Eighty-five per cent of aggregate United States bank deposits due to borrowing

We may have gone into unnecessary detail in describing these elementary business practices, but it is because it is important that the reader should understand the real nature of the operations of depositing and discounting. These are the fundamental things in banking and are, moreover, the fundamental facts that determine the amount and the nature of the bulk of our present-day media of payment. This third method of securing deposit credit at a bank is vastly more important than the other two. Actual cash is continually flowing out of the bank, just as it flows in, so that except in unusual periods, the first method of making deposits referred to above does not have a large net effect. The second method, as we have seen, involves merely the transfer, rather than the creation, of deposits. Probably as much as 85 per cent of the aggregate volume of bank deposits in the United States (amounting to nearly $13,000,000,000 in national banks alone in 1921) have been created by discounting and by similar methods of making advances to borrowers. If we should examine the books of any one individual bank we should hardly find as much as 85 per cent of its deposits represented by advances to borrowers. But we must take into account the fact that the deposits of any one individual bank are created in no small part by transfers from other banks, and if we should trace these transfer deposits back to their ultimate origin we should find that in the beginning many of them started as borrowings. Thus, although our statement is approximately true of the banks of the country taken as a whole, it is not necessarily true of any one individual bank.