Central Banking 101 by Joseph J. Wang

Section I Money and Banking

Chapter 1 – Types of Money
What is money? When most people think of money, they picture
rectangular pieces of government-printed paper, known as fiat
currency, decorated with historical figures. Although this is the most
well-known form of money, it is only a small part of what constitutes
money in the modern financial system. Look in your wallet and think
about your day—how much currency do you carry and use? If you are
like most people, then your salary is wired into your bank account
and spent via electronic payments. The numbers that you see in a
bank account are called bank deposits, a separate type of money that
is created by commercial banks, not the government. Bank deposits
are the vast majority of what the public thinks of as money.
In practice, bank deposits can be seamlessly converted into
government-issued fiat currencies in real time at any bank or ATM
machine. But the two are very different. A bank deposit is an “IOU”
from a bank that can become worthless if the issuing bank goes
bankrupt. On the other hand, a $100 dollar bill is issued by the
Federal Reserve, which is part of the U.S. government. That $100 bill
will have value as long as the United States exists. There is much
more money in bank deposits than there is in paper bills, so in
theory, a bank would run out of cash if everyone withdrew their
deposits. But that’s not really an issue because people today feel safe
holding bank deposits, in part because the government provides

Central Banking 101 by Joseph J. Wang