A little consideration of the manner in which notes are issued by banks will show that in the bank-note we have only another form of liability, differing in appearance, but not in substance, from the liability for deposits. The bank-note is the duly certified promise of the bank to pay on demand, adapted for circulation as a convenient substitute for the money which it promises. It is issued by the bank and can be issued only to such persons as are willing to receive the engagement of the bank in this form instead of receiving money or instead of being credited with a deposit. Thus the so-called borrower, who in the first instance has been credited with a deposit and to whom the bank is therefore to this extent liable, may prefer to draw the amount in notes of the bank and to use them in making his payments. But, in this case, it is plain that the liability of the bank is changed only in form; it is still a liability to pay a certain sum of money on demand. And so if the depositor pays in money and receives notes,1 or receives notes in satisfaction of a demand of any kind against the bank, he, in fact, foregoes the use of the money itself and consents to receive in its stead a promise to pay upon demand, and to receive the evidence of that promise in the form of notes. The question, in which form he shall hold his right of demand against the bank, is one to be decided by the nature of his business or by his present convenience, but plainly the decision of this question in no way alters the relation between himself or any transferee of his right, on the one hand, and the bank on the other. The notes issued by a bank are thus a liability distinguishable in form only from its liability for deposits, and the functions of deposit and issue, spoken of at the opening of this chapter, instead of being distinct, as is often assumed, are one in substance.

In the operations which have now been considered the subject-matter involved is in every case either money or contracts for the payment thereof. No form of dealing in merchandise or real property comes properly within the province of banking. And, inasmuch as a contract for the payment of money may be viewed either as a credit or as a debt, according as it is looked at from the one side or the other, banking is sometimes described as the business of dealing in credits and sometimes as that of dealing in debts. For the transaction of this business in the modern world both of the functions "discount" and "deposit" are indispensable. In order to be a bank, at the present day, an establishment must carry on the purchase of rights to demand money, in the future, or securities; and unless it is a savings bank it must also lend its credit, using in some form or other its own engagements for the payment of money upon demand.1 If it practises the former only, it is simply an investor of its own money, as any private individual may be; if it practises the latter only, it may indeed be said to be a bank of the obsolete type of the Bank of Amsterdam, but it then plainly ceases to answer one of the chief purposes of a modern bank, viz., that of enabling individuals to convert into immediate purchasing power such debts as may be due to them in the future. The use of the third function, however, that of issuing notes, is not indispensable to the existence of a bank, for, as has been shown, issue is but a modification of deposit, adopted for convenience and not from necessity. There are conditions under which the liability of the bank in the form of notes is desired for use, and there are also conditions under which the liability in the form of deposits better serves the convenience of individuals or of the community. Many banks in every country, therefore, carry on their business successfully without making any issue of notes whatever. In addition to these essential banking operations involving sales of rights to present payment for rights to future payment, banks engage in one important transaction which involves no immediate right of payment. They accept bills of exchange drawn upon them by their customers. Such bills of exchange, known as bank acceptances, can be more readily discounted than trade bills accepted by the merchant's own customers. The bank acceptance is an indispensable instrument in foreign trade, where, owing to the distance between buyer and seller, differences in legal arrangements and the constant fluctuations in foreign exchange rates, it is particularly necessary that certainty of payment shall be free from all doubt, and that the obligation shall be readily salable to dealers in foreign exchange. Until recently banks in the United States were not permitted to accept bills of exchange drawn upon them. This entirely proper power was granted to the national banks by the Federal Reserve Act of 1913, and legislation to the same effect has also been passed in a number of the States.

1 In early English banking this was a common practice and no doubt explains the phrase "take up money on their notes," used in legislation. See Bagehot, Lombard Street, p. 98.

1See in Bagehot's Lombard Street, p. 212, a remark that the Rothschilds are great capitalists, but are not bankers. The definition of a bank by the internal-revenue act of the United States of 1866 includes "every person, firm, or company having a place of business where credits are opened by the deposit or collection of money or currency, subject to be paid or remitted upon draft, check, or order, or where money is advanced or loaned on stocks, bonds, bullion, bills of exchange, or promissory notes, or where stocks, bonds, bullion, bills of exchange, or promissory notes are received for discount or sale." - 14 Statutes at Large, p. 115.

It must be added that incorporation by law is not a necessary condition of the existence of a bank. Discount and deposit, and if no legal prohibition exists, issue also, may be carried on by individuals and firms as well as by incorporated companies. It is true that in discussions of banking it is usual to give almost exclusive attention to incorporated banks, partly because they are usually more important and conspicuous, and partly because their affairs are in some degree open to official inspection, so that the nature of their business is not easily concealed, whereas the transactions of private banks are usually known only to the persons concerned. Investment banking is still largely in the hands of private banking firms, but in all countries commercial banking is tending to be conducted almost exclusively under the corporate form of organization.