Definition of Interest Bearing Account
In a variety of financial situations, you may give someone or something (a bank) money to hold for you until it disburses the money on your behalf. Similarly, you give it money to hold that you may later take back or otherwise use yourself. Meanwhile, the party holding your money pays you interest on the amount held. An account that pays interest on the money deposited in the account is an interest-bearing account.
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Why Pay You?
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Why does the bank or any financial institution want to pay you for holding your money? In fact, in certain circumstances, notably non-interest-bearing checking accounts, banks hold your money and don't pay you for it. But generally, they will pay interest on the money they're holding for you because they have a legal right under U.S. banking regulations to use that money (they can lend it out to others) and collect interest from their borrowers. They pay you a lower interest than they charge the borrower (the interest-rate differential), so they make money on your money.
Want Your Money Back?
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If the bank had only one depositor in its one and only interest-bearing account--you--and one borrower to whom it had lent your money, the system wouldn't work. If you wanted your money back, the bank would have to get it back from the person or business to which they have lent it. But banks have hundreds of thousands, even millions of people like yourself, who have put money in interest-bearing accounts. Statistically, there exists some percentage of the total funds deposited--a reserve level--that the bank can safely lend out because while you may need your money back on any given day, many more depositors will not. The Federal Reserve determines and regulates that safe level.
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Utility
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Interest-bearing accounts are an important feature of the financial system. Without a regulated way of allowing money deposited by you or anyone else to be used by the depository institution (your bank in this instance), deposited money would have no utility, or use, which would seriously reduce the flow of money in an economy.
Money Flow
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The economist John Maynard Keynes, a pivotal figure in the development of economic theory, first presented the idea that the wealth of a nation depended on the velocity of money within the national economy. "Velocity of money" means how often the money is spent--how fast it moves from me to you to the bank and from there to someone else. Interest-bearing accounts motivate and facilitate this money flow. You leave your money with the bank because they will pay you for doing so, the bank lends that money to others and derives income from it and the third party uses the money borrowed to do something else that keeps this money moving, producing wealth in the process.
Types
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Most banks provide interest-bearing savings accounts and interest-bearing checking accounts. Brokerages and similar investment firms pay interest on money you have deposited with them to buy equities; the portion of your account in cash rather than in equities is, effectively, an interest-bearing account, sometimes with check-cashing privileges included. A related kind of interest-bearing account, a money-market account, invests your cash in a "money market" that pays interest.
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References
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