Institutions which deal in debts

Nevertheless, we shall see that there is a certain sense in which we may speak of making payments by means of debts. But this is a misleading way of stating the matter unless it is clearly understood that we are using the words “making payments” in a rather loose way. Debts, very naturally, are means of avoiding, rather than of making, payments. And the greater the extent to which we can avoid immediate payments by utilizing credit, the more we will be able to avoid the necessity of making final payments, not because we fail to honor our debts, but because the accumulated debts of persons in the community are offset or canceled one against another. This cancellation or offsetting process is accomplished easily and inconspicuously by the mechanism of banking.

A bank is an institution which deals in debts. It buys the debts of its customers and sells its own debts. Its customers’ debts come to it in the form of promissory notes and bills of exchange. A promissory note is, of course, a promise to pay money either on demand or, more usually, on or before a certain date. A bill of exchange or draft is an order to pay, drawn by a creditor upon a debtor. When acknowledged or accepted by the debtor, as by writing his name upon it, it becomes an “acceptance”, and then, for all practical purposes, is like a promissory note.