Demand Deposit (1)

The demand deposit is the most basic tranaction I can make with a bank. Most deposits in cheque accounts are demand deposits. The demand deposit is not very well understood, but it at the core of the problems of the modern financial system.

When I get paid, my salary goes into my bank account. I am not lending my salary to the bank. I intend to spend most of my pay in the fortnight before I next get paid. I want to be able to spend that money whenever I choose for whatever I want to buy. This is the benefit of a demand deposit. My money is available on demand. I can withdraw my money when I demand it.

When my salary goes into the bank, I have not transferred the ownership of that money to the bank. The money is mine. It does not belong to the bank.

The current accounting process is that the bank records the cash it has received as an asset and records it responsibility to me as a liability. This is wrong. The cash does not belong to the bank. It belongs to me. The cash will be an asset on my balance sheet, so it should not be on the banks accounts as an asset as well. An asset cannot have two owners. This is the root of the problems with the modern banking system.

The full series can be viewed at Bank Deposits and Loans.