Checkable Deposits

3 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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  eBook - ePub

  Money, Banking, and the Business Cycle

  Volume I: Integrating Theory and Practice

  • Brian P. Simpson(Author)
  • 2015(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Checking deposits represent the largest component of the money supply today. Technically, they are not money but money substitutes, since they are claims to money held by the issuing bank. However, as long as the bank is not in financial trouble the checks circulate as the equivalent of money. When banks get into financial trouble, their checks might not be accepted in trade. In cases like these, the checking-account funds at such banks cease to be money because they are no longer a medium of exchange. 2 But this occurs infrequently and can be taken into account if necessary when measuring the money supply. It is proper to count checking deposits as a portion of the money supply under normal circumstances because they are generally accepted as a medium of exchange. As a part of the checking deposit component of the money supply, I include all accounts on which checks can be written. This includes personal and business checking accounts, money market deposit accounts (MMDAs), money market mutual funds (MMMFs), government checking deposits (at the federal, state, and local levels), and checking deposits of foreigners at US banks (whether foreign governments, banks, etc.). I discuss qualifications to some of these below. I also include certified checks, cashier’s checks, money orders, and traveler’s checks as a part of the checking deposit portion of the money supply. Another category of money is standard money. While not a separate component of the money supply, standard money is important to have knowledge of if one wants to have a good understanding of money and be able to explain the business cycle. Standard money is money that has ultimate debt paying power and is not a claim to anything further. Today it consists of coins and paper money. It used to be gold when countries were on the gold standard. When countries were on the gold standard, paper money was merely a claim to the gold deposited in banks

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  Macroeconomic Analysis in the Classical Tradition

  The Impediments Of Keynes's Influence

  • James C W Ahiakpor(Author)
  • 2021(Publication Date)
  • Routledge

    (Publisher)

  However, by including Checkable Deposits in “money,” the variation of whose quantity constitutes monetary policy, many economists are inclined to accept the imposition of 100% reserve requirement as a legitimate policy tool. But checks and Checkable Deposits do not circulate, even as they may be the dominant means of payment in a modern economy. The evolution of modern banking, from the goldsmiths’ custodial services to money depositors of old into their lending most of the public’s savings, has served to promote economic growth, just as Adam Smith explained. Only by failing to appreciate the economic harm that the imposition of 100% reserve on Checkable Deposits would cause that many economists, 53 including some Noble Prize laureates, have supported the proposal. Remarkably, even as John Maynard Keynes’s (1930) treatment of banking and money influenced the conception of the 100% reserve proposal, he declined being its advocate when Fisher asked for his support in 1944: “I am satisfied that in British conditions anyhow … we can obtain complete control over the quantity of money by means much less capable of exciting unfavorable comment and opposition” (July 7, 1944, letter from Keynes to Fisher, quoted in Allen 1993: 715, n

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