But what if we bank with different banks as in the example in Figure n? Given that a demand deposit, as we have seen, is no more than a contract with a promise to pay, how does it get transferred, as a means of final payment, from one bank to another? One option is forme to withdraw ÂŁ500
in the form of cash and give it to you to pay into your own account. Most of us would find this highly inconvenient.
Principally, there are two ways for banks to get around this problem. The first is for banks to use their accounts with other banks to settle transfers diiectly, having netted out transactions in opposite dilections. This is called 'bilateral settlement1. An alternative method is for banks to use their accounts with die central
bank. The Bank of England has its own clearing system witii its own equivalent of demand deposits tiiat have die status of final means of payment, just as cash or legal tender. Just to recap on Section 2.3. we call tiiis type of money central bank reserves. Togetiier witii currency in die form of notes and coins which is circulating outside die banking sector, tiiis makes up high-powered money, also known as base money, monetary base, or central bank money. I11 die same way tiiat you have a bank account witii a paiticular bank, the banks themselves have bank accounts) witii the Bank of England called
(Figure 12 \ Just as you must maintain enough balance in your account to ensure all your payments go through, so private banks must maintain reseive balances in their Bank of England account in order to enable payments to other private banks requested by customers. It should be noted tiiat commercial banks have been using central bank reserves as raseive
accounts