the issuer of the loan has got a cheque which he pays into some bank or other increasing its cash and its deposits. If the final receiver of the money borrowed or invested is a customer of the lending bank, then the lending bank will have increased its own deposits; its cash at the Bank of England will be unchanged, and its advances (or investments) and deposits will both be increased by the sum of the loan.
It is thus of the utmost importance to remember, as will be seen when we go further into our subject, that whenever a bank makes an investment or a loan or discounts a bill it is increasing the deposits, either of itself or of some other bank—of itself if the person to whom its borrowing customer finally pays the money lent is also one of its customers; as in the case of an investment if the seller of the security is one of its customers, or hands on the money received to one of its customers. By this process the banks create buying power or what may be called potential currency. They create the right to draw cheques, which are usually received without question in payment for commercial and financial transactions. But the extent to which they can engage in this currency making business is roughly limited by
