Giralgeld

What Is Giralgeld?

Giralgeld, often translated from German as "book money" or "sight deposits," represents the vast majority of the money supply in modern economies. It is the money held by individuals and businesses in their deposit accounts at commercial banks, readily available for cashless transactions. This form of money exists primarily as electronic entries on bank balance sheet records, rather than as physical currency. Understanding Giralgeld is fundamental to monetary economics, as its creation and destruction are central to how central banks and commercial banks influence the broader financial system. The concept highlights that commercial banks do not simply act as intermediaries for existing funds but play a crucial role in creating new money through their lending activities.

History and Origin

The origins of Giralgeld are intertwined with the evolution of banking itself, a practice that dates back millennia. Early forms of deposit banking can be traced to ancient civilizations in Mesopotamia, where merchants and temples accepted deposits of grain or precious metals, effectively providing safekeeping and facilitating transactions.⁸ These early systems laid the groundwork for the modern banking practice of accepting deposits and managing accounts. In ancient Greece and the Roman Empire, lenders based in temples accepted deposits and facilitated money exchange.

The transition to what we recognize as Giralgeld began to accelerate with the development of promissory notes and later, more sophisticated banking instruments in medieval and Renaissance Italy. As banking practices matured, particularly in the 17th and 18th centuries in Europe, the concept emerged that banks could create new "book money" by extending loans. Rather than simply lending out existing deposits, banks found they could credit a borrower's account with a sum that did not previously exist, thereby creating a new deposit, or Giralgeld. This understanding of money creation by commercial banks, distinct from the physical printing of currency by a central bank, has been a significant subject of study in monetary policy.⁷ The Federal Reserve System, for instance, was established in 1913 in the United States to create a more stable and secure financial system following a history of financial panics.⁶

Key Takeaways

• Giralgeld is the electronic money held in commercial bank accounts, forming the largest component of the money supply in modern economies.
• It is primarily created by commercial banks when they issue loans, crediting borrowers' accounts with new funds.
• Unlike physical currency or central bank reserves, Giralgeld exists as accounting entries.
• Its creation and destruction are dynamic processes influenced by bank lending and customer repayments.
• Giralgeld is crucial for understanding how monetary policy impacts economic activity and inflation.

Interpreting Giralgeld

Interpreting Giralgeld involves understanding its nature as the primary medium of exchange for most transactions in a modern economy. When economists or policymakers discuss the money supply, a significant portion of that discussion revolves around Giralgeld. Its volume directly reflects the level of economic activity and credit extension within the banking system. An increase in Giralgeld generally indicates more lending and economic expansion, while a decrease can signal contraction.

The significance of Giralgeld lies in its role in facilitating cashless digital payments, from everyday purchases using debit cards to large-scale interbank transfers. The ability of commercial banks to create this money through lending means that the overall availability of money in the economy is not solely determined by the central bank's actions but also by the demand for credit from businesses and households and the willingness of banks to lend. This interaction between banks and their customers directly shapes the volume of Giralgeld in circulation, influencing everything from investment levels to consumer spending.

Hypothetical Example

Imagine Sarah, an aspiring entrepreneur, applies for a small business loan of €50,000 from Alpha Bank to purchase equipment for her new bakery. If Alpha Bank approves the loan, it does not physically hand Sarah €50,000 in cash. Instead, Alpha Bank credits Sarah's checking deposit account with €50,000.

Before this transaction, that €50,000 of Giralgeld did not exist in Sarah's account or elsewhere in the broad money supply. Alpha Bank, by making an accounting entry, created new Giralgeld. Sarah can now use this €50,000 to pay for her equipment, transferring the Giralgeld electronically to the equipment supplier's bank account, which may be at another commercial bank. This process demonstrates how commercial banks directly expand the money supply by creating Giralgeld when they grant loans.

Practical Applications

Giralgeld is central to the functioning of modern financial systems, underpinning virtually all cashless transactions. Its practical applications span across various aspects of finance and economics:

• Payment Systems: The vast majority of daily transactions, whether through debit cards, credit cards, bank transfers, or mobile payment apps, involve the transfer of Giralgeld between accounts. These digital payments are simply changes in the electronic balances of Giralgeld held at commercial banks. The International Monetary Fund (IMF) highlights how interoperable digital payment systems facilitate economic activity and financial inclusion, with systems like India's Unified Payments Interface (UPI) driving significant volumes of digital transactions globally.
• Mon⁵etary Policy Transmission: Central banks influence the economy primarily by affecting the conditions under which commercial banks create Giralgeld. By adjusting key interest rates or implementing quantitative easing programs, central banks aim to encourage or discourage bank lending, thereby influencing the volume of Giralgeld and, consequently, aggregate demand and inflation.
• Credit and Lending: The creation of Giralgeld is directly tied to the extension of loans. Banks' ability to create new Giralgeld when lending is fundamental to how credit flows through the economy, financing everything from mortgages to business investments.
• Financial Stability: Monitoring the volume and flow of Giralgeld is critical for financial regulators and central banks to assess systemic liquidity and potential risks within the financial system.

Limitations and Criticisms

While Giralgeld is fundamental to modern finance, its nature as electronically created money by commercial banks also presents certain limitations and criticisms. One primary concern revolves around the potential for excessive credit creation, which can contribute to asset bubbles and financial instability. If commercial banks engage in overly expansive loans without sufficient oversight, the rapid growth of Giralgeld can fuel inflationary pressures or lead to unsustainable debt levels.

Another critique centers on the perception that the private creation of Giralgeld gives commercial banks significant power over the money supply, potentially leading to cycles of boom and bust. Some argue for greater direct control by the central bank over money creation to ensure stability and public benefit. While central banks set the overarching monetary policy framework that influences Giralgeld creation, the day-to-day decisions of commercial banks regarding lending and creditworthiness ultimately determine its volume. The Bundesbank, for example, has clarified that commercial banks' ability to create book money is constrained by their need for central bank reserves for cashless payments and by regulatory policy.

Furtherm⁴ore, the digital nature of Giralgeld makes it vulnerable to cyber threats and disruptions to payment systems. While significant efforts are made to secure these systems, a widespread technical failure could impede economic activity dependent on the seamless transfer of Giralgeld.

Giralgeld vs. Cash

Giralgeld and cash are both forms of money, but they differ fundamentally in their physical form, creation, and interaction with the banking system.

The main point of confusion often arises because both are used for payments and are included in measures of the money supply. However, Giralgeld is created "endogenously" within the banking system through lending, whereas cash is "exogenous," meaning it is issued directly by the central bank and national authorities. When an individual withdraws cash from their bank account, Giralgeld is reduced, and physical cash, which is a form of central bank money, is increased. Conversely, depositing cash increases Giralgeld and decreases physical cash in circulation outside the banking system.

FAQs

How is Giralgeld different from money printed by a central bank?

Giralgeld is created by commercial banks when they extend loans and credit customer accounts. It exists as electronic entries. Money printed by a central bank, like the European Central Bank or the Federal Reserve, is physical cash (banknotes and coins) or electronic reserves held by commercial banks at the central bank. The physical money is then distributed to commercial banks.

Can ¹Giralgeld be converted into physical cash?

Yes, Giralgeld can be converted into physical cash. When you withdraw money from an ATM or over the counter at a bank, you are essentially exchanging your Giralgeld (electronic balance) for physical banknotes and coins. This process reduces the amount of Giralgeld in your account and increases the amount of cash in circulation.

Does Giralgeld have a physical backing like gold?

No, Giralgeld, like most modern currencies, is fiat money and is not directly backed by a physical commodity like gold. Its value is derived from the public's trust in the issuer (the banking system and central bank), and its acceptance as legal tender for transactions.

How does the repayment of a loan affect Giralgeld?

When a loan is repaid, the Giralgeld that was created when the loan was issued is effectively destroyed. The borrower's bank account balance decreases, and this extinguishes the corresponding amount of Giralgeld in the banking system. This is the reverse process of Giralgeld creation.