Unit 1 · Level 1 · What money is
Two kinds of euros
The €20 note in your pocket is central bank money, a direct claim on the ECB. The €500 in your banking app is commercial bank money: an IOU from your bank promising to pay you central bank money on demand. Ninety-something percent of the euros people 'have' are really these bank IOUs.
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What you get asked
The number in your banking app is really…
A deposit is a claim on the bank, not a labelled box of notes. Usually the difference is invisible, right up until people doubt the promise.
Match each item to what it really is.
Two layers: central bank money at the core, commercial bank money built on top. The guarantee scheme is the bridge of trust between them.
Physical cash is a direct claim on the ___ bank.
Banknotes come from the central bank itself, so they can't go bust on you the way a commercial bank can.
Why can a healthy-looking bank still collapse in a bank run?
This mismatch is banking's core fragility: everyone can demand cash today, but the bank's money is locked in 25-year mortgages. In 2023, Silicon Valley Bank lost tens of billions in deposits in roughly a day.
In the EU, bank deposits are typically protected up to…
EU deposit guarantee schemes cover €100,000 per depositor per bank. It exists precisely to stop runs before they start, though details vary by country. 🐜
The rest of this unit
Shells, paper, pixels: why money works at all, and who really creates it.