The profits of banking are derived chiefly from lending out the money, funds or credits represented by capital stock and also by deposits made with the bank, or, in other words, by making "loans and discounts."

The distinction between these two terms is that a loan represents money loaned directly to any party giving his written obligation to repay same, while a "discount" is money loaned to a party who holds the written obligation of some second party given to the first party for valuable consideration.

The obligation upon which both "loans and discounts" are usually made is the "promissory note," which may be either written or printed, and executed in the following form:

This is a specimen of a note signed by one party, who is called the "maker," and payable to the order of another party, called the "endorser," because he completes the obligation and makes himself responsible with the maker for its payment by writing his name across the back of the note.

The form of promissory note just given is what is known as a "negotiable" note, for when properly endorsed by the party named in the note, to whose order it is payable, the title or ownership of same may legally be transferred to a new owner for the proper value or consideration given for the note.

The essentials of a note are that it should be properly signed and dated, and the amount in dollars and cents clearly stated in the body of the note. The bank or place of business at which it is payable should also be stated in the note, and if drawn with interest the rate should be named. If no rate of interest is named, then the legal rate of the State in which it is made is understood.

A negotiable note in the United States should be made payable in dollars and cents simply without any other qualification, such as "in current funds," or "in exchange," or the like, which might render it non-negotiable. The safe rule is to follow closely the form already given, and so avoid any question as to the negotiability of the note which might l)e raised.

Where a note is given for money "loaned" direct to the maker it is called "accommodation paper," and represents "liabilities for money borrowed" by the maker, according to the term used in section 5200 of the National Bank Act.

Where a note is signed on the face or "made" by a single person, firm, company or corporation, and is not signed or endorsed by any other person, firm, company or corporation, it is called "single-name paper."

If made by two different parties, or made by one party and endorsed by another, it is called "two-name paper."

Where a note by its terms is payable upon the demand or "call" of the holder or owner, it is termed "demand paper," and where it is payable at the end of any fixed period of time after the date of its execution it is called "time paper."

When a promissory note contains a clause setting forth the fact that certain "personal property" (such as certificates of stocks, or bonds, or other promissory notes, or a mortgage of goods, chattels or other personal property) is pledged to make the loan safer to the lender, it is said to be "secured by collateral" and is termed "demand collateral paper," or "time collateral paper," according to the terms of its payment.

$ ................. New York.................................................19

........................................................................................................after date........................... promise to pay to

The National Bank of the City of New York, or order, at said Bank,

.........................................................................................................Dollars, in funds current at the New York Clearing House, for Value received, with interest, at......................

per cent per annum, having deposited or pledged with said Bank, as collateral security for the payment of this note or any other liability or liabilities of..................................to said National Bank.

due or to become due, or that may be hereafter contracted, the following property, viz

......................................................................................................................................................

......................................................................................................................................................

with such additional collaterals as may, from time to time, be required by its President or Cashier, and

Which additional collaterals....................hereby promise to give at any time, on demand If these additional collaterals be not so given when demanded, then this note to be due, and rebate of interest taken shall be allowed on payment prior to maturity And....................hereby give to said Bank, its President or

Cashier, full power and authority to sell and assign and deliver the whole or any part of said collaterals, or any substitutes therefor or any additions thereto, at any Brokers' Board, or at the New York Produce Exchange or elsewhere, at public or private sale, at the option of said Bank, or its President or Cashier. or either of them, on the non-performance of the above promises, or any of them, or at any time thereafter, and without advertising or giving to.................any notice or making any demand of payment, and to purchase the said collateral, or any part thereof, at any such public or private sale or sales, freed and discharged of any and all equity of redemption whatsoever

Where a loan is made upon the security of land or of "real estate," the usual custom is that the borrower and owner of the real estate gives his promissory note, which states that the note is secured by a mortgage of the real estate, or a deed of trust on same, or some other form of written instrument by which the borrower empowers the lender to sell the real estate and repay himself from the proceeds of sale in case of his inability to repay the money named in the note when it becomes due and payable by its terms.

Before money is loaned upon the security of real estate, proper care should be taken by the lender to see that the title or claim to the property is good and valid, and that it has not been already pledged or mortgaged as security for any other loan or loans. To ascertain this it is necessary to employ the services of a competent lawyer or of a "real estate title company," whose business it is to examine titles to real estate for parties purchasing or lending money on same, and to guarantee the purchaser or lender against any loss arising from any defect in the title which may be found after it has been reported as good and valid.

Any mortgage or other lien on real estate taken as security for a loan should be promptly recorded by the lender with the proper official, as required and provided by law, to secure proper protection afforded by such security and guard against the risk of the same property being dishonestly pledged to some other lender.

The usual principle of law in real estate transactions is that the recording of a deed, conveying the right and title outright or conditionally to some other party, gives formal notice of the transaction, these records being always open to inspection by the public.

The profit which a bank makes upon the lending of money is called "interest or "discount," the rate of which is based upon a certain annual percentage, usually fixed within certain limits by the law of the State or Territory in which the loan is made.

Sometimes the rate of interest is stated in the note, and sometimes not. Where a note contains the words "with interest," without stating the percentage or "rate," it is understood that the rate fixed by law is to be paid, unless there is a special rate agreed upon by the borrower and the lender before the money is loaned.

Where a note is drawn "with interest," this is always computed from the date upon which the note is executed (unless some other date is specially named therein) to the date marking the last day of the period of time for which the loan is made, upon which date the note is said to "mature," called the "date of maturity." An old custom still gives the maker of a promissory note three days beyond the last day of the period of time named in the note, and these are called "days of grace," and in such cases the last "day of grace" is the date upon which the note is legally due and payable. In many States "days of grace" are no longer legal, and in such States the note becomes due on the last day of the period named in it. Where a time note is drawn with the words "without grace," the three days are not allowed.

Time notes are usually made payable upon a fixed date named, or so many "days after date," or so many "months" or "years" after date. Where drawn for so many days after date, the date of maturity is found by adding the stated number of days to the date of execution, and adding also three days of grace where custom or law allows this. Where a note is drawn payable a stated number of "months after date," as, for instance, three months after January 15, it would mature on April 15 if "without grace," or April 18 if grace is allowed.

When a note is dated the last day of February, the 28th or 29th, as it may be, payable "two months after date," it would be payable on the last day of April, or three days after that if grace is allowed. If such a note, however, is dated February 27th, when February ends on the 28th, or dated the 28th when February ends on the 29th, it would be payable on April 27th or 28th, respectively, if without grace, or three days beyond that if grace is allowed.

Again, when the date of maturity falls on a Sunday or some other legal holiday, it will be payable either on the last business day before such Sunday or holiday, or the first business day thereafter, as the law of the State or Territory within which it is payable may determine.

Interest on loans is computed in different ways. If a note is drawn for a stated amount, with interest at a stated rate or the legal rate, at end of a stated number of days, all the maker can legally be compelled to pay will be the amount named in the note, plus interest on same for the number of days; for instance, to a note for $100, payable 30 days after date, with 6 per cent interest, 30 days' interest on $100 at 6 per cent must be added if without grace, or 33 days' interest if with grace.

But in some localities, where law and custom admit, a person borrowing money on such a note would not receive $100 as the "proceeds" of the note, but the interest would be added to the $100 and interest at the rate of 30 or 33 days on $100 plus such interest would be deducted, which would cause him to receive something less than $100 as the proceeds, and in this case he would pay what is called "bank discount," which amounts to interest on interest for the time the note runs.

The same rule applies where a note is drawn without interest, for if interest on the sum named in the note, called its "face value," is deducted, then "bank discount" is charged, but if he receives such a sum which, with interest for the period named added, will produce $100, then he pays "true discount" or interest.