It may be supposed that the loans placed by White in this way do not exhaust the sum that may be loaned by him without endangering his ability to meet all demands made upon him, and that some of his customers have promissory notes, bills of exchange, or acceptances, which have come into their hands in the daily transactions of their businesses and which they are willing to sell. White may buy these to the face amount, say, of $35,000, but he will pay less than their face value by the amount of the interest on their face value till due. This interest is taken in advance, and the proceeds are either paid in cash or credited as deposits to the parties selling the paper. The interest taken in advance and calculated, not on the sum actually paid in cash or credited as deposits (that is, the sum actually loaned) but on the face of the paper, is called "discount," and the act of selling a note when discount is taken is called "discounting" the paper. At the time when White buys the paper the discount is not yet earned, but it is nevertheless credited at once. His balance sheet, based on the last above, will then stand: (1) If cash is paid:

Assets

Cash................. $66,000

Loans (Promissory Notes Of Borrowers)........ 45,000

Discounts (Promissory Notes And Other Paper Discounted).......... 35,000

Liabilities

Deposits.............. $145,000

Discount............. 1,000 or (2) if paid by creating deposits:

Assets

Cash................. $100,000

Loans................ 45,000

Discounts............ 35,000

Liabilities

Deposits.............. $179,000

Discount............. 1,000

The process of discount results in the creation of deposits, in much the same manner as did loans. White has now in his portfolio commercial papers bearing the names of makers, drawers, and indorsers - claims against these parties, these claims being earning assets, with the earnings taken in advance. In exchange for these White has given either cash or deposits. If cash is paid, the payee may possibly redeposit it. The discount is profit, since no interest is allowed on the credits which White gives the seller of the paper.