Bank deposits

For the majority of economists, bank deposits are the form in which money is stored on the liabilities side of banks' balance sheets. Depending on the contractual agreement with the bank, the ownership of bank deposits grants its holder the right to transfer funds to another account, withdraw cash, or make a payment. This last point is made possible because the purchasing power contained in bank deposits conveys to its owner the ability to appropriate part of economic output.

All monetary aggregates held by the public, minus banknotes and coins, are stored in the form of bank deposits in commercial banks' ledgers. Monetary aggregates therefore differ in their degree of liquidity, but share a common form as bank deposits. While his- torically bank deposits took the form of ink on paper, modern banks keep track of their customers' balances with entirely computerized solutions, reducing the physical proper- ties of bank deposits to electronic impulses. The recent development of more efficient payment and settlement systems both within and between countries has helped to reduce transaction costs and settlement risks substantially.

While income is stored in the form of bank deposits, not all bank deposits contain income. Saving, which is income that is not consumed, is the difference between Gross Domestic Product (GDP) and consumption. According to national income accounting, the total value of goods and services is identical to the income generated within a period of time. From this it directly follows that only those bank deposits that are created along- side production of new economic output contain money income. The amount of bank deposits usually greatly exceeds the amount of saving at any given point in time. As of today, however, there is no way for banks or their customers to know which bank deposits contain income.

On which side of the bank's balance sheet must a bank deposit be recorded in order to represent money? While most economists only consider deposits on the liabilities side as money, not everybody shares this restriction in theory and practice. For example, the glossary of the Organisation for Economic Co-operation and Development (2013, Internet) states that monetary aggregates "may be taken from either side [of the balance sheet] (since credit series, which are banking assets, are sometimes labelled monetary aggregates) but are normally taken from the liabilities side". The controversy over this question is rooted in the deeper controversy over the creation of new bank deposits, which has concerned economists since Cannan's (1921) and Crick's (1927) articles on the meaning and genesis of bank deposits. Table 1 illustrates how new deposits are created.

In order to avoid assuming the pre-existence of the very phenomenon economists want to explain, any analysis of the creation of new bank deposits must start from tabula rasa - that is, from a situation in which neither bank deposits nor cash already exist. As is made clear in Table 1, "the additional loan which is awarded to the borrower has an immediate counterpart in the liabilities of the bank, by the creation of an equiva- lent additional deposit" (Lavoie, 2003, p. 508). The notion that loans - recorded on the assets side of the bank's ledger - create deposits - recorded on the liabilities side of the bank's ledger - has been asserted by a large number of economists in history (Withers, 1909; Cannan, 1921; Tobin, 1963; Kaldor and Trevithick, 1981; Borio, 2012) and is a central theme of post-Keynesian economics and, more generally, the endogenous money approach in monetary theory.

See also:

Bank deposit insurance; Bank money; Cash; Endogenous money; Monetary aggregates; Settlement system.