Bank Deposit

Bank notes and coins together constitute the currency in circulation.  But they form only a part of the total money supply.  The larger part of the money supply in circulation today consists of bank deposits.  Bank deposits can either be a current account or deposit account.  These are created by commercial banks and the process is called credit creation.

Credit Creation

The ability of banks to create deposit money depends on the fact that bank deposits need to be only fractionally backed by notes and coins.  Because the bank does not need to keep 100 per cent reserves, it can use some of the money deposited to purchase income-yielding investments.