Weirdness in Banking and How it Affects Games

I've been trying to figure out how a game can work in real-world banking structures without making it so convoluted that it becomes boring or too difficult, while still providing real-world banking semantics that might result in some fun game scenarios. I've had a few problems doing this, many related to this being the first time through some system structures. The biggest conceptual hurdle is how the M0 and M1+ money supplies turn to total bullshit in a fictional world based on the future. The best way to explain what I mean by this is by walking through, in my own (possible inaccurate) words, how I understand the evolution of banking systems.

In the beginning, people would barter for goods, with exchange rates being determined in real-time. For example:

Shepherd: I want a shovel.
Blacksmith: I want a wool coat.
Shepherd: Let's trade then.
Blacksmith: Sounds good.

Naturally, this is an incredible pain in the ass once you try to scale up, which becomes essentially a requirement once you get to things like tenement law, which is the basis for all modern taxation. It basically means the king owns everything and you have to pay him a certain amount in labor or goods to use the land you live on. (Believe it or not, this is still the basis for modern taxation, the only difference is that you no longer have the option of paying the "king" in labor or livestock.) For example:

King: Give me half of all your stuff.
Peasant: All I have is this cow. Should I cut it in half?
King: No thanks, I'll just rape your eldest daughter.
Peasant: Fair enough.

Fortunately for commerce, everyone started falling in love with shiny metals like silver and gold, which led to its use as an intermediary product that you could carry around (and tax) more easily:

Shepherd: I want a shovel.
Blacksmith: I don't particularly want a wool coat right now.
Shepherd: How about a quarter ounce of gold?
Blacksmith: Cool! I mean, come on, who doesn't love gold?

Gold and silver became such commonplace exchange items that the government would mint standard amounts to make it easier to count out value without having to continuously weigh everything. This naturally led to people shaving gold off of the coins, which was a problem because the money was only worth the materials it consisted of. In that sense it wasn't a real currency at all, rather it was simply a convenient form of barter. This is also known as commodity currency.

As people got richer, they found that bigger and cooler things came up that they wanted to buy. Unfortunately, carrying around a big heavy sack of gold just made it easier to steal and harder to use, especially with lower value precious metals like silver. (Ever try to run with 60 pounds of sterling silver? Didn't think so.) Try buying a mansion with silver:

Rich Guy: I'd like to buy that mansion.
Salesman: Sure. That will be 500 pounds of silver.
Rich Guy: Sure. Does that include a horse-drawn cart or do I supply my own?

This is where the first banks come in. People could store their valuables in a vault and be certain of their safety (at the very least, they could be more certain of their safety than they would be if they kept the loot in their house). With the banks holding your gold, you could start exchanging the promissory notes much more conveniently:

Rich Guy: I'd like to buy that mansion.
Salesman: Sure. That will be 500 pounds of silver.
Rich Guy: Sure. It's in this bank. Here's a note. Trust me, they are totally good for it.

You would then be responsible for going to the bank at your leisure and retrieving the gold. That was often a phenomenal pain in the ass for people, and that's how the dollar bill was born. In this form, the paper bills represented a fixed amount of some tradeable good, or specie, held on your behalf at a reserve bank of some sort. This type of bill is known as representative currency.

Eventually governments usually get tired of trying to collect taxes from a bunch of different banks with different bills and different security, so they set laws that force people to use a single type of currency from a specific reserve bank, generally affiliated with the government in one capacity or another. This system exists today, and that's the reason we have dollar bills.

Up until now this kind of makes sense, but here's where it gets weird.

As governments gain power they gain the ability to enforce commerce laws in their nations. They can also depend on the fact that, under normal circumstances, people just simply don't walk up to a national reserve bank with all of their bills and say, "I'd like my gold, please". As the nation grows in power, the money gains an inherent value in that it is the required means of commerce within the land controlled by a government. As this occurs, the government divests itself of the gold investment it has made because it no longer needs to maintain a certain reserve. At this point the currency becomes fiat currency, and it is backed by the general confidence in the nation that issues it. For example, the United States has been liquidating their gold reserves since the Nixon presidency. (I think it was in the 70s, anyhow.)

So now we have a situation where a bank stores dollar bills for you. The paper money is now the valued commodity. Vaults are now filled with as much paper money as the bank feels the need to meet the withdrawal needs of its creditors. The size of the economy drives the amount of value associated with the paper money and governments can control inflation (in part) by printing money or destroying it. The paper itself, outside of the context of being required for commerce, has as much value as a store coupon.

Notice how I suggested the government only controls part of the inflation. The rest comes from the M1+ money supply. (This is where it gets really weird.)

If you add up all of the printed money a government produces, that's what's known as the M0 money supply. The M0 supply also includes electronic money supplies associated with the appropriate reserve bank that backs the currency in question, so it's not necessarily all paper, but it's all under specific control. M0 is the only quantity that the government directly controls. The M1, M2, and M3 money supplies (these are called various things by various financial institutions, but for the purpose of this post let's call it M1+; for more info, check out the money supply article on Wikipedia) are actually produced by the banks.

That's right, the bank prints money. Here's how.

Let's say you give a bank $100 in cash for a deposit, and I come in right after you and borrow $50. As far as you are concerned, you still have $100, but you don't really need it right now. As for me, I think I have $50. So, adding up our total assets between the two of us, we now have $150. The bank has effectively printed $50. That's M1 money. Higher levels refer to term deposits and other less fluid investment capital.

M1 money in particular is the same as real money, especially in the digital age, because we do so many transactions completely electronically. I have no idea how much real money my bank has, I just use my debit and credit cards. If I restricted my dealings to the same institution (for example, if I only shopped at Walmart, and they used the same bank I do) there's no real reason for any actual M0 money to be used at all. In effect, I have as much as my bank tells me I have, and there's not a damn bit of good the government can do about it.

So what prevents the bank from just running up accounts to a virtually infinite amount? Two things. First, I can always go to a local teller and ask to withdraw cash. Banks can't print cash so they have to keep a certain supply on hand. Second, if I transfer money between banks and there's not a specific trust relationship between them, I would have to use the reserve bank to get funds across, and the reserve bank account is an M0 supply.

Based on electronic availability of funds, less and less cash is in use all the time. So, what happens if cash simply stopped being used for most trades? The bank would not feel any need to keep any kind of real "reserve", and an infinite amount of money could be produced. Interest free loans could be provided and 100% weekly interest rates could be offered on savings accounts because there's no need to back the account with anything concrete.

And here's the climax. Mapping this onto a futuristic game becomes difficult because no logical futuristic game would support cash, and without enforcing some kind of banking regulator (which would defeat some of the realism) there's little to no physical asset to associate with the money. If I have no capacity or reason to ask my bank to convert my cheque into a concrete asset representing the appropriate currency, there's no need to manage money, and the economy collapses.

Maybe the possibility of massive inflation becomes a key part of the game. Maybe most banks would be forced to have an asset account with a core regulator or reserve bank, and that would become the M0 asset. Maybe a physical "cash" asset is still needed. Or, maybe all three are true.

More on this as I continue. There's definite possibilities for something new here.