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The Origin of Money – Part I: Cash

Euro banknotes and coins are used in a large number of payments every day. Private individuals and enterprises usually withdraw this money from their bank accounts. But where do banks get this cash from?

First of all, retailers and other customers deposit their cash at the bank. However, if customers want to withdraw more cash than has been deposited, the bank needs to obtain additional cash in order to satisfy this demand.

Banks get this cash from the central bank. In the Eurosystem, from the European Central Bank and the central banks of the euro-area countries, which in Germany is the Deutsche Bundesbank.

In order to obtain cash, banks withdraw it from their account at the central bank. If banks DON'T have sufficient funds in this account, they usually take out a loan from the central bank. For a loan of this type, the commercial bank must provide the central bank with collateral – usually in the form of securities – and must also pay interest on this loan to the central bank. The central bank then credits the loan amount to the account of the commercial bank, thereby creating money. The commercial bank can then withdraw its credit balance as cash.

The moment the central bank disburses the cash to the bank, the banknotes, which until then were just printed paper, are transformed into cash, or legal tender. This cash is transported to the banks, which can then pay it out to their customers.

The banks can pay in their surplus cash to the central bank. The central bank then carries out quality checks on this cash and removes notes or coins that are no longer fit for circulation. It replaces these with new banknotes and coins, which can then once again be paid out to the banks. The central bank analyses any detected counterfeits, reports these to the police and stores them securely.

The genuine money that banks deposit with the central bank is credited to their central bank accounts. The banks can use this credit balance to repay the loans they took out for the purpose of obtaining cash.

Euro banknotes and coins are legal tender in the euro area. For this reason, only the central banks of the Eurosystem – in Germany the Deutsche Bundesbank – are permitted to commission the production of new banknotes. They have a monopoly on issuing banknotes.

The Deutsche Bundesbank puts these banknotes into circulation and will take back any cash the banks no longer need at face value at any time. Manufacturing and transporting banknotes, as well as carrying out quality checks on them, all incur costs for the Deutsche Bundesbank. However, the Deutsche Bundesbank also makes money from the interest it charges banks for the loans that they take out in order to obtain banknotes. The profit made in this way contributes to the Deutsche Bundesbank's total profit, which, in turn, is paid on an annual basis to the Federal Ministry of Finance, that is the government.

Euro coins, by contrast, are issued by the euro-area governments. In Germany, this is the responsibility of the Federal Ministry of Finance. The right to issue coins is called the "coinage prerogative". The Ministry sells the coins to the Deutsche Bundesbank, which then puts them into circulation. The face value of the coins is higher than their cost of production, with the government making a profit on the difference.

Ultimately, ALL profits gained from the creation of cash benefit the government, and therefore society as a whole.

Additional information

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