Checkable Deposits

5 Key excerpts on "Checkable Deposits"

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  eBook - ePub

  The Financial System and the Economy

  Principles of Money and Banking

  • Maureen Burton, Bruce Brown(Authors)
  • 2014(Publication Date)
  • Routledge

    (Publisher)

  payments mechanism is the means by which transactions are completed-that is, how money is transferred among transactors.

  Payments Mechanism

  The means by which transactions are consummated; that is, how money is transferred in an exchange.

  If someone now asked you what makes up the U.S. money supply, we hope you would answer “currency held by the public and Checkable Deposits, the primary components of M1.” Checkable Deposits are payable on demand to third parties. For example, if you write a check to your grocer, the first two parties are you and the depository institution; the grocer is the third party. The check in payment for goods purchased is an order for your bank to debit (subtract) a certain number of dollars from your checkable deposit account. The dollars are then credited (added) to the deposit account of the grocer, the third party. Thus, a checkable deposit is a means of payment, and the check is the method used to transfer ownership of the deposit between parties to a transaction. The point is that the check itself is not money; if it were, printing presses would work around the clock! The balances in Checkable Deposits are money.

  Over the years, computer and telecommunications technologies have greatly altered the way in which payments are made. Technological innovations are making checks much less important, and perhaps soon obsolete as a means of transferring purchasing power. Today, we are making an increasingly larger percentage of payments through an

  electronic funds transfer system.

  In this system, payments are made to third parties in response to electronic instructions rather than instructions written on a paper check. Note that an electronic funds transfer system does not eliminate the need for deposit accounts; it is just a more efficient way of transferring funds from one deposit account to another. To pay your grocery bill, for instance, your account is debited by the amount of your bill, and the grocer’s account is credited by the same amount at the time of the exchange. The whole system is computerized so that no written checks are necessary. All you need is an account number and a debit card that you present to the grocer. The grocer, in turn, enters the prices of your purchases into a computer terminal (called a

  point-of-sale terminal

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  Fundamentals of Finance

  Investments, Corporate Finance, and Financial Institutions

  • Mustafa Akan, Arman Teksin Tevfik(Authors)
  • 2020(Publication Date)
  • De Gruyter

    (Publisher)

  2.3 The Definitions of Money Supply and Control of Money Supply Money supply has various definitions as M1, M2, and M3. Their components are pre-sented in Table 2.1. Demand deposit is a type of deposit which derives its name from the fact that the owner of a deposit account may withdraw all or a portion of the amount in his or her account any time. Checks are documents used to withdraw, deposit, or transfer money from a bank account. Traveler ’ s checks are offered by banks and other institutions. They are promises to pay on demand the face amounts of the checks. They are no longer used extensively. Other Checkable Deposits include automatic transfer service (ATS) accounts and negotiable order of withdrawal (NOW) accounts at depository institutions. Money market mutual funds certificates represent the shares of their owner in the mutual funds. The value of the certificate ’ s changes according to the change in the value of the financial instruments in the funds mostly composed of money mar-ket instruments. Repurchase agreement is a way of making a loan. The lender buys an asset, usu-ally securities, from the borrower, thus providing funds to the borrower. The bor-rower repays by buying back the asset at a prearranged time and price. Table 2.1: Money Supply. M  Currency in circulation Traveler ’ s checks Demand deposits at banks Other Checkable Deposits M  M  Plus: Savings accounts Small-denomination time deposits Retail money market mutual funds M  M  +M  Plus: Large-denomination time deposits Institutional money market mutual funds Repurchase agreements Eurodollars held by local residents 14 2 Money and Interest Rates Money Creation Mechanism More money in an economy stimulates consumption and thus stimulate production and investment (higher growth). This in turn lowers unemployment. However, this may result in higher inflation also. Less money in an economy lowers consumption and production resulting in lower inflation rate and lower growth.

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  Introduction to Finance

  Markets, Investments, and Financial Management

  • Ronald W. Melicher, Edgar A. Norton(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  Currency comprises nearly 43% of the M1 money supply. Traveler’s checks, offered by banks and other organizations, promise to pay on demand the face amounts of the checks with their acceptance based on the creditworthiness of the issuer. Since traveler’s checks are a widely accepted medium of exchange, they qualify as a component of the M1 money supply. Even so, their relative importance is small, as indicated by the fact that they represent substantially less than 1% of the M1 total. As noted, demand deposits (checking accounts) at commercial banks, and other Checkable Deposits at savings and loan associations (S&Ls), savings banks, and credit unions, also are con- sidered to be credit money, since these deposits are backed solely by the creditworthiness of the issuing institutions when checks are presented for collection. Demand deposits at commercial banks account for over 40% of the money supply. Other Checkable Deposits represent over 16% of M1 and include ATS accounts and negotiable order of withdrawal (NOW) accounts at depository institutions; credit union share draft accounts; and demand deposits at S&Ls, credit unions, and savings banks. Taken together, demand deposit and other checkable deposit accounts comprise a little less than half of the M1 money supply. This high percentage shows the importance of the banking system and its money-creating function within the monetary system and in terms of the broader U.S. finan- cial system. Before moving to a broader definition of the money supply, we should point out some of the adjustments or exclusions that take place when estimating the M1 money supply, or stock. M1 mea- sures transaction balances. These are sums of money that can be spent without first converting them to some other asset and that are held for anticipated or unanticipated purchases or payments in the immediate future. Essentially, only those amounts that represent the purchasing power of units in the U.S.

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  Monetary Economics

  Theories, Evidence and Policy

  • David G. Pierce, Peter J. Tysome(Authors)
  • 2014(Publication Date)
  • Butterworth-Heinemann

    (Publisher)

  In the case of bank deposits, Pesek and Saving argue that there is a clear theoretical difference between the role of banks as producers of demand deposits transferable by cheque and their role as financial intermediaries borrowing funds (e.g. time deposits) at one rate of interest and lending at another. Demand deposits are regarded as a product of the banking industry, sold by the banks for currency, or for financial claims (e.g. government securities), or sold for credit (e.g. bank advances). Bank money, like fiat currency, is seen as being resource-cheap in the sense that the real resources used to produce a unit of bank money are extremely small; in other words, bank money has low costs of production. Because of this bank money cannot be produced under conditions of free entry into the industry. Production is restricted to a limited number of producers so that the price per unit of bank money is kept appreciably above the cost per unit of producing it. Bank money also has certain advantages over fiat currency. Bank deposits are, for example, of variable denomination so that a user of bank deposits may write a 14 The functions, advantages and definitions of money cheque for exactly the amount he or she wishes; there is also less risk of losing bank deposits in the sense of misplacing them. The general acceptability of bank deposits as a substitute for state-issued fiat currency is enhanced by the bank's wilUngness to exchange deposits for fiat currency at fixed exchange rates. This situation Pesek and Saving call the instant repurchase clause. They argue that bank demand deposits are produced and sold by the banks for cash, credit or certain financial claims, but subject to a guarantee that they (the banks) will purchase the deposits in return for fiat currency. According to Pesek and Saving, the fact that banks do produce and sell demand deposits is quite clear because no interest is given on them.

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  Money, Banking, Financial Markets and Institutions

  • Michael Brandl(Author)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Banks provide liquidity, lend in large amounts, reduce transaction costs, and pay returns to investors. Let’s con-sider why each of these things is critically important to the functioning of a market economy. 7-4a Provide Liquidity Think about the differences between bank depositors and borrowers in terms of length of time. In general, depositors want to have access to their funds at any time. To understand why, think about checking accounts, or what we will call “demand deposits.” Let’s suppose someone gets paid the first of every month by having their paycheck deposited directly into their demand deposit account. During the month, this depositor withdraws funds to pay bills, buy food, and so on. Thus this demand deposit account holder wants to be able to convert their demand deposit into other assets in a quick, easy, and inexpensive way. We say that this account holder wants liquidity. Liquidity is defined as the ease and expense at which one asset can be converted into another asset. Demand deposits are very liquid; that is, converting a demand deposit into cash is easy and inexpensive. On the other hand, an automobile is illiquid; that is, it takes a long time and a lot of hassle to sell a car or to convert the car into another asset: cash. Liquidity: The ease and expense at which one asset can be converted into another asset. So, in general, bank depositors such as demand deposit account holders want liquid-ity; they want to be able to convert their bank accounts into cash quickly, easily, and inexpensively. Borrowers, on the other hand, want to borrow for a long time. Think about someone who borrows money to purchase a new car. This borrower is interested in paying back the amount borrowed over the next 4 to 6 years. People who borrow money to buy a house are looking to pay back the money over the next 30 years. This desire to borrow for a relatively long time also extends to businesses who want to borrow money to buy office equipment, machinery, and so on.

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