As already seen, the relationships between the public and the banker may be merely those of depositor and safe keeper, or of purchaser and furnisher of remittance or exchange, or of user and supplier of currency. In addition to these there is, as already mentioned, another relationship, which is that of lender and borrower. It is this relationship which gives opportunity for the exercise of the real service of the bank, since it gives opportunity for the institution to perform the function known as extension of credit. This function results in the creation of what are called loans and discounts on the part of the bank and these loans and discounts are paralleled or represented on the ledger by "deposit liabilities." The loans and discounts assume any one of a number of different forms, according to the type of "paper" which the bank has bought or discounted.

It must not be supposed, however, that the bank can purchase any kind of paper it chooses or can select the constituent elements in its portfolio according to its own disposition. The bank is surrounded by a community which has specified habits and customs of doing business. These cannot be immediately altered as a result of request or dictation, but if modified must be changed slowly and conservatively. Even within a given community the individual bank finds it a difficult problem of business competition to select exactly the clientele that it wants. There are many kinds of borrowers and many classes of business in every community. In every trade, occupation, or profession there are many individuals who vary in their solvency and the degree of their reliability, so that the bank must always exercise a great deal of discrimination in the choice of its loans, while it finds itself compelled to transact within certain limits the business that comes to it, since it cannot afford to stand aside merely because of inability to get the particular kind of paper which its officers prefer. There is thus opened in banking a serious question - the question of ascertaining the conditions in business which practically dictate or control the kind of paper that can be offered by the business man in return for the advances which he asks, and the further question of giving sound advice to the borrower with respect to the best methods to be pursued by him in conducting his business, regulating the amount of his loans, and determining the circumstances under which he will trade. The field of study and investigation thus opened is highly varied and the issues raised are multifarious. Nevertheless, it is possible to set forth in a general way the problems which present themselves to the banker and the business man in financing the operations of any particular enterprise.

As already intimated, the fundamental consideration to be borne in mind in determining the advances to be made in any given case is the financial and commercial situation in the trade or occupation where the loans are to be made. Possibly the basic element in this kind of study is the ascertainment of the credit period that is customary in the business. .Practically every trade or occupation has what are called "terms of sale" or standard terms. By this is meant that there is a custom or unwritten law in practically every trade that an ordinary buyer who purchases goods from a seller shall have a given length of time in which to pay for them. In this country at the present time such terms are frequently thirty, sixty, or ninety days. In retail trade the usual practice may be to sell steadily to customers throughout the month, with the understanding that anything bought on or after the first of the month is to be billed to the customer on the first of the following month, with the expectation that remittance will follow within a reasonable time thereafter. In some agricultural regions where customers are tenant farmers who have little available money, it may be the practice to supply goods to such customers steadily throughout the crop-raising season, so that the period of credit there will be from four to six months and in some cases longer.

The question of these terms of sale becomes much more complex in the more highly developed trades, as well as in relations between wholesalers and retailers. In these there is usually a series of alternative terms. For example, if a bill of goods is invoiced at $100 it may be accompanied by a printed statement to the effect that cash within ten days will result in a reduction of 2 per cent, cash within thirty days a reduction of 1 per cent, while the customer, if he allows his account to run for sixty days, must settle at full face value. The details of these terms of settlement might be multiplied, but would add nothing to the general consideration just advanced, which is that the terms of credit prevailing in any particular industry determine approximately the length of time for which the business man must extend credit to his customer, or in ordinary language must "carry" the latter. If a banker has a clientele consisting of wholesalers who in the spring of the year sell their goods to customers on a credit which, as experience has shown in the past, is likely to run about sixty days, this means that the bank, in order to be of service, must stand ready to extend sixty days of credit to its customers in order to give them immediate use of the funds which they need in order to get the proceeds of goods which they have sold to customers. It is, of course, true that the bank can in individual cases encourage its customers to shorten their period of credit by various methods to which reference will later be made. But looking at the bank not as an individual institution, but as an aggregate of institutions bearing a certain relationship to the borrowers or customers as a group, it is clear that the bank's average term of credit must, if desired, be allowed to run up to the average term of credit of the commercial community or must correspond roughly with it.