<p>When you go to spend the proceeds of the bank loan you do one of three things:</p>

<ol>
<li>Transfer money to another account at the same bank</li>
<li>Withdraw cash</li>
<li>Transfer the money another institution</li>
</ol>

<p>We'll ignore case 1 because eventually someone you transfer money to will want access to two or three, so we can just consider those eventualities directly. </p>

<p>If you go to withdraw cash, the bank has limited cash, as opposed to an unlimited (at least in principle, ignoring the requirements of integrity and law) ability to make changes in their account ledgers. So they can't actually give you more cash then they have. </p>

<p>If you go to transfer money to another bank, it helps to consider why is some other bank is willing to credit an account when some other bank says that it should. The basic answer, notwithstanding complexities like clearing houses and central bank check clearing, is that banks have accounts with each other. When customer Anabel tells bank Bryce to move \$100 to bank Charlie in the account of customer David Bryce does so by debiting \$100 from Anabel's account and crediting their own \$100. Bryce then tells Charlie to debit \$100 from his account (and credit his own) and delivers additional instructions to credit David. Charlie then debits \$100 from his own account and credits \$100 to David. Which gives you a hint as to Bryce's ability to credit anyone outside the bank, even at gunpoint. Bryce can't get Charlie to credit Charlie's accounts for more than the total credits that Bryce has with Charlie's bank. Maybe he can get a "check float loan" to process a limited number of transactions like this, maybe he can get some direct credit from David, but eventually these margins will be exhausted. Cash or securities will need to be deposited at Charlie's bank before Charlie will allow additional transactions on Bryce's behalf. </p>

CC BY-SA 3.0
2015-06-16T18:57:31.100Z
Thanks for the answer, but I have trouble following your example. Maybe on a third reading I will manage.
Alecos Papadopoulos
CC BY-SA 3.0
2015-06-16T20:39:26.787Z
Think of it as statistical multiplexing. Your liability bank deposits are denominated in dollars if you say they are, but to actually do anything internationally, you have to exchange the real thing from your asset account. Unlike the USA, you can' t print extra dollars on demand - this is the reason btw. that it's a bad idea to use somebody else's currency for this purpose.
Lumi
CC BY-SA 3.0
2015-06-16T21:50:50.737Z
You can also consider http://quant.stackexchange.com/
Konstantinos
CC BY-SA 3.0
2015-06-16T18:51:53.677Z
2015-06-16T18:51:53.677Z
BKay
<p>The same way you'd be stopped if you decided to purchase a bunch of stocks from the stock market, or at least the market would be close for appreciations, I imagine the same would happen if you decided to acquire a significant amount of money as that has many implications in exchange rates, debt, and so on.</p>

<p>This is regular procedure in Portugal, a "small, economically and geopolitically unimportant country".</p>

CC BY-SA 3.0
2016-01-04T00:42:26.440Z
2016-01-04T00:42:26.440Z
gsilvapt
<p>I think you misunderstand what "electronic money" is - moving electronic money around isn't simply a matter of sending the right "codes" - it is ultimately about asking the central bank of that currency to move money around.</p>

<p>Sure you can open up excel and write in it "I have \$100" but that isn't USD, much as writing \$100 on a piece of paper doesn't make it a \$100 bill.</p>

<p>In order to lend you dollars I actually have to have some dollars to lend you.  That means I need a reserve account with one of the 12 Federal Reserve banks.  <strong>There are no electronic USD that are not ultimately in a Federal Reserve Account</strong>.</p>

<p>The "ultimately" in that sentence is there because banks can (and do) form hierarchies.  Only the largest ("Tier 1" banks, sometimes called "clearing banks") actually have a reserve account with the central bank in a given currency.  Other, Tier 2, banks will simple hold accounts with Tier 1 banks.  Smaller local banks may even be Tier 3.  When it comes to foreign currency dealing, you could be even further down the chain (i.e. a small bank in Australia may be Tier 4 for USD)</p>

<p>Because of this hierarchy a certain amount of electronic banking can be done without moving reserves.  A transfer only needs to progress up the hierarchy until it gets to a common bank between the two customers.</p>

<p>So for example:</p>

<ul>
<li><p>A payment between two accounts at the same bank, can be done on that bank's systems.</p></li>
<li><p>A payment from an account at a Tier 2 bank, to a different Tier 2 bank might be done using a shared Tier 1 bank.  The Tier 2 bank's are "customers" of the Tier 1 bank, and so the Tier 1 bank can do the transaction on their system.</p></li>
<li><p>A payment between customers that ultimately fall under two different Tier 1 banks <strong>must</strong> be done by at a Federal Reserve bank.</p></li>
<li><p>The US adds an extra complication, because there are 12 Fed Reserve banks - if two Tier 1 banks don't bank with the same Fed Branch, then the Fed Reserve System also has to go "one step higher" and the New York Fed acts as the very top bank: "<a href="https://economics.stackexchange.com/q/194/119">How do reserves move between the 12 federal reserve banks?</a>" explores exactly how that is done.</p></li>
</ul>

<p>So the problem in your scheme is you couldn't get your central bank "into" this pyramid of banks.  </p>

<p>Your central bank's computer can show $1tr on screen but the only way to transfer to another bank, would be to instruct YOUR Fed bank to take money out of YOUR fed reserve account and put it into the other bank's account.  Your central bank can't make reserve dollars.</p>

<hr>

<p><strong>Aside:</strong>  An alternative way of looking at this, for those familiar with how BitCoins work, is to note that the important feature of electronic money is to prevent double spending.  BitCoin does this with the BlockChain; the USD equivalent of the block-chain is held on the Fed Reserve computers.  You can't just declare yourself to have billions of bitcoins - to spend them you have to get your transactions onto the BlockChain.  With electronic USD you have to get your transactions onto the Fed ledger.  Only the Fed has a copy of this and their say is final.  There would be no way for your central bank to change the Fed ledgers.</p>

CC BY-SA 3.0
2016-09-09T22:54:58.610Z
In this case, what safeguards prevent the USA's Fed bank (or some employees at that bank) from doing the things described in the question?
vsz
CC BY-SA 3.0
2016-09-10T02:45:07.673Z
@vsz well in the case of employees, you would lose your job and go to jail for wire fraud, and only very few employees would actually have access to the rtgs system that handles this. In the case of the fed, they've been doing it for years, it is called QE.
Corvus
CC BY-SA 3.0
2017-08-31T21:40:15.580Z
Thanks for the explanation. Do you have any references for this explanation? And, are the terms "Tier 1" and "Tier 2" official terminology? Do you have references to this terminology?
jmbejara
CC BY-SA 3.0
2015-06-18T15:43:37.753Z
We are nearing I guess. So all the banks in the world, in order to be able to maintain locally "accounts in USD", ultimately have an account with one of the USA's Fed banks, do I understand correctly?
Alecos Papadopoulos
CC BY-SA 3.0
2015-06-19T08:30:42.773Z
@AlecosPapadopoulos yes that is about right, although I've edited the answer to make it clearer that generally not all banks directly bank with the Fed, but will go to another bank who does.  Each currency has a few banks that hold reserve accounts and the other banks go to them when they want to deal in that currency.  In the past FX transactions could be complicated by this since you might need three or more banks, but now the big banks hold reserve accounts with virtually all central banks of the world.
Corvus
CC BY-SA 3.0
2015-06-19T10:58:39.093Z
@Corone. Thanks. I believe this clearly answers the question "what kind of checks has the international community in place in order to effectively avoid such a situation?". i.e. in order to control which entities can create which currency.
Alecos Papadopoulos
CC BY-SA 3.0
2015-06-22T11:57:33.147Z
But banks can create money by lending it out, right?  Then if a Tier 2 bank lends 200 k$ to a private citizen for a mortgage, it creates 200 k$; does then the money that Tier 2 bank holds with Tier 1 increase by 200 k$?  Or does Tier 2 bank borrow this money from Tier 1 bank and is it ultimately only the Tier 1 bank creating the money?
gerrit
CC BY-SA 3.0
2015-06-22T13:11:24.820Z
@gerrit to lend money out, you have to have some money to start with.  Banks can only create money by multiplying it up - but you still need some money to start the process.  A Tier 2 bank can create money, but it must have SOME money deposited at a Tier 1 bank, and the Tier 1 has SOME money deposited at the Fed.  Fractional reserve banking works by never having to pay out more than the fraction of money you have - so the bank can use that small reserve to make all its payments.  In the question the central bank is creating new money and then transferring it away.  That transfer won't work.
Corvus
CC BY-SA 3.0
2015-06-22T13:13:41.690Z
@gerrit think of it like this.  A Tier 2 bank can have \$10m deposited at the Tier 1 bank, and owe \$100m to it's customers, having created \$90m.  This only works fine so long as the net flow of transfer from all its customers to other banks is <\$10m, otherwise they run out of reserve.  You can't ever net "spend" that $90m.
Corvus
CC BY-SA 3.0
2015-06-18T15:32:25.290Z
2015-06-19T12:18:20.103Z
2017-04-13T12:51:38.253Z
Corvus
<p>Let's destroy the USD dollar: I am the government of a small, economically and geopolitically unimportant country that has its own currency and a local central bank. I order the local central bank (at gun point, if need be) to lend me <em>dollars</em>. Is there a <em>technical</em> problem to do this? No, this is just an exchange of papers and electronic messages -we can write on them anything we want, especially with a gun in our head. We can attach to these electronic records any three-letter code we want, so why not "USD"?  </p>

<p>Now I have a bank account with a balance of gazillions and gazillions of dollars- and USD ones, the heavy stuff.  </p>

<p>I can pay off my public debt, make every citizen rich (or just those that I like), import all the luxuries in the world, buy as much energy as I want, whatever. After all, I will be paying in <em>USD dollars</em> right? I will be wire-transferring from a bank account, an electronic signal that will contain some digits and the code "USD" attached.  </p>

<p><strong>So let's hear it from the experts: what kind of checks has the international community in place in order to effectively avoid such a situation?</strong></p>

<p>And what if, as the most long-lasting counterfeiters know, we were to do this <em>modestly</em>, just a little at the time to help a tad with the local government budget, but without "showing-off riches" to the rest of the world??</p>

CC BY-SA 3.0
2015-06-16T15:56:06.250Z
So clearing houses do not work? https://en.wikipedia.org/wiki/Clearing_House_Interbank_Payments_System
Konstantinos
CC BY-SA 3.0
2015-06-16T16:04:46.743Z
Why shouldn't they? Do they check _how_ did I get hold of the amount I want to transfer?
Alecos Papadopoulos
CC BY-SA 3.0
2015-06-16T16:07:07.567Z
http://www.ft.com/intl/cms/s/2/93a47a62-daf0-11e1-8074-00144feab49a.html#axzz3dCCDGciu we should get a gun.
Konstantinos
CC BY-SA 3.0
2015-06-16T18:23:03.053Z
@pidosaurus That was a very enjoyable story!
Alecos Papadopoulos
<money-supply><international-economics>
Destroying the dollar
Alecos Papadopoulos
# Destroying the dollar

(Asked by: username_0 on 2015-06-16)

Let's destroy the USD dollar: I am the government of a small, economically and geopolitically unimportant country that has its own currency and a local central bank. I order the local central bank (at gun point, if need be) to lend me *dollars*. Is there a *technical* problem to do this? No, this is just an exchange of papers and electronic messages -we can write on them anything we want, especially with a gun in our head. We can attach to these electronic records any three-letter code we want, so why not "USD"?

Now I have a bank account with a balance of gazillions and gazillions of dollars- and USD ones, the heavy stuff.

I can pay off my public debt, make every citizen rich (or just those that I like), import all the luxuries in the world, buy as much energy as I want, whatever. After all, I will be paying in *USD dollars* right? I will be wire-transferring from a bank account, an electronic signal that will contain some digits and the code "USD" attached.

**So let's hear it from the experts: what kind of checks has the international community in place in order to effectively avoid such a situation?**

And what if, as the most long-lasting counterfeiters know, we were to do this *modestly*, just a little at the time to help a tad with the local government budget, but without "showing-off riches" to the rest of the world??

**Tags:** money-supply, international-economics
> **Comments:**
> **username_1**: So clearing houses do not work? https://en.wikipedia.org/wiki/Clearing_House_Interbank_Payments_System  
> **username_0**: Why shouldn't they? Do they check _how_ did I get hold of the amount I want to transfer?  
> **username_1**: http://www.ft.com/intl/cms/s/2/93a47a62-daf0-11e1-8074-00144feab49a.html#axzz3dCCDGciu we should get a gun.  
> **username_0**: @pidosaurus That was a very enjoyable story!  

---

## 3 answers

### Answer by username_5 on 2015-06-18. Score: 27 | Accepted answer

I think you misunderstand what "electronic money" is - moving electronic money around isn't simply a matter of sending the right "codes" - it is ultimately about asking the central bank of that currency to move money around.

Sure you can open up excel and write in it "I have \$100" but that isn't USD, much as writing \$100 on a piece of paper doesn't make it a \$100 bill.

In order to lend you dollars I actually have to have some dollars to lend you. That means I need a reserve account with one of the 12 Federal Reserve banks. **There are no electronic USD that are not ultimately in a Federal Reserve Account**.

The "ultimately" in that sentence is there because banks can (and do) form hierarchies. Only the largest ("Tier 1" banks, sometimes called "clearing banks") actually have a reserve account with the central bank in a given currency. Other, Tier 2, banks will simple hold accounts with Tier 1 banks. Smaller local banks may even be Tier 3. When it comes to foreign currency dealing, you could be even further down the chain (i.e. a small bank in Australia may be Tier 4 for USD)

Because of this hierarchy a certain amount of electronic banking can be done without moving reserves. A transfer only needs to progress up the hierarchy until it gets to a common bank between the two customers.

So for example:

* A payment between two accounts at the same bank, can be done on that bank's systems.
* A payment from an account at a Tier 2 bank, to a different Tier 2 bank might be done using a shared Tier 1 bank. The Tier 2 bank's are "customers" of the Tier 1 bank, and so the Tier 1 bank can do the transaction on their system.
* A payment between customers that ultimately fall under two different Tier 1 banks **must** be done by at a Federal Reserve bank.
* The US adds an extra complication, because there are 12 Fed Reserve banks - if two Tier 1 banks don't bank with the same Fed Branch, then the Fed Reserve System also has to go "one step higher" and the New York Fed acts as the very top bank: "[How do reserves move between the 12 federal reserve banks?](https://economics.stackexchange.com/q/194/119)" explores exactly how that is done.

So the problem in your scheme is you couldn't get your central bank "into" this pyramid of banks.

Your central bank's computer can show $1tr on screen but the only way to transfer to another bank, would be to instruct YOUR Fed bank to take money out of YOUR fed reserve account and put it into the other bank's account. Your central bank can't make reserve dollars.

---

**Aside:** An alternative way of looking at this, for those familiar with how BitCoins work, is to note that the important feature of electronic money is to prevent double spending. BitCoin does this with the BlockChain; the USD equivalent of the block-chain is held on the Fed Reserve computers. You can't just declare yourself to have billions of bitcoins - to spend them you have to get your transactions onto the BlockChain. With electronic USD you have to get your transactions onto the Fed ledger. Only the Fed has a copy of this and their say is final. There would be no way for your central bank to change the Fed ledgers.

> **Comments:**
> **username_0**: We are nearing I guess. So all the banks in the world, in order to be able to maintain locally "accounts in USD", ultimately have an account with one of the USA's Fed banks, do I understand correctly?  
> **username_5**: @AlecosPapadopoulos yes that is about right, although I've edited the answer to make it clearer that generally not all banks directly bank with the Fed, but will go to another bank who does.  Each currency has a few banks that hold reserve accounts and the other banks go to them when they want to deal in that currency.  In the past FX transactions could be complicated by this since you might need three or more banks, but now the big banks hold reserve accounts with virtually all central banks of the world.  
> **username_0**: @Corone. Thanks. I believe this clearly answers the question "what kind of checks has the international community in place in order to effectively avoid such a situation?". i.e. in order to control which entities can create which currency.  
> **username_8**: But banks can create money by lending it out, right?  Then if a Tier 2 bank lends 200 k$ to a private citizen for a mortgage, it creates 200 k$; does then the money that Tier 2 bank holds with Tier 1 increase by 200 k$?  Or does Tier 2 bank borrow this money from Tier 1 bank and is it ultimately only the Tier 1 bank creating the money?  
> **username_5**: @gerrit to lend money out, you have to have some money to start with.  Banks can only create money by multiplying it up - but you still need some money to start the process.  A Tier 2 bank can create money, but it must have SOME money deposited at a Tier 1 bank, and the Tier 1 has SOME money deposited at the Fed.  Fractional reserve banking works by never having to pay out more than the fraction of money you have - so the bank can use that small reserve to make all its payments.  In the question the central bank is creating new money and then transferring it away.  That transfer won't work.  
> **username_5**: @gerrit think of it like this.  A Tier 2 bank can have \$10m deposited at the Tier 1 bank, and owe \$100m to it's customers, having created \$90m.  This only works fine so long as the net flow of transfer from all its customers to other banks is <\$10m, otherwise they run out of reserve.  You can't ever net "spend" that $90m.  
> **username_6**: In this case, what safeguards prevent the USA's Fed bank (or some employees at that bank) from doing the things described in the question?  
> **username_5**: @vsz well in the case of employees, you would lose your job and go to jail for wire fraud, and only very few employees would actually have access to the rtgs system that handles this. In the case of the fed, they've been doing it for years, it is called QE.  
> **username_7**: Thanks for the explanation. Do you have any references for this explanation? And, are the terms "Tier 1" and "Tier 2" official terminology? Do you have references to this terminology?  

---

### Answer by username_2 on 2015-06-16. Score: 4

When you go to spend the proceeds of the bank loan you do one of three things:

1. Transfer money to another account at the same bank
2. Withdraw cash
3. Transfer the money another institution

We'll ignore case 1 because eventually someone you transfer money to will want access to two or three, so we can just consider those eventualities directly.

If you go to withdraw cash, the bank has limited cash, as opposed to an unlimited (at least in principle, ignoring the requirements of integrity and law) ability to make changes in their account ledgers. So they can't actually give you more cash then they have.

If you go to transfer money to another bank, it helps to consider why is some other bank is willing to credit an account when some other bank says that it should. The basic answer, notwithstanding complexities like clearing houses and central bank check clearing, is that banks have accounts with each other. When customer Anabel tells bank Bryce to move \$100 to bank Charlie in the account of customer David Bryce does so by debiting \$100 from Anabel's account and crediting their own \$100. Bryce then tells Charlie to debit \$100 from his account (and credit his own) and delivers additional instructions to credit David. Charlie then debits \$100 from his own account and credits \$100 to David. Which gives you a hint as to Bryce's ability to credit anyone outside the bank, even at gunpoint. Bryce can't get Charlie to credit Charlie's accounts for more than the total credits that Bryce has with Charlie's bank. Maybe he can get a "check float loan" to process a limited number of transactions like this, maybe he can get some direct credit from David, but eventually these margins will be exhausted. Cash or securities will need to be deposited at Charlie's bank before Charlie will allow additional transactions on Bryce's behalf.

> **Comments:**
> **username_0**: Thanks for the answer, but I have trouble following your example. Maybe on a third reading I will manage.  
> **username_3**: Think of it as statistical multiplexing. Your liability bank deposits are denominated in dollars if you say they are, but to actually do anything internationally, you have to exchange the real thing from your asset account. Unlike the USA, you can' t print extra dollars on demand - this is the reason btw. that it's a bad idea to use somebody else's currency for this purpose.  
> **username_1**: You can also consider http://quant.stackexchange.com/  

---

### Answer by username_4 on 2016-01-04. Score: -1

The same way you'd be stopped if you decided to purchase a bunch of stocks from the stock market, or at least the market would be close for appreciations, I imagine the same would happen if you decided to acquire a significant amount of money as that has many implications in exchange rates, debt, and so on.

This is regular procedure in Portugal, a "small, economically and geopolitically unimportant country".


---

