We now have to consider what it is that the bank gives in exchange for the right to demand and receive money at a future time, acquired by it under these circumstances. To return to our first and simplest case of so-called discount; the proceeds of the discounted note, or its nominal amount less the interest for the time for which it is to run, are in the first instance placed to the credit of the borrower, to be drawn out by him at once or at different times, as convenience or necessity may dictate. In thus crediting him with the proceeds, the bank plainly gives to him simply the right to call upon it at pleasure for that sum of money. Whether this right is exercised at once by demanding and receiving the money, or whether the exercise of it is postponed as regards the whole or a part of the amount, in either case the right to demand, or to "draw," is the equivalent receivecd by the customer in exchange for the right, sold by him to the bank, of which the note discounted was the evidence. The sum which he is thus entitled to call for is said, so long as it stands to his credit, to be deposited in the bank, or to be a deposit standing in his name; so that the transaction is seen to be, both in form and in substance, an exchange of rights. The same thing is true also in other cases of so-called "loans" or "discounts"; whatever form they take and whatever the collateral security held by the bank may be, the operation is after all essentially an exchange of rights, whereby the bank acquires the right to receive money, or the legal tender of the country, at some future time, and the individual acquires the right to call for money or legal tender at pleasure. The result is to give to him that immediate command of purchasing power or of the usual medium of payment which, as we have said, is the real object sought by him; but at the outset this result is usually secured and the relations of the bank and the "borrower" are settled, by the sale of one right for another, and without the intervention of money or any of its tangible substitutes.1

But a deposit may owe its origin to a different operation from that which has just been examined. It happens every day that the merchant, having cash in hand, prefers not to hold it in his possession until it is required for use, but to "deposit" it with the bank where he usually transacts his business, until he needs to use it. In this case, when he makes his deposit, the property in the money or substitutes for money actually handed in by him passes to the bank, and he receives in exchange the right to demand and receive at pleasure, not that which he paid in, but an equivalent amount.1 Here then, as in the former case, the transaction is in effect a sale, although the use of the word "deposit" seems at first to suggest an entirely different idea of its character. In the case of one important class of banking institutions, savings banks, and the savings departments of commercial banks as well, all the deposits are due to the receipt of money or substitutes for money. Savings banks do not create deposits when they make loans they simply invest or lend an amount which does not exceed their capital and surplus and the deposits previously acquired. Other banks do more than this. They lend their credit and are able to do so because they provide substitutes for coined money which are generally acceptable for most purposes.

1 The less usual case of a loan made in cash does not create a deposit, but is a case of issue if the bank gives its own notes to the borrower. It is, however, the sale of a right for a right in every case except where the loan is made in actual money, when it becomes the sale of a right for coin.

The other leading operations of banks, when analyzed, can also be resolved into cases of the exchange of rights against rights, or of rights against money. As, for example, when the bank, for the convenience of its customer or depositor, undertakes to collect a note due to him by some third party, in which case the amount paid to the bank in money by the promisor is passed to the credit of the promisee as a deposit. Here the bank has received money for the account of the depositor, and has given to him in exchange a right to draw at pleasure for the amount or any part thereof, the property in the money actually paid having passed absolutely to the bank in exchange for the right to draw. And again, when the bank buys from a merchant a bill of exchange, or when it sells a bill of exchange drawn by itself on some correspondent, it effects an exchange of money against a right, or of a right against money, strongly resembling those already considered. And so, too, if in any of these cases any substitute or equivalent for money is used, instead of money itself, the transaction is still an exchange of a right on the one side and some means of payment on the other, the latter becoming the property of the bank.

1 It is true that money may be left as a "specialdeposit" with a bank, just as plate, jewels, or other valuables may be, in which case, the identical money deposited is to be returned, and the bank consequently does not acquire the property in the thing deposited, but is merely entrusted with its temporary custody. This, however, is not a banking operation, and the deposit in this case is made with the bank, not because it is a bank, but because it owns a strong vault.

We have thus far, for the sake of simplicity, spoken only of the "rights to receive" money bought by the bank in one class of cases, and sold by it in another. But where there is a right to receive on the part of a creditor, there is a corresponding duty to pay on the part of the debtor; and these rights or credits, when viewed from the other side, are, therefore, debts or liabilities. The deposit which is credited in making a loan is accordingly a liability to pay on demand, assumed by the bank in exchange for a security promising a payment to the bank in the future; and the deposit credited upon the receipt of cash from the depositor is a similar liability, assumed in exchange for so much money or so much of its substitutes. In short, as any addition to the loans of a bank is an increase of its investments or resources, so any addition to its deposits is an increase of its debts or liabilities.