The commercial or business bank performs the operations of receiving deposits and making loans. It uses its own capital and its receipts of money as a basis for the making of loans to several times the amount of these deposits. A bank may extend a loan to a customer by writing the amount in his deposit account against which he can then draw checks. The borrower may also receive credit from the bank in the form of its notes, which circulate throughout the community as media of exchange.

Institutions which perform these operations may be grouped according to whether they are chartered under state or national law. This legal distinction no longer affects materially the scope of business conducted by either type. Until recently, while state banks were generally permitted to lend money on farm land and other real estate, national banks were prohibited from granting such loans. On the other hand, national banks have been allowed to issue their own notes for circulation, but similar issues by state institutions were taxed out of existence by a federal levy of 10 per cent. The Federal Reserve Act has eliminated these differences between commercial banks by conferring upon national banks the right to lend on real estate, but at the same time providing for the gradual extinction of their circulating notes.

Commercial banks may also be classified according to whether their business is essentially domestic or foreign. Most banks are engaged in financing local transactions, such as extending credit to the farmer for raising his crops or to the manufacturer for operating his mill.

In addition to engaging in domestic financing, large commercial banks, particularly in the seaboard cities, also operate foreign departments for extending credit to exporters and importers. In fact, some banks do not enter into the financing of domestic transactions at all, but are engaged exclusively in facilitating foreign trade. These institutions perform the same services as the domestic bank, but differ only in the geographic area of their operations. While these institutions confine their activities to a definite territory, nevertheless in this field they perform all the operations of banking. They receive deposits, make loans, and at times issue notes for circulation.

Although city banks carry the accounts of firms representing many lines of business, there is often a tendency to specialize the extending of credit to certain industries. This is due in a large measure to the usual concentration of firms engaged in the same business in one locality, and obviously banks in this territory become closely identified with these enterprises. In the financing of a few industries, such as textiles or automobiles, specialization has advanced to a stage where an institution will grant credit only to firms engaged in this one line of business.

A further step toward specialization has been the development of finance corporations, or discount companies, which do not receive deposits, but instead act as intermediaries between lenders and borrowers. This type of banking institution discounts or buys the accounts, trade acceptances and notes receivable of borrowing firms, and on the basis of these claims sells its own obligations to individuals and banks, who thus become the real lenders.

Another type of specialized intermediary institution is the commercial-paper house, which also receives no deposits, but extends credit to borrowers through buying their obligations. These are sold directly to purchasers, and in this respect the commercial-paper house differs from the discount company which markets its own obligations. In no case does the dealer indorse the paper, and so he cannot be held liable by the purchaser if the instrument is dishonored at maturity. The commercial-paper house also differs from the discount company in that it is not incorporated, but is organized as a partnership or headed by a single individual.