A 10,000 yen bill in your wallet is a debt of the Bank of Japan. The 10,000 yen in your account is a debt of your bank.
The face value is the same, but who owes the debt is different.
Connecting Cash, Deposits, and the Central Bank
From account balances to bank ledgers. We examine in detail the connections between lending, settlement, government bonds, and the central bank.
Time to read the text: about 12 min ／ Time to read the in-depth book: about 146 min
The review questions are optional and not included in this time.
What you can read: the course opening and contents are free; the full text is for those who have purchased
After purchase, you can read the full text once your access starts.
Cash, Deposits, and Central Banks in 3 Minutes
1See it
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A pay transfer moves no banknotes. It moves three ledgers
The company’s bank, the employee’s bank and the Bank of Japan
When a bank makes a loan, it creates a deposit in the borrower's account.
Lending creates deposits. Repaying the loan makes them disappear.
But they can't create an unlimited amount. Profits, regulations, and interest rates act as brakes.
The central bank's interest rate is the most significant brake.
1999–
The Bank of Japan has shifted between eras of adjusting interest rates and adjusting the money supply.
On March 19, 2024, it returned to the policy of adjusting interest rates.
End of March 2026
The central bank has become the largest holder of government bonds.
42.2 percent
It was 8.9 percent at the end of March 2011.
Borrowing money overnight using government bonds as collateral. It's structured as a sale, but it's really a loan.
Trust comes from the collateral, not from who you're dealing with.
2008–
Major monetary easing increased the money that commercial banks hold at the central bank.
It didn't mean more bills in people's wallets.
Even with electronic money, the first question is, 'Whose debt is it?'
Whether it's settled on the central bank's books.
2In numbers
42.2percent
Percentage of Japanese government bonds held by the central bank (end of March 2026)
3What would you do?
You take out a home loan from a bank. What happens inside the bank?
Pick one
Money that someone else deposited was moved to your account.
This is a common explanation, but the order is backward. The bank creates a new deposit of the same amount in the borrower's account.
A new deposit was created in your account.
That's exactly right. The loan and the deposit are created at the same time, and they disappear together when the loan is repaid.
Lending creates deposits. However, brakes like profits, regulations, and interest rates mean banks can't create an unlimited amount.
4Read more
On payday, a company transfers salaries into its employees' accounts. The employees then use those deposits to pay a shop that has an account with a different bank.
In this series of payments, not a single banknote has moved. What has moved are the ledgers. The balance in an employee's account is a liability the bank owes to the employee. Payments between banks are settled by transfers of Bank of Japan current accounts (BOJ current accounts). These are current accounts that the Bank of Japan accepts from financial institutions and other counterparties, and they are liabilities of the Bank of Japan. The 10,000-yen note in your wallet is also a liability of the Bank of Japan, and the government bonds held by the Bank of Japan are liabilities of the state.
We pay, save, and borrow upon a chain of liabilities.
Ancient coins could be assessed for their weight and purity from the physical object. Much of modern money exists not as metal, but on ledgers.
This course traces that chain, starting from a single banknote.
Until you can read the single phrase "printed money" as three separate questions:
Which money has increased? Whose balance sheet has changed? What was exchanged for what?
The numbers are only from the primary sources read and placed in the archives. They are accompanied by a year and a country. It is the practice of this course not to apply them to other years or other countries.
What you will understand after this course
- Can distinguish between banknotes in a wallet and deposits in an account based on whose liability they are.
- Can explain together the mechanism by which lending creates deposits and the factors that constrain it.
- Can state, using balance sheet accounts, what increased and what did not increase with quantitative easing.
The book for this course
『Connecting Cash, Deposits, and the Central Bank』
A complete illustrated book. 19 figures, about 146 min
Free sample: Modern Money — Why are the numbers in a bank account money?
More about this course
Course number: B19
Supervised by: Mitsuru Hayama
Beyond the text: 6 exercises · 3 readings How reading times are calculated
You will also understand
- Can trace the chain of government bonds circulating as collateral for settlement, from issuance to their role as an interest rate benchmark.
You can start this course without reading any other course.
Also worth reading, to see the connections (optional)
- History of Banks and Credit
What you learn: You can restate "having credit" as a concrete action within a transaction.
If you want to know more about checking sources (optional)
- Is It Really True? Checking History
We re-examine the origins of money and famous anecdotes, comparing them with historical records and actual artifacts.
Assessment
6 exercises in this course (4 check, 0 compare, 2 written). Progress is recorded by self-assessment.
The 8 chapters of this course
- What moved when your pay was transferredA pay transfer moves no banknotes; it moves three ledgers. A deposit is a liability of a bank; Bank of Japan current accounts and the notes in your wallet are liabilities of the Bank of Japan.
- Why does bank lending increase deposits?Lending creates deposits. However, this must be considered together with what constrains lending.
- What has the central bank controlled?The operating target has changed many times. When reading articles on policy, first check whether the target for that year was an interest rate or a quantity.
- Government Bonds: Whose Debt, and Whose Asset?Government bonds are a liability for the state and an asset for the holder. The Bank of Japan is the largest holder, but this is the result of purchases from the market, not direct underwriting.
- Why do government bonds serve as collateral in financial markets?It is not the counterparty's face, but the collateral that carries the credit. The nation's debt has become the foundation for private-sector funds.
- What had changed before 2008?Read 2008 in this order: Cause → Plumbing → Clog → Central Bank Response.
- What actually increased with QE?QE is an exchange of national debt for central bank liabilities. What increased were reserves, not banknotes.
- Digital Money: What It Changes and What It Doesn'tEven for digital money, the first questions are the same — whose liability is it, and is it settled on the central bank's books?
Real-life examples in this course (3)
- The weight of being the reserve United States 2008 The financial district on the night of the crisis
Sections 6 & 7. The scene on the night of the 2008 crisis when dollars were sent via swaps between central banks, at the stop for the American chapter. - The digital shore United States 2009 Upon the internet
Section 8. How did the dollar's course position Bitcoin, which began in 2009? - Epilogue Overview: the world from AD 2009 Crypto-assets
Section 8. Epilogue to the General Remarks: “Crypto-assets” — The history of the idea of a currency without an issuer.
Read next
Considering Digital Money from a Historical Perspective →What you learn next: Be able to cite the historical precedent of a 'cashless economy' (11th-century Japan) and describe its similarities and differences with the present.
Time to read the text: about 7 min ／ What you can read: the course opening and contents are free; the full text is for those who have purchased
Price
After purchase, the full courses, the illustrated books, every country’s story and the numismatics examination are open to you.
See the price →