Under the circumstances just mentioned, White's ability to loan and discount further is decreasing; the ratio of his cash to his demand liabilities has decreased from 55:100 (or 100:145) to 66:145 (or 100:179). The larger the deposits, the larger absolutely the demands that may be made for payment; hence the cash left on hand may barely suffice to meet them. On the other hand, the larger the loans and discounts, the larger the profits. White is tempted, therefore, to make loans and discounts, husbanding his cash and creating deposits, to such an amount as will bring the greatest profits and yet be within the bounds of safety.

Crediting the proceeds of loans and discounts is the usual method of creating deposits. "Loans" is the term applied to the extension of cash or credits to a customer on his own note. The lender, White, will require interest for the time the borrower has the funds; the interest will be payable, however, not in advance but at maturity of the principal. The note is usually drawn with interest at, say, 4 per cent for the period of the loan, but it may be drawn without interest, in which case the principal of the note is made large enough to cover the amount of the actual cash or credit advanced plus interest thereon. "Discounts" is the term applied to extensions of cash or credits to persons selling notes or other commercial credit instruments, of which the makers or drawers are usually third persons, at prices less than their face value by the amount of the interest on their face value till due. The buyer, White, calculates the "discount" at his "discount rate," deducts it from the face value, and pays the seller the "proceeds" in cash, or credits them to his account. The two operations are essentially the same and result in the creation of deposits. The financial statements of banks group these two assets together as Loans and Discounts.

Discount, then, is not a distinct function of commercial banks, but one of the methods of creating deposits. The promissory note or discounted item becomes the property of the bank to which the promissor is bound to make payment at maturity; the note is listed among the assets, and at maturity the bank will receive the face amount. The volume of deposits varies directly with the amount of loans and discounts. The borrower gives his promise to pay the bank (and the seller of discount paper gives the promises of himself or third parties to pay to his indorsee, the bank) and in exchange gets cash or the right to draw at will on the bank with the implicit promise of the bank to honor his requisitions.