The bank, however, cannot answer the purposes of its existence, or earn a profit for its shareholders, until its idle cash is converted into some kind of interest-bearing security. Nor is it enough that a permanent investment of the ordinary kind should be made, as by the simple exchange of the cash for government bonds or railway securities. It is the chief business of the bank to afford to purchasers and dealers the means of using, by anticipation, funds which are receivable by them in the future, and this implies both the purchase of private securities or "business paper" to a considerable extent, and also frequent change and renewal of purchases. Moreover, while the private capitalist finds it advantageous to make simple investments of a permanent sort, this would plainly be insufficient for the shareholders of a bank, who have to pay from its profits some serious expenses of management, and need, therefore, a larger field for earnings than the ordinary returns on their capital alone. Funds secured from other sources provide the means for the bulk of the operations of all banks. These funds in the case of savings banks are acquired entirely through the receipt of deposits. Commercial banks also receive deposits, but they are also able to extend their operations by lending their credit both in the form of notes and of deposits. Another fundamental difference between commercial banks and savings banks should also be noted. Money is commonly placed with savings banks for long periods. Deposits in commercial banks, whatever their origin, are constantly being used. Security of the principal and the rate of return are therefore the essential considerations in the selection of investments by savings banks. Commercial banks must, in addition, endeavor to keep themselves in a highly liquid condition at all times.

Most of the conditions of the case are best answered by the "discount" of commercial paper as above described. The time for which such obligations have to run varies with the custom of the trade which gives rise to them, but is in most cases short enough to imply early repayment to the bank. And even where custom gives the paper longer time, if the paper itself is used only as a collateral security, the note which is the actual object of negotiation with the bank is by preference usually made not to exceed six months. It might seem easy then to arrange the purchases of paper with reference to the times of maturity, so as to provide for a steady succession of payments to the bank, and thus facilitate the reduction of the business, if necessary, or its direction into new channels, as prudence or good policy may require. The certainty of prompt payment at maturity, needed for this end, is presented in a high degree by the paper created in the ordinary course of business.1 Independently of the collateral security which the bank may hold, the written promise of a merchant or manufacturer to pay on a fixed day is an engagement which involves the credit of the promisor so far that failure is an act both of legal insolvency and of commercial dishonor. Selected with judgment, then, such paper is not only the investment which most completely answers the purposes of the bank's existence, but is probably as safe as any investment which could be found.1

1 The reports of a large commercial agency show that between 1879 and 1916 the number of failures in the United States was a little under one per cent, of the whole number of houses reported as in business. The highest per cent, of failures recorded in any one year was 1.5 per cent, in 1893. See Bradstreet's, Jan. 8, 1916. For a curious estimate showing that the liabilities of failed firms in 1874 amounted to less than one fourth of one per cent, of the total commercial liabilities of the country for the year, see Commercial and Financial Chronicle, February, 1875, p. 129.

It may easily happen, however, that the bank may find it desirable to invest a part of its resources in some other form, either because good commercial loans cannot be procured in sufficient amount, or as a matter of policy. In this case it will purchase such other securities as offer not only complete safety of investment, but the possibility of easy conversion into cash in case of need.2 In this country United States bonds, and many descriptions of State, municipal, and corporation bonds might answer this purpose. Stocks would more rarely answer it, being more liable to the fluctuations in price caused by misfortune or the ordinary vicissitudes of business. Mortgages of real estate, however, would not be admissible, except when held as a security, collateral to some other which is more easily convertible, for even when the mortgaged property is so ample and stable as to insure the goodness of the mortgage, the conversion of the mortgage into cash by sale is not always easy, and is especially difficult at those times when the bank most needs to have all its resources at command. Indeed, the danger to be

1 The liquidness of the various kinds of bank loans and other assets is further considered on p. 82 below.

2 See, in the reports of the Comptroller of the Currency, the "United States bonds" and "bonds and other securities, etc.," held by the national banks and amounting to $2,264,000,000 in May, 1916, apprehended from the locking up of resources, in securities which may be solid but are not easily realized, is so great, that it has been said to be the first duty of the banker to learn to distinguish between a note and a mortgage, his business lying with the former. As an investment for savings banks and for the deposits in the savings departments of commercial banks, however, well-selected mortgages are entirely suitable, and accordingly in 1913 the national banking law was modified to permit the national banks to invest a portion of their time deposits in this way. Real estate, of course, cannot be regarded as a banking security, however desirable it may be as an investment for individuals, for it is not only subject to great fluctuations in value, but is at times unsalable; and the law ofl:he United States therefore wisely prohibits investments in it by the national banks, except so far as is necessary for the accommodation of their business.