Ledger money is money that exists as an entry in a record of accounts rather than as a physical object passed from hand to hand. A balance is created, moved or cancelled by changing the record, and the holder's claim is only as good as the institution that keeps the books and the trust people place in it. Temple scribes, royal treasuries, merchant banks and modern commercial banks have all issued money in this form.
The idea is usually set against money as a physical token, such as coins or banknotes. Historians and economists use it to stress that writing down debts came before minting metal, and that most money today is still ledger money: deposits at banks and reserves at central banks. The design question that follows, whether money is verified by checking an account or by checking an object, is covered in Account-Based vs Token-Based Money.
Ledger money in plain terms
Think of a café that keeps a tab for its regular customers. Nobody hands over cash with each coffee. The owner writes the amount next to the customer's name, and at the end of the month the line is settled. The written line is worth something because everyone trusts the owner's notebook and agrees on what it says.
Ledger money works the same way on a much larger scale. Your bank balance is a line in the bank's notebook. When you pay a friend at another bank, no coins travel anywhere. One notebook goes down, another goes up, and the banks settle the difference between themselves in a notebook kept by the central bank. The money is the record.
Origins in Mesopotamia
Some of the earliest written records are accounts. In Mesopotamia, temple and palace administrators recorded rations, rents, loans and debts on clay tablets long before coins appeared. Values were expressed in barley and in weighed silver, with the shekel serving as a weight and a unit of account. A debt could be written down, carried forward and settled later in grain, silver or labour, without any metal changing hands at the time.
The laws of Hammurabi of Babylon, from around 1750 BC, set out rules for loans of grain and silver, which shows that credit recorded in writing was an ordinary part of economic life. This record-keeping has led several historians, and the anthropologist David Graeber in Debt: The First 5,000 Years (2011), to argue that credit and accounts came before coinage and that the textbook story of money growing out of barter does not fit the evidence.
Tally sticks and medieval accounts
In medieval England the royal Exchequer recorded sums owed and paid on tally sticks, notched wooden rods split lengthwise so that each party kept half. The two halves could be matched to prove the debt, and tallies issued by the Crown could circulate as claims on future tax revenue. The Exchequer used them until 1826, and the burning of the old stock in 1834 started the fire that destroyed most of the Palace of Westminster.
Italian merchant banks of the late Middle Ages moved money between customers by writing transfers in their books, a practice known as giro banking. Double-entry bookkeeping, set out in print by Luca Pacioli in 1494, made such records easier to check. The Bank of Amsterdam, founded in 1609, held coins on deposit and let merchants pay one another by transferring "bank money" in its ledger, which often traded at a premium to the coins themselves.
Modern bank deposits
Today almost all money held by households and businesses is ledger money. Commercial bank money is the balance in a demand deposit account, a promise by the bank to pay. Banks settle with one another in central bank money, which is itself a ledger entry in reserve accounts at the central bank. Physical cash is the main exception.
The Bank of England explained in 2014 that most money in the modern economy is created when commercial banks make loans: the bank credits the borrower's account, creating a new deposit at the same moment. This makes the bank's ledger the place where new money is born, subject to regulation, capital rules and the central bank's monetary policy. Measures of the money supply are therefore mostly sums of ledger balances.
Risks and limitations
- Trust in the record keeper. A ledger balance is a claim on whoever keeps the books; if a bank fails, depositors depend on deposit insurance or the resolution process to recover funds.
- Errors and fraud. Records can be altered, which is why ledgers rely on audits, reconciliation and controls.
- Access and identity. Holding ledger money usually requires an account, and opening one requires identification, which can exclude people without documents.
- New ledger designs. Distributed ledger technology spreads the record across many parties instead of one institution, though the underlying idea, money as an entry, is the same.