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Notes might be issued by banks in either of two ways. One way is to exchange them for money. According to accounting principles, the bank here enters into a debit transaction and a credit transaction; but the transaction is actually a matter of indifference, since the new liability is balanced by an exactly corresponding asset. The bank cannot make a profit out of such a transaction. In fact such a transaction involves it in a loss, since it brings in nothing to balance the expense of manufacturing the notes and storing the stocks of money. The issue of fully backed notes can therefore only be carried on in conjunction with the issue of fiduciary media. This is the second possible way of issuing notes, to issue them as loans to persons in search of credit. According to the books, this, like the other, is a case of a credit and a debit transaction only. [5] It is true that this is not shown by the bank's balance sheet. On the credit side of the balance sheet are entered the loans granted and the state of the till, and on the debit side, the notes. We approach a better understanding of the true nature of the whole process if we go instead to the profit-and-loss account. In this account there is recorded a profit whose origin is suggestive—"profit on loans." When the bank lends other people's money as well as its own resources, part of this profit arises from the difference between the rates of interest that it pays its depositors and the rates that it charges its borrowers. The other part arises from the granting of circulation credit. It is the bank that makes this profit, not the holders of the notes. It is possible that the bank may retain the whole of it; but sometimes it shares it, either with the holders of the notes or, more probably, with the depositors. But in either case there is a profit. [6]

Let us imagine a country whose monetary circulation consists in 100 million ducats. In this country a bank-of-issue is established. For the sake of simplicity, let us assume that the bank's own capital is invested as a reserve outside the banking business, and that it has to pay the annual interest on this capital to the state in return for the concession of the right of note issue—an assumption that does correspond closely with the actual situation of some banks-of-issue. Now let the bank have fifty million ducats paid into it and issue fifty million ducats' worth of one-ducat notes against this sum. But we must suppose that the bank does not allow the whole sum of fifty million ducats to remain in its vaults; it lends out forty million on interest to foreign businessmen. The interest on these loans consitutes its gross profit which is reduced only by the cost of manufacture of the notes, by administrative expenses, and the like. Is it possible in this case to say that the holders of the notes have granted credit to the foreign debtors of the bank, or to the bank itself?

Let us alter our example in a nonessential point. Let the bank lend the forty million not to foreigners but to persons within the country. One of these, A, is indebted to B for a certain sum, say the cost of goods which he has bought from him. A has no money at his disposal, but is ready to cede to B a claim maturing in three months, which he himself holds against P. Can B agree to this? Obviously only if he himself does not need for the next three months the sum of money which he could demand immediately, or if he has a prospect of finding somebody who can do without a corresponding sum of money for three months and is therefore ready to take over the claim against P. Or the situation might arise in which B wished to buy goods immediately from C, who was willing to permit postponement of payment for three months. In such a case, if C was really in agreement with the postponement, this could only be for one of the three reasons that might also cause B to be content with payment after the lapse of three months instead of immediate payment. All these, in fact, are cases of genuine credit transactions, of the exchange of present