Why does the federal reserve require reserves for demand deposits but not for time deposits?
- Posted:
- 3+ months ago by dreyhanna16
- Topics:
- federal, reserve, time, deposit
Answers (1)
"Reserve" means pretending to have money that you don't have. You only have enough money to cover the day's exchanges, and you have credit for everything else. "Demand deposit" means someone can demand the money at any time, so the bank has to have enough to cover estimated activity. "Time deposit" means the money will not be demanded soon, and the bank can put off payment while they scrape up the cash.
There is a subtle point in there: a bank that has a dollar pretends to have ten dollars. That is inherently dishonest, and that is why many people consider bankers to be crooked. If a bank tries to foreclose a mortgage, the mortgagee can block the action by charging that the bank never put up any money, only credit. In common law, a contract is not valid if no money changes hands. People have actually done this, but it is not widely known.