The great development of the credit system in modern times accounts for the ability of banks to make profitable use of deposits left with them even for very short periods of time, and explains the chief forms of their investment. The credit system is the result of the practice of buying and selling on time instead of for cash. It rarely happens nowadays that merchants and manufacturers or buyers and sellers of any class of goods or securities receive all the payments due them before the goods leave their hands or pay spot cash for everything they buy. Instead they buy on time and sell on time. This practice is rendered necessary by the wide separation of producers and consumers and the rapidity of action demanded by modern business methods. Goods must often be sent across a continent or over the ocean in order to reach their destination, and a considerable length of time must, therefore, elapse between the date of the purchase and that of the arrival of the goods. To this must be added the time needed to sell the goods to their ultimate consumers, if we are to make a proper estimate of the entire amount of time which must elapse before a mercantile transaction can be completed. It is customary to bridge over this period by granting credit to the purchaser, thus enabling him to realize upon the goods bought before he needs to pay. It is frequently necessary that goods should be ordered by telegraph or telephone and despatched immediately without waiting for the arrangement of all details and the settlement of accounts. Indeed, whenever the parties to commercial transactions live in different towns, or find it impossible or inconvenient to meet face to face, the transfer of cash directly from the hands of the buyer to those of the seller is an impossibility, and the granting of credit becomes, therefore, a necessity.

The length of time during which credit is granted varies from a few days to several months according to the nature of the transaction and the financial condition and relations of the parties. As a rule, it is short, ten, thirty, sixty, and ninety days being most common.

This practice of granting credit results in the creation every day of an enormous mass of promissory notes and other documents, which constitute the security given by buyers to sellers or by borrowers to lenders, or record the credit transactions in a legal and convenient form. It is these securities which present to the banks the opportunity to make profitable use of their deposits. The owners of this paper usually need the funds due them before the maturity of the notes, and bankers are in a position to supply them. The process by which this mutual accommodation is accomplished is usually called "discounting." That is, the bankers buy the notes at a price equal to their value at maturity minus interest from the date of their purchase. Since this period is usually short, but of different degrees of length in the cases of the different classes of notes, bankers are usually able to so arrange their investments as to secure the return of their funds in time to meet the demands of their depositors. Current accounts must, of course, be invested in paper which matures in a short period, while time deposits may be used in the purchase of paper maturing at longer intervals.