Demand deposit

Demand deposit

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Encyclopedia
Demand deposits, bank money or scriptural money are funds held in demand deposit accounts in commercial banks. These account balances are usually considered money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...

 and form the greater part of the money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...

 of a country.

History


Traditionally, demand deposits only referred to funds held in checking accounts (or cheque offering accounts), however, financial innovation has allowed easier access to funds from other types of accounts (e.g. savings account
Savings account
Savings accounts are accounts maintained by retail financial institutions that pay interest but cannot be used directly as money . These accounts let customers set aside a portion of their liquid assets while earning a monetary return...

s, money market account), and these funds are sometimes also referred to as demand deposits.

In the United States, demand deposits arose following the 1865 tax of 10% on the issuance of state bank
State bank
A state bank is generally a financial institution that is chartered by a state. It differs from a reserve bank in that it does not necessarily control monetary policy , but instead usually offers only retail and commercial services.A state bank that has been in operation for five years or less is...

 notes; see history of banking in the USA.

Money Supply


Demand deposits are usually considered part of the money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...

, as they can be used, via checks
Cheque
A cheque is a document/instrument See the negotiable cow—itself a fictional story—for discussions of cheques written on unusual surfaces. that orders a payment of money from a bank account...

 and drafts, as a means of payment for goods and services and to settle debts. The money supply of a country is usually held to consist of currency plus demand deposits. In most countries, demand deposits account for a majority of the money supply.

During times of financial crisis, bank customers will withdraw their funds in cash, leading to a drop in demand deposits and a shrinking of the money supply. Economists have speculated that this effect contributed to the severity of the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...

.

This did not happen, however, in the financial crisis that began in 2008. In fact, demand deposits in the U.S. increased dramatically, from around $310bn in August 2008 to a peak of around $460bn in December 2008.