Negotiable Order of Withdrawal Accounts

Negotiable order of withdrawal (NOW) accounts are interest-bearing checking accounts offered by banks and, particularly, thrift institutions, in the United States. The so-called M1, the narrowest definition of the money supply in the United States, includes NOW accounts. NOW accounts came about from a process of regulatory evolution rather than consciously thought-out planning for the monetary system.

The Glass–Steagall Act of 1933 banned payment of interest on checking accounts, reflecting the Depression-era thinking that interest-paying checking accounts had contributed to the high incidence of bank failures. Payment of attractive interest rates on checking accounts was one means banks used to attract depositors away from other banks, and banks that lost a large quantity of deposits faced bankruptcy.

Because savings and loan and other thrift institutions were not authorized to issue demand deposits, the zero-interest rate ceiling on demand deposits did not directly affect them. Thrift institutions were authorized to issue passbook accounts and regular savings accounts, which allowed customers to deposit funds or make withdrawals anytime during business hours. Technically, thrift institutions could require a seven-day notice before allowing the withdrawal of funds from these accounts, but in practice this requirement was usually waived.

The first NOW accounts were offered in 1972 by the Consumer Savings Bank in Worchester, Massachusetts, a mutual savings bank. Massachusetts had mutual savings banks, which were insured by a state insurance fund and therefore independent of the regulations imposed on the federally insured depository institutions. By 1970, Massachusetts savings banks were already authorized to waive a 30-day withdrawal notice for regular savings accounts, and depositors could walk into a savings bank and transfer funds to a third party by using counter checks devised for that purpose. The Worchester bank only proposed changing the location at which the third-party draft was written.

The idea came before the Massachusetts Supreme Judicial Court, and the court took two years before deciding that the Consumer Savings Bank had a point. After 1972, NOW accounts spread rapidly among mutual savings banks in Massachusetts. Regulatory bodies allowed NOW accounts to penetrate the rest of New England, and then New York and New Jersey. Title III of the Depository Institution Deregulation and Monetary Control Act of 1980, called the Consumer Checking Account Equity Act, authorized the savings and loan industry to offer NOW accounts nationwide. The act also authorized credit unions to issue similar accounts called share drafts. Theoretically, share drafts pay dividends rather than interest, but the practical implications are the same.

Before the introduction of NOW accounts, savings deposits at thrifts fluctuated with opportunities to earn interest in other types of financial investments. A period of rising interest rates was invariably attended with a withdrawal of funds from savings deposits at thrift institutions. The availability of interest on NOW accounts eased some of the pressure on depositors to find investments for their money outside of the thrift institutions. NOW accounts increased the costs of funds to thrift institutions, but also have added stability to savings accounts. From the consumer’s stand point, accounts that pay interest are not as vulnerable to inflation, because the interest earned offsets the deterioration in purchasing power from inflation.