The Impact of Deposit Guarantees on the Economy

Diamond and Dibeveg did not create the savings account. It existed long before they were even born. What they did do though is propose a system for monitoring and predicting the level of demand for withdrawals given certain conditions in the economy. If people heard rumours that a bank was going to go under then demand for those deposits would increase. People are much less likely to demand their cash when they have assurances from institutions that they trust that their money is safe. This means banks can lend out more money and more projects can get off the ground creating a better economy.