MONEY AND BANKING

202

times; but if over-exercised,

it

can become abnost in a

moment a most importunate bability.

240. Use of credit as a medium of exchange,
most important function of credit

is its

power

The

to circu-

medium of exchange. Obviously, if exchange

can be consummated in large volume by means of credit,
the necessity of huge national investment in the precious
metal is obviated. The whole system rests upon the
assumption that not everyone is going to present demand credits for redemption at the same time. Except in extreme instances, the assumption is a good one,
,and credit has become the chief medium of exchange of
late as a

this country.

In order to circulate in lieu of money, credit must

be payable on demand. Furthermore, the issuer must
be one in whose integrity and ability to pay, the public
has

entire

confidence.

Naturally,

then,

the

credit

which circulates the most freely is Government credit.

Second to this is bank credit, and as this is the medium
in which a large proportion of our exchange is made, it
is

well to consider
241.

and

Bank

deposits.

it

credit,

The

separately.

Bank

credit has

true bank note

is

two forms, notes

the simple promise

of the bank to pay legal tender on demand; the deThese

is precisely the same except in form.
credits are created as the result of an exchange, either
of money for credit, or credit for credit. If the customer brings money to the bank he receives for it either
notes or a deposit account, depending upon which will
If he comes to the bank as a borbest suit his needs.
rower, he exchanges his own time credit for the bank's
demand credit and again takes it in either form he desires.
It is the credits thus created which perform so

posit