Book Money

The term book money primarily denotes bank account balances. Book money differs from base money in that it is not part of a limited supply of actual currency released by a central bank or monetary authority, but is simply a debt agreement between a commercial bank and a depositor.

As opposed to base money (sovereign money) which is made of banknotes and coins in circulation and sight deposits held by central banks on behalf of commercial banks, book money is not legal tender and is not included in a currency’s monetary base.

When you deposit money into a bank account, the bank simply credits your account with that amount of money. The cash which you deposit is invested by the bank (in loans or securities trading, for example). It is also used, in part, to cover the bank’s running expenses. However, the bank continues to owe you the amount which you deposited – plus interest and minus fees and charges. This balance which the bank owes you is book money.

Typically, banks only hold enough base money to cover a fraction of their debts to depositors. This is known as a fractional reserve system.

As long as a bank has enough base money to meet the immediate demand for cash withdrawals, depositors are able to convert their account balances (book money) into cash (base money) if they so choose. However, if a bank is unable to meet its depositor’s cash withdrawal demands, it may quickly become insolvent. Because of this, many commercial banks place limits on the amount of base money (cash) which a depositor may withdraw from the bank within a certain timeframe.

In Switzerland, a portion of book money is covered by the bank depositor protection insurance scheme managed by Esisuisse. This insurance covers bank balances at commercial banks up to a maximum sum insured in the event that bankruptcy prevents a commercial bank from meeting its debt obligations by converting book money to actual base money.

More on this topic:
What happens to your account balance when a Swiss bank goes bankrupt?

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