I have trauled high and low on the internet for an answer to this. The best I can get is something like “A wire transfer is when a person transfers money from his account to another person’s account, electronically”.
I’d like to know what happens logistically.
Back in the days when money was backed by gold, I am guessing the transfer of money from one bank to another was done by physically transporting the gold from bank to bank.
Now that we have fiat money, and the transfer is “electronic”, how is it done, logistically speaking?
I am guessing a line of communication is opened between two trusted banks, and the electronic conversation goes something like “We’re sending $100 to put in Bob’s account, here’s his account number. We have debited one of our bank accounts by $100, so you can now credit Bob’s by $100”. Banks then get audited up the wazoo to make sure they keep everything above board.
Is that all there is to it?
Will the bank then send a $100 note at some stage? Or do numbers simply change on a database?
That’s pretty close to it, except there’s an intermediary entity known as a clearinghouse between the two banks. The US federal government operates the main clearinghouse known colloquially as The Fed, and there are numerous other “third-party” clearinghouses as well.
It’s all electronic and automated. At the end of the day, transactions run through the Fed are balanced out and the individual banks settle up with the Fed, either making a net payment to the Fed or getting a net payment.
I guess the question then becomes, how do banks “settle up” with the Fed? Again, is it just numbers on a database running up and down? If the Fed owes the bank money, do they have to transport bank notes to them?
Why would there need to be a physical money transfer? What would they do with it? Why would they want the expense that electronic transfer was created to abolish?
It’s true that banks do remove physically worn bills from the money they take in and receive brand new bills in return from the Fed. However, that would be a tiny fraction of their daily transactions. All the currency in the country, in fact, is a tiny fraction of the monetary interactions that go on in any day.
Money is an abstract concept. It can be represented by numbers in a database just as well as by arbitrary fiat currency.
Just don’t tell that to goldbugs. Their heads might explode!
So what prevents a foreign bank from saying they have more dollars than they actually do? ie Bank of America sends $1000 to National Bank of Dubai, which later sends it to HSBC in Hong Kong, which sends it to a bank in Uganda. By this time, surely the US Fed does not know where it is so how would they know if the bank in Uganda sends $2000 back to Bank of America?
Same goes for Bank of America telling some bank in Germany that they have more Euros than they actually do.
It probably means that the bank has a million dollars less that it needs to buy from the Federal Reserve. It would just be added to the bank’s stock of cash, and fed out to customers through ATMs, etc. It would not stay as an identifiable collection of federal reserve notes.
Giles is correct in answering saladin9876’s question. Additionally, if the bank doesn’t need the million dollars in cash, it can return it to the Fed for credit to its account.
However, it is hugely expensive to move physical money around. There are staff hours at both ends to count, recount, pack and unpack, double-check, and enter numbers into the books. And the armed transport is ridiculously costly. Banks will try to avoid this wherever possible. It’s not always possible, which is why you see armored cars on the streets, but everything that can be done to reduce the need for them is done.
Your bank will most likely kick it over to the Fed as soon as they can because they don’t want all of that tangible (and stealable!) cash in the building - not many bank branches need that much cash on hand. It just becomes a deposit entry on your bank’s account with the Fed, to be balanced out with the net withdrawals your bank makes when it receives money from other banks.
At the end of the day, it’s really just the same as balancing your own checkbook, but with much larger dollar amounts and far more transactions per day than you’d ever make in a lifetime. Internally, we’re hitting close to one billion financial transactions a day. I have no idea what percentage of that touches the Fed or other clearinghouses.
There are so many layers and types of clearinghouses and attendant balancing of accounts that it would make your head spin - ACH and wire transfers, paper checks, ATM withdrawals, debit cards, and so on. But, they all get balanced out exactly like a very large personal checkbook.
So what is a commercial bank’s relationship with the Fed?
My understanding is that ‘new money’ basically gets created in two ways:
The Fed buys US Bonds off the government
Banks loan out more money than they have in reserve
So what, exactly, is the direct relationship between a commercial bank and the Fed? Do commercial banks “buy” notes from the Fed? Other than that, what “balancing” needs to take place between a commercial bank and the Fed?
No, because the deposit means that it now owes the customer the amount of the deposit. A credit amount in your bank account means that the bank owes you money.
But after the deposit of $1,000,000, the bank officer in charge of ordering money from the Federal Reserve would look at the bank’s stock of cash, and say something like, “We’ve got about a million more than usual, so instead of buying $1,500,000 from the Fed like we usually do, I’ll just buy $500,000 today,” or, “We’ve got about a million more than usual, so instead of buying $200,000 from the Fed like we usually do, I’ll sell the extra $800,000 back to them.”
I appreciate your patience. I still don’t get it. Here’s the bit I don’t understand in my mind. I present 2 scenarios:
Scenario A
A customer deposits 1 million dollars in to a bank account via electronic transfer. The customer checks his balance with the bank and, sure enough, he’s got 1 million dollars sitting in his account. A few weeks later, the customer decides to electronically transfer the money to some other bank. The bank deducts $1 million from the customer’s account.
Result: Bank is in pretty much the same position as it was before the customer deposited the million.
Scenario B
A customer rocks up at a bank with a suitcase full of cash - 1 million dollars to be exact. The customer announces that he wants to deposit it in to his bank account, and the bank agrees. The bank credits the customer’s account with 1 million dollars and takes possession of the cash. A few weeks later, the customer decides to electronically transfer the million dollars to some other bank. He does this, and the bank deducts 1 million from his account.
Result: The bank is in pretty much the same position as it was before the customer deposited the million… except… it still has the 1 million in cash!
So… when it comes time for the bank to purchase their bank notes from the Fed… that’s 1 million less they need to worry about spending. A saving of 1 million. A saving of the exact amount that the customer deposited in cash.
To put it another way - are you saying that giving 1 million in cash to a bank, and then wiring it out - results in a $1 million profit to the bank? (Because it’s one less million they now need to spend on notes)?
You’re forgetting that there’s no loss involved when the bank buys currency from the Fed. They electronically transfer $X to the Fed, they get $X worth of bills. This week, because they got the suitcase of dough, they transfer $X minus one million to the Fed, and get $X minus one million dollars of bills. No profit or loss occurs in either case.
However, in scenario A, which started off with an electronic transfer from another bank, the bank acquired money through that electronic transfer. Even though it’s just a record in a banking database, it’s a deposit in an account owned by the bank. And the bank can use it like money, e.g., they can in turn transfer it to the Federal Reserve in exchange for a bag containing 50,000 $20 bills, at which stage the bank will be in the same position as at the end of scenario B,
You keep thinking that there is somehow a difference between $1 million in cash and $1 million in any other form. There isn’t. They are exactly the same in every meaningful way.
I’m not sure why the electronic transfer is throwing you so much. What if your rich person showed up at the bank with a $1 million check? How is that in any way different from an electronic transfer? Both involve nothing more than a change in a deposit line in a database. Is the bank any poorer if it takes in the check and hands out a million in cash? No. It can use the check in every conceivable way that it could use the cash. (Well, not in a vending machine. )
Again, physicality means nothing when it comes to money in the modern world. The total funds, in cash, checks, and transfers, is all that counts. You can convert any one of these into any other (they are fungible) so they are all the same in the end.
)