Among the functions usually authorized by law to commercial banks and loan and trust companies is the power to borrow money. The theory of this is that there are seasons of the year when the resources of banks in certain localities are taxed to provide funds temporarily to get crops to market, such as cotton, wheat, corn and the like. This power is also granted to enable a bank to save its life, so to say, in case of an extraordinary demand on it for funds from its depositors. By its contract or agreement with depositors, a savings bank may claim a postponement of 30 or 60 days for payment of deposits, but a bank holding deposits payable on demand must either pay on demand or admit failure and stop business. In borrowing money a bank usually gives its promissory note, signed by one or more officers of the bank authorized to sign for the bank. Notes issued in this way are called "bills payable." Another way is to take certain of the notes or drafts upon which the bank has loaned money to its customers, known as its "loans and discounts," endorse them with the name of the bank by one of the officers authorized to do this, and borrow the money on these. Notes and drafts so used for borrowing are called "notes and bills rediscounted." A bank may borrow from any source it wishes, but usually these accommodations are procured from some other bank with which it is accustomed to do business. Whenever a bank lends money to another bank it should be careful to procure evidence of authority from the board of directors of the borrowing bank to the officers of said bank, and this is usually shown by an authentic copy of the resolution passed by the board authorizing the officers to borrow a stated amount. This precaution to procure evidence of the directors' authority to borrow should be taken, because in cases where a dishonest officer has borrowed money, ostensibly for the benefit of his bank, without this authority, and used the money borrowed for his own benefit and not for the benefit of his bank, the lender has not been able to recover the amount loaned.

In some cases banks borrow money on "certificates of deposit," but these should not be issued except for deposits voluntarily offered to a bank. The best obligations to give for funds which a bank seeks to borrow are either its "bills payable," with or without the collateral security of some of its loans and discounts, bonds, or other securities it might own, or its "bills rediscounted," as already described.

In conclusion on this subject, the prudent banker will not ordinarily use this power to borrow money as a means for procuring temporary additional capital to extend his business, but will reserve it for use in times of emergency, like crop-moving seasons, or in case of a run on his bank.

Such a banker will find it much less difficult to procure temporary help in time of need and difficulty than one who habitually uses this resource in seasons of prosperity.

Sometimes a bank will have to pay as high a rate of interest for the money it borrows as it receives from its customers for what it lends, but usually a bank in good credit can borrow at a lower rate of interest than it lends at, and so makes a small margin of profit on the money it borrows.