Demand deposits or checkbook money are funds held in demand accounts in commercial banks. These account balances are usually considered money and form the greater part of the narrowly defined money supply of a country. Simply put, these are deposits in the bank that can be withdrawn on demand, without any prior notice.

History

In the United States, demand deposits arose following the 1865 tax of 10% on the issuance of

state bank A state bank is generally a financial institution that is chartered by a federated state, as opposed to one regulated at the federal or national level. State banks differ from a reserve bank in that it does not necessarily control monetary polic ...

notes; see history of banking in the USA. In the U.S., demand deposits only refer to funds held in

checking account A transaction account, also called a checking account, chequing account, current account, demand deposit account, or share draft account at credit unions, is a deposit account held at a bank or other financial institution. It is available to the ...

s (or cheque offering accounts) other than NOW accounts; however, in a 1970s and 1980s response to the 1933 promulgation of

Regulation Q Regulation Q ( 12 CFRbr>217 is a Federal Reserve regulation which sets out capital requirements for banks in the United States. Updated as required. The version of Regulation Q current was enacted in 2013. From 1933 until 2011, an earlier version ...

in the U.S., demand deposits in some cases came to allow easier access to funds from other types of accounts (e.g.

savings account A savings account is a bank account at a retail bank. Common features include a limited number of withdrawals, a lack of cheque and linked debit card facilities, limited transfer options and the inability to be overdrawn. Traditionally, transa ...

s and money market accounts). For the historical basis of the distinction between demand deposits and NOW accounts in the U.S., see Negotiable order of withdrawal account#History.

Money supply

Demand deposits are usually considered part of the narrowly defined

money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circul ...

, as they can be used, via checks and drafts, as a means of payment for goods and services and to settle debts. The money supply of a country is usually defined to consist of currency plus demand deposits. In most countries, demand deposits account for a majority of the money supply. Krugman, Paul R., and Robin Wells. Economics. New York: Worth, 2006. Print. 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. 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.

References

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History

Money supply

See also

References