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The fundamental difference between base money (like banknotes) and bank money (deposits) lies in their issuer. Base money is a liability of the central bank, whereas bank money is a liability of a commercial bank. This distinction in origin is what categorizes them differently.

Distinction Between Base Money and Bank Money Based on Issuer

An individual takes a $100 banknote and deposits it into their personal checking account at a commercial bank. The bank's digital ledger now shows the individual's account balance has increased by $100. From the perspective of the financial system, what does this newly created $100 digital balance represent?

Imagine a scenario where a large commercial bank is rumored to be financially unstable. Explain why a depositor might feel safer withdrawing their funds as physical banknotes rather than keeping a digital balance in their account at that specific bank. Your explanation must focus on the difference in the issuing entity for each form of money and the implications for risk.

Issuer Liability and Financial Risk

Based on the distinction between different types of money by their issuer, explain why the customers' digital balances are at risk, while the physical banknotes they are withdrawing are not subject to the same risk of default from 'First Commercial Bank'.

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