The term bank is ordinarily applied to an institution which receives deposits of money or of credit and which seeks profit through the extension or sale of its own credit. It is sometimes said that a bank lends "money," but actual money enters only occasionally into the transactions of a bank. All bank transactions are, however, expressed in terms of money, and if money itself be not employed only that which is equally acceptable will suffice as a substitute.

What is a deposit? "Why," says the depositor, "that is an amount of money standing to my credit on the bank's ledger and against which I can draw my check." Is it a specific sum of money actually stored in the bank's vault? Most decidedly not. It is simply an entry that is made on the books of the bank in order to indicate that the depositor, under whose name the entry is made, has a right to demand from the bank a certain sum of money. To only a small extent does the depositor actually exercise his right to demand money. In most cases all his purposes can be served simply by transferring his right, as a whole or in part, by means of a check, to whomsoever he desires to make a payment. The result is that the bank finds it necessary to hold in actual cash against its deposits only a fraction of the total liability represented by the sum of all the deposits. The cash so held is called the "reserve." The general nature and purpose of the reserve will be more fully discussed later on.

"If a deposit is not cash," it may be asked "what is it?" It is simply that elusive something to which we give the name "credit." From the viewpoint of the depositor himself the deposit is equivalent to cash because it is a right to demand cash from a thoroughly responsible agency. From the viewpoint of the bank the deposit is simply a liability, an obligation to pay cash, which in all probability will not have to be met for some time to come. That is to say, in place of the cash itself which the depositor has a right to demand he is satisfied with the naked obligation of the bank to pay. As long, therefore, as the deposit is allowed to stand it represents simply "credit" based on the confidence that the bank has been able to inspire in the depositor.

Definition of a bank

Nature of a deposit -simply a book entry

Only a percentage of deposits needs to be held in cash

Bank deposits are simply credit

Why, it may be asked, should a person desire to have a mere right to demand cash from a bank when he might just as freely have the cash itself? This is another way of asking the question: why should a person prefer to deposit money in a bank rather than keep it at home? There are of course several excellent reasons. In the first place a bank deposit is much safer than money in hand or at home. The risk of loss, theft or destruction of a sum of money in the pocket or stored in a place of uncertain security at home is normally ever so much greater than is the risk of failure to meet its obligations on the part of a well established bank. Of course, a good many worthy people have a profound distrust of all banks and bankers, preferring to sacrifice possible earnings of interest and to run the risk involved in hiding the money at home rather than to intrust it to the safekeeping of others. But while in earlier years this distrust often had ample justification, today there is less and less reason for it, and it tends to survive only among the very ignorant.

In the second place a bank deposit offers a more convenient method of payment than actual money affords. This is especially true where the amounts involved are large. It is a relatively simple matter to write out a check for a large amount, but the counting out of a large sum of cash in coins or in bills is tedious and time-consuming. Not only is the writing of a check simpler than counting out cash, but the check itself with the payee's indorsement is a valid receipt for the sum paid. Ordinary receipts may be lost in the mails or otherwise destroyed, or they may even be fraudulently withheld, but a bank will not pay a check until it is properly indorsed, and after paying it the bank itself safeguards it and delivers it only to the depositor or to his known representative. So thoroughly satisfactory is a canceled check as a receipt that some large firms neither give nor ask for receipts when checks are used as the medium of payment. Furthermore, it may be pointed out that the entries of receipts and payments on the books of the bank often constitute a valuable secondary record, the accuracy of which is, in most cases, little short of absolute. Indeed, considering only the matter of payments to be made, it would be difficult to imagine what the modern business man would do without his bank account and his check book. It is only in the field of retail trade that cash payments enter to any noteworthy degree, and even here the greater safety and convenience involved in the use of the check as against cash is telling always more heavily in favor of the check.

Deposits preferred to cash because of safety and convenience

Bank deposits, against which checks are drawn, may be obtained in several ways. The prospective depositor may deposit actual cash, namely, coin or currency; he may deposit checks and drafts1 drawn on his own bank or on other banks or individuals; or he may get his deposit by getting the bank to "discount" notes or bills for him or to "lend" to him with or without the deposit of collateral security of some kind. These several methods of obtaining deposits may now be considered more fully.

The deposit of cash in a bank is really a sale for cash by the bank to the depositor of a right to demand an equivalent sum. It was pointed out above what, from the viewpoint of the depositor, a deposit in the bank really constitutes, namely a naked right to demand. It was also pointed out that, from the bank's point of view, a deposit constitutes a liability. Hence when the depositor surrenders cash to the bank he is really simply buying a right to demand an equivalent sum and is paying cash for it. This, authorities agree, is the exact situation legally. When once the cash has been paid over to the "receiving teller," and proper entries have been made, it becomes the absolute property of the bank. The depositor may, of course, demand an exactly equivalent sum, but he cannot demand to have returned to him the identical coins and bills that he originally surrendered.1