From money to Target2 balances

Many people discuss trade, money and Target2 balances without really knowing what they are talking or writing about. After all, the term "money" alone, which is common and present in almost every age, in almost every corner of the world, is not so easy to understand and explain. I'm going to make an attempt here to draw a wide arc from the origins of trade to the significance of money and bank transfers to Target2 balances. And it's so simple that I can understand it myself.

Trade is the foundation

Isn't this supposed to be about money? But the first title is trade? Quite simply: without trade, or more precisely without the exchange of goods or services in terms of time, place or object, there would be no money: it would simply not be necessary.

Before trading

An excursion into the history of the Incarnation! Sometime two million years ago or so , the evolution of the animal species we now call humans began. Rough subdivision: If you are reading this text, you are one of them! I don't expect you to be a cheetah or an eagle, even if your eyes are perfect for reading. The most important tool back then was the flint, and with it you could shape anything you needed. Short stick: knife. Longer stick attached: arrow. Long stick on it: spear. And then you could turn other animals into food - and enemies into drinking vessels

Even the flint itself was plentiful. So at that time there was nothing that was scarce and in demand - except perhaps (as today) women. But that was regulated by hormones or, if necessary, a club.

Start of trading

Thus, the noteworthy part of the history of trade(s) only begins with the settling down of people +/- 8,000 years ago. It is not for nothing that this is the beginning of modern historiography, such as the Bible. With the onset of agriculture and animal husbandry, the demand for goods increased rapidly. Ploughs, animals (or other people) to pull them, seeds when their own were spoiled, wood and its processing: This is also the time of specialization, the beginning of trade, the exchange of goods and knowledge, - in general the formation of property & knowledge about the effects of medicinal herbs and animal & water findings. Chinese advanced civilization, the Egyptians, the Bible, agriculture and animal husbandry, language families: everything is connected with settling down in this period. No other cultural change in the millions of years of human evolution has brought about such upheavals in the social structure of mankind.

Simple bartering

During the development of his farm, Mr. Habicht needs a plough, but only has chickens. OK, that still works: 10 chickens for a plow to Mr. Schreiner. That's it. That can still be exchanged. The plowing went quite well. Mr. Habicht sowed and harvested, and with the grain he fed even more chickens. He now had so many chickens and barley that he couldn't use them up himself. He now wanted to produce something that was called "beer" in the neighboring village. According to historians, this was the most important reason for farming and thus settling down. But he also needed clay pots and fermentation jugs and all sorts of other things. These were produced by Mr. Potter. But he already had enough chickens. Mr. Gerber didn't have enough chickens yet, but he didn't make any pots. And Mr. Habicht already had enough skins and shoes.

The tanner needed chickens and offered ready-made clothes.
The hawk had chickens and needed pots.
The potter needed clothes and offered pots.

When used for bartering, pots and chickens were "money in kind", a precursor to the more abstract coinage.
Trading is therefore the exchange of goods that you need less urgently at the moment for goods that you need more urgently now or in the future. The temporal shift ("later needs") found its way into the trade.

More complex bartering

So things got complicated. How were the three of them supposed to swap chickens, pots and clothes in a way that satisfied everyone? Anyone could make chickens, so they were only valuable when you needed them. They were not valuable at all times ! Pots required a lot of work, time and preparation. Wood and clay had to be procured, clay had to be refined and shaped into pots and jugs before being fired. Clay as such was not valuable, it was lying around everywhere. But if someone brought it to the potter, this clay became valuable. The potter's working time was already too valuable to be wasted on such menial tasks as searching for wood and mining clay. Due to their high level of production, finished pots brought in many chickens, but collecting wood and mining clay did not. The chickens could now be broken down into smaller pieces: Into eggs. However, these were worth very little. And half a chicken didn't keep so well, at least not until the first refrigerator. It would also be practical if you could preserve chickens and save them in this way. Again, there was no fridge. Mankind needed "something" with which trade could be time-shifted . So you could freeze 100 chickens every month and exchange 1,200 chickens for a metal plow at the end of the year. The metal plow was not available in your own village, but only in the neighboring village. It is not so easy to bring 1,200 chickens to the neighboring village and the blacksmith there does not need 1,200 chickens all at once. The trade was now slowly being needed elsewhere . And the blacksmith didn't need thousands of chickens, but iron ore and charcoal. Trade also had to be shifted well, a conversion was needed between shoes, eggs, charcoal, iron plows and clay pots. An intermediate means of exchange! In all cultures, therefore, some form of moneydeveloped along with animal husbandry and agriculture. There was also money that had no value "in itself", such as shells. But even here there was a preliminary processing that made the money scarce together with its origin. Because "money" as a medium of exchange only works if the money itself is also scarce! Leaves and stones can therefore not function as money
Only an intermediate means of exchange allowed the emergence of a finer division of labor. Take the example of a horseshoe: first, a rather useless raw material - iron ore - had to be extracted from the mountain at great expense. To do this, trees have to be turned into (charcoal) with a lot of work. And someone has to build a (blast) furnace from - in this form - quite useless clay. Only the iron ore together with the coal in a furnace resulted in usable iron. How could the individual raw materials be meaningfully exchanged for each other? Remember: neither iron ore nor clay can be eaten or drunk. Only coal (or its precursor wood) fulfilled a basic need (that of warmth). Only through an intermediate means of exchange could a miner acquire chickens and heating material through his work.
Intermediate means of exchange allow a good that is currently less urgently needed to be exchanged for another, usually more compact and generally more durable product. And to exchange this compact, more durable product back later at this or another location for a genuinely usable good that is then needed.

The emergence of money through complex trade

Money could not be created by itself, otherwise it would be unsuitable as a medium of exchange: After exchanging it, no one else would need it. Therefore, scarce raw materials that can only be obtained with effort are a good basis for money. Gold and silver are therefore very suitable for this purpose: A great deal of effort is required to "produce" gold or silver. More than with other materials such as wood, barley, copper... Like wooden or metal plows, this material already has an inherent value. Gold and silver were also durable and shiny, which established these materials as a common medium of exchange in many cultures. However, there were also cultures such as the Maya who only liked gold because of its appearance; it had no other value for them. This is understandable: You can't eat or drink gold, it's too soft for tools. There are only a few real technical applications for gold.
Therefore, gold (also the root word for money) requires a general consensus in order to function as a medium of exchange.
But when this consensus existed, gold and silver were ideal: they were difficult to produce. Once they were produced, they did not lose their properties and were accepted throughout their entire cultural sphere. Gold and silver were therefore able to facilitate the time-shifted and place-shifted exchange of goods as an intermediate medium of exchange. As such, they could not be counterfeited, so they did not arise by themselves. Pyrite, which is visually difficult to distinguish from gold, was of course often or even unknowingly used as a substitute for gold. If this was done knowingly, it was fraud and forgery. If it was done unknowingly, it caused a loss in value. These are both problems that still plague money today. Incidentally, it is this inherent value that distinguishes gold and silver from the usual paper money. However, this should not be overestimated: the effective use of gold and silver is comparable to that of copper and iron, except that gold and silver are even rarer and therefore more difficult to extract. They are also less useful. Except - in terms of value - for jewelry. This principle of making a medium of exchange "rare" through the work it contains is also the basic principle of bitcoins, except that they have absolutely no inherent value associated with them. Bitcoins therefore combine the disadvantage of gold (the "production" requires hard work) with the disadvantage of paper money (the principle of hope).

A product that is to function as an intermediate medium of exchange, "money", must not be available indefinitely and must not be produced without effort, otherwise it loses its characteristics of "scarcity" and "durability". It loses the property that it absolutely needs as a medium of exchange.

Impractical and practical gold money: coins

Gold and silver were difficult to use. They had to be weighed and tested, and their equivalent value in chickens and plows had to be reassessed at every place and at every time. Direct exchange of goods therefore accompanied trade until modern times.

Money (in whatever form) has had precisely these properties from the very beginning: it could be transported and exchanged for something useful (from one's own point of view) at (almost) any time and in (almost) any place. However, in order to obtain it for this purpose, you first had to give something for it yourself. As a miner or silver/gold prospector, his time and labor; as a farmer or cattle breeder, his crops or livestock. Rulers (the employers of the past, so to speak) recognized this very early on and brought money under their control. And vice versa: whoever controlled the money also controlled the society associated with it. Anyone who produced the medium of exchange (e.g. gold miners) therefore had to hand it over to the ruler. In order to create a universal money controlled by the ruler between this "authorized" and "unauthorized" silver/gold or other material, the material was "minted". From around 1,000 BC, it was put into forms that made its value recognizable even to laymen: coins. With the standardization of these coins into large and small value units, Pheidon achieved a major success around 700 BC. Now even money could be exchanged as a medium of exchange for other mediums of exchange! From this point at the latest, money also revealed its worst dark side: it corrupts. Anyone who created money without authorization (counterfeiters) or appropriated it (thieves), anyone who was able to increase or decrease the value of money (coin changers), was able to create an advantage for themselves at the expense of the community. Murder has probably existed ever since emotions found their way into the human race. Presumably for millions of years. Even the extraction of food from living beings is ultimately nothing more than murder. But "base motives" are a number higher, you have to become human to do that. Theft has probably only become important since the formation of property (with settling down). Because without property, no unwanted transfer of ownership can take place. But it was the invention of coinage that made it possible to enrich oneself on a grand scale by taking advantage of one's fellow human beings. Fraud, drug dealing, prostitution, violence and murder for profit: Everything first needed a compact, easy to collect and transportable intermediate medium of exchange. This is why their "invention" coincides with the development of money.
Revenge, gluttony and money: there shouldn't be much more that distinguishes us from animals.

Coins as a standardized, easy-to-use medium of exchange revolutionized trade - and the dark side of our existence. Now anything could be exchanged for anything - even with a temporal or spatial shift.

Cash transportation

Only the transportability of money and the standardization of coins made higher forms of state formation and division of labour possible. In the Stone Age, a blacksmith could not have made a living from his work. Although iron as a trace element is an important food component, a horseshoe as such is rather difficult to digest. And an iron ball in the heart is clearly an overdose, as can be clearly seen from the end of life that followed quite quickly. Even if there was already a division of labor in the barter trade, it was the introduction of money that made it possible for a blacksmith to take money for a horseshoe and then exchange this money for chickens and milk.
Incidentally, it is precisely this goal of exchange that is often forgotten in economics (economicemptiness) is very often forgotten: No matter whether we exchange money for lipsticks, cars or jewelry: In the end, we (all of us, whether bankers, car salesmen, blacksmiths or murderers) always need agricultural products in order to enjoy lipsticks, cars or jewelry. What an irony that - after several thousand years of monetary history - we are still dependent on chickens and barley in the end.

The transportability of money, however, now made possible such cool inventions as the division of labor - even over long distances, taxes, handguns (these also help -indirectly- in the procurement of money), exotic foods and every form of prostitution and exploitation such as paid work in factories. It was precisely the invention of ever new weapons in connection with traveling money, which was first made possible by the division of labor, that unfortunately also ensured that unwanted transfers of property became a danger for every traveler, whether he was a tax collector or a normal trader.

Transition to book money

The most important characteristic of money, its ability to be exchanged for desired services and goods depending on time and place, was also - with increasing mobility - its greatest danger. Then as now, it was simply dangerous to travel around with anything of value. Book money as such already existed in the time around Christ. Money could be deposited in a - hopefully - safe place. In return, you were given a worthless piece of paper with the amount of money written on it. Later, this worthless piece of paper could be exchanged for the deposited money. There are probably no records from this time, but it can be assumed that even then there were attempts to keep the useful money away from the useless note: Certainly there was something like Lehmann Brothers or Wirecard or other financial transactors even then.

All the trade listed so far presupposed that the exchange goods involved met at one point ("market").
If a Venetian wanted to sell pepper, someone had to go to India for him, exchange pepper for something (if necessary the life of the poor pepper grower, but that was not sustainable), and come back to Venice with the pepper.
Let's take a closer look at the trade from this point onwards.
Pepper "somehow" arrives in Venice, then the gateway to the world, and now belongs to the pepper importer.
But this pepper importer can't use 25 large sacks of pepper! So he puts the pepper on a marketplace (he "offers it"). 25 pepper merchants smell a deal and buy (exchange money for goods) one sack each.

_{At this point, please don't think about why someone brought these 25 sacks to Venice and where the money from these traders came from. Of course, money and trade were already involved here.}

Now these traders move across the countries and in turn offer this pepper to other traders (= resellers) and end customers (users, consumers). They sell pepper and receive money in return.
When the pepper runs out, they go back to Venice, hopefully with more money than before, and buy new pepper from the pepper importer for some of the money. They use the rest of the money to buy jewelry or build ships to import pepper themselves, or they drink and whore it away in the nearest dive. This creates a whole new money cycle.

In all cases, however, money met goods or goods met money on the markets. No money = no goods. No goods = no money. In principle, the same principle of exchange as around 10,000 BC.

Check transactions / bank transfers

The bankers (from bank, actually a thing to sit on) ushered in a completely new era in 14th century Italy: Check transactions. While sedentarization spread over several thousand years in Eurasia and other continents, intermediate exchange goods (some form of money) only needed a few hundred years to spread throughout the then important world.
Cheque traffic needed the post, fast means of transportation. Fast means of transportation in turn required cheque traffic.

The invention of the non-cash bank transfer is - by its very nature - closely linked to the development of the postal and transportation system . And the intangible is also - to this day - the most abstract form of trade.

Let's take the pepper trade again. A Hamburg merchant wants to buy a bag of pepper in Venice and then sell it (hopefully at a profit) in Hamburg. We already know the traditional way: he takes some gold/money from the sideboard in the hallway, shouts something like "Honey, I'm going to the place where the pepper grows", rides to Venice, buys a bag of pepper in the marketplace and rides back again. Just in time for the crime scene. 2 years later he is back in Hamburg. Never mind, neither Tatort as a television series nor the television itself was invented. But during this time he can't buy any silk in Florence because he and his horse are already busy with the pepper. Stupid. Even more stupid: in between, he is caught by a crook who knows absolutely nothing about the pepper trade. He gives the Hamburg pepper merchant a new middle parting with a club and is a horse and a few gold coins richer as a result. Good for the rake, bad for the pepper merchant and his wife.

Triumph of check transactions

The postal system in conjunction with the bank transfer now made it possible to separate the flow of intermediate exchange funds from the flow of goods. The Hamburg merchant went to a branch of Taxis or another banking house he trusted. The only important thing was that this bank had a branch in Venice and a communication link there. There he said in a firm voice: I would like to transfer these 25 gold ducats, the equivalent of a sack of pepper, to Venice. He handed over these 25 gold ducats to the bank. In return, the bank issued him with a worthless slip of paper with something like "25 gold ducats" written on it, plus some crazy complicated stamps and seals and all sorts of stuff like sender, recipient and purpose. Just as worthless. Still.

Now he sent off a servant with the horse and this note as well as two bundles of Hanseatic cloth. He gave him a few pieces of silver for some wine, women and song . Too little to be killed for. Also too little to buy a sack of pepper. But enough to feed his horse and rider all the way to Venice. Remember: no matter how rich or poor we are, in the end we all live from the agricultural produce of our farmers. At that time, he could still find water in any forest.
Once in Venice, the servant went to the pepper importer with this - now still worthless - note. If this note had fallen into the wrong hands beforehand, the hamburger might have lost a horse and/or a servant. But he would not have lost money that was much more valuable to him! Here, of course, we are talking about the equivalent of perhaps a hundred sacks of pepper, or other valuable trade goods.

The Venetian pepper importer can now take this slip of paper to the local bank branch and exchange this worthless piece of paper for the coveted medium of exchange, "money". And use it to give the servant the sack of pepper and a few pieces of silver for his return home. This pepper is also worthless to the bad guys in the forest, as they usually have no sales network to exchange the pepper for wine, for example.

The previous paragraph reads like the most natural thing in the world because we grew up with it. Source (for the younger ones: that's like Amazon on paper), Ebay, Amazon, a car purchase, wage transfers: Quite normal. But it's not. Until the 14th century, recipients and providers had to meet in order to exchange goods (or services) for each other. A farmhand went to the fields to harvest and left with bread and wine. The hawk went to the tanner with his chickens, handed them over to him and went home with a soft coat. In principle, trading money was no different, except that the chicken was first exchanged for money and then the money for fur. But in both exchanges, the two traders were together in the same place at the same time.

Location-independent exchange

Non-cash money transactions broke this dependence on location!
Please check again: The intermediate exchange commodity money could now simply appear - practically on demand - at any other location within this network! Virtually out of nowhere. This step is the most important in understanding the Target2 balances!

Bank Transfers

Traditional bartering has been described so far: Giver and receiver and both goods must meet in one place to make the exchange.
In the case of transfers, the intermediate exchange goods are NOT moved! No 25 gold ducats are sent from Hamburg to Venice! This is a new revolution in trade, similar to standardized coins or sedentarism. Exchange goods (don't forget: money is also nothing other than an exchange good!) can suddenly "appear" from a source location A at a destination B without actually moving from A to B.

How is that possible?
In the past, this was a simple sleight of hand: the (intermediate) exchange goods were simply held in sufficient quantities at both locations.
If this note is now written in Hamburg, then what happens in Hamburg with the intermediate exchange good money... Nothing. Nothing at all. It simply stays there in the chest. Mind you: in the bank's chest! And at the same time, nothing happens to the money in Venice... Nothing.

Only when the pepper importer gives the note to the local bank and the bank hands him 25 gold ducats from the Venetian gold chest: only at this moment is the intermediate exchange good money moved to its destination and leaves this bank.

As a reminder, nothing has moved in the gold chest in Hamburg at this point! Although the Venetian bank branch has now handed over 25 gold ducats to the pepper importer, not a single ducat is missing in Hamburg! But: The Hamburg bank now owes the bank in Venice 25 ducats.

Debt and interest also only arose with money. But that is a completely different topic.

We stay in Venice for a moment. The servant of the Hamburg merchant had brought something else from Hamburg to Venice on his journey: two thick bundles of silk fabric that the Hamburg merchant had bought in the port of Hamburg. The servant offered these two bales at a Venetian market, and lo and behold, a Turkish merchant bought them from him. For 26 gold ducats. As instructed by his master, the servant took these 26 gold ducats to the Venetian bank branch he had visited earlier. There he handed the coins to the counter, who then wrote him a similar - worthless - note for the Hamburg branch as on the way there. With this note, some change from the pepper importer and a sack of pepper, the servant returned to Hamburg.

As a little reminder:
Nothing has happened in the gold chest in the Hamburger Bank yet! Not a single gold ducat has gone out of there. The bank in Hamburg still has the 25 gold pieces from the beginning in its chest.
In the Venetian bank branch, 25 gold ducats were taken out of the gold chest... and 26 gold ducats were put back into the chest only a short time later. The Venetian branch now has one more gold ducat than at the beginning. The Hamburg branch has neither more nor fewer gold ducats. And the Hamburg merchant has now made a good deal exchanging, trading and selling cloth in Venice. And traded/purchased/traded pepper in Venice.

The servant arrives and, after his exciting but, thanks to the worthless paper, quite safe journey, proudly hands over this paper and a sack of pepper to the merchant.

The merchant takes the - still worthless - piece of paper and carries it to his bank. The bank recognizes the seal, stamp and lettering of its Venetian branch and hands the merchant 26 gold pieces.
The merchant had carried 25 gold pieces to the bank himself a few months earlier. The Hamburg bank now only has to add a single gold piece from its own stock in order to pay the merchant his gold pieces.

To refresh: The Hamburg bank is now missing one gold piece, the Venetian bank now has one too many.
The Turkish, Venetian and Hamburg traders are satisfied. They have exchanged goods - just like 8,000 years ago.
A total of 51 gold ducats were moved: 25 for the pepper and 26 for the cloth. In effect, only the Hamburg bank had to hand over a single gold ducat from its own stock.

Book money

Now things get really crazy: the Hamburg merchant decides not to have the 26 gold ducats due to him paid out . He simply leaves them in the bank. But there is a little booklet in which it says that the bank owes him 26 gold pieces. Hehas a credit balance in the bank, hence the H on today's bank statements and in the financial accounts, from the 15th century to the present day. The Venetian merchant was also somewhat unsettled by the - for him dangerous - gold ducats in his coffers. There are said to have been evil villains in Italy too. He happens to take the 25 gold ducats from the pepper business to the same bank where he had previously received them.

Now the Hamburg bank has 25 more gold ducats in its gold chest than before (from the Hamburg merchant for the pepper).
The Venetian Bank now has 51 more gold ducats in its chest: the 25 gold ducats from the pepper merchant and the 26 gold ducats from the servant, the proceeds from the sale of the bale of cloth.

Now it's time for a balance sheet (the word balance also comes from the Italian roots of money trading):

Hamburg Merchant:
-2 Bales of fabric
+1 bag of pepper
+ 1 piece of worthless paper stating that the bank owes him 26 gold ducats.

Turkish Merchant:
+2 Bales of fabric
- 26 gold ducats

Venetian trader:
- 1 bag of pepper
+ 1 piece of worthless paper stating that the bank owes him 25 gold ducats.

Hamburg Bank:
+25 gold ducats (from the very beginning of the story!)
-1 piece of paper.

Venetian bank:
+26 gold ducats
-1 piece of paper.

"In principle", each of the traders now has what they wanted: pepper and fabric have each arrived correctly. Effectively, however, 2 merchants have now only received a worthless slip of paper for their goods. The banks have 51 more gold pieces in their chests, without the horse and rider and danger.

Let's do the next trade in short form:

Hamburg merchant receives a note for 25 gold pieces, sends servant with cloth to Venice, who exchanges note for pepper, cloth for 26 gold pieces, 26 gold pieces for note, rides back.

The Venetian Bank now has ... 52 gold ducats (and its own supply). The Hamburg Bank still has 25 gold ducats (and its own supply) in its chest. All three merchants are satisfied again. This time, not a single ducat has been moved in the Hamburg bank! The Venetian bank now has 52 gold pieces.

We can spin this trade out further: Servant is robbed, pepper is stolen. Merchants have to pay fees to the bank for this service. Disadvantage for the bank? None! The banks involved still have the 77 gold ducats + a little fee money.

That alone is outrageous, if you think about it. And yet it is precisely this injustice that forms the basis of almost all subsequent commodity swaps: The bank always wins. Even in these transactions alone, where it only exchanges valuable money for worthless pieces of paper.

But that was nowhere near enough. The two banks have now sat down together and had a quick think:
The customer gives us his money so that we can transfer it to Italy.
As a reminder: the money itself never moved from Hamburg to Italy or back!
But if the money doesn't move at all... then we don't need it!

Now the Hamburg merchant wants to buy 3 sacks of pepper. He has a balance of 25 gold ducats in his bank. He has the Hamburg bank fill out a slip of paper that says: 75 gold ducats. A piece of paper. These slips of paper were later called checks, and the older ones among us still know them.
Servant to Italy, WITHOUT fabric.
The farmhand goes to the pepper importer with the piece of paper. He gives him 3 sacks of pepper.
Servant rides home with pepper, importer gives the paper to the bank.
They write in a large book (hence "bookkeeping"): We owe the pepper importer 75 gold ducats. The Venetian Bank still has 52 gold ducats! And a book stating that it owes the pepper importer 75 gold ducats.

And again, everyone is happy! The Hamburg bank now has claims against its merchant. After he has sold the pepper, he gives his bank the 75 gold ducats he has earned (or much more if he is a good merchant). The Hamburg bank now has 100 gold ducats (and perhaps a little more). The Venetian bank still has 52 gold ducats and a worthless book with the title "Liabilities".
The banks have created the first money. The Venetian Bank now has 75 gold ducats as book money. It could never pay it out, as it only has 52 gold ducats.
At this point, however, the Hamburg bank could step in, as it has the missing gold ducats in its chest!

Money creation

OK, the two banks actually have - in total - the traded gold ducats in stock. But... they don't need them!

Now the Turkish fabric merchant returns and proposes a deal to the Venetian bank: He knows a merchant from Hamburg who sells great fabrics. He can sell these fabrics really well in his home country, with a good profit (i.e. an increase in the value of the traded goods: the trade has resulted in many rich families, estates, cities and countries. But that's another topic). Unfortunately, he does not currently have enough money to buy cloth from the merchant. Couldn't the bank help a little...?
And the bank can. The Venetian bank informs the Hamburg bank and the Turkish merchant informs the Hamburg merchant that fabrics are to be purchased for 144 gold ducats.
The Hamburger sends his servant to Italy with 4 bales of cloth. The Hamburg bank does not have 144 gold ducats! It only has the 100 gold ducats from the Hamburg merchant. In the meantime, they have put the one gold ducat from the beginning into decoration, as business is going well.
The Venetian Bank does not have 144 gold ducats either! It only has the 72 gold ducats from the previous transactions.
And yet the deal goes ahead. The servant receives another slip of paper with 144 gold ducats on it, the Turkish merchant the 4 bales of cloth. Perhaps the servant also takes a pretty Italian girl or pepper or something else, but that is no longer important. The Venetian bank has now lent money that it doesn't even have. It has given a "loan". Cloth was sold from Hamburg to Italy, without money or anything else in return. Just for a piece of paper. If the Turkish merchant returns from Turkey a few weeks later and gives the bank the 144 gold ducats (and a little more for the interest), the Venetian bank now has 144 + 72 = 216 gold ducats! The Hamburg bank still only has its 100 gold ducats. The bank first "invented" 72 gold ducats. It supported a transaction for 144 gold ducats, but only had 72 itself, so it simply made up the missing 72 gold ducats: It has created book money.

At this point, we now come to the bank liabilities. The Italian bank has 72 gold ducats and a promise to pay - a security - for a further 72 gold ducats from the Turkish cloth merchant.
Should the Hamburg merchant now come up with the funny idea of having his balance paid out - which is now 244 gold ducats - the Hamburg bank has a problem: it only has 100 gold ducats in its chest. The missing 144 gold ducats would first have to be moved from Italy to Hamburg. But there are only 72 gold ducats in Venice too! The missing 72 were simply made up.

Where every normal person is already thinking, a banker is just getting started!
In fact, there are still 100 gold ducats in Hamburg and 72 gold ducats in Venice. So the bank as a whole could still grant another loan for - let's say - 172 gold ducats. If these are not drawn down, but are only on the books as a loan, further loans of 172 gold ducats could be granted. The book money multiplies. If these loans are actually serviced correctly, the bank will end up with the 72 gold ducats initially invented and the 3 additional loans granted = 516 gold ducats as real money in its coffers.

As Berthold Brecht so aptly put it: Bank robbery is an endeavor of dilettantes. True professionals set up a bank. People even voluntarily carry their money into the bank! But that is not surprising, because they are useful for any form of time- or well-displaced trade. If we didn't have banks, we would have to invent them.

Who does this made-up money belong to?

Well... interestingly enough, it doesn't even matter! It was created out of nothing, and that's exactly how much it's worth: nothing. If the debt is paid correctly by the debtor, the balance of this invented money is then: 0. It was created out of nothing and disappears into nothing again. In the end, all that remains for the bank is the interest it charges on the invented money. The book money simply dissolves again.

How can a bank go bankrupt?

It could simply continue to "invent" money. Wirecard has actually tried that. But it's not that simple. Money is always a debt. Money only exists if someone has entered into a debt obligation. The chickens were exchanged for money: the person who spent the money (or later: the person who passed the money on) guarantees to exchange something worth the value of the chickens back later, otherwise the money would be worthless again. It lives from this trust. Even if it has traveled through hundreds of corners and thousands of exchanges, the chicken trader must be sure that he will receive something worth the real value of his chickens in the end. If money loses this property, it loses its value as a medium of exchange. And money has no more value than just that. This is why unbacked paper currencies are generally doomed, as Germany and Symbabwe have shown once again. Not by nature, by the way, but because states are generally unable to budget.

But what happens if the Hamburg resident really wants the 244 gold ducats to which he is entitled? In our example calculation, they hand over the available 144 gold ducats and go bankrupt. They simply don't have the missing 72 gold ducats, so they suffer a shortfall. The receivables remain, so that "someone" will one day have the missing 516 gold ducats and the Hamburg merchant will still have 72 gold ducats less. Banks are therefore "systemically relevant" and are provided with an incredible amount of money by us taxpayers - in addition to the invented 516 gold ducats.

Money generation

This principle of the simple production of money was the next big step: previously, the medium of exchange had to be "produced" (or better: obtained) through a lot of work. As a result, the medium of exchange was already inherently labor-intensive, it had something like a built-in (inherent) value, was inherently scarce and coveted, whereby the desire for gold in particular was always a fictitious need: you could hardly do anything useful with it. It was only in modern times that an ndustrial demand for low-oxidation metals with perhaps super electrical properties arose. Before that it was - pretty. That's why the Aztecs had so much gold, but it wasn't worth much to them. Stupid that the Spanish noticed that.

Rulers now discovered the sensational possibility of creating money more simply: You take paper and write a number on it. As with the creation of money by banks, there is no service behind it. But: first you have to put this piece of paper into circulation! A ruling system (today with the same meaning: state system) had to buy power for this piece of paper. Otherwise this piece of paper could not be introduced into the economic cycle: It would again have no value if you simply handed it to someone in the marketplace. Modern money makers were well aware of this fundamental disadvantage of paper money. Therefore, money was often a promise, e.g. that the equivalent value of the number written on it could be exchanged for gold. Someone who had a piece of paper with the number 5 on it could go to the ruling system (the state) and say in the same loud voice of the pepper merchant: "I would like 5 gold ducats for this worthless piece of paper. The state would then have had to give him these 5 gold ducats... or should have.
However, practically every ruling system (state system) became too stupid at some point: why should any promise be kept? So the gold backing was gradually abolished, and this piece of paper was now really worthless. It was nothing but an uncovered loan, a promise of debt without liability.
States that issue paper money are nothing other than banks that invent money. A banknote is a loan from this state. The state's liability is limited to the fact that "someone" in this association of states will give or do something for this note. Note: A state as such cannot do anything for this note. Only the members of this state can guarantee this value among themselves. Paper money is an exchangeable credit, by definition. That's why states don't like counterfeiters: they mess with the state's business. They do nothing else: they create an uncovered promise of value out of nothing. However, this criminal act per se is reserved for the ruling system "state". In this way, the useless paper note becomes a scarce commodity again, the basis for an intermediate medium of exchange.

This finally brings us into the modern age:

Target2

If you now understand the nature of book money ("notes") and money creation ("inventing money"), it is only a small step to understanding Target2.
In our example, Target2 is nothing more than a message from the Venetian bank to the Hamburg bank: "You, we still owe you 144 gold ducats".

In a functioning monetary cycle, the pepper, for example, would move again, thereby reducing these debts of 144 gold ducats. Or Italy could really send a chest of gold ducats to Hamburg. But that only exists in our model calculation and in dreams.
In the European monetary cycle, however, goods - especially from Germany and Austria - are bought by countries such as Greece, Spain and Italy. These countries have no gold ducats. They say to their central bank: We owe you a few billion gold ducats. And the German central bank says: OK, take your time. Money creation, i.e. the creation of book money, is taking place. In simple terms: money is printed.

As the debts of the European countries cannot be repaid (any more) anyway, not even by our children or our children's children, it really doesn't matter. The euro is already doomed to its own demise. In commercial terms, of course, this is the worst possible outcome for a currency. But that shouldn't worry us too much: So far, every unbacked currency (again, that's a separate issue) has gone down the drain, and in the case of the euro, this self-destruction has simply been built right into the currency.
However, this does not distinguish the euro from other unbacked currencies: Every unbacked currency is a loan from the state to its citizens - guaranteed and redeemable by the citizens themselves. The value of a currency therefore depends on the performance of its citizens and the budget of the corresponding ruling system. And since - as we learn from history - states never do well in the long term, every national currency is doomed to decline in the long run. Banks are no different from states in this respect.