jmherbenerBanks offering checking accounts to customers. Banks will redeem a customers’ checking account balances on demand at par for cash. Because of this, merchants accept checks drawn on these accounts instead of cash. They are money substitutes.
Banks hold only a fraction of reserves of money for redemption against their customers’ checking accounts. In normal times, banks in the U.S. hold around 5 percent reserves against their customers’ checking account balances. For every $100 you have in your checking account, your bank has $5 in reserves.
Our central bank, the Federal Reserve System (FRS) or Federal Reserve (FR) for short, allows banks to hold either cash, which are Federal Reserve Notes (FRN), or checking account balances that banks have at the FRS as reserves against the checking account balances customers have at the banks.