Basic banking is a business like any other; a basic bank has its own capital on hand to start up the banking business, and it charges its customers a fee to cover the cost of services. The bank sets its fees, and like any business in the community, it must compete for your business by providing better service or cheaper service, or both.

A basic banker keeps fund accounts – a separate account for the bank’s own business funds and separate accounts for each of its depositors. Your deposit is your money and the bank cannot touch it without your instructions. The bank must keep 100% of your money on hand unless otherwise instructed by you. So this is called a 100%banking system.

Storage and transfer services

How does it work?

Let’s say you put $100 into your account at the bank. Then you use your debit card or use your phone app to make payments to others. You are essentially instructing the bank to transfer money from your account to someone else’s account. The bank is facilitating your transactions and providing security for the transfer. These are services that cost them money to provide. When you get free checking and money transfer, you can be sure you are paying for the service in some other way.

As far back as the Bronze age (2,500–800 BC), government often provided this service. For example, the central governments of the Babylonian, Egyptian and Chinese empires, provided storage and transfer bank services to facilitate trade in the copper and tin required to make bronze, as well as other goods from faraway lands. Today both private and government banks exist.

If the person receiving your money banks at the same bank, the bank can debit your account and credit their account. The transfer of your money that you demanded is an accounting entry, not the physical movement of money from one place to another.

If there were only one bank on the planet, aside from the 2–3 percent of the money supply that is cash, 97 percent of the money supply would never physically move anywhere. It would be a matter of an accounting entry moving it from the account of one person to another. If you considered only how much money literally goes in and out of this planetary bank – zero to 3 percent (cash), you might say, “Gee, there is all this excess money just sitting there in this bank not being used.” You would be wrong. That money is freely circulating and represents the money supply available. It is simply moving from one account to another, sitting for varying lengths of time in different accounts.

Of course, we have many banks. If the recipient of your money banks at another bank, then the bank must move your money to the other bank. Customers of the nearly 7,000 banks in the US send and receive money all day long. All this money moving from one person to another is part of the money supply. However, the banks can wait until the end of each day, total up all the money they must send to another bank and all the money they will be getting from that bank, then they move only the difference. The bigger the bank and the broader their reach, the smaller the difference. The money moving from one account to another, and the net moving from one bank to another is all in circulation as part of the money supply.

This end-of-day net transfer used to take place physically. Money would be loaded onto a truck and moved to the bank with a positive net. As you can imagine, it was risky. It was also costly and a nuisance to hire an armored vehicle to haul the net difference from one bank to another. So, banks did not settle their accounts every night. Not too long ago it could take weeks to transfer money from bank to bank – for a check to clear.

Basic central banks

But, banks figured out a way to make paying the net they owed to other banks easier. They realized just as they only needed an accounting entry to move money from one of their depositor’s accounts to another account in the same bank, if they created a bank to the bankers, in which all the banks had deposit accounts, they could do the same with their net transfers at the end of the day. Central banks increase efficiency, and reduce transfer and security costs.

Banks have been getting together to create a central bank for nearly a millennium. A central bank can belong to a government or be owned by the private banking sector it serves. The earliest central banking systems belonged to the governments of empires. Early privately held banking systems belonged to tightly knit families or religious groups, whose paterfamilias manned the central or main bank, while brothers, children and cousins managed their global banking empire branches. (e.g., the Italian-Catholic Medicis in the 14th century, the German- Jewish Rothschilds in the 18th century, and the Quaker-Scottish confederacy of merchant bankers in the 19th century. Please note: the all-too-common idea that banking cabals are an exclusively Jewish invention, with the Rothschild family in particular controlling the world, is misinformed anti-Semitism.)

If the central bank is privately owned, each member bank must put up some capital, generally in proportion to the amount of its own shareholder equity. In exchange for this capital, each member bank is given shares in the central bank and will have a right to a share of the profits from this central bank’s operations. In a publicly owned central bank in a 100% system, the individual private banks would pay for the services of their central bank, just like you would pay for the services of the bank holding your personal account. A publicly owned central bank could price its services to be non-profit or for-profit.

Member banks keep a deposit account at the central bank, just like you keep a deposit account at your bank. In a 100% banking system, an individual bank keeps enough of its depositor’s money on hand to cover its customers’ cash needs and keeps the rest of its customers’ money in a depositor fund account at the central bank. The member banks may keep their own capital in their own bank or have a separate proprietary bank account with the central bank for these funds. For the banks, this is comparable to you keeping a certain amount of cash in your pocket, while you put the rest in the bank.

With a central bank, at the end-of-day settlement, when one bank owes depositors’ funds to another bank, they instruct the central bank to move money from their depositor account to the depositor account of the other bank. No physical money needs to move anywhere; the central bank makes an accounting entry, debiting the banks that owe, and crediting the banks that are owed. The fact these net amounts may be small does not mean the rest of the money is not in use as an active part of the money supply; it is not inactive excess.

In a 100% basic banking system, the amount of money available for transfer will always be enough to cover the draws from other banks because 100% of depositors’ money is held in trust accounts – either at the home bank or the central bank. Whatever money you deposit remains your property and the bank simply provides the services of safe storage, accounting and secure transfer. Any inadequacy would be the result of theft or fraud on the part of the bank. Whatever money belongs to the bank itself will be kept in its own set of proprietary accounts. This is called fund accounting, when honesty and integrity require keeping people’s money in separate accounts from the proprietary accounts of the bank.

In a 100% bank system you would expect to pay a fee for the services of the bank, just as you do with any other business that provides a service.


Some of these aspects, such as the role of a central bank, apply today. However, this basic 100% model is not in use today. This is a choice we could make.

 PrevMoney Fundamentals 3.26