In the preceding chapter reference has been made more than once to the transfer of deposits by one holder to another, and to their consequent use as currency. It is now necessary to examine more closely the simple machinery by which this transfer is effected. The depositor, or the creditor of a bank, who has to make a payment to some other person, has his choice between two methods of making it. He may demand money from the bank, in the exercise of his right as a creditor, and deliver this money; or, with the assent of the person to whom he has to make payment, he may give to this person an order on the bank for the money, or what is commonly called a check. If he adopts the latter method, a payment for goods or of a debt is effected by the simple transfer of a right_to demand money from the bank; and so too if the recipient of the check gives it in payment to some third person, and he to a fourth, and so on. To this extent the check is plainly made a substitute for the sum of money for which it calls. It represents no particular money or group of coins, for, as we have seen, the deposit is likely to have been created by the bank in exchange for some security bought by it, and is, therefore, a naked right to demand, and not a claim to any particular cash; and even if the deposit originated in the lodging of money by the depositor, it has in this case also become a naked right to demand and does not imply any claim to the money actually deposited. But the transfer of this naked right, in the case supposed, is made by the agreement of the parties to serve the same purpose as the transfer of money, and the right thus becomes a substitute for money.

The effectiveness of this substitution, however, is increased and the use of the deposit greatly prolonged, where it is the practice for the transferee himself to deposit the check, instead of demanding its payment by the bank, or seeking his opportunity to use it in some payment of his own.

If we suppose all the parties concerned to keep their accounts with a single bank, and suppose a check for $2,000 to have been drawn by A against his deposit in the bank and given by him to B in payment for goods, B may deposit this check to his own credit as he would money. The bank then makes the necessary changes in its accounts, cancels its liability for $2,000 to A and recognizes a liability for a like amount to B, and thus the transfer of the right by A to B is made complete. This novation, or change of creditors, to which the bank has made itself a party, has not only secured

B against the possibility of finding A's deposit in the bank exhausted by other checks drawn by A fraudulently or by mistake, but it has also made B's right of demand against the bank divisible at pleasure, since this, instead of a right to demand a determinate sum, has now become a right to draw his own check or checks to an amount not exceeding $2,000 in all. in this way checks become the instruments by which rights to demand money may be transferred from one individual to another , in such amounts as the transactions between them may require; and when we consider the great security and convenience of transfer by such means as compared with actual payment in money, there is little need of further explanation of the astonishing extent to which checks are now used, especially in English-speaking communities.

If, now, we suppose the parties concerned to keep their accounts with different banks in the same city, we shall have results somewhat more complex but not different in kind. In this case we may suppose the check drawn by A upon Bank No. 1 to be deposited by B in Bank No. 2. If the transaction stands alone, the latter bank collects the money called for by the check, and holds itself liable to make payment to B on demand in sums to suit his pleasure. This makes a change not only of creditors, but of debtors, and yet at the close, after the payment by A to B has been completed, we have in existence a bank liability of the same amount as that with which we started. Probably, however, in a community where there were several banks, the transaction would not stand alone. At the end of a day's business every bank would be likely to have received in deposit checks upon several, and perhaps all, of the others; each would then have checks to meet as well as checks to collect; and each would naturally make its settlement with every other, not by making mutual demands and mutual payments, but by the offsetting of demands and the payment only of such balance as might then remain due from one or the other. Thus, if at the end of the day Bank No. 1 had received in deposit checks upon Bank No 2 to the amount of $25,000, and Bank No. 2, in like manner, checks upon Bank No. 1 amounting to $23,000, the account as between the banks would be settled easily by the payment of $2,000 by Bank No. 2 to Bank No. 1. And the result is the same if the operation here traced is multiplied by the number of banks carrying on business with each other in a great city. The settlement of accounts by the banks with each other, however, still leaves the banks collectively under the same liability for payment on demand as before. The liability rests upon the banks, it may be, in different proportions, and is differently distributed among the creditors: but so long as payments are made by checks and checks deposited, the right to demand from a bank which is called a deposit continues to exist in somebody's possession, and is as well fitted to discharge the office of money as when it was first created.1

This medium of payment acquires great perfection wherever the Clearing House system is adopted. Under this system there is a daily meeting of clerks representing all the banks carrying on business at any common center. Every bank there turns in at a central office all the checks and cash demands which it holds against others and is credited therewith, and is also charged with all checks and demands brought against it in like manner by others. The checks and demands which have thus been credited to and charged against each bank are then summed up, and the balance found to be owed by or due to each bank, as the case may be, it then pays to or receives from the central office in money. By this means a great mass of transactions, which would otherwise require a series of demands by each bank upon every other in the same place, are settled at once, and the transportation of large sums in cash from one bank to another is to a great extent dispensed with.2