To the degree that banks invest in stocks and bonds of corporations, they contribute fixed capital to enterprises. The purchase of securities is the practical equivalent of loaning funds; loans to purchase securities which are then pledged to secure the loans are practically vicarious purchases of the securities. That there is a marked tendency for commercial loans to become continuous and permanent is due to the fact that production tends to become more and more capitalistic and continuous operation more and more necessary for efficiency, while improved facilities in distributing products lengthen the period of consumption and reduce the seasonal feature of business. Probably a fifth of commercial bank loans are now for investment purposes.

The one-time practice of banks of insisting that their borrowers "clean up" their loan account at least once a year has nearly ceased, except in lines of business having one or two definite seasons, and loans are indefinitely renewed time after time, or if borrowers are required to "clean up" they may borrow at one bank to "clean up " at another. Large borrowers sell their notes widely over the country through note-brokers; to pay a lot of notes maturing and due to holders in one section of the country, another lot will be issued and sold either to these same holders or to purchasers in other sections; thus the banking system as a whole supplies permanent working capital. The individual bank, however, may decline to renew a loan or to purchase the renewal paper, and thus not itself provide permanent capital.

When the whole banking system is considered, it is clear that commercial paper is only to a small extent self-liquidating. The banks renew loans freely, as just noted; their regular customers depend upon this accommodation, and large contraction or refusal to renew loans is quite impossible, especially in time of panic. When a borrower becomes strong enough to borrow through sale of his paper widely over the country and any holder refuses to purchase the renewal paper, he can borrow from other banks. The holder bank may also at any time sell the paper to another bank. Thus rediscount gives liquidity, but rediscount is simply a shifting of assets as between banks and as between forms of assets. One of the specific purposes in developing the federal reserve banks was that of providing central banks where paper holdings of needy banks might be converted into cash funds by this process of shifting assets. The capacity of the federal reserve banks to liquefy by rediscounting comes through their ability to tap unused reserves and to create federal reserve notes, which in the tills of the banks constitute not only a paying medium but also an actual reserve, although not termed "reserve" by the law.