Interbank Deposit

1 Key excerpts on "Interbank Deposit"

• 

  eBook - ePub

  Introduction to Economics

  • John Roscoe Turner(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  A bank may be likened to a reservoir from which capital (purchasing power) flows in the form of credit. Surplus funds flow into the bank and become the basis of credit issues, which flow out to the places where capital is needed. Thus banks become equalizing agencies of finance throughout the community. Small driblets of idle capital are collected by the banks and consolidated into huge funds capable of meeting the demands for large capital on the part of great industrial establishments. In this way the banks put idle capital to work and they arrange capital in such volumes that it can work most effectively.

  10. Deposits.

  Individuals might retain their own funds, might disappoint the burglars by hiding them in unsuspected places, or at enormous expense keep burglar-proof vaults, but a division of labor is better which allows one man to make it his business to provide a place of safekeeping and so do this work for all. Those who intrust their funds to a bank are called depositors and the funds so intrusted are deposits . The bank holds itself ready to pay the depositor at any moment, or "on demand." Individuals would rather leave their means "on deposit" than to bear the risk and inconvenience of carrying them about. Consequently, even the most wealthy carry little money with them; they carry instead the right to draw money. Thus risks and inconvenience are reduced to a minimum.

  But the money deposited is small in comparison with the deposits made through discounting. A simple illustration will show how deposits are thus made. A merchant who sells on time furnishes a farmer with tools, fertilizer, and seed, taking in exchange his note for $500, which will mature four months hence, when he sells the crop. The merchant cannot exchange this note to distant commercial houses for goods, as such houses would not take the note of a man, though of high moral honor and financial ability, who is unknown except in his home community. But such houses make it a practice to accept the credit of banks. The merchant wishing to use in his business the $500 called for in the note will wish to trade this promissory note to the bank for its generally accepted credit. He indorses this note and presents it to the local banker, who (knowing both the maker and indorser to be honest and able to pay, and knowing further the power of the law to compel payment) is willing to trade the credit of his bank for it. Inasmuch as the note will not mature for four months he will not give in exchange the credit of the bank to the full face value of the note, but accepts the instrument at its present worth ($500 less interest for four months). The merchant is now at liberty to take his pay for the note, for instance, $490, in either of two ways—he may take the cash, or he may leave it with the bank as a deposit and take away a pass-book which evidences the deposit, and a check-book which enables him to draw in such amounts and at such times as he finds convenient. The latter is the usual method followed in this country, therefore in discounting a customer's note the bank increases its own deposits. What does this illustration show a deposit to be? From the standpoint of the bank, a deposit is the bank's promise to pay money to a person or corporation. From the standpoint of the depositor, a deposit is the right to draw upon the bank.

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