A common misconception exists as to the difference between the processes of accepting and lending. The misconception, as commonly stated, is that in accepting, the bank does not part with money as it does in lending. In preceding chapters an effort has been made to show that when a bank lends it hardly ever does more than extend its demand liabilities in the form of bank notes and deposits. If it lends bank notes, it lends money; but the proportion of bank notes to deposits is small and the number of banks that issue notes is also small. To say that a bank lends money when it extends deposits is not exactly true; what is done is to extend its credit in the form of rights to draw money; to only a small degree, however, is money actually withdrawn, for in the first place many checks on the bank are redeposited with it, and in the second place the balancing of checks at the clearing house leaves only small settlements to be made and even these are not usually made in money.
Now when a bank accepts a time draft or bill of exchange it lends its credit to the drawer. Instead of the drawer exchanging his 6o-day promissory note for the bank's demand deposit credit, which will more readily circulate in the community, he draws a 6o-day bill on the bank, which by accepting the instrument extends to the drawer the use of its time credit for 60 days. The drawer then converts this time credit into demand credit by selling the bill in the discount market for bank notes or a check or for cash which he immediately deposits in his bank.
In the foregoing explanation the important point to grasp is that the difference between accepting and lending is not the paying as against the non-paying of money, but is the extension of time credit as against demand credit. In either case the bank incurs a direct liability, against payment of which provision must be made. The two facts: first, that it is a time liability, and second, that the drawer has contracted to put the bank with funds before the maturity of acceptance, relieve the bank from anxiety about meeting the acceptance. The bank does not expect to be obliged to pay from its own funds; it regards the liability rather as a contingent one and therefore does not concern itself so much about its reserve. In this there lurks a positive danger. If due caution is taken in selecting drawers, in protecting the issue of letters of credit, and in watching the documentary securities, the need of a reserve is small. No banker, however, can trust in the naive idea that, since accepting does not require the immediate payment of money, he may extend his acceptance business to any amount and keep no reserve as a protection thereto. A reserve should be kept, but it may be much smaller than against bank notes and deposits.