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The Origin And Functions Of Money
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Banking Operations And Accounts
The Use Of Credit Instruments In Payments In The United States

The Issue Of Notes

As an alternative for or a supplement to the conduct of checking
accounts a commercial bank may issue its promissory notes payable to
bearer on demand. By the issue of notes is meant their transfer to
customers in exchange for cash, for checks left for collection or
drawn against a credit balance in a checking account, or for
discounted notes and bills.

By the use of these notes commercial banking can be carried on
without checking accounts. In that case the notes are issued in
exchange for cash and discounted bills, and notes are returned to the
bank in exchange for cash or when discounted bills or notes mature and
are paid. In the bookkeeping process which has been described bank
notes thus issued and returned perform precisely the same function as
checking accounts, and are related to the discount of commercial paper
and the credit system of the country in precisely the same manner as
such accounts.

Most banks of issue at the present time conduct checking accounts
also, using the one instrumentality or the other as their customers
desire. In this case notes are issued in exchange for checks drawn
against credit balances on checking accounts or deposited for
collection as well as in exchange for discounted notes and bills and

By the use of both notes and checking accounts, a bank can supply most
of the needs of its customers for a circulating medium, the notes
serving as hand-to-hand money, and the checking accounts, practically
all other purposes. Being the direct obligations of banks attested by
the signatures of their responsible officers, and being payable to
bearer on demand and capable of being issued in all necessary
denominations, such notes can be transferred without indorsement, can
be used for making change and payments of small and moderate size for
which checks are not convenient, and they do not need to be presented
at a bank for the test of their validity. If the bank or banks which
issue them are properly conducted and supervised and properly
safeguarded by law, such notes will circulate freely through the
length and breadth of a country.

Checking accounts meet in the most satisfactory manner all currency
needs for which hand-to-hand money is not well adapted, such as large
payments and payments at a distance. With a few strokes of a pen
payments of the greatest magnitude can be made through their agency.
Checks can be sent through the mails at slight expense and without
danger of loss of the amount involved. By the devices known as
travelers' and commercial letters of credit, checking accounts supply
the most convenient form of currency for travelers and for merchants
engaged in foreign trade.

Besides bank notes and checking accounts the only forms of currency
needed in any community are standard and subsidiary coins, the former
for use as ultimate redemption material for all other forms of
currency and for the payment of international and other balances, and
the latter for small change. Even these forms of currency are supplied
by commercial banks, but since they do not create them, ways and means
of procuring them in the quantities needed constitute one of their
peculiar problems.

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Previous: The Conduct Of Checking Accounts

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