Discount houses and the short-term money market

Since my own experience of the cycle of monetary operations I shall describe is concerned with banking, it would seem natural to commence by discussing the functions of a bank. There is no legal definition of a bank, but the term is generally understood to apply to an institution which accepts from depositors money withdrawable on demand, in practice generally by cheque. The cardinal point to bear in mind is that a bank is a trustee of other people's money which, apart from deposit accounts at 14 days' notice, is all repayable on demand. The fundamental consideration is that it is customers' money, apart, of course, from the comparatively small proportion of resources represented by shareholders' capital.

A bank's first duty, therefore, is to its depositors (not to its borrowers!), and the exercise of that trust requires that any depositor shall be free to come to his bank and withdraw all or part of the funds he has entrusted to it. Hence liquidity is of prime importance and a bank must arrange its structure of assets so as to comply with this requirement. But like other commercial concerns a bank must have earning power to cover its outgoings, reward its shareholders and try to satisfy its staff! So, consistent with liquidity, a bank's ‘quick’ assets are arranged to bring in as large a return as possible subject to this overriding limitation.