Term Deposits(1)

Sometimes when I receive my salary, I will not need it all in the next fortnight. I might build up the size of my deposits in the bank to the level where I have a couple of thousand dollars that I do not want to spend until some time in the future.

In this case, I might want to put the money on a term deposit, so I can earn some interest as a reward for not using it immediately. This is a different type of transaction from the demand deposit. I am agreeing to let the bank have the use of the money for a specified time. I am allowing the bank to decide how to lend the money. I expect them to do this in a way that will keep my money safe, while earning a good return.

This is different from the demand deposit, so the analogy of the warehouse does not apply. This transaction is more akin to someone who leases a piece of machinery. If a person owns a tractor, but has no way to make use of it, the tractor brings them no benefit. If they can find a farmer who needs, a tractor, they can lease it to the farmer for use on his farm. The farmer is better off because he has the use of a tractor. The tractor owner is better off, because his tractor now earns him some income.

The same applies with cash sitting in a demand deposit for month after month. If I do not want to spend it immediately, I am better to lease it to someone else who can use it productively. They are better off because they have capital that they did not have. I am better off, because they will pay me for the use of the money. This is the nature of a term deposit. I am making a loan to someone who can use it more efficiently in return for interest. The interest is really just the rent or lease for the use of the money.

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