What is a bank deposit?

Bank account

You go to work and receive a salary in return. The salary is paid to your bank account. But did you know that you are not the owner of the money on your bank account? Regardless of whether you have opened an account at Nordea, HSBC, JP Morgan, Deutsche Bank or somewhere else, your money is used for the same purpose: your money is lent forward to others.

This article will tell you about the bank account's nature, the interest rate for your deposits and cash. At the end of the article, we will compare the current banking and monetary system with former practices.

Bank account's nature and deposit interest

Your bank account is an account whose money is always lent to the bank. Banks are credit institutions, and this loan is called a deposit. However, the word deposit can be misleading if you think that you are placing something in store. When you deposit money into your bank account, you are lending your money to the bank, who in turn lends it forward to another person or company in exchange for interest. Because the bank lends your money forward and thus exposes it to a lending risk, the bank pays you interest in return. While bank deposits are often deemed as the customer's own, risk-free money, it is evident that this is far from the truth.

By keeping your money on your bank account, you carry the risk that the bank or the bank's debtors cannot repay their loans. Since the creation of the current banking system, such developments have been seen in many parts of the world, even in the more stable areas like the eurozone, where Cyprus underwent a crisis in 2013.

However, nowadays banks barely pay any interest for the lent money you originally earned from your work. If you have a lot of money on your account, you might even get negative rates. In such a scenario, you would be paying for the bank for them to use your money to gain revenue. An ingenious system—from the banks' point of view.

Cash

This begs the question: is cash safer than bank deposits?

Cash is of course safer when compared to lending money to a bank—this way, there is no longer a counterparty risk, since the bank is not lending your money forward. Paper notes and coins, however, are not without risk. While it is rarely talked about, it is a fact that, for example, the purchasing power of euros has weakened by over 85% since 1999, the year when the euro was introduced. The current monetary system also does not offer you a choice to get rid of debt altogether: even when you withdraw your money from your account, your money is still the central bank's debt to you.

Here's a direct quote from the webpage of the Bank of Finland:

Consumers carrying banknotes in their wallets hardly think of themselves as creditors; nonetheless, banknotes represent the central bank's debt to banknote holders. Similarly, a bank deposit represents the bank's debt to the customer.

Source: Bank of Finland

The situation is the same in all places across the world where similar national currencies are used.

It is, however, more difficult to pay your rent or bills with cash. As cash is used increasingly less, citizens are almost forced to lend their money to banks and thus carry the risk that banks or banks' debtors do not meet their obligations. In addition, in the current system, we are in the vicious cycle of weakening purchasing power, when currencies like the euro and the dollar weaken. In other words, we are punished for saving in these currencies.

Has this always been the case?

Originally, before the modern banking system, the money deposited at a bank actually belonged to the customer—not to the bank. Instead of debt or bytes, banks used to store good money, such as gold. Unlike the euro, gold is not a promise created by a central bank or debt. It is real money that is nobody's debt.

Back then, banks were for safekeeping the money of their customers, and in return for this, the customers paid the banks a small sum in return. If the bank wanted to lend a customer's money forward, the customer's consent was needed and they were paid interest for their investment.

Nowadays, your money is lent to banks, who lend it forward in turn. You carry the risk and the bank gets the profits. At the beginning of the 2000s, interest was still widely paid for your deposits, but now things have changed. Interest rates have fallen substantially to a point at which fair interest is no longer paid for deposits in most parts of the world. On top of this, these days even cash is debt from the central bank to you. The system might currently be operable, but it is not fair.

At Voima, the Customer owns the gold on their account, and gold is nobody's debt. Gold is real, good money.