Depositogeld
What Is Depositogeld?
Depositogeld, often referred to as deposit money, represents the primary form of money in modern economies, primarily existing as balances in bank accounts rather than physical currency. It is a core component within the field of Monetary Economics and the broader Financial System. This form of money is created by Commercial Banks when they extend Lending to individuals and businesses, or when assets are purchased by these banks. Unlike physical cash, depositogeld is essentially a digital entry on a bank's Balance Sheet, representing a liability of the bank to its depositors. This widely used form of money facilitates the vast majority of transactions in the economy.
History and Origin
The concept of depositogeld evolved significantly over centuries, tracing its roots back to the practices of early goldsmiths in the 17th century. Initially, people would deposit precious metals or coins with goldsmiths for safekeeping, receiving receipts in return. These receipts, known as "running cash notes," eventually became transferable, functioning as an early form of currency. Over time, goldsmiths realized they could lend out a portion of the deposited gold, as not all depositors would demand their gold back simultaneously. This practice marked the genesis of Fractional Reserve Banking, where new loans would create new deposits, expanding the money supply beyond the physical gold held. The Bank of England, for instance, began issuing notes in return for deposits, further formalizing this system.4 This pivotal shift transformed banking from merely safeguarding assets to actively creating money through the act of lending, laying the groundwork for the modern system of depositogeld.
Key Takeaways
- Depositogeld is money held in bank accounts, largely in digital form, representing a liability of commercial banks.
- It is predominantly created by commercial banks through the act of lending, which generates new deposits.
- Depositogeld constitutes the largest portion of the Money Supply in modern economies.
- Its stability and functionality are underpinned by public trust in the banking system and robust regulatory frameworks.
- The widespread use of depositogeld underpins the efficiency of global Payment Systems.
Interpreting Depositogeld
Depositogeld is not merely a record of existing funds but often represents newly created money. When a Commercial Bank issues a loan, it credits the borrower's account, creating a new deposit that did not previously exist. This highlights the crucial role banks play in influencing the overall Money Supply. The amount of depositogeld in an economy directly impacts purchasing power and economic activity. For instance, an increase in bank lending leads to more depositogeld, which can stimulate spending and investment. Conversely, a contraction in lending can reduce depositogeld, potentially slowing economic growth. Understanding this creation process is fundamental to grasping how Monetary Policy influences the broader economy, as central banks aim to manage the total volume of money and credit in circulation.
Hypothetical Example
Consider a small business owner, Sarah, who needs to purchase new equipment for her bakery. She approaches her Commercial Bank, "Diversified Bank," for a $50,000 loan. Upon approval, Diversified Bank does not transfer existing cash to Sarah; instead, it credits her business checking account with $50,000. This $50,000 is new depositogeld that Diversified Bank has created through the act of Lending.
Sarah can now use this $50,000 to pay the equipment supplier. When she writes a check or makes a Digital Payment to the supplier, the $50,000 is transferred from Sarah's account at Diversified Bank to the supplier's account, perhaps at a different bank, "Apex Bank." This transfer moves the depositogeld, but it remains within the banking system. The supplier now has $50,000 in their account, and this depositogeld continues to circulate, facilitating further transactions and contributing to the economy's overall money supply. When Sarah repays her loan, the depositogeld she created is "destroyed" as the bank reduces her deposit balance upon receiving payment.
Practical Applications
Depositogeld is the backbone of modern financial transactions, encompassing everything from everyday purchases to large corporate investments. Most money used by the public in the euro area, for example, exists as commercial bank money.3 It is integral to:
- Retail Banking: Checking and savings accounts, debit card transactions, and online bill payments all rely on depositogeld.
- Corporate Finance: Businesses use depositogeld for payroll, supplier payments, and managing working capital.
- Monetary Policy: Central banks influence the creation and volume of depositogeld through tools like setting Interest Rates and implementing quantitative easing. They aim to steer economic activity by affecting the incentives for banks to lend and for consumers and businesses to borrow.
- Payment Systems: Digital Payment networks, including Automated Clearing Houses (ACH) and wire transfers, move depositogeld between accounts.
The vast majority of money in circulation today is created by commercial banks through the act of making loans, not by central bank printing presses.2 This process is a fundamental aspect of how monetary policy translates into real economic effects.
Limitations and Criticisms
While depositogeld forms the bedrock of modern economies, it is not without limitations and criticisms. A primary concern is the potential for "bank runs," where a large number of depositors simultaneously attempt to withdraw their funds due to fears about a bank's solvency. Since banks operate on a Fractional Reserve Banking system, holding only a fraction of deposits as physical cash or reserves, a widespread panic can quickly deplete a bank's Liquidity, leading to its collapse even if it is fundamentally solvent. Historical events, such as the numerous bank failures during the Great Depression, highlight this vulnerability, which led to the creation of institutions like the Federal Deposit Insurance Corporation (FDIC) to provide Deposit Insurance and restore public confidence.1
Another criticism revolves around the uneven distribution of new money. When banks create depositogeld through Lending, this new money often enters the economy through specific channels (e.g., mortgage lending, business loans), which can disproportionately benefit certain sectors or asset classes, potentially contributing to asset bubbles or wealth inequality. Furthermore, the ability of commercial banks to create money can complicate a Central Bank's efforts to precisely control the Money Supply, as bank lending decisions are influenced by a multitude of factors beyond just policy rates.
Depositogeld vs. Electronic Money
While depositogeld is inherently digital and therefore "electronic," the term "electronic money" (or e-money) often refers to a broader category that includes funds stored on electronic devices or held by non-bank institutions. The key distinction lies in the issuer and the nature of the liability:
| Feature | Depositogeld (Bank Deposits) | Electronic Money (e.g., e-wallets, prepaid cards) |
|---|---|---|
| Issuer | Commercial Banks | Non-bank e-money institutions (EMIs), payment service providers |
| Nature of Money | Created through Lending and asset purchases; a liability of the commercial bank. | Represents a claim on underlying funds, often held in a bank account at a commercial bank; a liability of the EMI. |
| Risk Profile | Subject to commercial bank solvency risk, but typically protected by Deposit Insurance. | Subject to the solvency risk of the e-money institution; usually not covered by deposit insurance schemes but typically safeguarded by regulations requiring segregation of client funds. |
| Creation | Banks create new depositogeld when they issue loans. | Generally created by pre-funding, meaning money is transferred from a bank account to the e-money provider's system. |
| Regulation | Heavily regulated by Central Banks and banking authorities. | Regulated, but typically under specific e-money or payment service regulations, which can differ from full banking regulations. |
In essence, depositogeld is the fundamental "money" in bank accounts, whereas electronic money often functions as a digital wrapper around that underlying bank deposit or other forms of Fiat Money.
FAQs
What is the primary difference between physical cash and depositogeld?
Physical cash (banknotes and coins) is a direct liability of the Central Bank, while depositogeld is a liability of Commercial Banks. Most money in circulation today is depositogeld, not physical cash.
How is depositogeld created?
Depositogeld is primarily created when commercial banks extend Lending. When a bank approves a loan, it credits the borrower's account with new funds, effectively creating new money as a deposit.
Is depositogeld safe?
In many jurisdictions, depositogeld is protected by Deposit Insurance schemes, like the FDIC in the United States, which safeguard a certain amount of deposited funds in case of a bank failure. This helps maintain confidence in the Financial System.
Can depositogeld be converted into physical cash?
Yes, account holders can always convert their depositogeld into physical cash by withdrawing funds from an ATM or a bank branch. The commercial bank then draws on its reserves (central bank money) or vault cash to meet this demand.
What role do Reserve Requirements play in depositogeld?
Historically, Reserve Requirements influenced the amount of depositogeld banks could create. However, in many modern banking systems, central banks no longer use strict reserve requirements as the primary tool to control lending. Instead, they manage the total Money Supply through interest rates and other monetary policy tools.