a function correlative with that of conducting deposit accounts. It may be described as the process of advancing funds on the security of personal notes and bills of exchange, payable at some future date, the funds advanced consisting of cash or of deposits subject to check, or, as the exchange of cash or deposits subject to check for such notes and bills. The term discount is properly used to describe this process when the interest charge, the consideration the bank receives for making the advance or exchange, is paid in advance or at the time the transaction takes place. The term loans is broad enough to include discounts as well as advances the interest on which is paid when the note or the bill falls due.

In addition to their own notes or bills of exchange persons securing advances may transfer to the bank as security other credit instruments or forms of property with the right to collect or sell them for its reimbursement in case the note or bill in question is not paid when due. Loans thus secured are called collateral loans and the securities or property deposited collateral. For this purpose high class bonds and stocks, real estate mortgages, and bills of lading and warehouse receipts representing goods in transit or in store are widely used. In financial centers the securities listed on the stock exchanges, sometimes called stock exchange securities, constitute desirable collateral on account of their ready salability.

4. Deposits as currency.-By means of loans, discounts. and deposits, banks conduct exchanges of commodities with as great and in most cases with greater facility, economy and safety than they are conducted by means of hand-tohand money. This fact may be made clear by the following illustration: Suppose five customers of a bank, whom we shall call A, B, C, D, and E, each having commercial transactions with the other, have their notes discounted each to

the amount of one hundred dollars and receive in compensation credit balances at the bank, each to that amount. A then buys a bill of goods of B valued at one hundred dollars, but, instead of paying him in coin or government notes, gives him an order on the bank. This order may be simply a verbal command to transfer A's balance to B's credit, or it may be a written order to that effect. In either case A's balance at the bank is reduced to zero and B's increased to two hundred dollars. B now contracts an obligation in favor of C to the amount of one hundred dollars, and pays him in like manner, thus reducing his balance to the old figure and raising C's to two hundred dollars. Next in order C makes a hundred dollar purchase of D, D of E, and E of A, each paying by a transfer of credit on the bank's books in favor of his creditor. The result is that at the end of the five transactions each man has a balance of one hundred dollars at the bank, and is thus in a condition to repeat the process just described, and business to the amount of five hundred dollars has been transacted without the use of coin or government notes. The deposit account thus serves as means of payment or currency, and must be regarded as an element of the medium of exchange coördinate with hand-to-hand money.

5. Bank notes.-Besides the deposit account, certain banks, known as banks of issue, make use of so-called banknotes. These are promises of the bank to pay specified sums to the bearer on demand. They are designed to serve as hand-to-hand money and hence are issued in such denominations as are convenient for this purpose. They are usually printed on specially prepared paper, though they may be written, and are signed by the responsible officers of the bank, in this country by the president and the cashier.

In many respects bank-notes and deposits resemble each

other. Both represent obligations of the bank to pay on demand. Both are used in making advances to customers or in exchange for promissory notes and bills of exchange. Both serve as means of payment and are therefore elements of the medium of exchange. They differ in that the bank note is payable to bearer and is issued in fixed denominations, while the deposit is made available by means of checks, which are orders instead of promises to pay, which are drawn for any amount to suit the transactions in which they are used, and which must be presented to the bank for payment or acceptance before their validity can be tested. On account of these differences bank notes serve as hand-tohand money, while deposits are used in large payments and in payments at a distance. For many purposes, of course, they may be used indifferently.

The relative importance of these two banking devices, measured by the extent of their use, has greatly changed during the last century, the deposit account having everywhere and continually gained over its competitor. In great commercial centers at the present time more than fifty per cent. of all exchanges are probably made by its means. In the early days of banking in this and other countries the deposit as a checking account played a very inferior rôle, bank-notes being essential to the existence of banking institutions and being consequently almost exclusively employed. In this country the dominance of the deposit dates less than half a century back.

6. The advantages of bank currency.-Bank currency, as the deposit account and bank-notes may be called, is in certain respects superior to other forms. Besides being able to transform their notes and bills of exchange into funds immediately available for purposes of commerce, business men derive great advantage from its superior convenience, safety and elasticity. This is due, in the first

place, to the fact that this currency exists in a variety of forms, each adapted to definite commercial needs. The check, for example, is a very convenient and safe means of making large payments. It takes less time to write into the printed forms, now furnished by all banks, the name of your creditor, the amount to be paid him, the date, and your own signature, than to count out a large number of notes or coins, and in this way the danger of loss from mistakes in counting is also avoided. Your creditor finds the check more convenient and safe than coin or notes, because it is less bulky, and, if he chances to lose it, he can procure a duplicate and direct the bank not to honor the original if it is ever presented for payment. Furthermore, the stub of a check-book constitutes a convenient record of expenditures. For payments at a distance, as in another town or country, banks furnish a convenient currency in the form of drafts, that is, orders of one bank upon another to pay to the person named or to his order a specified sum. These can be conveniently and cheaply sent by mail, and, if lost, like checks, can be duplicated. For travelers in foreign countries banks furnish so-called letters of credit for any amount needed. These enable the holder to obtain at any place of commercial importance any sum he may desire in the money of the country in which he is traveling. These, too, can be duplicated if lost. The commercial letter of credit makes it easy for merchants to pay for goods bought in any part of the world or to receive payment for goods sold without inconvenience, delays or danger of loss. Bank-notes, which may be issued in any and all denominations, can be used in all ordinary commercial transactions; they are more convenient than coin for all purposes except small change, and are quite as convenient as government notes, being in all external respects identical with them.

By the elasticity of bank currency is meant its capacity to adapt itself, as it were automatically, to the varying needs of commerce. We have just learned that banks are able to supply the various forms of currency needed, and it only remains to show that they can also supply these in the amounts, at the times, and in the places required. The amount of bank currency depends primarily upon the needs and desires of the customers of banks, among whom nowa-days are to be found all business men and large numbers of people otherwise engaged or living without labor. As we have already shown, it is created by the processes of discount and deposit, and enters into circulation when the customers of banks pay out the notes received or make use of their credit balances by transferring them to others by means of checks. So long, therefore, as banks are able to continue discounting the paper of their customers the amount of bank currency can be increased, and, assuming that banks exist in sufficient numbers in all places where business is carried on, this currency will come into circulation in the places where it is in demand and at times when it is needed. Any business man can get the money he needs, at the times and in the exact form that he needs it, provided his banker will discount his notes. The only limit to the increase of bank currency, therefore, is the capacity of banks to discount mercantile securities, and within that limit its increase is in direct response to business needs.

Besides the capacity to increase at the right time and place, an elastic currency must possess the capacity to decrease when the need for it has passed away. This quality also bank money possesses in a high degree. Credit balances, which by means of checks are made to serve the purposes of a medium of exchange, diminish in magnitude when discounted notes fall due and are not renewed, customers meeting their obligations to the bank by checking