The rationale of this exchange of credits is that the seller (or borrower) gives less widely known credit for the more widely known credit of the bank. The bank essentially guarantees the private credits, the bank credit being more widely accepted and therefore more useful to the customer in his business operations.

The exact nature of this substitution or guaranty of credits should be fully perceived, for it constitutes the fundamental principle of commercial banking. There is an exchange of less known credit for better known credit; of less useful credit for more useful credit; of credit in which the time element is considerable for credit in which the time element is inconsiderable, the check or draft on a bank being payable upon demand; of credit subject to interest and discount for credit freed from such depreciation.

To illustrate, suppose a retailer buys goods from a jobber on 30 days' time. The common methods of financing the transaction are three. The first method is for the jobber to carry the retailer on open account for 30 days. In this case the jobber will probably have to borrow at his bank funds to meet his own debts maturing meanwhile. He gives his own note, payable to the bank, and gets in exchange deposit rights which he transfers by check to his creditors. The bank in this way becomes the direct presumptive debtor to these creditors, and remains so until the checks are presented and paid. Such an operation is a substitution of credits. But the jobber was able to get this substitution only by showing to, or pledging with, the bank his account receivable, that is, the retailer's credit, the retailer's implied promise to pay in 30 days. The bank accepted the jobber's credit, supported by a contingent right to the retailer's credit, giving in return its own credit. The bank accepted credit items in which the time element was considerable and gave demand credit items.

The second method is for the retailer to give to the jobber a promissory note for 30 days, or to accept (that is, sign) a draft drawn on him by the jobber by which the retailer agrees to pay in 30 days. The jobber can indorse (and thereby guarantee) this explicit promise of the retailer to pay, and can sell or pledge it with the bank for credit to his own account. The jobber can then draw checks and remit to his creditors, and the bank becomes debtor to his creditors until the checks are presented for payment. The bank looks primarily to the retailer and secondarily to the jobber for payment; for the credit of these two men it substitutes its own.

The third method is for the retailer to borrow at his bank, giving his note for 30 days, and either receive credit to his account against which he can check and pay the jobber, thereby substituting the bank as debtor to the jobber till the checks are presented; or to have the bank authorize the jobber to draw against it and agree to accept the draft drawn payable in 30 days and to pay at maturity, thereby substituting time credit of the bank for the retailer's time credit.