I have been listening to Huerta de Soto talk about Robert Peel's 1844 Bank Act(http://www.youtube.com/watch?v=FQAPGhLNV1M&feature=relmfu) and I have a question about the terminology used (2:18).
He says that the legislation was good because it declared a 100% reserve requirement for all receipts(bank notes/certificates of deposits) issued. Meaning the banks in England could no longer issue more receipts for gold unless the gold actually existed in their vaults. Got that. But then he goes on to say that the same reserve requirement for deposits, introduced by the legislation, did not apply to 'demand deposits' and ultimately that meant the legislation was a major failure.
What does he mean by 'demand deposits'?
It means that the money deposited is available "on demand", as in a checking account. Things like CDs, savings accounts, etc. usually have some sort of stipulation or restriction that keeps the depositor from withdrawing their money before the specified time, or penalizes them for doing so.
Yeah, this is why cheques and other promissory notes say, "Pay to the order of/bearer X dollars and Y cents on demand."
If there isn't a 100% reserves of all demand deposits, then there is the risk of a run on the bank, as the bank doesn't have enough money if too many bearers of these promissory notes come and demand it on the same day, as they are entitled to.
A 100% reserve requirement that doesn't apply to demand deposits is a bit of a joke.
Sorry, it's still not 100% clear...
Do you mean to say that a receipt for gold, deposited in a bank's vault, is a 'demand', which can itself be deposited into a bank's vault?
The reciept is a claim on the contents of the bank account. It is not a "demand". It just means that the contents of the bank deposit, whether it be wheat, gold, or fiat currency, is available whenever it's claimant decides to withdrawl it.
That is what a demand deposit is. With fractional reserve banking, you can run into problems, because all depositors have claims to their accounts "on demand", yet the bank doesn't keep enough of the claimed property on hand to cover all those withdrawls.
Sorry but it's still as clear as mud.
Would someone kindly define the terms 'deposit' and 'demand deposit' as they are used in the video? At least as you understand them.
He(de Soto) is saying the legislation only applied to the former, so there must be a difference. So far I don't see what the difference is, seeing as they both seem to involve a deposit and both seem to be a receipt of some kind.
Thanks.
Demand deposit = the money is a bailment. The bank is merely a warehouse for those funds.
[27] A bailment may be defined as the transfer of personal property to another person with the understanding that the property is to be returned when a certain purpose has been completed… In a sale, we relinquish both title and possession. In a bailment we merely give up temporarily the possession of the goods.” Robert O. Sklar and Benjamin W. Palmer, Business Law (New York: McGraw-Hill, 1942), p. 361.
Mystery of Banking, p. 104-5:The bank note has always been the basic form of warehouse receipt used by the mass of the public. Later, however, there emerged another form of warehouse receipt used by large merchants and other sophisticated depositors. Instead of a tangible receipt, the bank simply opened a deposit account on its books. Thus, if Jones deposited $10,000 in a bank, he received, if he wished, not tangible bank notes, but an open book account or deposit account for $10,000 on the bank’s books. The bank’s demand debt to Jones was not in the form of a piece of paper but of an intangible book account which could be redeemed at any time in cash. Confusingly, these open book accounts came to be called demand deposits, even though the tangible bank note was just as much a demand deposit from an economic or a legal point of view. When used in exchange, instead of being transferred physically as in the case of a bank note, the depositor, Jones, would write out an order, directing the bank to transfer his book account to, say, Brown.