| Can they? Most 'central banks' dont really offer banking services. Eg: you can't deposit to the federal reserve. So the question is what to do with your money, that is both (a) easily transferable (b) auditable (c) safe Government bonds are the traditional answers to these. They offer all of a,b,c. And until now they even offered extra money, aka interest, as bonus. I think the best way to understand bonds is the old fashioned paper bonds. There was 2 parts: a primary part representing the money down, and a detachable 'coupon', say 5 of them for yearly interest for five years. So every year you'd bring the appropriate coupon in and get your interest. At the end, you'd get your money back which is represented by the main bond. Or more likely trade it for another bond. All this means is the coupons now represent how much you have to PAY the government for issuing the bond. So it's more like a maintenance fee, rather than 'interest'. Or another analogy, safe deposit box fee. Bank account fees. Etc. Money in the mattress, in physical vaults, safe deposit boxes all have the following property: (a) difficult to value (gotta count all those bills! who's doing the counting? is it auditable? did any 'shrink' somehow?) (b) costs quite a bit of money to just store ($100m is a lot of bills! it weighs a lot! it can get set on fire!) (c) not so easy to transfer. As a result of all of the above, it's unlikely to be usable as collateral. Since the primary target is banks, they need 'liquid' assets that they can present to their auditors to prove they have reserves for their deposits. |