Checks function only thanks to the nature of deposits. Whereas in their original forms, checks were a way of keeping track of debts between two parties, banks changed the nature of checks and drafts in general, thanks to the usefulness of deposits.
A deposit account with a bank provides a customer with a way of keeping track of how much money he or she is owed by the bank. The amount of money in a deposit account, then, is entirely dependent upon how much money the customer has put into the bank through deposits, and it furthermore determines how much money can be drawn from the bank through a check.
To understand the importance of deposits requires a slightly different understanding of the banking system than occurs to most individuals. Most people would see a bank as holding money for the individual with the deposit account, where a deposit account is any account into which an individual can deposit funds and out of which an individual can withdraw funds. But this is not entirely true.
A different way of looking at the function of a bank is to say that whenever one makes a deposit into a bank, one is actually giving the bank a loan. The bank is not holding money for its customers; it instead owes its customers a value equal to that of the deposits which they have given it.
Those customers can then call on their debts at will, through checks and through withdrawals, and the bank will have to pay. When viewed in this fashion, then, the importance of deposits becomes clear. Banks only owe money to their customers insofar as the customers have loaned money to the banks.
Because of the nature of deposits, then, one can imagine the classic scenario of creditor-debtor relationships, in which the debtor cannot pay to the creditor. In the case of bank deposits, this is seemingly less likely, but not unknown, and perhaps significantly more frightening than any other form of debtor defaulting.
Banks being unable to pay off deposits accounts occurs in many of the worst circumstances of America’s economic tribulations, including the Great Depression. Fortunately, thanks to such instances, America implemented some forms of deposit insurance in order to protect depositers.
Deposits today are easier to perform than ever before, thanks to any number of services which circumvent classic deposit techniques. For example, most deposits only 30 years ago were performed using physical checks and cash. Nowadays, however, one can set up direct deposit systems for paychecks and the like such that any time such a check would come in, it instead goes straight into the account in question, as opposed to going into check form first.
While this does lead to the diminishing use of checks, it does not diminish the use or importance of deposits, as the money is still being put into the account as a deposit regardless of the fashion in which it occurs.