The Functions of Money: Checkable Deposits as a Form of Money

Checkable Deposits as a Form of Money Federal Reserve notes, along with the coins minted by the federal government, which constitute the nation's currency, are not the only means of paying off debts. A check serves the same function as currency because it can be used to pay for purchases and pay off debts. Checkable deposits is money deposited in bank accounts that can be used to write checks accepted to pay debts, or that can easily be converted to currency. Paying by check has the advantage of safety. A check is made payable to a specific party and must be endorsed by that party before it can be converted to currency or before funds can be transferred from the payer's account to the recipient's account. Paying by check also avoids the risks associated with transporting sums of currency. Thieves find currency a more desirable target than checks, which require endorsement before they can be cashed or deposited. Checkable deposits are money because they are accepted as a means of payment for goods and services and also perform the other major functions of money. The convenience of paying by check (or electronic transfer of checkable deposits), particularly when large sums of money are involved, explains why, as you'll soon see, the bulk of the money stock is held in the form of checkable deposits rather than currency. Checkable deposit accounts are offered by various types of specialized firms called depository institutions. These institutions are commonly called "banks" and include commercial banks, savings and loan associations, savings banks, and credit unions. Commercial banks are firms that acquire funds by accepting checkable deposits and savings deposits from households and business firms and use these funds to make loans for a wide variety of purposes. Commercial banks such as the Chase Manhattan Bank and the Bank of America make both short-term and long-term loans to a variety of businesses and to individuals seeking credit. These banks also extend credit to governments by purchasing government bonds. Savings and loan associations are depository institutions that acquire funds chiefly through attracting savings deposits and have, in the past, specialized in making mortgage loans. Mutual savings banks are depository institutions operating in some states that are similar to savings and loan associations because they primarily attract savings deposits and in the past have specialized in making mortgage loans. Mutual savings banks are owned by their depositors and are concentrated in New York State and the New England states. Credit unions are depository institutions whose depositors, called members, belong to a particular organization such as a business firm or govern-ment. Credit unions make loans only to their members for the purpose of financing homes or personal goods and services (such as cars). Savings and loan associations, mutual savings banks, and credit unions are commonly called "thrift institutions," because they encourage saving by households and small businesses. Prior to the late 1970s, checkable deposits were mainly available at commercial banks in the United States. Up to that time funds in checkable deposits didn't earn interest. Since that time changes and reforms in the U.S. financial industry have allowed thrift institutions to issue checkable deposits and have modified the restrictions on the types of loans all depository institutions can make. Checkable deposits are now available at thrift institutions as well as at commercial banks, and some special checkable deposit accounts pay interest. For example, checkable deposits are available at savings and loan associations and mutual saving banks as NOW (negotiable order of withdrawal) accounts that permit check writing on the sums deposited in interest-bearing savings accounts. ' Commercial banks offer ATS (automatic transfer of savings) accounts that transfer funds from an interest-bearing savings account to a noninterest-bearing checking account when a check is written. The funds in an ATS account therefore earn interest until checks written on the account result in withdrawal of funds and transfer to the checking account. Demand deposits are noninterest-bearing checkable deposits held at commercial banks. Over two thirds of demand deposits at commercial banks are held by business firms and largely represent deposit accounts of corporations. Total checkable deposits in the nation are the sums in demand deposits, NOW accounts, ATS accounts, and other checkable deposits. What Money Is Not You should review the preceding discussion of money and its functions and make sure you understand how the functions of money can be used to define money itself. Be careful not to confuse money with other important economic concepts. Although money is a store of value, it is not a productive input. Do not confuse money with capital. Money can be used to purchase investment goods that add to the nation's capital stock. However, this is simply because money is the medium of exchange. Also, do not confuse money with bonds and other debts of corporations. These bonds can be sold for money. However, the bonds themselves are not a medium of exchange. Bonds are securities issued by corporations and governments representing the promise to make periodic payments of interest and repay a debt of borrowed funds at a certain time. Do not confuse money with income. Income is measured as a flow of dollars over a given period. It's convenient to measure income as a money sum because, after all, money is the standard of value. However, money itself is merely an asset that is held mainly in bank accounts and as currency in people's pockets and purses or in vaults. Do not confuse credit cards with money. If you've ever used a credit card, you know it's accepted almost as readily as currency as a means to purchase goods and services. However, when you make a purchase with a credit card you really are incurring a debt that must be paid with money at a later time. Most credit card companies give you a specified period in which to repay your loan. After that point you must pay interest on your debt. You cannot use credit cards as a store of value. But credit cards have allowed many Americans to economize on the amount of money they hold. Rather than having to use money in checkable deposits each day for purchases, they can hold more bonds and other interest-bearing assets that they liquidate on a monthly rather than daily basis to pay their credit card bills.