What natural limit is to be found then to the continued circulation of a liability for deposit, when once it is created and set in motion by the process of "discount"?

Plainly, if at any stage the holder of a check, instead of depositing it, demands its payment in money by the bank on which it is drawn, the payment extinguishes the liability. It is, to be sure, quite possible that the money, after a brief circulation, may find its way back, in fresh deposits of cash made by one or more individuals, and so a new liability similar to the old one may come into existence; but, nevertheless, we may fairly say that the use of the original deposit as a substitute for money came to a natural close with the payment of the check. Except, however, in the cases where money is required for some special purpose, as to be sent abroad or to some other part of the country, or for the increase of the stock in the hands of the public, this limit to the circulation of deposits is not of great importance. For, as the withdrawal of specie under ordinary circumstances is merely the exchange of one medium of payment for another, any withdrawal on a large scale would imply such a change in the habits and preferences of the public as is not often or easily made.

A more important limit is found, however, in the use of deposits for the payment of debts due to the bank. That the depositor can, to the extent of his deposit, pay a debt due from himself to the bank by the relinquishment of the bank's debt to him, needs no explanation. In practice he draws his own check in favor of the bank and exchanges it for the obligation held against him by the bank, this mutual release being for each side as effectual a discharge of liability as a payment in money could have been. Such a payment of the debt due by the depositor, and previously standing among the securities or loans of the bank, finally cancels a liability of the bank equal in amount to that which was created when the loan was made.1 It matters little by what process the deposit, or right of demand, finally used by the depositor in payment came into his possession. If he is a merchant, he has probably collected smaller sums which were due to him, for the purpose of his payment to the bank, and these smaller sums are likely to have come to his hands to a great extent in the shape of checks, which, as we have seen, were the instruments for transferring

1 Compare the statement of account for operation b, on p. 41to him the rights of demand which others held against the bank. If he borrowed the means of payment, he in all probability received the amount in a check. Nor is the case different when there are several banks, and the depositor has received his collections in checks drawn upon other banks than his own. As was seen when we were considering this method of payment on page, 45 the deposit of these checks to his credit effects a transfer of the liability from the other banks to his own; and here also this liability is finally extinguished when he uses it in payment of his debt to the bank.

It is possible, indeed, that the payment should be made by the debtor to the bank in money, or by a check drawn against a fresh deposit of money, and in this case either there is no extinguishment of bank liability by the payment, or only the new liability created by the fresh deposit is extinguished. But in a community where banking is firmly and widely established, the large payments of commerce and of general business are certain to be made, for the most part, in the medium which is most accessible and most convenient for use in large sums, and this medium is undoubtedly that which is commonly termed bank deposits.1

1 A series of investigations made by the Comptroller of the Currency show that more than ninety per cent, of the National Bank deposits consist of checks and similar instruments. The following table presents the relative percentage of money and credit substitutes for money in the deposits of the National Banks on particular days in the years 1896 and 1909:

It appears then that deposits are created by the act of the bank, when loans are increased, and that they are cancelled when loans are paid.1 There is, therefore, a rough correspondence between the movements of loans and of deposits. This correspondence may be weakened by the actual flow of money to or from the bank, but in the ordinary movements of business it is tolerably close, and where it fails the apparent exception will be found to be explained by some special condition of the case.2 It will be found in general that, at times when banks are increasing their operations, their deposits swell, and that when they are contracting,

Kinley, The Use of Credit Instruments for Payments in the United States, pp. 29, 184.

1 For some striking remarks on this subject, see Hamilton's report on a National Bank, Works (Lodge's edition), iii., 128. See also Quarterly Journal of Economics, i., 403.

2 The weekly statements of the New York banks for November, 1890, are a good illustration of the movement of loans and deposits, at a period of great financial disturbance, when there was a heavy contraction of loans and some serious withdrawals of cash. The aggregates, stated in millions, are as follows:

For the special conditions affecting the banks during these weeks, see the Commercial and Financial Chronicle, passim.

their deposits fall. The true connection between these movements is often forgotten, but its nature cannot be mistaken by anybody who will observe the steps by which an ordinary "discount" is placed at the command of the borrower.

It has already been suggested that the use of checks is most highly developed among the English-speaking peoples. The American or Englishman who is in the habit of receiving and making frequent payments avoids the keeping of cash in hand, deposits his receipts, and pays all except the smallest sums by checks. As a consequence, the establishment of a bank is an early symptom of the growth of trade in a small community of English blood. On the Continent the practice of depositing with a bank developed more slowly, and even now when this habit has become general deposits are not made available for payment by the common use of the check. Coined money and bank notes are used for most payments and consequently the banks are unable to extend credit very far in the form of deposits. The imposition of stamp taxes and the failure to surround the check with simple and effective legal safeguards sufficiently account for the comparatively slight use of this important credit instrument. Its utility has in recent years come to be very generally recognized, and in various European countries payments by means of checks are being urged by banks and public authorities.