A Note on the Liquidity and Stabilization Effects of Savings Deposits

Money, conventionally defined as demand deposits and currency held by the nonbank public, has two principal functions. It serves as a medium of exchange and as an asset conferring perfect liquidity on the holder.Savings deposits in commercial banks, savings and loan associations, mutual savings banks, credit unions, and the postal savings system are almost like money. For all practical purposes, they are perfectly liquid assets, or at least considered as such by depositors, and therefore substitutable for asset money. Because interest is paid on savings deposits, and not on demand deposits (except for an implicit return received through checking services provided below cost), it can be reasonably argued that the long-term asset demand for money (money that people expect to hold over six months) is considerably less than it would be in the absence of savings deposits. This does not mean, however, that the sum of currency, demand deposits, and savings deposits measures what the demand for money would be if savings deposits did not exist. Some savings deposits are certainly held in lieu of nonmonetary assets.