BBC News – John Sloman
Published: October 15th, 2008
This article explains what money is, the two main elements of money, how we access money and what banks do with money in ‘abnormal times’. It explains how banks handle deposits and how a “run on the bank” affects banks. The article discusses sub-prime debt and how money loses its value due to inflation.
John Sloman is director of the Economics Network, the Economics subject centre of the Higher Education Academy, based at the University of Bristol. He is author of Economics, Essentials of Economics and various other textbooks.
Analysis of Potential Bias
There are facts and numbers given in the article not backed up by opinions of economists or other experts. However, the author does not appear to be giving his own opinion on the topic and can be seen as an expert in this topic.
Money has two main elements: cash and bank deposits. The larger portion of the total money is bank deposits not backed by cash because for most large purchases we do not use cash, instead we access money in an account using debit cards, credit cards, cheques etc. So the larger portion of money is simply a record of deposits or entries on a balance sheet.
Banks are not just large storage spaces. In fact when you deposit your money, banks will use deposits and lend to individuals and firms and to other banks, when people spend the money let’s say at a Tim Horton’s the shop will deposit the money back into a bank, which will again be given out as a loan. More deposits are generated and deposits count as money, so money grows.
Banks are careful to keep enough cash to meet demands and if they run out, they can borrow directly from their central bank. In abnormal times, if customers feel like their bank is going out of business or banks are afraid to lend to each other this can lead to a bank run. In this case the government and the central bank must make sure deposits are secure, if not the banks reserves may not be sufficient to cover the withdrawals and banks may be pushed to insolvency, central banks will normally begin lending huge sums of money to the banking system.
So, your money is still there but money loses its value because of inflation, which is a reason you are paid interest to save money. Subprime debt is an issue because the loans were mainly used to buy houses and houses can fall in value, if sold the customer may not get all their money back. However, houses are assets not money and subscribe to laws of supply and demand that determine their price, so bank deposits have not disappeared, but your wealth may have.