§ 6. #Discount and deposit#. The process of discount and deposit is the purchase of the promissory note of a customer,[6] the price being a credit in the form of a demand deposit on the books of the bank. This--the central and most characteristic banking operation--has something of mystery in it at first view. The simplest idea of making a deposit is that of bringing to a bank window bags and rolls of money or other funds (credit papers such as checks and drafts, calling for the payment of money). The bank in that case becomes the debtor and the depositor becomes the creditor of the bank. But in discount and deposit the depositor brings no money, and the credit paper that he gives is his own promise to pay whereby he becomes the bank's debtor. For example, when a bank discounts a thousand dollar note for three months and credits its customer with the proceeds, its deposits are at that moment increased (let us say) $985. Notice that hereby the bank does not add a cent to the cash in its vaults while it has added to its liabilities payable on demand. As an off-setting asset it holds the note of its customer receivable at some future time. §7. #Nature of banking reserves#. Banks would have nothing to gain by receiving deposits or by issuing notes if they were obliged to keep in the vaults actual money to the amount of their deposits and outstanding notes (unless they were paid by depositors for taking care of deposits). Banks have found it necessary in practice to keep on hand money amounting to only a fraction of all their outstanding obligations in order to be able to pay promptly all due demands, excepting in periods of general financial distress. The sum thus kept on hand is called the _reserve_ or the _reserves_ of the bank, and this is frequently expressed as a percentage of reserves against deposits or against note issues, respectively. Frequently, as in the United States, a minimum percentage of reserves is fixed by law.[7] A bank's reserves consist, first, of the lawful money which it actually holds in its vaults at any moment and secondly, of certain other credit items in other banks or with the government, of such a nature that a bank is permitted to count them as tho immediately available.