It is easy to say, as the layman does, that a commercialbank "is a place to keep your money.”So it is，but to put itthus is an oversimplification. Commercial banks hold different kinds of deposits and hold them in a variety of forms. There are also other places to keep your money, ranging from the cookie jar to a mutual investment fund.
The most useful way to examine the depository function of the commercial banking system is to look at the purposes for which money is deposited. Again, the average person's concept is likely to be misleading - "For convenience, "he says, "or for safety. " These are partial truths that shed little light on the functional role of banks as depositories.
Demand deposits in commercial banks constiture the major portion of the money supply. A primary function of money is its use as a means of payment. Consequently, one of the most important reasons for becoming a bank depositor is to use the payment facilities of the commercial banking system. Demand deposits also frequently consist of funds kept with a bank to support credit requirements or to compensate the bank for a wide variety of banking services. All such funds can be collectively designated working balances. Whether held by individuals or corporations, working balances are funds needed in the transaction of daily business and cannot be invested even temporarily. They are funds that must be kept in the most liquid of all forms- money.
Money has another primary function-that of providing a reservoir of purchasing power for the future. It shares this attribute with a number of other assets that can normally be exchanged for money on short notice and with minimum risk of loss. Such assets include short-term government securities, commercial paper, bankers' acceptances, and, for individuals, funds held in depository forms, such as bank savings deposits or savings and loan share accounts. These assets are held for reasons of liquidity(known or anticipated future expenditures) and, in contrast with working balances and longer-term savings, may be designated investment funds or liquidity reserves. Such funds generally seek the highest available interest return consistent with ready or specific availablity at minimum risk.
Finally, funds may be deposited in commercial banks for accumulated savings purposes. Such funds are usually accumulated by individuals over relatively long periods of time for nonspecific purposes, such as the proverbial rainy day, retirement, or unknown personal emergencies. These funds have greater stability than investment funds, and the latter, in turn, are less volatile than working balances.
It is important to recognize that form does not necessarily follow function in bank deposits. A considerable number of depositors still keep their liquidity reserves-and, in the case of individuals, even their savingsin the form of idle demand deposits. The past reluctance of some banks to seek time deposits aggressively stemmed from their appraisal of the degree to which depositors kept a portion of their liquidity reserves in noiiinterest-bearing demand deposits. Conversely, some individuals may try to keep their working balances in savings accounts, although commercial banks discourage this practice because of the resulting abnormally high, costly account activity.
Essentially, demand deposits are likely to represent working balances; time deposits(other than savings deposits) usually consist of the liquidity reserves of corporations, including municipalities and foreign banks, and of individuals when banks offer higher rates on longer-term certificates of deposit. Savings deposits are likely to represent a combination of accumulated savings and investment funds or liquidity reserves of individuals.
Because commercial banks are the primary source of commercial and industrial loans and because they operate the payments or check collection system, they have little competition for the deposits that represent purely working dalances. This is the bread-and-butter business of the commercial banking system. For investment funds and savings deposits, the competition is very keen and has grown keener with the postwar rise in interest rates.
