The most striking feature of modern banking, however, is not the profitable use of deposits in the manner just indicated, but the loan of the credit of banks, which makes possible the universal practice of discounting securities greatly in excess of all the money which in any form or through any channel comes into their possession. The origin of this feature of the banking business is traceable to the two practices already alluded to in the case of the goldsmiths and the old Bank of Amsterdam, by which the former were able to secure the circulation of their receipts as money, and the latter made common in Amsterdam the practice of making payments by means of the transfer of credit on its books from one customer to another. The only essential difference between the practices of these early bankers and those of the present day consists in the fact that the receipts of the goldsmiths and the credit accounts of the customers of the Amsterdam Bank were based upon deposits of actual cash, while modern banknotes and credit balances often have their origin in discounts. When the customer of a bank brings the notes of his creditors or his own paper to the bank for discount he frequently accepts as a consideration either the notes of the bank or a credit balance on the bank's books transferable to any other person upon his order. In either case he enjoys the advantage of the immediate use of his funds, and in a form for many purposes more convenient, economical, and safe than coins, while the bank has been able to loan at interest its own credit. In order to make this clear we will illustrate the processes of issuing notes and transferring book credits.

A bank-note is simply the written promise of the bank to pay to the bearer on demand the sum indicated by the figures or statements on its face. Provided it is actually redeemable on demand in standard money, and that fact is generally known in the community, and the notes are issued in convenient denominations, they will circulate as money and for many purposes be preferred to coin. In reality, however, they are simply representatives of the bank's credit, unredeemed promises to pay which may have originated in a transaction of pure credit. Suppose a merchant has immediate need for one thousand dollars which he does not possess, and goes to his banker for a loan. On the assumption that his credit is good, the banker will probably accommodate him, and possibly in the following manner: He will draw a promissory note in his own favour for one thousand dollars due three months from date with interest at six per cent, and the merchant will sign it, thus legally assuming the obligation therein expressed. The banker will then hand over to him the notes of his bank to the face value of one thousand dollars, and the merchant will use them in the purchase of goods, the payment of wages or salaries, or in the meeting of any other financial obligation he may chance to have. In reality the transaction has consisted in the exchange of the bank's credit for that of the merchant, and in the use of the former as money, the consideration being the interest which the merchant agrees to pay at the expiration of three months' time.

The other method of lending and employing bank credit as money may be illustrated as follows: Suppose five customers of a bank, whom we shall call A, B, C, D, and E, each having commercial transactions with the other, have their notes discounted each to the amount of one hundred dollars and receive in compensation credit balances at the bank, each to that amount. A then buys a bill of goods of B valued at one hundred dollars, but, instead of paying him in coin or government notes, gives him an order on the bank. This order may be simply a verbal command to transfer A's balance to B's credit, or it may be a written order to that effect. In either case A's balance at the bank is reduced to zero and B's increased to two hundred dollars. B now contracts an obligation in favour of C to the amount of one hundred dollars and pays him in like manner, thus reducing his balance to the old figure and raising C's to two hundred dollars. Next in order C makes a hundred-dollar purchase of D, D of E, and E of A, each paying by a transfer of credit on the bank's books in favour of his creditors. The result is that at the end of the five transactions each man has a balance of one hundred dollars at the bank, and is thus in a condition to repeat the commercial process just described, and business to the amount of five hundred dollars has been transacted without the use of coin or government notes. In this case, as in the preceding, the origin of the process was a loan from the bank, and the medium of exchange was the bank's credit, the only essential difference between the two cases being the form in which that credit was used.