question may not be directly related to trading, but I would appreciate an explanation from the perspective of banking, and the financial system.

Main Question:

Is the total balance in all bank accounts (digital/deposit money/) necessarily equal to the total amount of physical currency and coins in existence or circulation, including currency and coins that have been lost, destroyed, or mutilated by individuals?

Answer by ChatGPT: No.

The total amount of bank deposits can be greater than the total amount of physical cash and coins actually circulating.

For example:

Suppose Customer A deposits ₹100 cash in Bank A.

Initially:

  • Bank A has ₹100 cash/reserves.
  • Customer A has a ₹100 bank deposit.

Now Bank A gives Ravi a ₹90 loan.

The bank does not necessarily need to receive another ₹90 cash deposit from someone else.

Instead, when it grants the loan, it records:

Bank A’s Assets:

  • ₹100 cash/reserves
  • ₹90 loan to Ravi
  • Total = ₹190

Bank A’s Liabilities:

  • ₹100 deposit of Customer A
  • ₹90 deposit of Ravi
  • Total = ₹190

So the balance sheet still matches:

Assets ₹190 = Liabilities ₹190

The important point is that the additional ₹90 bank deposit was created when the bank granted the ₹90 loan. It does not necessarily represent ₹90 of physical cash sitting somewhere in the banking system.

Therefore, bank deposits/digital money can exceed the amount of physical currency and coins in circulation.

But does this logic actually make sense? In other words, are banks legally and practically allowed to create a new deposit in this way when they grant a loan ?

2

It is not created out of thin air, banks also take loans from rbi for around 5-6% pa, only rbi can create or print new money

3

Any thoughts on main question ??

4

Of course.

Also, when we hear/read central bank “prints money”,
part of it is simply updating a number in some ledger against some entity.

Yes that is they way.
However, commercial banks cannot do so willy-nilly,
they need to operate within the thresholds defined by the central bank.

In most modern economies, both central banks and commercial banks create money. Central banks issue money as a liability, typically called reserve deposits, which is available only for use by central bank account holders. These account holders are generally large commercial banks and foreign central banks.

Can start by reading about creation of money in Money creation - Wikipedia.

5

I think the key distinction is between physical cash and digital bank deposits. They’re not necessarily equal.

Most of the money we use today is actually bank deposits, and commercial banks create new deposits when they issue loans. The Bank of England explains this pretty well (Source)

So the amount of digital money can be much larger than the physical cash actually in circulation.

Makes you realise how much of the money we use today is basically just entries on a balance sheet rather than physical cash. All the hustle and chaos, just to end up as another number in a ledger.