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This question already has an answer here:

This question has been bothering me for a long time and I’m hoping that someone here can help to answer it.

I will use Greece as an example, but my question could really be applied to any country or even a bank:

While a government in the Eurozone, the Greeks for example, might have an actual building in which Euro coins are minted and Euro banknotes printed, these are most likely tightly regulated, with lots of physical checks to ensure that the Greek government doesn’t just print more whenever they want to.

I understand that physical money typically makes up a small portion of the actual money supply, so I assume that “printing them selves out of debt” regardless of whether it would be legal, isn’t an actual option for them.

However, what prevents the Greek national bank from simply going into their computer system and adding some zeros to their bank account? What system prevents any bank anywhere from doing the same? Does the bank of international settlements in Basel keep some kind of record of the total global money supply? How is this kind of fraud prevented?

I’m very curious to hear the answer!

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marked as duplicate by EnergyNumbers, BKay, FooBar, Giskard, The Almighty Bob Jul 10 '15 at 1:20

This question has been asked before and already has an answer. If those answers do not fully address your question, please ask a new question.

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    $\begingroup$ It is really interesting how we never heard this type of question (despite the Greek crises being really present since creation of the beta), and now suddenly we have two within 2 weeks. $\endgroup$ – FooBar Jul 9 '15 at 16:24
  • $\begingroup$ The answer that fully explains (to me at least) my question is indeed the one that was pointed to as the "duplicate". Many thanks to everyone for shedding light on this! $\endgroup$ – rohrl77 Jul 10 '15 at 6:40
  • $\begingroup$ I'll take Lumi's answer as the correct one for my question. So that leaves me wondering about just one thing... what does the bank of international settlements do?... guess I can research that question myself a bit. $\endgroup$ – rohrl77 Jul 10 '15 at 6:41
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Double entry book keeping.

If we take the example given here, of the Greek Central Bank (bank nerd trivia - interestingly the GCB is a commercial bank, listed on the Greek Stock Exchange), arbitrarily adding 000's to its deposit account.

This cannot be done as stated. The double entry book keeping accounting system on which all banking is based, requires that two ledgers are simultaneously updated, one with a credit and one with a debit. So if the GCB credits its own deposit account (which in practice would be a liability income account of some kind), there has to be a matching debit on another ledger. Those are the rules.

Typically deposit accounts increase their value either by people depositing cash in them (see below), by direct transfer from another deposit account, or by receiving a loan.

For example, if the government prints physical cash then this can be deposited at the central bank:

[debit cash account, credit GCB bank deposit account]

and this is how the US TARP intervention was performed. The federal reserve then used the money to buy loans from the US Banks. Note that a debit to an asset account increases its value, and a credit reduces it, whilst on the liability (right hand side), a debit reduces the account, and a credit increases it.

If the European central bank makes the Greek Central bank a loan then on the Greek side, the book keeping is:

[debit cash, credit interbank loan]

The GCB has received cash, and now has a debt that it owes the ECB among its liabilities.

The one thing it can't do is just arbitrarily increase the value of a single account, one of the main reasons for double entry book keeping is in fact to prevent that.

Bank fraud and the various forms of banking system abuse that do occur typically involve manipulations of banking operations within the framework of double entry book keeping. So while DEB. prevents accounts from having zero's tacked on the end, it doesn't prevent Mr. Smith the bank manager, lending his very good friend Mr. Brown a large sum of money that Mr. Brown has no intention of repaying.

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My guess is that sometimes any value of money in a bank is tied with the physical representation of that value. Although fiat money is not tied with any form of minerals (gold or silver), but it is tied with some form of paper money. If banks just adding zero to its bank account without any tangible representation of that value, people in the future, when they are about to draw physical cash, the bank will not provide that cash. This can cause much trouble for the banks itself. This is why when the Feds want to "pump" money into the money supply, they print money and buy treasury bonds, instead of just "adding zero" to the back of its bank account. Since Greece cannot just print money at their own will, adding zero to their currency will cause much problem. In the case of the debt crisis now, imagine if they DID add zero and people are drawing their cash. Their books says that they still have money but the banks cannot provide the cash that people demanded. Another proposal is to just print money. Greece cannot do this and if a country can, it can cause a rapid inflation, another economic problem that can backfire...

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Nothing.

In essence that's exactly how banking works nowadays, see Fractional Reserve Banking.

Furthermore, it's perfectly legal.

It works because people rarely ever want to withdraw all the money they have in cash. Instead, they are happy to just check their bank account balance and keep the cash secure in bank.

Obviously there are limits and even Fractional Reserve Banking can't go on for ever but, in essence, majority of money supplies gets created by shuffling account balances. It does not even have to zeros and ones as you can do the same on paper.

Banks do not go bankrupt because they have team of statisticians at hand that calculates how much cash should they have at any time to maintain liquidity.

Update

Regarding Greece. Since Nixon Shock, any country can create endless supplies of money at no cost but only if that country did not deprive itself from that right by joining currency union as Greece did. Once Greece quits the Euro zone, they will regain the power to create money supplies.

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  • $\begingroup$ negative voter - speak up! $\endgroup$ – matcheek Jul 9 '15 at 18:06
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    $\begingroup$ You should read up on the duplicate question of this, where the accepted answer yields quite some interesting information. $\endgroup$ – FooBar Jul 9 '15 at 20:28
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    $\begingroup$ Fractional reserve banking is so badly understood. $\endgroup$ – Lumi Jul 9 '15 at 20:46
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    $\begingroup$ When banks create loans, they're also creating a liability for themself. $\endgroup$ – dwjohnston Jul 9 '15 at 21:15
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    $\begingroup$ Let's see - you're referencing the FRB wikipedia page which is still using the now acknowledged incorrect textbook description, you're also claiming that it is possible to just arbitrarily add 0's - it's not - and banks actually go bankrupt all the time, see FDIC Fridays. Liquidity provision doesn't require much in the way of statistics btw., banks have a very good idea of how much asset cash they will have flowing just by looking at their loan book. There are also considerable costs to printing endless supplies of money, just ask Weimar Germany, Zimbabwe, and lately Russia and the Ukraine. $\endgroup$ – Lumi Jul 9 '15 at 23:10

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