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Bank Deposits are Not Idle


From my Mises Canada article yesterday, I address the question of whether bank deposits are idle? Or are they held for a reason, albeit a reason that the depositor might not know about yet?

Advocates of fractional-reserve banking err in claiming that deposits are “idle”. The prevailing belief amongst this group is that depositors don’t have any present need for their funds, and so they give them to the bank to care for them (or invest) until that point in time when they do need money.

Austrian economists are in a good position to assess the role of bank deposits in the economy. The reason is that this group is amongst the few economists who understand what money represents and where its usefulness stems from.

We hold cash balances to shield us from uncertain future expenditures. Instead of being idle resources going unused in our accounts, like fractional-reserve banking advocates think, money on deposit is performing the very task we want it to. When banks make use of these deposits they create a conflict as they take that good which is performing a task for the depositor and put it to another use. Read more here.

David Howden is Chair of the Department of Business and Economics and professor of economics at St. Louis University's Madrid Campus, and Academic Vice President of the Ludwig von Mises Institute of Canada.

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