Pointedstick wrote:
I think I see your problem, jafs. You're focusing on cash, and yes, cash is physical and has to come from somewhere. Banks don't have printing presses in the back room. That's true.
But cash makes up only a very small slice of the economy. The vast, overwhelming majority of transactions involve checks, credit or debit cards, wire transfers, ACH transfers, or some other form of purely electronic money.
You personally can go to the bank and withdraw some of the virtual money in your account and turn it into physical cash, but if everyone did that, the whole system would come crashing down because the amount of cash that the banks have on hand is only a small fraction of the total deposits people have made to them. The banks would close until the drama had been ended, probably with Fed trucks full of dollar bills being dispatched throughout the country. People can only withdraw cash as long as not too many people do it at once. This is what fractional reserve banking is, and it's why there's the FDIC, Federal Reserve, etc. These institutions exist to protect banks, the banking system, and depositors from the systemic danger of running out of money in the case of a run on physical cash, as well as other problems unique to fractional reserve banking.
The other piece of the puzzle that you're missing is that bank loans generally do not involve cash. If I get a mortgage for $200,000, the bank doesn't need to find two hundred thousand one dollar bills in its vault. It simply credits the account of whoever is selling the house by $200k and creates a corresponding liability in mine. No dollar bills need to be created or even involved at all; the money in the seller's account is simply brought into existence by virtue of receiving that credit. Accounting-wise, the money and the liability cancel out, but the money is created in the present, while my new liability stretches on into the future according to the terms of the mortgage. Even if the bank's vault were completely empty and they had no dollar bills or even no depositors yet, they would still have the power to credit the seller's account. Again, this is simply what fractional reserve banking is. Loans that create electronic/virtual money do not require deposits. If every person whose account was credited due to one of these loans being made went out and tried to withdraw the newly-created money as cash, then boom, you'd have a bank run, because no new dollar bills had been created to back the new electronic money from the loans.
This "change to become more abstract" happened generations ago. It was in full swing by the time of the great depression, for example. Money is already mostly "virtual" and has been for a long time. Conceptualizing the banking system as built around physical cash is a mistake.
I understand all of that.
But if you went to your bank and tried to withdraw some money, and were told that you couldn't because it's not a real thing, it's just numbers on a page, you'd be very upset. If the home seller couldn't withdraw the money they got from the bank, they'd be upset. If anybody can't convert the numbers in their bank account to cash if they want to, they'll be upset.
Thinking about cash is just a way to make the ideas concrete, which is useful.
The FDIC stuff is to preserve people's confidence in the system, and is also largely symbolic, as the FDIC doesn't have anywhere near enough to cover all of the deposits, even just up to $250K or whatever the limit is currently.
Not only do banks not have printing presses, they don't have the legal right to print or coin money.