Demand deposits, while not money, clearly perform the function of a reserve of purchasing power for depositors and reduce by so much the amount of money each must keep at hand to meet his current needs of purchasing power.  If the depositor’s credit balance bears no interest, he has no motive to keep a balance greater than he would require of actual money, and he has the motive to spend it or invest it in income-bearing capital whenever his balance (plus his cash in hand) exceeds his monetary needs.[12] Thus demand deposits are often spoken of (somewhat inaccurately) as “deposit currency,” being funds at the command of depositors which are as disposable and as active and current for the monetary function as so much actual money would be.  It is estimated that the rate of turnover of deposits in the United States is about 50 times a year.  We may view the demand deposits subject to check as either a substitute for money or as a means by which the rapidity of circulation and the monetary efficiency of actual money held in bank reserves is multiplied many fold.[13]

The method of payment by bank drafts in domestic exchange reduces the need for, or increases the efficiency of, money in just the same way as does the use of checks.  By the mutual credit of banks in different parts of the country, very large payments may be made in both directions with the movement of only the comparatively small amount of physical money needed to pay the balance after the cancellation of drafts, bills of exchange, and checks.

The use of bank notes reduces the amount needed of other kinds of money more directly, tho not more effectively, than do deposit accounts.  Bank notes are money, and so long as their amount is limited by prompt redemption they circulate instead of so much of other kinds of money.  Redemption is possible by the use of a reserve of standard (or of legal tender) money very much smaller than the amount of notes outstanding.

Sec. 12. #Productive services of banks.# There have always been some erroneous ideas regarding the magic power of banks to multiply the power of money.  But there should be no more of mystery about banking credit than about the nature of money itself.  Banks are the labor-saving machinery of finance.  They gather loanable funds, reduce hoarding, make money move more rapidly, and create a central market between borrowers and lenders for the sale of credit.  While not creating more physical wealth directly, they add to the efficiency of wealth; they simplify and quicken the movement of nearly all commercial transactions.  Banks perform incidentally a further service in developing better business methods in the community.  They enforce promptness and exactitude in business dealings.  In supplying credit to enterprises, banks are constantly passing judgment on the collateral security presented to them and on the soundness of the enterprises that are seeking support.  This gives to bankers great economic power, capable at times of misuse in political and social affairs, especially where a group of selfish men come to exercise a practical monopoly of business credit in any community.