tion.

So long as the discounts are confined to commercial paper the bank's
part in these transactions consists almost exclusively of bookkeeping
between its customers and between itself and other banks. Ordinarily,
what is debited on one man's account is credited on another's, the
cash received nearly balancing that paid out. To the extent that the
cash receipts and payments do not balance, the bank either has a
surplus or is obliged to provide for the meeting of a deficit. The
means available for this latter purpose will be explained in
subsequent sections, as well as some of the details of this
bookkeeping process. For the present it is important to note precisely
how the discount of commercial paper is related to this bookkeeping
process.

As explained in Section 1, commercial paper is an essential part of
the process of exchanging goods through credit. A person buys on time
and sells on time and expects to pay for his purchases by the
proceeds of his sales. So long, therefore, as the processes of
commerce and industry proceed in a normal fashion, the paper
discounted by a bank will be paid at maturity and the credit balance
created by means of such discounts offset by corresponding debits.
Ordinarily the credits created through discounts during a given
period, say a day or a week, in favor of one set of customers will be
balanced during this same period by the payment of notes previously
discounted for other customers. Within a complete trading area this is
certain to happen, since purchases and sales of goods are equal and
what is credited to one man is debited to another.

The result is very different if a bank discounts investment paper,
that is, credit documents which represent the unproductive consumption
of individuals or of public and private corporations, or which
represent the purchase on time of the instruments of production rather
than the production of goods through the use of such instruments and
their transfer from the producer to the consumer. The means of payment
of such documents can only be created gradually by the application of
the profits of the enterprises in which the investments were made, or
by taxes spread over a series of years, or by a slow process of
saving. If a bank issues its own demand obligations in exchange for
such documents, it cannot make its books balance and it will be
constantly exposed to the danger of forced liquidation. If it attempts
to protect itself by requiring th