Demand Deposit - Money Supply

Money Supply

Demand deposits are usually considered part of the narrowly defined money supply, as they can be used, via checks and drafts, as a means of payment for goods and services and to settle debts. The money supply of a country is usually held to consist of currency plus demand deposits. In most countries, demand deposits account for a majority 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 that began in 2008. In fact, demand deposits in the U.S. increased dramatically, from around $310bn in August 2008 to a peak of around $460bn in December 2008.