"A bank is a manufactory of credit and a machine of exchange. Mr. H. D. McLeod's analysis of the mechanism of banking is substantially this: A man has $5,000.00 of his own money. He starts a bank. His neighbors deposit $45,000.00 with him. This money becomes the absolute property of the banker. The depositors have simply a right to withdraw an equal amount whenever they like, which right can be enforced by law. The banker owns the money and the depositor has a claim, or right of action, against him for an equal sum. But the depositors will not draw the money out immediately; if they had intended to do so, they would not have deposited it at all. The banker finds by experience that some of his customers will deposit as much money as others draw out, so that $50,000.00 is on hand all the time. He concludes that if his own $5,000.00 in connection with his good reputation, is considered by the public a guarantee for $45,000.00, then the whole $50,000.00 will serve as a guarantee for at least $200,000.00. When he begins, his balance sheet reads in this way: LIABILITIES. ASSETS. Deposits $45,000.00 Cash $50,000.00 "He now begins to discount the commercial paper of his customers running say ninety days at 6%. When he discounts a bill of exchange for $1,000.00, he deducts the interest for ninety days ($15.00) and credits the customer the remainder ($985.00) on his books. This $985.00 is called a deposit, because the customer has the right to draw it out by his check exactly as he could draw out an equal sum of gold deposited by him in the same bank. In the eye of the banker, and of the customer, and of the law, it is a deposit. In ordinary times it is like any other deposit. That is, the proportion remaining uncalled for at any time will be about the same as the proportion of actual money deposited. Yet it is nothing but a bank credit. Hence the word deposit, when thus used, is clearly a misnomer, since, by derivation and common understanding, a deposit means a thing laid away, or given in charge of somebody. It must be borne in mind, therefore, that bank deposits consist of two different things, namely, (1) money, (2) bank credits, and that the latter may be four or five times as large as the former. "The process continues till the banker has $200,000.00 of discounted bills in his portfolio. Then his accounts stand thus-- LIABILITIES. ASSETS. Deposits $242,000.00 Cash $ 50,000.00 Profit 3,000.00 Loans & Discounts 200,000.00 ----------- ----------- $245,000.00 $250,000.00