A BANK may be described, in general terms, as an establishment which makes to individuals such advances of money or other means of payment as may be required and safely made, and to which individuals entrust money or other means of payment, when not required by them for use. In other words, the business of a bank is said to be to lend or discount, and to hold deposits. With these two functions may be combined a third, that of issuing bank-notes, or the bank's own promises to pay, for use in general circulation as a substitute for money.

The object of the present chapter is to inquire into the real nature of the operations, thus roughly classified and usually described by the terms Discount, Deposit, and Issue; and for this purpose we shall analyze the transactions attending the ordinary and simple case of a loan made by a bank to one of its customers.

The borrower who procures a loan from a bank does so in order to provide himself with the means, either of making some purchase, or of paying some debt. He seeks, therefore, to obtain, not necessarily money, but a certain amount of purchasing power in available form, or of whatever may be the usual medium of payment, measured in terms of money. If we suppose him to be a merchant, buying and selling goods upon credit in the regular course of his business, he is likely at any given time to have in his hands a greater or less number of notes, not yet due, signed by the persons to whom he has heretofore made sales; and it may be in the form of a loan, made upon the security of one or more of these notes and giving him immediate command of the amount which will become due upon them in the future, that he will procure what he needs from the bank. This loan may be supposed to take the form of what is termed a discount; in which case, in exchange for the note "discounted" the borrower is entitled to receive from the bank the amount promised in the note, less the interest on that amount computed at an agreed rate for the time which the note has still to run.1 The dis-

1 If, e. g., the note discounted promises to pay $2,500, has 87 days to run, and the agreed rate is 6 per cent., then the interest to be deducted is $36.25, and the proceeds received by the borrower are $2,463.75. This process, which is commonly used and is known as "bank discount," gives a result somewhat different from that of discount in the strict sense of the term. Strictly speaking, discount consists in finding that sum which, if put at interest for 87 days at 6 per cent., will then amount to $2,500, or, in other words, in finding the present worth of $2,500 due under the conditions stated. As this present worth is $2,464.27, the established practice gives to the bank a slight profit in addition to that afforded by true discount. See on this point Agricultural Bank vs. Bissell, 12 Pick. 585, counted note becomes the property of the bank, to which the promisor is henceforward bound to make payment at maturity; and this payment when made obviously restores to the bank the amount advanced by it in exchange for the note, together with the interest which was the inducement for making the exchange.

It is now clear that the operation which we have described, although spoken of as a loan by the bank to a borrower, is in fact something more than_a loan. The note when given was evidence that its holder owned the right to receive at a fixed date a certain sum of money, and this right the so-called borrower has ceded to the bank. Passing over for the present all question as to what he has received in exchange, his cession of property by sale is as distinct and complete as if he had sold a bale of cotton to another merchant, instead of selling to a bank his right to receive money in the future. It is true that in parting with the note he probably endorsed it, and thus bound himself to make good its amount in case the promisor should fail to do so; but he might equally bind himself by some warranty given to the purchaser, when selling any other description of property. The note has ceased to be his, and now takes its place among the investments or securities of the bank, although custom may lead to its classification as a "loan or discount."1

1 In an account of the Bank of England, the note supposed, if taken, would be classified under "other securities," together with bonds or stocks owned by the Bank.

The operation which we have here presented in its simplest form may easily change its shape according to circumstances. Thus, instead of offering for "discount" the notes of his customers, our merchant may offer his own note for the sum which he wishes to obtain, and attach to it, as security for its payment at maturity, one or more of the notes of his customers. In this case the principal note, his own,becomes the property of the bank, the right to receive from him at its maturity the sum promised in it being the real object of sale; and the attached notes, originally received by him for merchandise and now pledged to the bank as collateral security for the performance-of his contract, continue to be his property, subject to the right of the bank to be indemnified therefrom in case of his failure. So, too, he may offer his own note, securing it by the pledge of bonds, stocks, or other valuable property, the ownership of which he does not part with, while at the same time he sells as effectually as in the first case the right to receive from him a certain sum at a fixed date. Finally, following a practice which has become increasingly common in recent years, the bank may discount the unsecured note of the borrower. These unsecured notes are based on the character and financial position of the business of the borrower, and are generally limited to not more than half of his total working capital requirements. Instead of the note of hand which we have supposed to be used, some other kind of negotiable paper, as, for example, the bill of exchange, may be preferred by local usage as the evidence of commercial obligation. Still, whatever the form of the transaction by which a bank may make "advances" or "loans," it will be found that in every case a right to demand and receive a certain sum of money has been acquired by the bank for a consideration.