yed as a means of importing gold. They are only means
through which real reserves of standard coin are distributed. The
payment in cash of a balance with another bank or the discount of
commercial paper with another domestic bank or the sale of bonds on
domestic stock exchanges do not add to the sum total of the cash
resources of the banks of a nation. Their only effect is to increase
the cash resources of one bank at the expense of another.

Adequate facilities for the distribution of the reserve funds of a
country, however, are second in importance only to the existence of
adequate supplies of standard coin. If such facilities are lacking,
existing reserves can be only partially and uneconomically used, with
the result that much larger aggregate reserves are required than would
otherwise be necessary and that the entire credit system is much less
stable than it otherwise would be.

_2. The Selection of Loans and Discounts_

The problem of the reserves is vitally connected with that of the
selection of loans and discounts. As was shown in the preceding
chapter, the chief business of a commercial bank is to conduct
exchanges by a process of bookkeeping between individuals, banks,
communities, and nations. This process consists primarily in the
converting of commercial bills and notes into credit balances and
bank notes, in the transfer of such balances and notes between
individuals and banks, and in the final extinguishment of such
balances and the return of such notes at the maturity of the
commercial bills and notes in which the process originated.

In this process there is little need for cash, provided the
arrangements between banks for clearing checks and for the interchange
of notes are complete and efficiently administered. But when a bank
accepts investment in lieu of commercial paper, its need for cash at
once increases, because the demand obligations created by the credit
balances or the bank notes into which this paper was converted are not
extinguished by payments for goods purchased, but must be met by cash.

To distinguish between commercial and investment paper is, therefore,
one of the chief problems confronting commercial bankers. For its
solution an accurate knowledge of the business operations of customers
is necessary. An inspection of the paper presented and a general
knowledge of their wealth and business capacity are important, but not
sufficient. The forms of the paper employed in both com