Money & Demand Deposits

Money is broadly known as something that is used as a means of trade and is accepted by those that use it. It is necessary to detail the features of each other commodity and money in order to differentiate them. As a result, capital differs from other commodities in that it must be comparatively constant in terms of valuation over time in order to function as a store of such value; its value must be persistent over a long period of time. Cash, unlike other investments, can also be used as a standard of deferred payments. Money, unlike other assets, needs to be generally acceptable in order to be used as a unit of exchange. Further, to serve such purpose, money (unlike other assets) needs to be divisible into smaller units. This characteristic enables money to be used a unit of measuring value.

Included among the checking deposits held by banks, demand deposits are payable to the creditors, or their appointed third party, on demand. In essence, the demand deposits are the claims that depositors hold against banks; and are transferrable by either cheques or standing orders. These demand deposits should always be included in the stock of money as they form part of the “credit money” from which banks are able to create money by advancing loans to customers at a fee. In that manner, demand deposits are therefore, in theory, principals from which money (in form of interest) is created in the economy. Demand deposits also form part of the overall amounts that banks can claim to have, as they are included in the circulation of money.

2. What are demand deposits, and why should they be included in the stock of money?