We, the non-legacy economics crowd, say the money you have in your bank is not your account deposits but that “deposit,” as a noun, is really the wrong word for what is in people's accounts, and that what that money really is is the bank’s new “asset.”
Now of course, one's bank has no choice but to do what you tell it, so it's not what you or I call, “bank-owned,” what comes to mind when someone says “It's not a deposit that's in your account; really, it's the bank’s asset.”
There's often a little delay before we can use money we receive; “waiting for the check/payment to ‘clear.’” Maybe it's just my own tactile impression/figment of imagination, but assuming it is a thing: we assume it's either processing time for the transaction itself (makes a lot of sense for a paper check), or making sure the payer actually has the funds to draw from. With automated processing, that could be instantaneous less distance times the speed of light. And the payer is keeping track of its own accounts payables and receivables such that no “checks” could “bounce” outside of exceptional cases… I have a checkbook I used to use back when I used to write checks for honestly I forget what. In the back there's a personal ledger where one is *supposed to* balance deposit checks received and checks written and sent out, in short, credits and debits, such that in theory a bounced payment could never occur. One imagines a large enough business would have a whole slate of outgoing and incoming payments even in a single day. Depending on the within-day exact order of submission of payments and reception of receivables, the business at various points during the day would be, momentarily, in the red if it weren't for an amount it kept in reserve above the largest said mistiming instance. Suspend disbelief, dear reader, as I have assumed no overdraft agreement with the bank. Now in this example, one can see that businesses in this model are not paying out of such a reserve of cash they keep above their daily or weekly or whatever amount of time level of the (zero) balance of their expected payables and receivables, but out of their receivables or the balance of the two, with any reserve, however large its quantity or time span its covering for, serving the timing of payments function rather than serving for the payments proper. In this POV, an account isn't a store of funds but a credit/debit accounting ledger. My own idea is that businesses could get together and create their own payments clearinghouse and bypass the banks, but perhaps there’s this kind of thing already, as I am just making all this up—a bit of common sense discussion about my old checkbook, yes?—and know nothing myself in the world about the topic I am discussing.
If so, if accounts are just a handy payments tool for businesses, I don't see it as as useful to say your account balance is the bank’s asset if the balance is just a side player to the role receivables and payables play in the payments function. But in fact, your bank is doing something subtle. It itself sees all the payables and receivables of the individual bank clients passing through it and has made arrangements with the other banks to not pay these one by one with the timing with which they are sent out by the customers, but rather, to match up payables and receivables from all customers between banks such that only the net is transferred between banks, such that only the net residual becomes a payable or receivable of the bank end of day. You have heard of conservation of energy, of motion, and this is a kind of the same thing, you know. Depending on a bank’s specific arrangements, its own customers might not see the slightest “waiting for the check/payment to clear” time gap, as as soon as it receives the electronic signal, it can just mark up its own ledger books for its own customer while it waits for the “real” payments to clear through with the other banks. If so, its customer will then immediately be freed to make it’s own outgoing payment into the across the economy payments pool and I suppose there’s a similarity to the velocity of money theory, albeit with the twist that all payments are gathered together and simultaneously cleared, albeit with a carry-lookahead type function in which each customer can, depending on desired “velocity” immediately upon (or who knows, perhaps before!) receiving a credit from its bank for the payment, use the credited money itself to increase the total payments going into the pot. In a clearinghouse across all banks, if just payments, there would, basically, be a zero balance of settlement in the entire world dollar system, as we are tracking payments made by businesses that know their own balances. To extend this over a week rather than intra-day clearance with overnight (basically zero necessary) settlement, one could make it convenient for businesses—not to mention as yet the banks—so as to allow for a wider variability of the timing of outgoing required expenses and expected incoming receivables. And so on.
In simplifying such that no deep consideration of the topic of settlement comes in, we are sticking to a system in which no credit has been created… If all banks were creating roughly equivalent amounts of credit, in a system with a great deal of balance, we are still basically in the focus-on-payments clearance talk. It matters not a jot whether credits from banks to customers are being sent to customers at other banks for payment or whether government minted silver dollars were the “source” when talking just the clearance stage; what only comes in is the balance of owed payments, because at the clearance stage, the banks are dealing with the payables and postponing the payments until after that process of cross-cancellation is completed (end-of-day, (or the following Wednesday?)), however instantaneously the payment becomes available for a bank account holder to then directly apply to a payment of its own. So where this narrative, might, fall apart is that “the economy” is a state of imbalance.
As to credit, and the resulting topic of “settlement,” there are two broad frameworks:
Legacy Economics: I.e., hard currency (if in a ledger) settlement.
Credit Creation of Money Theory: This theory always skips the part about actual payments of the funny money, of clearance and settlement. So I have to give my idea: banks settle not with payments but with interest rates they receive, albeit not with the opposing bank, but on the interbank loan market or similar sources. You will think, say with the Federal Reserve interbank overnight hard ledger currency (“reserves”) lending facility that the residual after clearance will have to be hard borrowed, but if it can but get an opposing soft loan from any bank prior to clearance, no residual would exist to be settled. One would think in a low-reserves environment, such as pre-2008, banks would avoid the hard payment risk of submitting payments through the F.R.B. System, but if the system of clearing credit derived payments against credit derived payments just kept going along swimmingly, banks would just use the FRB System for the convenience of it. Businesses would all be balancing payables and receivables internally whether credit derived or hard currency origin. That would explain there was only thirteen billion dollars in the whole banking system say in 2007. Now you can see I am out if my depth but while interbank hard loans of banking system “reserve balances” are between banks, as it's a clearinghouse system, settlement is with the Federal Reserve System as a whole, and the banks get two weeks to settle. Now i think about it, I don't know if that helps my talk, but I don't imagine banks submit payments to clearance for the sake of paying out a hard settlement when they might have settled the same liability with a simple agreement on an interest rate for the sum, from some bank or another. And it strikes me as odd that the debt to the system might not just be plowed with the aid of said interbank credit back into the system the next day as just one more payment at the clearance level only.
To go back to my topic: rather than exchanging a *quantity* of hard payment, might not banks simply be exchanging, or borrowing from a third party bank, a soft currency payment of an interest rate on the unpaid funds, which “un-payment” might sit in the background to be exchangeable/cancelled out by some future clearance.
It's an incredibly byzantine, perhaps even nonsensical, idea if mine, but until real experts in the credit theory of money explain the key missing step of when this magicked up newborn money goes to be actually paid to someone, where are we?We are left proposing byzantinely complicated guesses such as mine or accepting the hand wave or falling back unto the hard currency camp. Oh, “Hard Currency” is my Substack name, but we'll have to weave that in another talk.
But if bank’s are simply arbitraging future rates they expect on average to be able to obtain against rates they are offering customers, where does the topic of bank “assets,” a.k.a. bank capital sufficiency, come in as Chief Protagonist the way it us treated in banking regulations.
Putting grand theory aside and going back to an individual bank: is it likely it will attempt to hold back cash in reserve against expected payouts, or is it more likely it will plow as much as possible such cash, which is essentially incoming payments to its customers into lessening its own outgoing liabilities by attempting to use said “cash” (incoming payments) to cancel out its own payments liabilities? If a positive balance of owed payments exists, it will attempt to exchange this zero-interest asset for an interest rate. So there is no natural, non-regulatory, rationale for banks to attempt to hold soft currency cash in reserve against expected payouts. As for hard currency reserve account balances at the Fed: a bank will try, logically speaking, to exchange those for a soft currency rate on the same amount. The argument can be made that the reserves, or also of soft currency “cash” that its very zero interest (at minimum) nature makes it an asset that can be used in payment for the sake of the rate the bank would otherwise have to pay in its outgoing “rates.” Yet by this you can see my limits as an armchair magicked-up idea commentator!
What we have left are two opposed frames or lead roles (in *Much Ado about Nothing*) for viewing this:
a quantitative frame, in which resources in-hand play the lead role
a qualitative frame in which a bank is but arbitraging interest rates between what it charges customers and a qualitative estimate of the rates it will be able to receive over the life of the loan on the difference between its own accounts receivable and payable.
This interest rate theory is of course but my own idea. The real explanation of how magicked-up money gets accepted as real payments is that other banks are willing to accept at face value the payments under the full faith and credit theory of banking, something something the loan agreements behind the payments are money-good even if since the other bank but gets the payment as-is which cannot be visible information to the other bank! Something is added about banks being state licensed money minters; what that can mean could be that bank regulators gave imposed reserve ratio requirements, or perhaps asset or “capital requirements” and are constantly overseeing the banks activities. Of course the reserve account balance ratio to loans requirement is simply an artificial fractional reserve system. And the capital requirements system that replaced it us just the same thing writ-large. The fractional reserve theory1, is that money is created by loaning out of a set quantity of money based upon an estimate of payment demand from a bank’s customers. In the sense that this is an estimate on the part of a single bank, it's also a qualitative theory, but one built on a hard total MQ. But the fractional reserve banking theory, if that’s what backs up the magicked-up money in the credit creation theory’s own proponents minds, wee have a real mashup of two antagonistic theories scrambled as eggs.
Theories of money creation, or lack thereof (fractional reserve) are not the untended main player in this essay, though. So to wrap up: do we view bank accounts under:
a stock framework: within the frame of either your deposit or the bank’s asset/capital
a flow frame: treating accounts simply as accounts payable and receivable processing mechanisms.
So instead of customer “deposits,” our group wants to relabel these as a bank’s “assets,” but I would like to reframe the conversation, labeling these “deposits” as “receivables”: not a static stock of cash but more as a payments-in-motion, and in balance, process. To step back from my idea and explain how customer account balances might be seen, also, as bank assets: I am guessing that it is the use of a clearinghouse procedure to create a conservation of payments: in short, that the bank is handling the cash separately from how it's handling the customer’s account entry.
Have a nice sleep and good night.
Fractional Reserve Banking: What It Is and How It Works (investopedia.com)