There has previously been discussed the nature and functions of credit, particularly as they relate to commercial credit and its instruments. There have also been considered the various classes of credit such as are availed of by individuals, firms, business enterprises, and Governments. However, by the banks there is created what is known as banking credit, which arises in a way similar to that of commercial credit.

Banking Credit

Banking credit is the power of a bank to secure advances of funds in exchange for its promises to pay. In this respect, it is related very closely to commercial credit, the only difference being that in the former case, the bank is the source of credit instead of a business establishment. Banks in this respect are manufactories of credit.

The credit of a bank is extended by means of the bank check, the bank note, the bank draft, and the newer means,-the bank acceptance.

The Bank Check

A check is a written order on a bank to pay a stipulated sum of money, and is drawn by one who has a deposit there. It is usually made payable to the order of a particular party and must be indorsed by that party before it can be negotiated further or cashed. A bearer check is payable to anyone who holds it. Legally, the check is an implied promise on the part of the drawer that there are sufficient funds in the bank to meet it.

The operation of bank checks is so common that no explanation need be given. They are of great utility in modern commerce, inasmuch as they effect settlements between distant points and eliminate the inconvenience attendant upon the handling of actual money in the form of bank notes and specie.

The Bank Note

A second way in which a bank extends its credit is by the issuance of bank notes. Though under the Federal Reserve System, banks are discouraged to issue their own notes to circulate at par, this function has not, however, been withdrawn entirely, but has been transferred from the banks that previously issued them into the privileges exercised by the Federal Reserve Banks, which today do most of the bank note issuing. The bank, may however, upon the discount of proper security with the Federal Reserve Bank, receive the proceed in Federal Reserve notes.

The Bank Draft

The bank draft is another form by means of which bank credit is extended. It is an order by one bank on another bank, the same as a bank check is an order by a commercial firm on a bank. Practically all banks keep funds on deposit with banks in other cities, especially in the large financial centers, in order that they might be able to meet the demands of their customers for a form of payment which will be accepted without question. Banks draw against these accounts by selling their drafts to their customers, charging as a consideration for the service a small sum in the form of "exchange." Bank drafts pass as practically cash everywhere in the country, and are an important means by which settlements are effected by commercial as well as financial concerns. Drafts on New York are denominated "New York exchange" and are accepted all over the country at par, owing to the fact that New York is the commercial and financial center of the country and that businessmen everywhere have dealings with New York.