Commercial banks are also called banks of "discount and deposit," and this term fairly summarizes their essential functions. They receive deposits of cash, checks and drafts, and make loans to the business public by discounting or purchasing commercial paper. To these functions may be added a third, that of providing a medium of exchange through the issue of circulating notes. Not all commercial banks issue notes - none are issued by state banks - and usually the medium of exchange supplied by banks in this way is of lesser importance than that afforded by means of their deposits. In the early days of banking, people used bank notes in their business transactions much more than deposit currency in the form of cheeks and drafts, and the note-issuing function therefore was very important. Banks were commonly referred to as "banks of issue," and scores of them were organized for the purpose of lending money in the form of bank notes, but since about 1850, when deposit currency began to be more widely used, the note-issuing function of banks has been of subordinate importance.
A bank has been aptly defined as a manufactory of credit and a machine for facilitating exchanges. It manufactures credit by accepting the business prospects of its customers as security in exchange for its own bank credit in the form of a deposit account. Business credit cannot be conveniently used for current business transactions, but bank credit in the form of checks and drafts is widely acceptable and is the actual medium of exchange for a large part of the community.
Commercial banks serve the community in various other ways. In common with savings banks and other types of financial institutions, they provide a safe place for the keeping of money. Many state and national banks accept "time deposits," that is, deposits which are to be left in the bank for a stated time drawing a fixed rate of interest. These may be in the form of ordinary book deposits or they may be represented by "certificates of deposit." More and more, banks are engaging in the safe deposit business, renting vaults to their customers for the safekeeping of money, jewels, deeds, wills, mortgages, bonds and other forms of valuable personal property. Large city banks have gone extensively into buying and selling foreign exchange and issuing letters of credit to facilitate the settlement of foreign obligations. Under the terms of the Federal Reserve Act of 1913 national banks are permitted to make leans on farm property and to exercise some of the functions of trust companies. In recent years some of the larger city banks have entered the field of 'financial" banking, buying and selling securities, underwriting the securities of industrial enterprises, and furnishing funds for the floating or "promoting" of industrial corporations. This may be a safe practice where the banking department and its funds are kept separate and distinct from the financial department; but, if they are not kept inviolately distinct, grave danger may arise. The primary business of commercial banking is to furnish temporary capital to business enterprises in the form of short-time loans, not to supply funds for permanent investment.
Conant: Principles of Money and Banking, Vol. II, Bk.
V, Ch. III. Scott: Banking (National Social Science Series), Ch. I. White: Money and Banking, Bk. III, Ch. I.