NATURE OF BANK CREDIT Specialization in Credit Issue The credits issued by the government are incidental to its major functions of making, executing, and interpreting the law. The credits issued by the business man are incidental to the con duct of his commercial operations. The personal credits issued are occasional and for personal consumptive uses. None of these parties specializes in the issue of credits or devotes time primarily to that function. The commercial banks have undertaken this specialized function. Their business is the issue and guaranty of credits for business uses; they are dealers in credits, and are some times, although too narrowly, called "manufacturies" of credit. As will appear in the later chapters on banking practices, com mercial banks function in many ways which do not bear strictly upon credits, and which concern financial as well as commercial credits. The fundamentals of banking, however, are most easily grasped from the point of view of purely commercial credit opera tions.
Forms of Bank Credit The liabilities of a bank to creditors take four chief forms: 1. Deposits 2. Bank notes 3. Acceptances and letters of credit 4. Bills payable Deposits are rights to draw on the bank for money. A deposi tor commonly gets such rights in one or more of the following possible ways: 1. By the deposit of cash or cash items.
2. By depositing time items for collection and credit.
3. By remitting securities or other property to the bank for sale and credit.
4. By the process of loan and discount.
5. By the sale of securities, real estate, personalty, or services to the bank for credit.
Bank notes are promises of the bank to pay money on demand; issued in round denominations and transferable without indorse ment, they are designed to circulate in lieu of metallic money. The transferee becomes the noteholder and creditor of the bank; the bank note may come into his hands in the ordinary transac tions of his business, or through any one of the five methods de scribed above by which a depositor gets deposits.
Acceptances are bills of exchange drawn on the bank, which, for a commission, it obligates itself to pay, but to provide funds for which payment the person for whom the letter of credit is procured is obligated to the bank. Letters of credit are agree ments by the bank to accept, and to pay at maturity or demand, bills of exchange drawn under certain specified conditions.
Bills payable are promissory notes, secured or unsecured, interest-bearing, and running for a period of time, by which a bank borrows in large, irregular sums, at various times.
Sometimes the borrowing is done by selling some of the bills receivable, acceptances, or other commercial paper which the bank has in its portfolio, a process which incurs the contingent liability of indorsement or agreement to repurchase.
Bank credit extensions more commonly take the forms of de posits and bank notes, and therefore the theory of these two forms will be fully developed.
Nature of Cash Deposits Suppose a person, Mr. White, from motives of hire, public interest, or business efficiency, undertakes to accept moneys from a certain number of persons, Messrs. Black, Brown, Green, and Blue, who have mutual business transactions, to act as trustee and common custodian of the funds, to keep a record of receipts and withdrawals, and to permit and care for the transfer of title to these funds on his books. The transfer of title to these funds would become the common method of payment in their business transactions. Such transfers would be accomplished most easily by Black ordering White to debit his account a certain number of dollars and to credit Brown's account the same number of dollars; other orders might be written by Green on White in favor of Black, and by Blue on White in favor of Brown, and so forth. If a number of such orders were presented to White, all the pay ments could be handled by the simple cancellation of debits and credits on his books. Trade would be much convenienced.