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A demand deposit or bank money refers to the funds held in demand deposit accounts in commercial banks. These account balances are considered money and usually form the greater part of money supply.
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Traditionally, demand deposits only referred to funds held in checking accounts (or cheque accounts), however, financial innovation has allowed easier access to funds from other types of accounts (e.g. savings accounts, money market account), and these funds are sometimes also referred to as demand deposits.
In the United States, demand deposits arose following the 1865 tax of 10% on the issuance of state bank notes; see history of banking in the United States.
Demand deposits are usually considered part of the money supply, as they can be used as a means of payment for goods and services and to settle debts, by means of checks and drafts. The money supply of a country is usually held to consist of currency plus demand deposits. In most countries, demand deposits make up the greater proportion of the money supply.
During times of financial crisis, bank customers will withdraw their funds in cash, leading to a drop in demand deposits and a shrinking of the money supply. Economists have speculated that this effect contributed to the severity of the Great Depression.
This did not happen, however, in the financial crisis which began in 2008. In fact, demand deposits in the US increased dramatically, from around $310bn in August 2008 to a peak of around $460bn in December 2008 . The existence of FDIC insurance no doubt accounts for this.