iiii!iiiiini I ' 'J i; ■)) FIRST LESSONS ^ IN FINANCE |.'^ CrF.VFLAND zL'^fof. V CORNELL UNIVERSITY LIBRARY FROM 3>c Cornell University Library HG173 .C63 1903 First lessons in finance olin 3 1924 030 171 528 \B Cornell University M Library The original of tliis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924030171528 TWENTIETH CENTURY TEXT-BOOKS EDITED BY A. F. NIGHTINGALE, Ph.D., LL.D. SUPERINTENDENT OF SCHOOLS, COOK COUNTY, ILLINOIS FORMERLY SUPERINTENDENT OF HIGH SCHOOLS, CHICAGO TWENTIETH CENTURY TEXT-BOOKS FIRST LESSONS IN FINANCE (SCHOOL EDITION OF FUNDS AND THEIR USES) BY FREDERICK A. CLEVELAND, Ph.D. WHARTON SCHOOL OF FINANCE AND ECONOMY UNIVERSITY OF PENNSYLVANIA IVITH MANY ILLUSTRATIONS NEW YORK D. APPLETON AND COMPANY 1903 /\77ri^L 3 Copyright, 1908 bt d. appleton and company i/i ^ I "I . \ >! .'\ '■ \ PREFACE Except in its public aspects, the subject of finance has received little attention at the hands of writers. The neces- sity for funds with which to carry on King William's war with France gave rise to the Bank of England and, with it, to modern funding methods. Nearly all of the great banks and banking systems of the past have grown out of public rather than private needs. So constantly has atten- tion been drawn to funding measures of Government, that the words " finance " and " funds " have come to be associ- ated almost exclusively with public affairs. The fast in- creasing funds in private institutions, the magnitude of modern industrial and commercial undertakings, the large funding operations wholly private in their character that have gone along with private enterprise during the last dec- ade, have awakened an interest in private finance far ex- ceeding that which attaches to public revenues and expendi- tures. Recognizing the need for the collection and coordi- nation of data in this branch of the subject, effort has been directed toward the development of a literature such as may bring the facts of financial life within the reach of the reading public. This larger work was undertaken some years ago in cooperation with Dr. Edward S. Meade, of the University of Pennsylvania. The present essay is the vi PREFACE first of a series aiming to give a wide survey of the field of finance. Looking npon the subject of private finance as one which has to do with the getting and spending of funds for private enterprise, the materials of this book have been grouped around three central ideas, viz.: (l)Wliat are Funds ? (2) How Funds are Obtained. (3) The Insti- tutions and Agencies Employed in Funding Operations. The more technical fields of financiering — the several de- partments of financial operation — are reserved for subse- quent essays. In Part I the vaiious forms of money and credit used as funds, and tlie means of transfer of credit funds, are discussed. An understanding of the nature of funds is regarded as fundamental. Part II, which has for its subject " How Funds are Obtained," divides modern funding methods into two classes, namely, (1) the methods of the industrially and socially dependent, and (2) the methods of the industrially and socially independent — i. e., those who depend upon active participation in business. The only method by which the former may obtain funds is that of gift and inheritance, which is the title of Chapter IV; in this the consideration is one of personal attach- ment and direct appeal. The funding method of the second class, those actively cooperating in industrial life, is that of exchange. The consideration for exchange is one of " value." In business there is but one way of ol)taining funds — that is, to have something to sell, some- thing for which those having funds are willing to ex- change them. To this method several chapters are given. Those without capital or other property must resort to sales of labor. The limitations of the laborer, the advantages of education and industrial training, and PREFACE Vll savings as a means of obtaining industrial capital, are some of the important considerations for this class. Those possessed of property or established business may avail themselves of methods which are made the subject of the three concluding chapters of Part II. For illustration of instruments and methods, those actively employed in the market-place have been used. In their reproduction, how- ever, it has been necessary to reduce all exhibits to type- page dimensions. Engravings of checks, notes, scrip, drafts, etc., are about one-fourth of the size of the originals from which they are made. Stocks, bonds, and the larger security documents are in some instances reduced to one- eighth of their original size. In Part III a chapter has been given to each of the leading financial institutions. The labor of collecting the data and illustrations in many cases must have proved fruitless had it not been for the friendly assistance of those in control of financial concerns, and those in possession of instruments acquired by years of con- tact with financial life. In this relation I am especially indebted to Mr. Charles C. Harrison, Jr., of the banking and broking firm of McMichael & Co. ; Mr. John C. Daw- son, of the banking house of Brown Brothers ; Mr. L. G. Fouse, President of the Fidelity Mutual Life ; Dr. Stewart Culin, Curator of the Free Museum of Arts and Sciences of the University of Pennsylvania ; Mr. Herbert G. Stock- well, and Mr. H. A. Chambers. F. A. C. University of Pennsylvania. CONTENTS CHAPTER PAGE I. — Introductory • , , . 1 PART I WHAT ARE FUNDS f II. — Money funds 11 III. — Credit funds 30 IV. — Instruments of transfer of credit funds ... 55 PART II HOW FUNDS ABE OBTAINED V. — Funds obtained by gift and inheritance. ... 79 VI. — Funds obtained by exchange ...... 89 VII. — Funds obtained by sales of commercial credit . . 109 VIII. — Funds obtained by sales of long-time paper . . . 149 PART III INSTITUTIONS AND AGENTS EMPLOYED IN FUNDIIiG OPERATIONS IX. — The United States Treasury 195 X. — The savings-bank ■ 209 XI. — The building loan association ..... 239 XII. — The commercial bank 240 XIII.— The trust company 256 XIV. The broker and the brokers' board .... 265 XV.— The insurance company 282 Index ^^^ ix LIST OF ILLUSTRATIONS PAGE Copper-sheet money . . 19 Silver-sheet money r ... 23 Note of first Bank of United States . . ... 42 Note of second Bank of the United States 43 Note of Southern Bank of Kentucky 43 Note of Exchange Bank of St. Louis 44 Note of Tioga County Bank 44 Certificate of Chattanooga Savings-Bank 46 Clearing-house certificate 46 Scrip of Baston & Wilkesbarre Turnpike Company . . . .47 Sutler's scrip 47 Store scrip 48 Camden & "Woodbury Railroad scrip 48 Chesapeake & Ohio Canal scrip 49 Marion Change Association scrip 49 Patapsco Bank certificate of deposit ... ... 49 Dividend warrant 50 Town scrip of Payetteville, Ark 51 Scrip of Port Deposit 53 Port Deposit loan, 1862 52 Check of Pulaski National Bank ... .... 56 Andrew Jackson's check on Bank of United States . . . .57 Daniel Webster's check on Bank of United States . . . .58 Wages check of Lehigh Valley Railroad 60 Dividend check 61 Coal shipper's check 61 Receipt used as check 62 Daniel Webster's power of attorney 63 Crossed cheek 64 Certified check 65 Cashier's check 66 Bank draft, Bank of United States 67 Express money-order 68 xi xu LIST OF ILLUSTRATIONS PAGE Letter of credit 69 Draft list to letter of credit 70 American Express Company's traveler's check 70 Brown Brothers' traveler's check 71 Identification signature on same 73 Knauth Nachod & Kiihne's traveler's check 73 Interchangeable bank money-order 74 Share of stock in Bank of United States 97 Common stock of United States Steel Corporation .... 99 Non-cnmulative preferred stock 101 Common stock of Gramercy Finance Company .... 102 Preferred stock (cumulative) of Gramercy Finance Company . . 103 Standard Oil Company certificate 105 First preferred trust certificate, Reading Company .... 107 Promissory note (non-negotiable) 118 " " (without payee) 112 " " (negotiable) 113 " " (negotiable by delivery) 113 " " (joint and several) 114 Interest note 115 Note with waiver of grace 116 Signature " His mark " 117 "Value received" and "without defalcation" 117 " Credit the drawer " note 118 Accommodation, credit the drawer note 119 Assignment of note . . 131 " Without recourse " indorsement 121 Indorsed guarantee . 123 Detached guarantee of note 122 " Iron-clad " collateral note 133 Memorandum collateral note 124 Judgment note (simple form) 125 Judgment note with power of attorney 125 Collateral judgment note 126 Notice of non-payment 128 Note with waiver notice of non-payment 139 Protested note 130 Notarial notice of protest 130 Notarial certificate of protest 131 Account stated 134 settled 135 " paid 136 LIST OP ILLUSTRATIONS Xlll Memorandum of settlement and due-bill Commercial draft (simple form) . London draft of Bank of United States Sight-draft Documented bill — invoice . Bill of lading attached to draft . Insurance policy on shipment . Draft of Burnham, Williams & Company Advice of sale of draft Balance sheet Mortgage note Mortgage securing note Parti-mortgage receipt Collateral gold receipt Collateral trust certificate of Asphalt Company Individual private bond Receipt for money deposited on bond purchase Same, purchase Glen Echo Railroad bonds Unsecured bond, Bank of United States Real estate bond Guarantee of bonds .... Individual real estate bond . Guarantee of Reading Terminal bonds Indorsement of bonds .... General mortgage bond of Reading Company Car-trust bond of the Railroad Equipment Company Same, American Transportation Company Debenture bond .... . . Income gold bond Chesapeake & Ohio purchase money bond . Improvement bond of Reading Railroad Company Bond extension contract ... Exhibit in sale of note broker .... Release from liability on indorsement Memorandum of note purchase .... Memorandum of note sale Floor plan of Philadelphia Stock Exchange Philadelphia board-room of Haight, Preese & Company Haight, Preese & Company's chart of private wires . CHAPTER I FUNDS AND THEIR USES— INTRODUCTORY Among the first ideas that one gets from early assoeia- tiou is a notion of respect for the " property " of others ; „ , we soon come to know that there is a differ- ence between those things which we may call " our own " and those things which " belong " to another. Parental authority within the family first impresses the lesson ; later, association with playmates enforces it. Any attempt to violate what are commonly recognized in the community as " rights of property " brings us to grief. The jealousy with which the child guards his right to use his own top, his own marbles, his own knickknacks, and the respect which he comes to have for things displayed in shop- windows or in the possession of his playmates, illus- trate the force with which ideas of property are early im- pressed upon the race. No sooner, however, does the child come to know the use of things, or begin to long for objects that attract his ^g^ notice, than he learns that the " consent " of property is some one must be obtained before they may be acquired. taken. From a parent, a sister, or a brother — members of the household — this consent may be had for the asking ; within the family, acquisition takes the form of "gift." From others, however — those not bound by ties of affection or mutual regard — a mere request is not suf- ficient. In front of a shop is a basket of apples. Their rich 2 FUNDS AND THEIR USES color and fragrance suggest to the child passing that he would like to have some of the fruit. He asks the shop- keeper — seeks to obtain an apple " by gift," as he had been accustomed to do at home. His request is refused. How is he to obtain the coveted fruit? The shopkeeper helps him out of the difhculty. " Have you a penny ? " " No." " If you will get me a penny I will let you have an apple." With this suggestion the boy has his first idea in finance. He runs to his father, obtains a penny "by gift," and, returning, " exchanges " it for an apple. Thus he learns how. the " consent " of shopkeepers may be won, and that this is a second method by which the property of others may be acquired. Exchange lies at the foundation of the world's industrial progress. The story of Crusoe serves well to illustrate the possibilities of life without it. Among a primitive people centuries may be required to obtain the metals needed for weapons and a few rude implements. We have but to reflect upon the many thousands of things about the mod- ern household, each of which contributes a share to comfort or pleasure, to realize how incapable man would be to provide for himself. How long, for example, would it take a man, working alone, to extract from nature a pound of iron ? Having the metal in hand, how long must he labor to make a needle or a screw ? Few of the common things in use to-day could be had at all ; they are each the product of hands whose skill has come from years of Exchanqe the ■ , , . . , . . , chief method experience and training, working with pro- of acquiring cesses and appliances inherited from a society that has labored for centuries past — a coopera- tive society in which, without exchange, cooperation would have been impossible. In every instance, increased facil- ities of exchange have led to a wider range of social and industrial activity. To its development we owe the economies of division of labor, the benefits of the fac- tory system, the larger return and more intelligent con- INTRODUCTORY 3 trol, coming from differentiation and centralization of in- dustries— in fact, every mile-stone of human progress has engraved upon it the significant emblem " Exchange." Out of exchange arises the necessity for " funds." In business parlance there is probably no word so bic with Importance meaning as this one. " If I could get the nec- biltmls "' ^^^'^^^ funds," says the blacksmith, " I would build a wagon shop." The grocer does not add to his stock of sugar when the price is low " for lack of funds." " We are in need of funds," says the building contractor to his partner—" we must have at least $1,000 more to pay our men." " Our funds are running low," says the miller's clerk ; " we must realize on outstanding bills, or make some other arrangement to meet obligations matur- ing on the first of the month." It is out of just such situa- tions and just such problems that the business of finance arises. " Funds " are the key to business under an economy of exchange — a necessary part of business equipment. Business is said to be a contest in which every one is striving for the same thing. This is not entirely true, yet one has but to look out on Broadway or any main thorough- fare of a great city to be impressed with the fact that some kind of contest is going on. Men are hurrying business? ^^ ^^^ ^^'^^ pushing each other about, each try- ing to get somewhere, to do something one does not know what. But it is evident that each has something very definite in mind and that he is straining every nerve and muscle to accomplish a purpose. What is it that brings these millions into the street, takes them to the shops, causes some to stand behind counters and others to work and sweat before a furnace ? Each seems to be working and striving in a different way, but if you ask the clerk or the foundryman, the day-laborer or the banker, what he is striving for, each will make the same answer. " I am not in business for my health," is a saying which expresses a great deal of truth. Each one has certain wants and desires 2 4 FUNDS AND THEIR USES to satisfy. On all sides are found the requisite materials. To gain those things which will satisfy desire, in cm orderly and peaceful way, is the aim of business. Under an indus- trial regime, based on exchange, the quest of business is for " profits." The success of a business enterprise is measured by its " profits " — i. e., the gains to proprietors made through it. Profits, however, are measured by the standard of increased or decreased ability to resolve one's property into funds. A peaceful contest must have rules to govern it, for without rules there would be violence between parties. A number of marbles are placed within a ring ; a line is drawn, behind which each player must stand for the first throw ; the one who lands his marble nearest the center takes first shot. So the rules are laid down for the begin- ning of the game. After the contest is over each counts the marbles which he has driven out of the ring. Each player has put in two marbles as " counters." At the end, . one has scored three ; he is one marble ahead, laiv and while the other player has driven out but one order in — he has lost a marble. There must be a rule for every possible situation and every point at issue, otherwise the game could not proceed. The one boy would not allow the other to take his marble (his property) unless he did it according to rules understood by both at the beginning. Tlie same is true of football, baseball, lacrosse, every contest for points. ISTot only must the rules be known, but they must also be strictly observed. In case of a dispute as to what the rules are, or how they should be applied, the parties may come to a subsequent agreement, or, failing in this, they may refer the point at issue to some one not in the game who knows the rules. He who does not play "fair" may have some of his points taken away, or, on continued offense, may be " ruled out of the game." Business is a contest in which the "counters" are money. Business law is nothing more nor less than the INTRODUCTORY 5 rules governing the contest. The honest man is the one who plays according to rule. A law-breaker not only runs the risk of losing points (i. e., of being " penalized ") but he may be "ruled out." This may be done by his fellows refusing longer to do business with him, or by his being " locked up," — put in jail as often as he breaks the rule. Business may be a very large game. The whole world is the field, and its rules must be understood and observed by all who come into common business relations. Bicsmess ipj^g j^^^^g ^-f ijugjness must be common to all people trading together. It sometimes happens that those known as civilized people attempt to do business with others who do not understand their rules or who have different ones. This is like two sets of players entering a football contest, the one trying to play " association ball," and the other trying to play " rugby." Two systems of business come into conflict. The rules of the one people must be made to conform to those of the other or else there will be trouble. The common advantages of trade are so great that no one industrial group can afEord to shut itself oS. In fact, no barrier is strong enough to preclude men from following up a business advantage when it presents itself. This brings the people of all nations into constant contact. In the conflicts between systems, the stronger forces the weaker to change its rules. The importance of obedience to rules of business law is so great that nations as well as individuals are made to suffer by what is deemed a violation of them. That " honesty is the best policy " is a saying trite but true. Whatever may be said of the atti- tude of one nation toward another, no single individual can afford to raise even a suspicion of dishonest conduct, as this would cut him off from opportunity and preclude him from the advantages offered by broader cooperation with his fellows, cooperation made possible l>y confidence in fair dealing. To quote a saying of Mr. Croker, the Democratic leader of New York : " No combination can be made where 6 FUNDS AND THEIR USES all are dishonest and each one knows it. The first element of leadership is honesty, perfect honesty. The honest man will prevail because other men will trust him. A rascal can trust an honest man, but a rascal can not trust a rascal. You may take one hundred men, ten of them honest and ninety of them false, and put them away on an island ; come back in two montlis and, for the reasons I have given you, you will find the ten men dominating the rest." While Mr. Croker is not often referred to for standards of moral- ity, his success as a jjolitician has depended very largely upon his recognition of the advantage of strict integrity among his political followers, and the advantage of fair play is even more striking in business organization and control. In a game, two conditions are prerequisite to success : (1) An intimate knowledge of its rules ; (2) Skill in the use of the instruments employed. A knowledge of business laws, and skill in the use of the instruments and agents by means of which " gains " are to be made, are just as neces- sary to business success. To the laborer — the one who relies for income on the sale of his labor, who subordinates his own business or talent to help another work out his schemes for gain — a general knowledge of law may be of less importance than skill in the use of some particular tool ; but he must know enough of the rules to play his part well, otherwise he will not be able to render service to „, . . the manager to whom he engages himself. The success in man who manages a business plant and seeks business. income from the sale of its products must equip himself in a different way. He may have less skill in the use of some particular instrument than has the man whom he employs, but he must know the use of instru- ments, and know the manner in which they may be used by others to the highest advantage in order to direct the efforts of his working force in such a manner as to make largest gains without breaking rules. Like a football cap- INTRODUCTORY >J tain, he must know Low to manage his men and his plant so as to take advantage of every opening. Business is co- Funds a Operative. A man can not do business alone. par7oP ^^ .™'^®* P^^y ^ P*^^"*- He must be properly business equipped for whatever part he plays. Business equipment. training, knowledge of the law, equipment adapted to the enterprise, materials, services, all are neces- sary, but in obtaining these the first need is for " funds." The acquiring of funds (capital), therefore, may be said to be the first step in providing for business equipment and business success. Children are frequently found on the street asking for pennies. They have learned the use of money as a means of obtaining things desired, but they have not yet risen above the most primitive knowledge of how to get money. Their fathers and mothers may provide it by gift, as they would also provide the things which pennies will buy, but those not moved by affection or, as sometimes happens, by charity, turn a deaf ear to appeals of this kind. In early Fimds the J^^^'^} "gifts" based upon affection afford a subject of means quite adequate, except in cases of inabil- flnance. ^^j ^f parents to provide. Generally speaking, girls and women throughout their lives are limited to this means of obtaining funds. Many men also pass their lives in this fashion — they obtain all things desired by means of funds contributed. Those who may not depend upon en- dowments of ancestors, and those engaged in active business, have quite different financial problems to solve. Finance is that branch of business which has to do with the getting and spending of funds necessary to the equipment and management of enterprise. A student of finance must first consider what is meant by " funds." When a business man says that " his funds are running low," what does he mean ? Does he mean that his money is nearly all gone? Perhaps he has not had more than a dollar in his purse for a week, and has had no particular use for that, yet he has been car- 8 FUNDS AND THEIR USES rying on a large " cash " business all the time — has had no lack of " funds." What are " funds " ? How are they obtained ? How are they managed ? These three ques- tions answered, the whole field of finance will have been covered. PAET I WHAT ARE FU^DS? CHAPTEE II MONEY FUNDS ExPEEiENCE will at once suggest that what we call "funds " must be something that will be accepted by others in exchcDir/e for their goods or services — i. e., something that others regard as valuable to them in their own business transactions. Those things which will serve as " funds " to one, must have such qualities that they will serve as " funds " to others. By way of illustration let us suppose that a blacksmith in Springfield wishes to enlarge his busi- ness. To that end he begins to accumulate a store of horse- shoe nails. Each week he lays by twelve pounds of nails, until at last he has a ton of them. This might serve as " funds" in a community where every one desires horseshoe nails, but in Springfield not one in a thousand can make use of them. With this stock in hand he is not able to buy bricks, lime, or machinery, or pay for labor. Horseshoe nails are not " funds " in Springfield. The blacksmith, how- ever, finds a man who can make use of a ton of nails; he exchanges them for ten double eagles of gold. He has sold his nails for no other purpose than to obtain something that will serve as funds. "With $200 in gold he may purchase the materials and equipment desired. He has "funded" his enterprise. The whole system of finance grows out of the economy of exchange. Where commerce exists as a feature of busi- ness enterprise, where each member of a community strives to do that for which he is best fitted, and where each relies 11 12 WHAT ARE FUNDS? ou exchange of things prodaced for other things desired, it is to the advantage of each to provide himself with " funds " with which purchases and payments may be made. A "fund" is a collection, or store, or amount of something by means of which purchases and payments may be made. Tlie word " funds " signifies any and all things which may be accumulated and which may be currently used in a com- munity in exchange for goods or properties of others. As has been suggested before, the consent of both Definitions— parties is necessary to an exchange. That Avhieh will serve as funds must have qualities which will induce others to give their consent to part with the things which they own, in exchange. Funds that are col- lected or stored up to pay living expenses, or for the pur- chase of comforts and enjoyment, may be called " main- tenance funds." They answer the same purpose for an individual that a fund would when laid by for the " main- tenance" of a manufacturing plant. Funds that are col- lected or provided for business equipment are called " capital funds." The capital of a business concern is made up of funds contributed to it for permanent use. A money or a credit reserve laid by for the payment (sinking) of a debt is called a " sinking fund." When money is stored up for the purpose of hiding it away, and not for use, it is called a "safe deposit" or a "hoard." This, however, does not properly come within the field of finance. To " fund " an enterprise is to provide the means whereby such pur- chases and payments may be made as are necessary to its success. One whose business it is to provide funds for business enterprise is called a " capitalist " ; the manager of funds is a " financier " ; he who hoards money is a " miser." A " funded debt " is one for the payment of which some definite and adequate provision is made for funds when due. To illustrate : A borrows $1,000 from JB. A thereby procures "funds" for his enterprise; he funds his under- taking ; he secures a working capital of $1,000. The MONEY FUNDS 13 instrument employed to this end is a contract for the future delivery of money which he sells to B for the funds desired. But before B delivers the $1,000 to A in exchange for the note, he demands that some detinite provision be made for its payment. Complying with this demand, A executes a mortgage on his farm as " security" for the payment of the note. The mortgage is a conditional deed to his land, the condition being that in case A fails to pay the note when due, B may sell the farm, and out of the "funds" thereby obtained retain enough to pay the note. In other words, A sets aside property in trust, the sale of which will create a fund sufficient to pay his debt. Funds may be divided into two classes : (1) Those things which pass in the community as money ; (2) forms of credit, or contracts for the future delivery Two forms q£ Q^onev. These may be given and accepted of funds. r ., •' f \- ^ i for the purpose oi making purchases and pay- ments. Both of these forms are a part of a money economy. Under a system in which credit is used as a means of pur- chase, the necessity for actual delivery of money is in large measure avoided. Instead of " money funds " being kept on hand by each member of the business community, a few individuals or institutions hold a large store of money " in reserve," and the business community makes its arrange- ments with them for forms of credit which will serve their financial needs more readily than money itself. The money demands and money uses are largely demands for and uses of money for settlement of credit balances. In all modern systems of finance, by far the greater part of business enter- prise is " funded '' by means of credit. The manner in which this is done will appear later. Money Funds Two qualities or characteristics are essential to money. In the f/rst place, those things which are used as money within a given community must exist in such quantities as 14: WHAT ARE FUNDS? to allow the various members of the community to collect them into " funds " large enough to make the purchases and „ . , payments necessary for their business under- charaderis- takings. A people can not use as money that tics of money, -^^rliich they do not possess; the thing employed must exist in such quantities that it may be had when needed. In the second place, the money conmiodity must be so highly valued by all that it will readily be taken in exchange for goods offered for sale. No two persons may place the same estimate of value upon it ; judgments of value of the money commodity may differ as widely as its various uses, but value it niust have in the judgment of all with whom exchanges are to be made. Otherwise a busi- ness man could not get together, or offer, enough of the commodity to cause another to think that he would proiit by an exchange. Conditions on which the Fundability and Value of Monet Depend To this end the things accumulated for use as money must admit of being divided with such accuracy as to en- able one readily to calculate the amount or por- 1. A money ^^^^ q^ which his iuda;raent of value is to be fund must t c /■ J » admit of di- based. If, for example, some one offers a vision into j^^j-gg f^j, |]^oO, it must be known at once just units. ' •> how much gold is intended before one can form a judgment as to whether he would prefer the gold or the horse. The money offered must admit of division into comparatively uniform units. In a pastoral community sheep may be used as money ; a flock of sheep may be divided into units. One hundred sheep or fifty sheep have a very definite meaning. There is uniformity enough about the primitive sheep to satisfy the judgment of the primitive man. Then, instead of judging the comparative values of a goat, an ox, a horse, and a stack of fodder in terms of dollars as we do now, the party having all of these MONEY FUNDS 15 things for sale might offer the goat for 5 sheep, the ox for 10 sheep, the horse for 20 sheep, and the stack of fodder for 15 sheep. Each member of tlie community having sheep would then have to consider whether 5 sheep would be of greater value to him for purposes of trade or for other use than the goat ; whether 10 sheep would be more useful than the ox, etc., and on the result of his judgment, in the bickerings among those making estimates and offers, would depend the agreement as to price. Since prices must, be made and quoted in terms which will be understood by others, it becomes necessary to have 2 Mmieu some common standard of judgment in esti- funds must mates of value. Without such a standard one *« ^'j^^"™ trader would not he able to make himself un- derstood by another. If I were to ask you the value of a certain piece of land, you would not be able to express your thought or conclusion in answer to the ques- tion unless you could appeal to some standard or measure of value which was known to me. The same is true in making a trade. In this case the one offering goods for sale does not volunteer his estimate of value, hut by offer- ing the goods for a definite sum of money both parties find in the price a common standaixl for judgment. Unless, however, the money funds in which the offer is made are uniform in quality there can be no judgment as to the rela- tive value of the thing offered and of the price to be received. In other words, as let^^een the various units which go to make up the money fund, the judgment of value must be practically the same. Without uniformity, such expressions as a dollar, a sheep, a bushel of wheat, or whatever the thing used as money, would have no uniform meaning. The thing used must likewise have such durability as to protect it from immediate decay. There must be no fear of loss or damage while the thing used is held in the form of funds. Lack of durabihty would render uncertain ah 16 WHAT ARE FUNDS? judgments of value for future use. It would make exchange „ „ itself so far a subiect of chance as to render a. Money ,• i x i funds must impossible all estimates of an advantage to be have dura- "gained" from a business transaction. When calculation of value for future use is made diin- cult, exchange as a regular part of the industrial system is hampered. Money funds must be adapted to being carried about or passed from one person to another without great inconve- nience. JSTothing can serve as money unless fundTmust ^^^ fund accumulated can be easily handled. admit of Lands, houses, and country estates can not be aiZft ""''""^ ised on this account. There are other quali- ties which may add to the value of a thing to be used as money, but the foregoing may be said to be necessary to adapt it to the purposes of exchange. Each and all of these qualities must be possessed to some extent. Some things are more easily carried about than others ; some are more- durable than others, while some may be more uniform or more easily divisible, but no one of these charac- teristics must be wholly wanting in the thing used as money. The greater the degree in which all are present, the more serviceable will be the substance employed. Things that have been used as Monet In a given community those things will be used for money that will give greatest ease to exchange. Among one people, each family may grow a little corn, may have a few horses or cattle, may possess various rude weapons or utensils for domestic use, may also have provided for „, . themselves shelter. They, however, are a hunting people ; meat is perishable ; for long periods they may be entirely without corn. At times horses may be had, but they are not obtainable by all ; weapons are in great variety and size, and adapted to the strength and skill of those using them. The tribe is migra- MONEY FUNDS 17 tor J and often changes its location. Among such a people the things best adapted to serve as monej' may be the skins of animals. Another people may live under quite similar conditions, except that they get a large part of their substance from Dried fish ^^^^g- The things that best lend themselves to their use as money are dried and smoked fish or clams. These will last for years, and there is always a demand for them as food. When fish are scarce the dried products will be more highly valued ; when plentiful, they will be prized less ; but at all times they will have some value due to their usefulness and to the labor entailed in procuring more. Under other circumstances a people may develop a pas- toral life. "With them their flocks and herds furnish that ^. , , -, which serves them best as money. Many of our financial terms have come from such a prac- tice : pecus was the Latin name for kiue — cattle; jx'cunia came to be the Latin word for money ; we have from this such words as pecuniary, pecunious, impecunious, pecula- tion, etc. They counted their money (cattle) by the head (per capita), and their kine were their capital. Our money is our capital ; our goods are our chattels ; our kine are our cattle. In old England scot was a tax or fee ; this presu- mably came from the Saxon scot, meaning cattle, and " scot " was used when taxes were paid in kind. Our exjDression, to go " scot free," comes directly from this use of the word — that is, free from taxes or fine. In communities where agriculture prevailed, some forms of agricultural products were found to be most serviceable in making exchange ; wheat, oats, and barley products!^" were used in Europe for centuries ; maize was employed among the Indians of Central Amer- ica ; where olive-oil, cakes of dried fruit, cocoanuts, and tea have been largely produced they have served peoples as a means of exchange. 18 WHAT AKB FUNDS t Both the advantages and disadvantages of the use of these primitive forms of money are apparent. By their , , , use many of the economics of exchange were Aamiitages •' , ,. , ...^ ,^. J , , and disad- secured and many of the dithcuities of barter miitaycKiit -^ere overcome ; hut still commerce could not III e use of , A 1 1 (• 1 1 • 1 these forms he carried on with ease. All ot the thmgs used of money. possessed the qualities essential to money, but none possessed them in high degree. All had qualities which caused them to be valued, but judgments of value varied widely with each individual. All admitted of divi- sion, but division, in most cases, could not be made with exactness. There was little uniformity, therefore judgment was hampered as to the value of a unit of kind. Their durability was not great. Many of them could not easily be passed about from hand to hand. Yet, with all these faults and disadvantages, they were the best that the people using them could provide ; it required centuries of social and industrial progress for these peoples to acquire those things which would serve them better. Every increased facility given to exchange gives a wider range to social, political, and industrial activity. With the growth of intelligence, with the higher devel- The base ... metals. opment of industrial processes and artistic skill, metals were brought into use which possessed qualities better adapted to serve as funds. Copper, tin, iron, zinc, brass, and other alloys, came to have currency. Even when these were comparatively scarce, they were to be had in such quantities as to allow the accumulation of "funds" sufficient to serve the community in exchange, and were so far superior to agricultural products that the latter became supplanted. Iron was at one time used ; but when iron came to be so plentiful that it was used for weapons, household implements, plowshares, etc., the estimate placed on the \'alue of iron, us compared with other things, was so small that one could not easily accu- mulate and carry about a fund large enough to make MONEY FUNDS 19 the necessary purchases of the goods. Thus, with increased use of iron for other purposes, it became unfit for use as money, because of the great amount necessary to an ex- chsin<'re—i. e., it lacked so far tlie element of convenience 20 WHAT ARE FUNDS? that other metals were preferred. In time, the same came to be true of tin, zinc, and to a large extent of copper, brass, nickel, and other metals. A good illustration of the inconvenience attending the use of copper is furnished in the cut on page 19. The copper sheet from which the engraving was made is 14 inches long, 9 inches wide, and weighs 7 pounds. It bears the stamp of a Swedish sovereign. It may be called a Swedish four-dollar-bill of 1741. Imagine taking a few of these to market to do a little shopping ! Strange as it may seem, the world's best moneys have come from materials used for ornament. This, however, Oniaments. ^^^^^ows naturally. The desire for ornamenta- tion is general. It arises out of a desire for distinction among one's fellows. Those things that are used for decorative purposes are things not common. Things that will serve a particular people for ornament will be desired by all — that is, they possess qualities which will cause them to be highly valued. In both money and ornament the element of value brings them into close rela- tion. If the things desired for decoration possess the other qualities essential to money, the two uses may be concur- rent. Fishermen have polished the vertebrae of fish and used them for beads ; the American Indian has polished the ends of black and white shells and strung them ; wampum- peag (sometimes called wampum, or peag) was used for money by the Indians. In Massachusetts, when the money which the English people were used to became too scarce to serve them in their exchanges, they reverted to the use of the Indian wampum ; the general court of that colony made this legal-tender currency among the settlers at a fixed rate to the amount of 40 shillings. Ornaments of various kinds have been used for money. Many of them have great durability; they accumulate from one generation to another until they are possessed by members of the tribe in quantities snflicient to answer the purposes of money. When these things serve exchange better than the less MONEY FUNDS 21 durable products, they often come to be the only money used. Gold and silver were first used for ornament alone. For many centuries they were too scarce to serve as money — to ^ 7j J ^^ accumulated as money funds. This is still (jiola and . i mi , ,. silver. ^"^^ among some peoples. These metals finally came to be the generally accepted money in civilized nations. Under modern industrial conditions these metals are in every way better adapted to money uses than other materials are. They are universally prized ; they ad- mit of accurate division, and units of value may be exactly determined ; they are easily refined, and may be given exact uniformity of quality ; they have great durability, do not easily corrode ; they exist in quantities sufiicient for cur- rency, but are not so plentiful that it is necessary for a trader to encumber himself in his effort to have on hand a store large enough to effect exchange ; funds of gold and silver being highly valued may be easily passed from hand to hand. Eor these reasons they are more useful as money in civilized communities than the " baser metals." They also serve better than the other " precious " metals ; better than platinum, because platinum is too scarce ; dia- monds and precious stones are easily broken and destroyed, are not divisible into equal parts, are not uniform in qual- ity. Gold and silver not only possess the qualities essential to money in a high degree of perfection, but also admit of stamps and other marks of authority which give certainty as to weight and fineness. Coins made of these metals are easily distinguished from counterfeits; they have charac- teristics which permit traders most easily to arrive at a con- clusion as to value and to agree on a price. With all primitive people several commodities are in- discriminately used as money. Such a money system mul- tiplies the difiiculties of exchange. If skins be used, then an ox may, by one man, be estimated as having a value equal to 10 bearskins ; another may compare the value of 22 WHAT ARE FUNDS? the ox to 20 raccoon skins ; a third may use the fur of the mink as his basis of comparison ; a fourth, having an as- sortment of skins, might offer 2 bearskins, 6 raccoon skins, _,, , , 10 mink skins, and 15 skunk skins. With such ment of a a money it is difficult to come to a conclusion standard. ^^ trade. Commercial transactions become in- volved ; the bickering necessary to a sale is a long process. Exchange with such a money VFOuld be little better than barter. Metallic money may quite as much encumber a transaction. Before the development of a system of exact coinage the money metals often had stamped upon them marks of private houses or of government which guaranteed their fineness. They were then clipped up or cut into pieces to serve the purposes of the transaction in which they were used. The illustration on the next page is a copy, slightly reduced, of a Japanese sheet of silver bearing such marks of guarantee ; in whatever way it might be cut, each piece would still carry with it a stamp. After a system of ex- act coinage was introduced, the problem of the different values placed upon each metal had still to be solved. A gold coin and a silver coin might each bear the stamp of " one pound sterling," yet each would pass at a different valuation. Each metal added to the currency increased the confusion. Attempts have been made to avoid this trouble by using a fixed legal ratio between coins of different materials. Such devices, however, have often proved futile, for traders were constantly passing judgment on the comparative values of the coins used, and when the values of these did not correspond with the ratios intended, each stipulated the metal he would receive in exchange. After many failures, an expedient was hit upon which allowed several kinds of money to be used at the same time and all of the estimates of value to be compared with one metal. This was done by what is known as " the establishment of a standard." In a complex system of money, the standard is a coin composed of a certain amount of metal of a particular kind, having MONEY FUNDS 23 prescribed weiglit and iinenese, for wliieli all other coins may be exelianged at a tixed ratio. The ^Yeight and tine- 2i WHAT ARE FUNDS? ness of the other coins are also prescribed, but it is by a process known as redemption that their relative values and ratios of exchange are maintained. It is this device that lies at the foundation of modern graduated systems of money. As before observed, the evolution of the modern money system is a long and involved process, one dependent upon the development of higher intelhgence, broader The decimal association, and improved methods of social, political, and industrial cooperation. With modern methods even barter would not be as cumbersome as monev exchange under more primitive systems. In fact, modern facilities for comparison of wants and of goods by advertisement and other means of intelligence, allow of many things being exchanged by a system of bai-ter in pref- erence to sale and purchase. Some newspapers and circular publications are devoted to this, and their support is the best testimonial to their success. With all our improved processes, however, with all our modern adaptations, there are still many of the old difficulties that persist. A com- parison of the complex, lumbering English system of money with our own will serve to illustrate the economies intro- duced by later experience and better adaptations. Ex- changes and accounts in pounds and shillings and pence necessarily burden English commerce with an enormous expense of time and energy. It is a burden similar to a tax on trade. If the amount of time that is saved to our nation by the decimal system of money were to be com- puted, the result would be starthng. Let us assume that, by means of the decimal system, twenty minutes per day were saved to those engaged in commercial transactions and accounts ; with 5,000,000 people employed in this manner, there would be an economy of over $100,000,000 per annum. In the United States, however, we are still en- cumbered by older systems of weights and measures. It is to be hoped in the interest of economy that a decimal system MONEY FUNDS 25 may ultimately be adopted for these calculations. Another economy in exchange that has been worked out by Americans comes through our broader social, political, and industrial organization. Throughout the United States and Canada we have practically one standard and one system of money. The business of this Continent is freed from the multiplicity of computations necessary to deals in Europe and other parts of the world. Gradually the world is working toward uni- formity in standards and uniformity in monetary systems. The result is a higher economy — increased facility in mak- ing commercial judgments, and increased advantage in com- mercial exchange. The Monet System or the United States The central idea of the American money system is the " dollar." What is a dollar ? This question has been the „ „ subiect of volumes of discussion. The answer The ''^dollar " —The central to the question has become involved in a wilder- fact in our nggg of theory — lost in a maze of abstractions — as a result of which the reader is led to believe that there is great difficulty in understanding just what a dollar is. Fortunately we do not have to read all this literature and wrestle with all the hypothetical problems propounded. The whole matter is settled by one section of the United States statutes. The Act of February 12, 1873 (Sec. li), establishes "25.8 grains of gold" ^^Vf fine (or 23.22 grains of fine gold), which bears the required stamp and impress. The statute says that this is a dollar — not that it resembles a dollar, or that, for the purposes of discus- sion, it may be considered a dollar, but that it is a dollar. Furthermore, the statute again cuts off all controversy regarding the worth of a dollar ; for it says that the dol- lar (the printed piece of gold containing 25.8 grains of gold iVinr fine) "shall be the unit of value" in our money system. 26 WHAT AKB FUNDS? But what about the other forms of money in our com- plex system ? In the first place, there are six kinds of gold Gold coins of coin, viz., the "dollar," the " quarter-eagle," the the U7iited "three-dollar" piece, the "half -eagle," the States. "eagle," and the "double-eagle." What about these ? They must contain exactly the proportions of 1, 2^, 3, 5, 10, and 20 in weight of gold of uniform fineness (jViro)- The statute does not provide how much the several pieces enumerated shall be worth. But the weight and fineness of metal being established for each, they pass in the com- munity and are "valued" by business men at $2.50, $3, $5, $10, or $20, as the case may be. That is, a piece of gold which has 51.6 grains of gold is valued at just twice as much as a piece containing 25.8 grains. If, therefore, the latter is one dollar, the former would be valued at $2. They all pass "at par" by virtue of this exact proportion of gold having the same quality and fineness, and thus the "three-dollar" gold piece will pass interchangeably for three " one-dollar " pieces. We also have in our system "silver dollars," "half- dollars," " quarters," " dimes," etc. The statute prescribes Silver coins .l*^®* ^°^ much silver there shall be in each, of of the United YoVTr ^^c, and what stamp and impress shall be States. p^^ Qjj |.]jg]^_ ijij^g ]g^^ (jQgg jjqI; attempt to pre- scribe how much these coins shall be worth ; it simply makes provision for their form, weight, and fineness. The Gov- ernment also holds itself ready to exchange a silver "dollar" for a gold "dollar," and with this lets each man decide for himself how much it is worth. Minor coins are also a part of our metallic money equipment. The five-cent pieces, " nickels," and " cents " add to convenience in making exchanee. Minor coins. ,, __, . . , , , „ ,. ,, -r-rT, . ° " What IS a ' nickel ' « " or " What is a cent ? " may be determined in the same manner as' " What is a silver dollar ? " They are pieces of metal, of definite form, weight, and quality, which the Government agrees MONEY FUNDS 27 to exchange for gold coins at the rate stamped on tlieir faces. Besides the gold, silver, nickel, and bronze metallic moneys there are nine classes of paper moneys in circula- Paper ^i^^^' ^^^^ of which has a definite provision for money in form and design. Paper money is issued in '''''''^''*"'^- denominations of $1, $2, $5, $10, $20, and higher multiples. Each is in the nature of a promise of the Government, directly or indirectly, to deliver the number of dollars (gold) for which it is issued. The United States notes 1. United (greenbacks) are promises of the Government States notes to pay to the holder a definite number of gold or greenbacks. ^^ g-j^^^ ^^^jj^^.^ « ^^ demand." For example, a "two-dollar greenback" is one which has written upon it the promise of the United States to pay to the bearer on demand two gold or silver dollars. Silver dollars, however, are exchangeable for gold whenever gold is desired. There- fore it is entirely optional with the holder as to which will be received. A national bank-note is a promise of a national bank to pay to the holder, or bearer, on presentation, the amount named in the bill in legal-tender money of the lanJc'lTe^! ^^^i^d States-i. e., in gold, silver coins, or greenbacks. This makes the bank-note indirectly convertible into gold at the option of the one owning or holding it. The Government, recognizing the inconvenience of car- rying about a large fund of gold, has made provision for the deposit of gold funds in the Treasury, either as coin or bullion, in any amount in which they may be c'ertincates accumulated, against which an equal amount of gold certificates, or certificates of gold deposit, is issued. Thus one holding the certificates may, "on de- mand," have the gold "dollars" or the money value of bullion deposited. The silver certificate is issued for a similar purpose. 28 WHAT ARE FUNDS? Silver money is about sixteen times as heavy as gold money. To carry about a large fund of it becomes impossible ; even small sums are very inconvenient to handle. By 4. Silver allowing a deposit to be njade and certificates cerhjicates. o ir • i • j of deposit to circulate as money m their stead, the public is served in every manner the same as by the use of the coin. At the same time, if gold is preferred, they may be exchanged for gold when presented for payment. Similar privileges were formerly given to owners of silver bullion. Instead of requiring the owner to have his metal coined before putting it into circulation, the noieslTiSBO Grovernment allows him to deposit the bullion at the coinage value and receive certificates which entitle him to withdraw silver coin. Thus the Government has the metal for coinage if occasion requires, but is not put to the necessity of coining it. The certificate is indirectly exchangeable for gold "dollars" in the same manner as "sil- ver certificates." The process is only one step farther removed. The holders of small denominations of "greenbacks" find that it takes a long time to count out large sums with accuracy. As a means of avoiding this, small ferHficate7 ^^'^^ ^^^ ^® deposited to the amount of $10,- 000 or multiples thereof, and one or more bills or " currency certificates " may be issued to represent the amount deposited. Thus, for the transfer of $1,000,000 it would require only one hundred bills of the lowest denom- ination. These, as may readily be seen, are indirectly ex- changeable for gold. Fractional currency notes were issued for small change during the civil war when gold and silver were scarce. 7 Fractional "^^^7 "^^^^ issued in fractions of a dollar, and currency were derisively called " shinplasters." They jiotes. have been canceled as fast as presented at the Treasury, but there are still about $15,000,000 out- standing. MONEY FUNDS 29 Old demand notes and compound interest notes are 8 Old de- iorms of currency similar in character to the mand notes, greenback, except that the latter bears com- 9. Compound pound interest at the rate stated in the contract interest notes, mu • j.t„ ^ r • /■ ,i ^ iney are m the nature oi promises of the Gov- ernment to pay on demand gold or silver in exchange. In none of these forms of money does the Government attempt to say how much it is worth. It simply deter- The uniform- ™iiies what a " dollar " is — i. e., it represents ity of calue that a dollar is a coin of the United States con- mow sys em. ^g^^j-^^^^g <23.33 grains of fine goldYfith one-tenth of alloy to prevent abrasion. It then agrees to exchange all forms of money, other than gold, for coins of that metal, and supplies itself with a reserve fund of gold to this end. The public is left to place its own value on the gold " dollar " as well as on all other coins and bills in the system. The process of redemption operates to make the estimates or valuations of all kinds of dollars alike. The value of a " dollar " of any kind is therefore the value of 23.22 grains of pure gold. CHAPTER III CREDIT FUNDS Ceedit is a contract made between two parties whereby the one promises to deliver a certain amount of money to the other at a specified time. This contract, or promise, may be written or oral, formal or informal, expressed or implied, but in each case the essential fact is the same — a contract for the future delivery of money. A " credit transaction " is one in which a promise to pay (i. e., a con- tract for future delivery of money) is ex- Defimhon of changed for something else of value. "When one deals " on credit," he deals on his own promises to pay, or contracts for future delivery, instead of money ; when one buys for (or on) credit, he purchases goods and gives his obligation to pay in exchange ; when one sells for (or on) credit, he transfers his goods to another in exchange for the promises of that other to deliver a defi- nite sura of money at a definite future time. Illitstbations of Credit Uses Morgan is a young man of sober, industrious habits, is well trained, and has a good reputation in the community where he lives. He decides to begin business for himself. He goes among the farmers with whom he is acquainted, and asks them if he may become their agent for the sale of grain in Chicago. A list of clients is scheduled which seems to warrant the opening of an office. But he has no capital, and it will require at least $1,000 in " funds " to equip and manage an office where he can display his sam- 30 CREDIT FUNDS 31 pies, meet prospective buyers, manage consignments, etc. He lays his plan before his friend Drexel, who has an abundance of means and who makes it his business to sup- ply funds to those who have need for them in business. Morgan explains his plan, shows his assured list of clients and his business prospects, and proposes to Mr. Drexel that if he will give to him $1,000, then he (Morgan) will execute to Drexel a contract in writing for the delivery of $1,100 one year hence. Mr. Drexel has confidence in the integrity of young Morgan, and after studying his plan of undertaking and his prospects of success, he decides to exchange $1,000 for Morgan's contract to deliver $1,100 one year hence. Ko money passes, however. Morgan hands to Drexel his "note" for $1,100, and Drexel gives to Morgan his " check " for $1,000. Morgan takes the check to the bank and presents it, and the cashier transfers $1,000 from the credit account of Drexel to the account of Morgan. That is his capital. This credit account is the " fund " with which his business is begun. Morgan now goes to Chicago, where he has the credit account transferred to a bank. He rents and equips an oiBce. He forms business relations with an old and reliable produce broker who has a seat on the Board of Trade, and agrees to divide commissions with him until, finally, he is able to purchase a seat of his own. He devotes himself to build- ing up and enlarging his clientage. By adver- rmt^funds^' tiseraent and constant effort he gains prestige ; he arranges with the bank to carry the margins of speculating clients ; he finds constantly increasing profits in his commissions. A business which at first netted him only enough to meet office and personal expenses, after years of effort nets him $10,000 per month. During this time he has paid the original loan from Drexel, bought a seat on the produce brokers' board (the Board of Trade), and at a mature age becomes possessed of many valu- able properties and securities. All of this has come to 32 WHAT ARE FUNDS? him from tlie use of credit, from untiring energy, from thrifty habits, and an unimpeached integrity. He now wishes to retire from the business of brokerage and to lead a more quiet life, devoting only such time to business affairs as may be necessary to the care of his investments. Gates, a young man of wealth, and a friend of Morgan, desires to engage in the business of brokerage. He does not wish to spend a life of hard competitive effort in building up a new business ; he prefers to buy a business already estab- lished. He goes to Morgan for advice, and each recogniz- ing an opportunity, a bargain is made, whereby Gates agrees to pay $50,000 for Morgan's seat on tlie Board, and $250,000 for the business name of his firm. That is, Morgan retains all the securities, accounts, and investments ac- A credit quired by him in course of business ; he sells his purchase. /i • . seat (his opportunity to trade on the Board) and his "good will" (or business reputation) for the sum of $300,000. But how is this to be paid for ? Does Gates count out standard gold coins to that amount ? No. He does not even pass to Morgan his check. Finding that it will be advantageous to retain his present available "funds " for use in the business, it is arranged that the purchase shall be made " on credit " ; that is to say. Gates offers to Morgan three promissory notes for $100,000 each, due in one, two, and three years resj^ectively. The purchase price of the business is $300,000, as agreed, but in consideration of the time that payment is deferred. Gates further promises to pay 5 per cent interest on the respective amounts until they are paid. By these several contracts (agreements for the purpose of exchange) Gates promises to deliver $115,000 at the end of the first year, $110,000 at the end of the sec- ond year, and $105,000 at the end of the third year— $330,- 000 in all, principal and interest— instead of $300,000, the purchase price if payment had been made in money at the time the business was delivered. Now note just what has taken place. Morgan has sold what ? Nothing tangi- CREDIT FUNDS 33 ble; nothing that maybe seen; nothing that maybe passed from hand to hand. He has disposed of his business oppor- tunity and his business reputation as a broker — nothing else. Morgan may still do business in any other way so long as he does not attempt to use his seat on the Board or the name and reputation of his old firm for the business of brokerage. And what has he received ? Something tangi- ble ? Something that may be seen ? Something that may be passed from hand to hand ? Yes, but what is it ? Is it gold ? Is it money ? JSTo. What is it ? " Paper." One slip reads as follows : $100,000.00. New York, January 1, 1901. One year after date, for value received, I promise to pay to Morgan or order One Hundred Thousand Dollars in gold coin of the United States, of present weight and fineness. With interest at the rate of 5 per cent per annum from date until paid. [Signed] Gates. The other two slips read exactly the same way, except as to date of payment. But suppose Morgan loses these slips of paper, or that they are destroyed by fire, is the credit destroyed ? Not at all. The obligation to pay re- mains as before ; if Morgan can prove the loss and likewise the amount due, he can enforce the payment. These slips of paper are only evidence of the credit agreement, which in itself is a thing as intangible and as invisible as that for which it was given — viz., business opportunity and business reputation. Still, credit is bought and sold in the market; in fact, credit is one of the chief items of exchange in mer- cantile business. Essential Chaeaoteeistics of Ceedit Good-will, membership in a society of brokers, business opportunity and reputation are the properties that have changed hands. They have not been given away. None of them has been exchanged for another — they have not 34 WHAT ARE FUNDS? been bartered, yet no money Las passed. They have been bought and sold, full payment has been given and received, Credit ^^^ the full title has passed. What represents arises out of the other side of the transaction ? As a result exchange. Q-f j-j-^g exchange there came into being, and still exist, Gates's notes for $330,000. All these promises have purchasing power, and so long as they exist they may serve again and again in any number of transactions until paid, or until their values are lost by depreciation. To understand the nature of credit it may be well to re- flect on the underlying principles of exchange. In the first place, why did Morgan and Gates trade ? Morgan had a business that was bringing him in a net profit of $10,000 per month^$120,000 per year. This was its net income- producing power to him. Much of the return was due to continued personal effort, but the reputation of the firm was so well established that its clientage in large measure would be retained, though its management were changed. Mor- gan, however, wished to avoid the nervous principles strain and the responsibilities of an active of exchange broker. In his judgment he would rather have 'to crFdit^ $300,000 in gold than the business which he has sold — i. e., he estimated or valued $300,000 more highly than the business. Gates, on the other hand, would rather have the business than $300,000 in gold ; each found the transaction to his advantage and $300,000 was agreed upon as the pi-ice. Here was a difference as to valuation but an agreement as to price, and the exchange took place as a result. Now after the price has been agreed upon there follows another transaction. Instead of Gates delivering the $300,- 000 in gold first agreed upon as the price, he offers to Morgan his three notes, each for $100,000, with interest — obliga- tions for the future delivery of money, amounting in all to $330,000 when due. Morgan accepts these in lieu of the $300,000 in gold. Why does Gates offer the notes, and CEEDIT FUNDS 35 wty does Morgan accept them ? Gates ofEers them because he values $300,000 in gold more highly than the notes. Morgan accepts the notes because in his judgment they are Value quite as valuable as $300,000 in gold. Morgan and price indorses the notes and sells them for $805,000. of credit. yfl^j does the purchaser offer, and Morgan ac- cept, that amount ? Manifestly, because the purchaser thinks the notes of greater value to himself than $305,000, while Morgan esteems the $305,000 more highly. The purchaser of the notes is an investor in commercial paper ; he gets his income from furnishing current funds to those who wish to sell credit on terms of advantage to him. Morgan is also about to devote his energies to investment, but his judgment is that he will profit something by exchanging the notes for $305,000 in gold. But again, the purchaser of the notes, instead of paying Morgan $305,000 in gold, hands to him his check for that amount, which is accepted. It is quite clear that this was done because the one making the pur- chase thought it to his advantage, while Morgan valued the check quite as highly for the purpose of exchange as he did the gold. We now pass to the consideration of the basis of credit — i. e., the elements in it which cause credit funds to be val- Basis of the '^^^ more highly than money and consequently credit to supplant money exchange. Morgan's judg- judgment. ment is that the promise of Gates to pay $300,000 with interest at 5 per cent is more desirable than his own business as a broker. But why ? Before an ex- change can take place the conclusion must be reached ; but by what process ? The thing to be considered is oUailmonly a contract for future delivery of money. The for future promise is that Gates will pay $330,000 in gold delivery. ^^ ^ definitely appointed time. In estimating the value of such promises, what element must be taken into account? In the first place, Morgan must estimate the ability of Gates to obtain that amount of gold at the time proposed. 4 36 WHAT ARE FUNDS? He sells his business ; he receives a claim against the future income of Gates ; he must, in estimating the ability of Gates, therefore, consider his facilities for obtaining money. But this is not all. There is a second consideration. Morgan must not only pass judgment on Gates's ability, 3. Business ^^^^ j^g j^^g^ g^lg^ ^^],g |j^|.q account Gates's dispo- integrity. -t sition to apply the money obtained to the fulfil- ment of his promise — to the payment of the claim when due. These two judgments lie at the basis of all credit ; on these two elements does the value of credit rest. (1) A judgment that the one promising is able to fulfil his promise. (2) A judgment that he will be willing. Willingness is another name for " honesty " or " integrity." If these two judgments are favorable, or, as the business man would put a favorable i^j ^^ Morgan has "confidence" in the future judgment— delivery, he is in a position to make a business Confidence. ,• , j.xi ji j^-c-j estimate as to the present value of a juture income of $330,000. Confidence is nothing more or less than the result of judgment that a person is both able and willing to do what he promises. That which we call security is a contract whereby a fa- vorable judgment is secured when otherwise such judg- ment would be lacking. In the transaction in which Morgan sells Gates's notes, the purchaser of the notes was not well acquainted with Gates, and was not in a position to pass favorable judgment ; he did not value Gates's ability and integrity as highly as did Morgan. The purchaser of the notes, perhaps, would not offer more than $250,000 for them, but he knew Morgan and had confidence that he would meet his credit obligations. He was willing to buy Morgan's contract for future delivery of $330,000, at the times specified in the notes from Gates to Morgan, for $305,000. He therefore proposes that he will pay $305,000 for the notes, on condition that they be indorsed by Mor- gan. "What was the force of this indorsement ? Why did the simple fact of Morgan's name written across the backs CREDIT FUNDS 31 of the notes raise the purchaser's valuation to such an ex- tent that he was willing to add $55,000 to his oiier ? By operation of commercial usage (law) the addition of Mor- gan's name set up a new contract. If this contract had been written out in full it would have been as follows : In case Gates does not pay this note when due, upon notice given to me, I hereby promise to pay it in full myself. [Signed] Moegan. This contract is one of the obligations known as j>erso7ial security. Now the purchaser has confidence that the sev- Relation of ^^^^ amounts promised by Gates will be paid security to at the time specified, and he offers Morgan credit. $305,000 for them. The effect of security is to obtain a more favorable estimate ae to the value of the contracts for the future delivery of money which Morgan offered for sale ; it increased the price obtainable from the credit and decreased the cost of the money or other things received by Morgan in exchange for credit. Ceedit viewed as a " Short Sale " of Monet 1^0 better illustration of a credit transaction may be found than what is known as a " short sale " — the sale of something that one does not possess. Pillsbury A short sale ^ q^ ^j.g millers. They enter into a contract 0/ flour. •' for the delivery of 10,000 barrels of *A* flour to Kimball & Co., of Liverpool, at any time that Kimball & Co. may want it, after May 1, at $8 per barrel. Their business manager has made a sale of something that they do not possess — something that they are " short " of. They have neither wheat nor flour. The company has only a mill and other equipment for making the kind of flour sold. The contract for future delivery, however, is im- portant to the successful management of the mill. By this, one factor in the manager's problem is solved — the price 38 WHAT ARE FUNDS? which he will receive for his output. From business ex- perience he is able to calculate another factor with sub- stantial accuracy, viz., the cost of manufacture. If, thei-e- fore, the manager can make a contract which will fix the cost of the wheat to be used in the manufacture of the flour, he can calculate the profits as well as if he had sold flour already produced. Wheat was selling at 99 cents per bushel at the time that the " short sale " of flour was made. If, the company's manager calculates, " 'No. 2 Hard Spring" wheat f/whlir^^ may be had at $1 per bushel, his company will make a profit of $2 per barrel on the Liverpool contract. To assure his company of this, he enters into an- other contract with Brown & SchafEer, produce-brokers, for the future delivery of 50,000 bushels " ISTo. 2 Hard Spring " wheat " on call " after thirty days, at $1 per bushel. But Brown & SchafEer have no wheat at the time the sale is made. They are "short" of the commodity contracted for, but, being a reliable business concern, Pillsbury & Co. make a part payment, or " put up a margin," and rely on Brown & Schaffer for the delivery of the grain. The manager can now devote himself to the manufacture of flour without being troubled about fluctuations in the price, of wheat ; he has shifted the risk of market fluctuations in the price of wheat to Brown & Schaffer. Pillsbury & Co. liave made a " short sale " of flour, and to cover the risk of fluctuating price they enter into a contract for the future delivery of wheat. Brown & Schaffer sold "short" of "No. 2 Hard Spring " wheat at $1 per bushel for delivery on demand Settlement of ^^^^^ thirty days. They did this because in the short sale their judgment wheat was "going down " ; they of wheat. wished to buy on a better market to fulfil their engagement with Pillsbury & Co. Instead of going down, however, a " corner " is formed in this grade of wheat and the price advances rapidly. Thirty days hence Pillsbury CREDIT FUNDS 39 & Co. " call " for the delivery of 26,000 bushels. Nothing will satisfy the contract under which the call is made but " JSTo. 2 Hard Spring " ; this is the grade needed for the milling process for the production of the kind of flour sold to Kimball & Co. ; this is the only kind that will be re- ceived. Whatever the sacrifice to be made by Brown & Schaffer, there is for them no alternative other than to de- liver the exact thing promised, or to " settle " — i. e., to turn over to Pillsbury & Co. $12,500, to pay the difference be- tween the contract price and the market price, which on that day happens to be $1.50 per bushel. In other words, before Pillsbury & Co. will agree to "settle," Brown & SchafEer must place the mill company in a position to buy $1.50 wheat at a cost, to them, of only $1. The Pillsbury company, however, have not the extra $25,000 with which to pay for the wheat needed. The manager therefore takes the $12,500 received from Brown & SchafEer and goes to Armour & Co., whose elevator bins are filled with " No. 2 Hard Spring," which they are holding at $1.50 per bushel ; he arranges to purchase 25,- 000 bushels at $1.50, paying down $12,500 (the amount received from Brown & SchafEer), giving his firm's note for $25,000 -(principal) and $500 (interest), due in ninety days in payment for the balance. The wheat f/monir^' is immediately delivered. Pillsbury & Co. have purchased 25,000 bushels of the kind of wheat desired. They have become the absolute owners of it ; they may grind it and dispose of it as they please. But how has the wheat been paid for ^ In exchange, the company, in part consideration, has sold its contract for the delivery of $25,000 " on call " after ninety days ; it has made a " short sale " of money — has again promised to de- liver something that it was " short " of at the time the con- tract was made, hoping to obtain the money from Kimball & Co., of Liverpool, in return for the flour, before the maturity of the note. Thus, the calculation is, the return iO WITAT ARE FUNDS? on the contract for the short sale of flour will cancel the contract for the short sale of money, and the Pillsbury company will have the difference between the two contracts as profit. The same rules, identically, apply to the credit contract of short sale of money as applied to the short sales of flour and of wheat. Nothing will satisfy the credit contract but the delivery of the thing promised. Pillsbury's manager makes a similar contract on the purchase of the flemm/tht remaining 25,000 bushels of wheat due from same as in Brown & Schaffer ; he grinds his flour and de- fale of wheat, ^i^^rs it to the Liverpool merchants in time to meet the short sale of flour to them. But Kim- ball & Co. fail to make return in money on the shipment ; after the delivery of the flour Kimball & Co. become bank- rupt. Nevertheless Pillsbury & Co. must meet their " short sale " of money — their two notes for $25,000 each to Armour & Co. on demand after ninety days. This must be done even though it requires the sacrifice of working capital, credit accounts, treasury securities, even the milling plant and business reputation of the company. All must be sold, if need be, to procure the money for delivery under the con- tracts to Armour. Nothing but money will satisfy the con- tracts. If the notes be for the delivery of " gold coin of the United States, of present weight and fineness," then gold coin of this description must be delivered, or a " settlement " made — a new contract entered into for the delivery of some- thing else which Armour & Co. will take in lieu of gold. Greenbacks may be offered instead, and accepted ; Pills- bury's check may be taken as readily, if Armour believes he can get the amount of gold contracted for in exchange for the check. If Pillsbury & Co. can not get greenbacks, or if they have not a bank account, then they may offer to Armour some real estate in St. Paul, and this may be taken " in settlement " of the short sale. On the other hand, un- less something else will be taken " in settlement " by Ar- CREDIT FUNDS 41 mour & Co., there is no alternative. Pillsbury must get the gold or be declared bankrupt. In a period of great financial distress — in other words, at a time when demands for delivery of tnoney on credit con- tracts are large — the price of money may he forced up ; all kinds of property may command a low price in exchange for money. As in case of the corner on wheat, those who have sold " short " of money may have to pay any A corner on . i ■ i i . i. j .1 money— Fi- pnce necessary to obtain the thing contracted nancial dis- for or for such other " funds " as will be received in place of money by way of "settlement." When demand is made for payment, money may cost two or three times as much as at the time the contract for fu- ture delivery is entered into. Failure to meet these con- tracts means bankruptcy — the sacrifice of all forms of property on the altar of "short sales" in credit. Bank- ruptcy is, in effect, a means of judicial " settlement " of short sales of money in cases where the parties to the contract can not come to a new agreement or " settlement " among themselves. Financial Uses of Credit In its relation to finance, credit has two uses : (1) It may be used as a means of obtaining funds. (2) It may itself be used as " funds." The second use is the subject of present consideration. Yery often it happens that a merchant will take his note to the bank for discount. In this case the transaction is one of exchanging a form of credit created for the purpose of obtaining " funds " (a note) for another form of credit which is created for the purpose of being used as " funds " (a bank account). FOEMS OF CeEDIT USED AS " FuNDS " — BaNK CeEDIT Bank credit is a form of contract for the future delivery of money, especially created to serve the business commu- i-2 WHAT ARE FUNDS'? iiity as " current funds." The capital of the bank is in the form of a " money fund." This stock of money is held in reserve — is used to support its credit. The whole equip- ment of a bank is directed toward this end, and its success or failure depends on maintaining its credit currency. The obhgation of the bank is to pay money on demand. It must always keep in stock a " money fund " sufficient to meet the demands of creditors for delivery of money under these contracts. The larger its money fund the greater the amount of credit currency it can safely sell to its cus- tomers. About 50 per cent of the funds of a well-organized business community are in the form of bank credit ; about 90 per cent of the exchanges of such a community are inade for bank credit in one form or another. There are several forms of contracts for the delivery of money which are sold by a bank for use in a community as funds. One of the most common is the " bank-note." The bank-note is a written promise of the bank to deliver or " pay " the amount of money named on its face to the one presenting it at its counter. The following is a photo-copy of a ten-dollar-note issued by the first Bank of the United States in 1796. This form of note is known as a " Willing Note," taking its name from Bank-notes. Mr. Thomas Willing, the president of the bank. The second reproduction is known as a " Biddle Note." It was issued CREDIT FUNDS 43 by the second Bank of the United States in 1829. In most countries bank-notes may be issued only in conformity with ifar certain legal regulations and under such guarantees of government as to cause them to pass from hand to hand as " money." Until about the middle of the last century this was the most usual form of " bank credit " used by busi- ness men. In exchange for notes, bills, accounts, etc., offered to the bank for sale by customers, it would give y///^f^^y;^^tf!iiS'ais^-^i^K^^yiaJ>^"t^ ^^Irri^ rency. To meet this emergency business houses and con- cerns of every kind issued " shinplasters," as they were called. The first here exhibited is from an issue of the Old Easton & Wilkes Barre Turnpike Company. From 1837- '41 the issues of private concerns were almost the only currency in use. The scrip of the Camden & Woodbury -' / / / / , iOiit / !(3^^ /Zf: ,,f^ Transportation Company and that of the Chesapeake & Ohio Canal Company are good illustrations of the form of funds in current use by transportation concerns of the time. The demand for " change " at this time finds illustration in the issues of the Marion Change Association of Marion, Ala. Being without money or means of carrying on transactions with their customers, the leading business men CREDIT FUNDS 49 of the place, whose names appear at the top of the bill, organized for mutual accommodation. Certificates of de- ::!iKNAi'EAfi": > Ai! u;iiO CAN M. W^^ m f^yr^^y^ . ^ ^- posits of savings-hanks were also put into use as money in denominations to suit the convenience of customers. An- WUI p,y 'he Hvir.r. TwelVC ."IBld .1 Half CeiltS, il-l'lu: cou.il^r of tiUh.:r memhcr of iha A.iMria'ion, nr al ihp -Olficf of SjKi": ytMIc, in SlaJe Bank jVolex, iclirn the amount of Fiv Dolhrg i.i prcxenifl [• t Marion, Alabama^ !*).■) '" Pre^'t- \i^^fi<^',^^'iti\ other form of currency is what is known as a dividend war- rant. It is intended to serve as funds without putting the ^E:^2aB225SfflaaHSM*;?K'3';?iSsac5:?^si^ 50 WHAT ARE FUNDS? S55g5^r^;j5SJ^ity!:i^^ty«ijYivigi^»v;i-V^^ concern to the ne- cessity of raising funds to pay divi- dends. Generally speaking, it is a dangerous expe- dient, and indi- cates financial weakness in the company using it. The dividend warrant is some- times used as a means of making sales of property which a company may have on the market. The div- idend or income warrant here ex- hibited is of this sort. Yarious depart- ments of the Gov- ernment may at PuhUc tidies emergency find currency. ^j^g^j. selves under tem- porary financial disability — may not be able to meet outstanding credit demands or procure funds for necessary pur- CREDIT FUNDS 51 chases. Instead of making the sacrifices necessary to pro- cure gold or other current funds demanded, new contracts for the future delivery of money may be sold or exchanged for old ones already matured. A copy of a certificate of indebtedness or obligation of the town of Fayetteville, Ark., as issued in 18i2, is here exhibited. Nearly all the States Mai/ iNi, 1^1 Eiic CoriiocatiOH of Hit iiotoii of .ffaBtttrtaic and local divisions of States were at that time bankrupt from having undertaken public improvements in the form of canals, railroads, and turnpikes. These notes were paid out to ofiicers and others having credit claims against the towns, and were circulated in the community in the same way as are national bank-notes to-day. The scrip of the town of Port Deposit issued during the depression of 1857, and that issued by the same town in 1862, when the levies of war had depleted local funds, are good examples of the emergency currency issued by towns at a later time. After the catastrophe at Johnstown, Pa., a similar financial method was resorted to. Bond certificates in convenient denomina- tions, to the amount of $20,000, were put into circulation as a means of meeting current necessity. In 1893 the city of Eichmond issued a 6-per-cent bond certificate of similar character. The " warrants " of counties and school districts find like employment. The one- and two-year "interest notes" issued by the National Government during the civil war were " emergency currency " for the use of the Federal Government. They were contracts for the delivery 5 52 WHAT ARE FUNDS? of money one or two years from date given, in settlement for credit claims due, and on wliich demand for payment ■^jji ^ PORT DEPOSIT LO.\]V. t / TWENTY FIVE CENTS g^ ft-* // / / / V/r. had been made. The United States note or " greenback " was originally a species of emergency currency in the nature of a contract for the delivery of gold or silver coin "on de- mand." It was understood, however, at the time of issue, that the demand would not be met until the Government had the necessary gold and silver in the Treasury with which to meet it. The result was that the notes did not pass " at '>^a»fcfafefeAAAjB^ par" with gold or silver, but were received at a discount proportionate to the estimates of value based upon them by those receiving these promises. Commercial Credit Funds Commercial credit or contracts for the future delivery of money are frequently given and received in transactions CREDIT FUNDS 53 with merchants, as between those using tliem they answer every purpose as "funds." The practise allows merchants to make sales and customers to make purchases. Under such credit arrangements a customer may order goods of a house "on credit" and make "settlement" for the credit at a future time. The promise to pay is unwritten; it may be made by tacit understanding. Some memorandum of the transaction is usually taken at the time, although it may be left entirely to the memory of the parties without any form of entry. A large part of the mercantile business of the country is conducted in this way. When one opens an account at a store he may make definite arrangements to have all purchases " charged "—that is, entered on the books —statements to be made and settled on the first of each month. When the customer is well known, however, and his ability to pay is undoubted by the merchant, he may order goods without any previous arrangement. In this case it will be tacitly understood that the purchaser of goods will pay the account when demand is made. One may go to a grocer and say, " Please send out a barrel of ^o. 2 Pearl flour." The merchant will deliver the flour and charge the price to purchaser's account on his books. The contract for payment is just as well understood as if a definite formal arrangement had been made. A manu- facturer usually has many such arrangements with laborers, material men, and business houses with which he deals. So a retail merchant will deal on similar funding arrangements with wholesalers, and wholesalers with producers. This form of credit is not transferable except by special agree- ment, and can not pass current in the community. It answers as funds only to the one with whom the contract for future delivery is made. In all lines of mercantile business "the books " will show a large number of current credits — that is, the regular customers will have an understanding that all orders will be honored to a certain amount, settlements to be made at 54 WHAT ARE FUNDS? stated intervals. The goods purchased in this way become the property of purchasers as absolutely as if money had been paid for them. Goods are exchanged for credits Credit on open account. The merchant has a right to enforce the collection of the claim in the same manner as if a promissory note had been given. It often happens that two merchants, or a manufacturer and a merchant, may each wish to run an account with the other. In this case each will make entry of credit goods piirchased, and at the end of the month or year settlement will be made by exchange of statements of account and the payment of the balance due. CHAPTEK IV INSTRUMENTS OF TRANSFER OF CREDIT FUNDS EvEET purchase and sale involves an exchange in pos- session and ownership. Money funds when used in ex- change are passed from hand to hand. Many forms of credit funds, however, do not admit this method of trans- fer. For the purpose of making transfer of credit funds, several classes of instruments have come into vogue, each adapted to some special use or to the transfer of some special form of credit funds. The most common form of instrument used for the transfer of credit funds is the " customer's check." A $10,000 credit account is purchased at a bank er's check. ^J ^ customer for the purpose of making cur- rent purchases and payments. He then buys a stock of goods for $1,000. In exchange for the goods the customer of the bank transfers $1,000 of his credit account to the one from whom the goods were purchased. To do this he draws his check for the amount. A " customer's check " is a sight draft on a bank for the payment of the amount of money stated therein, to a third person, " on account " of the maker. It differs Hg^ficance ^^om ordinary commercial drafts in that it is of a "custom- drawn against an account purchased of a banker ersc ec . ^^^ ^-^^ ybtj purpose of drawing against it ; the bank is therefore bound to honor the check when presented. The check need not be in any.preseribed form ; it may be written on a blank sheet of paper, with a 55 56 WHAT ARE FUNDS'? pencil or entered on the printed forms of a bank. It is for the sake of convenience and uniformity that banks provide blank checks for the customers. These blanks are usually bound and given out to the regular customers of the bank in book form. Each check usually has a " stub," or short end, which is left in this book after the Pulaski City Va 190 No.. IkEPiiASKi:'!fefiO;NAi Bask ^4 12At 1-0 THE p/* ORDER 0F_ _jf7 Bo LL A RS check itself has been torn out, on which memoranda may be entered for the convenience of the customer — it assists him in keeping a record of the transfers made by him, and of the amount of such credit fund still remaining at the bank against which checks may be drawn. As before stated, no particular form is necessary, and a lead-pencil will serve as well as ink. The Ijona-fide inten- ^ ^ , tion of the one owning; the fund or account is How to malce . . ° out a all that it is necessary lor the bank to know. "customer's J^^^^^ certain rules should be followed as a matter C/LSC/C of convenience to the bank and precaution to the drawer. In writing and signing checks good black ink should be used. Checks should be dated, but the absence of the date does not warrant a bank refusing to cash them. While a note executed on Sunday is not good in many check jurisdictions, a check so dated is valid. A post- dated check does not make the bank liable for payment if presented before the date entered. Checks should never be issued under an arrangement with the holders that they will not present them till a subsequent riSrSTRUMBNTS OP TRANSFER 57 date, inserted on the face of the instrument, as such prac- tise often leads to complications of business relations which wreck the credit of the maker and put the bank to endless trouble. A check may be drawn for any amount, so long as it does not exceed the " credit fund " of the one drawing. In the office of the Pacific Mills, Boston, may be FiUing in ggg^ ^j-^g canceled check of the United States the amount. n c i -r> n _<• /-i for one cent ; on the walls of the isank oi Com- merce, New York, is a check for $14,000,000, signed by the banking-house of Kidder, Peabody & Co. In this ap- pears one of the great economies of the use of bank credit. It is just as easy to transfer |li,000,000 in form of credit funds at the bank as it is to transfer one cent. In writing in the amount, the drawer should begin at the extreme left of the line. The illustration here given is a copy of a check drawn by Andrew Jackson on the second Bank of the United States, for one dollar. It is an excellent example of a poorly written check, and one which could be very easily Pldladeljiliia, yt'- ^ ^ ~^2^ iAi/ UNITED STATES, DolUirs - '^i:Z^d^i£JJ:~..~i^i&3r'i:^i:. " raised." One receiving such a check might write " one hundred " before the word " one," and " 10 " before the figure " 1," and in this way raise the check from $1 to $101. If this were done, and the bank cashed the check, the bank would not be responsible for the loss. The clinnmr would be held responsible for his own carelessness. This 58 WHAT AKE FUNDS I method of raising checks is the one most common in Ijank- ing experience. It is wise to begin the writing at the left- hand margin, or draw a running Hne ^..^■.,...^~..~^,'^^.^^.~.^..^.^^^^ before as well as after the written words, thus preventing any additional writing. The check here exhibited, drawn by Daniel Webster on the Boston branch of the Bank of the United States, is a carefully drawn instrument. When ■m>i Office ofDviCounl and Deposit ofthcBanh of the United States. _i: BOSTON, _ /\:/i J f }S LlT Of iiiiiVtV, Dollars 7U0 checks in which the figures" in the margin do not correspond with the amounts stated in the body of the checks are pre- sented to banks for payment, the courts have decided that the amount stated in writing shall be considered correct. The usual practise, however, is for the paying teller to withhold payment until he may satisfy himself as to the intention of the maker of the check. It is not necessary to enter the name of the one to whom the credit funds are to be transferred. If a check is drawn Enterinn the " ^^7 ^^ Bearer," any person that is the bearer nn I lie. of the can collect it and no name need be inserted. paiju,. ^}\Q name of a definite payee may be inserted, as, for example, " Pay to Leonidas Smith." Usually, how- ever, checks are drawn to some person " or order." The phrase " Pay to the order of Leonidas Smith " signifies that the amount is to be transferred or delivered to Leonidas Smith, or to any person to wliom he oi'flfirs it paid. It is customary to number checks consecutively in the check-book so that each one can be accounted for. The numbers are inserted for the convenience of the custom- INSTRUMENTS OF TRANSFER 59 er, and not for the convenience of the bank. The checks (or " vouchers," as they are called after they have Checks ^een paid) when returned may thus easily be should he compared with the " stubs " of the check-book or pasted back into the book and filed for easy reference. A check-book is a bound collection of blank orders for the transfer of bank credit. The advantage of binding is that y^^ the " stubs" may be kept for reference. By ref- '' check-booh." erence to the memoranda so kept the customer may at any time know what amount of funds re- main subject to draft. The " bank-book " or transcript of deposits shows the other side of the customer's accounts. At the end of each month this is left at the bank that the amounts drawn may be entered and a balance struck. If the bookkeeper's balance is different from the customer's, this may be accounted for by checks drawn but not pre- sented for payment. There being no mistake, the book- keeper's balance, less checks outstanding, will equal the balance appearing on the stubs of the check-book. The unpaid checks may be presented at any time ; therefore the available balance of account is the amount shown by the " check-book." After the " bank-book " has been bal- anced, the paid checks are returned as " vouchers.'' If one wishes to draw money on his own account the check should be written " Pay to the order of Gash." This Drawino ^® preferable to a check drawn to " Bearer." A check to check drawn to " Cash " will not be paid to oneself. ^^^ ^^g 1^^^ ^j^g drawer or his well-known representative, while a check payable to bearer, if lost, might be misused. A check written "Pay to the order of ... . [your own name] . . . ," will necessitate an indorse- ment — i. e., one drawing to himself would be required to indorse his own check before he could get it cashed. One wishing to draw a check to pay a note may make it payable " To the order of Bills Payable." One buying 60 WHAT ARE FUNDS! a draft may indicate this in proper language, as " Pay to tiie order of iV. JT. Draft and Exchange." Any special „, , , personal use may be indicated on the face of ChecJcs drawn \ •' to oneself the instrument. for special Likewise, a clreck drawn to another may have the purpose or use of the funds transferred indi- cated on its face ; as, for example, " Pay to the order of John Jones, for September rent." When the check has been re- Checksdrawn *"™e.p!, lagitofEDf EsBf- ^^^^/^^#^ ■ Ssfei* Many safety devices have been used to prevent the fraud- ulent alteration of checks. A customer may have an en- Safet)/ graved check-form of his own, and will notify devices in his bank that it may honor those only which are drawn on this prescribed form. But even then the prescribed blanks may get into the hands of those who would use them for purposes of fraud. As a means of preventing alteration and forgery, the amount may be punched or cut out of the paper. This safety device has been circumvented by having the holes filled with paper pulp and new figures cut or punched to suit the purposes of swindlers. Some companies have their checks limited on .M.O '(/^Mr.i their faces. The best device yet adopted, however, to prevent " raising " is that employed by the express companies and the Post- Office Department. These will be explained later. 62 WHAT ARE FUNDS? A novel instrument, used by the banks to save their cus- tomers the expense of paying the stamp tax imposed by the Government to help defray the cost of the Spanish- Ameri- can War, is given below. It is in form a receipt for funds transferred or withdrawn. The internal revenue asfhechr"^ law provided for a minimum tax of two cents on each check. Instead of presenting a check, the customer would sign a receipt, and the bank would there- upon make the payments or deliver the funds for which the fil:^ajyt^ '3i<^i>xJL yWfcf ^^J^ ^<^ '^i^ -^ ¥ 0« atatmt r/at..Ti&- e^A^ULfijj receipt was drawn. This was in general use in many parts of the country for direct dealings of customers with banks. It is sometimes a convenience in business to give to some one else the power to check against one's bank-ac- Eow to count. This may be done by giving to another authorize a, power of attorney — i. e., the right or author- draw on one's ity to be your attorney, to represent you in the account. transfer of funds on your account at a bank. Authority of this kind must be in writing, unless the bank is willing to take the responsibility for oral authorization. Financial houses, as well as the United States Post-Office, issue printed blanks for use by those who wish to give to others the power to draw on their accounts or to sign money-orders. A power of attorney from Daniel Web- ster to Mrs. Webster, giving her authority to draw and sign checks, is represented opposite. This was first reproduced in Rhodes's Journal of Banking ; it was taken from the files of the bank where it was used by Mrs. Webster. INSTRUMENTS OF TRANSFER 63 The " crossed check " is a form of customer's check not commonly found in America. In England, however, it is in common use. It is an ordinary customer's check °^^^ check that has across its face bars which signify that it must be presented for payment through some other banker. Such a check will not be cashed if presented by the payee himself to the bank against which it is drawn. The object of such a check is to have it first presented to a bank to whom the payee is known, and 64 WHAT ARE FUNDS 1 whose indorsement will be accepted as a guarantee of the credit of the maker. "When a check is crossed " in blank " — that is, has two lines drawn across its face with " & Co. " inserted — it may be presented for payment to any bank / - ^^ yy/ '^/,9rijz /-/^. ^ other than the one on which it is drawn ; but when it is " specialized " — i. e., when it is crossed or has stamped across it the name of a particular bank — it must iirst be presented to that bank for payment. A law has been enacted in England which prohibits the payment of a crossed check by a bank against which it is drawn until it has been presented through another bank. If the drawer of a check knows the payee's bank he will usually " specialize " it ; if his bank is unknown, the check is ci-ossed " in blank," and the bank paying it is held for proper indorsement. The " crossed check " is a more secure form of negotiable in- strument than the ordinary " customer's check." It is use- less in the hands of the wrong person. "We have reached practically the same end in this country by having stamped on checks intended for circulation as negotiable paper the words, " Payable only through . . . Clearing-House when properly indorsed." The use of the " crossed check " has given rise to an institution known as a " cheque-bank." This form of bank sells to its customers a book of its checks, the amount for INSTRUMENTS OF TKANSPBE 65 The cheque- hank check. wliieh each may be drawn being limited on the face of the check itself. For example : A book containing 50 blank checks, each of which may be drawn for the maximum amount of $10, may be purchased for $500. When the book is finally presented at the bank for settlement, the bank will return to the cus- tomer the canceled and paid checks ; the difference between the amount of drafts actually made and the amount paid for the book will be returned to the customer, or credit will be given on the purchase of a new book. Check- books are made up of assorted blanks, to suit the customer's conve- nience. Such books may be had at the main office, or at any of the other banks which serve as correspondents of the " cheque-bank." The " customer's check " is the instrument usually em- ployed for the transfer of funds from one bank customer „„ . , to another where business relations are such as mentsof to make them acceptable. It often happens, trtdit7und ^O'^®^®^' ^^^^ ^ customer will find it desirable to have funds in a bank where he is not known, or will desire to make payment to one who does not care to take the risk of a private check. In such case some other form of instrument of transfer will be used. For this purpose one of the most common devices is the " certified check." The customer will draw his check for the amount desired, and this will be handed to the cashier 66 WHAT ARE FUNDS'? of the bank in which he has funds. The cashier will there- upon write across the face " Certified," or " Good when properly indorsed," over his oificial signature, and charge The " certi- the same against the customer's account. This ^"^/i M^"^ " amounts to a transfer to the bank of the amount " cashier's drawn, and a guarantee on the part of the bank check:' i\^2X the funds will be transferred to the owner of the check on presentation. Another form is the " cash- ier's check." To obtain a cashier's check the customer will exchange his own check for that of the cashier — i. e., the \p' 0.,„,y//r^ y/^ 'I'f^ /' ^/' rj'/t/-'/ /.y^ , _V ,/^,:j M amount of funds represented by the check will be formally turned over to the bank, and the bank, through its cashier, will thereupon deliver its own instrument of transfer to the customer, made payable to such person as the customer may direct. Another form of instrument of transfer of credit funds used between banks is the bank draft. One of the most artistic engravings of this kind is given on the oppo- site page — a form of draft used by the " Biddle Bank " for business with its correspondents. The money-order is an instrument of transfer of funds created for a special purpose. For example : One wishes to send $50 to a person residing in another part of the country. He will make a deposit, or in some manner cre- ate a $50 fund in the hands of a company or department of Government whose business it is to transfer funds. The fund having been created, the company or department will issue an order for the amount, payable to the person speci- INSTRUMENTS OP TRANSFER C7 The Utter of credit. fied. This will be sent instead of money or other forms of funds. Money -orders are issued by express companies, the Bankers' Money-Order Association, and the Post-Office. A photo-engraved copy of an Adams Express Company order is exhib- ited on page OS. One may wish to travel in a foreign land — let us assume the esti- mated cost to be §1,000. It may not be c o n V e- nient or safe to carry money enough to pay the expenses of the entire trip. For this reas(in some form of credit is preferable to money. With this in view, the prospective traveler goes to his bank- er. He arranges at the bank for a special credit fund of $1,000 to be drawn against at any time. But banks and business houses abroad will not accept a "cus- tomer's check" against an American bank. A "Letter of Credit" is therefore issued. The ordinary letter of credit is really a guarantee of payment of all " customer's checks " or drafts drawn by the holder to the amount stated in the letter. It is a " certified -account " 6 C8 WHAT ARE FUNDS? instead of a " certified-check." It has its advantages over a certitied-check in that it allows the customer to draw just the amount needed at any time or place, and, upon identi- fication, to have his check cashed in the same manner as a certified-check or a cashier's cheek. With the increase of foreign travel the letter of credit has hecome such a com- mon instrument for the transfer of credit funds that every- one should be familiar with its form and purpose. "We reproduce on pages 69 and 70 a facsimile of the first and second pages of a letter of credit for £100 ($500). The first page is the letter guaranteeing the account, authorizing the various correspondents of the bank issuing it, or any other aijjtiuiiitikiiajuii»i«J'jjjH51iii^^ banker to whom the letter may be presented, to pay to the holder any amount for which he may draw not to exceed the fund provided. In order that the fund may not be over- drawn, a second page is provided upon which are entered the amounts drawn. These entries are made by the bank ofiicer himself at the time that the draft is paid, and give a complete accotmt of the fund. The entries give the names of the banks to which the letter is presented, the place, and the amount paid by each. On the third page is the " Indica- tion List " — i. e., the names of the bank's correspondents where drafts will be honored. The customer is not, in fact, limited to the correspondents of the bank issuing the letter, as the draft will be accepted at any place where the bank INSTRUMENTS OP TRANSFER 69 of issue will be given credit. As a matter of safety and of greater ease in identification, the banker issuing the letter requires the one to whom it is issued to place his signature on the face of the letter itself. He also takes a number of = — p — = ^ -- ( ii;rriAl; i.i:i-n-i.' \'^J^-^L^,^d' (Dm ; .,/,:/,,„/ „y,u,u/./, „.,//,/, A. ./Z\,, \li;ss';^llllii\VN,SUII'l.l':i \Co. M 1 I.().\1)0\; .,„■/, .U.,///. / /k, ,,,/,, ,„,„/,,/ /,„ /,, .P 2 .y^. n„ -ih, .,/.,,..' ^,./ _X^'/, , ./ / ,.,//j]'J%7SSH i I ,...■/../,.// //; . — -/../,„ \ //,. /,„/,./-//:... /.//,: ,,.,,/^;,, „, „.,,// ,„//„,„. ./„,,,./ i .,//, ,,/,, „ . //,, /,//, , ,/^y„„/,/v, ,„,.,; /,■:./.,„,/,://,„/,. ./ ' / //, "/,„„/,/,,,//./,„.,„ ^ K ; ■ ''/■ ^'/ '/'■'/A/., ,A.,//., /, ..„y /,., M s ,„, /,/„ //, .,„ 1-1 //,„// -S //„,,//,,, y, ./ //„,'j,//,> ,// >,,/:' ^*fc.-«o*,P^^«'-«.- ■^■^ W / r^:smM^^sssp^,^=!S^?s&^^^m^i^^3eM&sfs^siis^^/s^ii^ other signatures on blanks specially prepared for that pur- pose, and sends one to each of the leading foreign bankers drawn upon. In course of travel or business the holder presents his letter at one of the banks named on the " Indi- 70 WHAT ARE FUNDS? cation List " ; thereupon the cashier will ask him, in his presence, to sign a draft for the amount desired. After ENOORSEMCN- jp«P«. 1902 P«io er worgab.iiabjes scf PAHIS J ' 8 MA'^ate BROWN, sHifLa & d. mm*. "^I'f/i j.BflOWil EnOTEEHSfflCO., fHHABEaaiA. 2f comparing the signatures, the cashier will enter the amount of the draft on the second page of the letter, and return the letter with the money drawn to the payee. Payment is usually made upon the simple identification of comparison of signatures. Should the traveler lose his letter of credit, he will at once notify the banks upon and by whom it is drawn. 'XSSSS 49170 %2m ^ 2?J^ "im«Tum: L^y/^:-- / Cy^e^/f^ Another instrument of transfer of credit funds for use in travel has been devised by the express companies. This is most extensively used by the American Ex- press Company, which has offices all over Eu- rope. Over 10,000 agents are authorized to pay these checks. The ease with which they may be re- deemed causes them to be received by hotels, railroads, and The " travel- er's cheeky INSTRUMENTS OP TRANSFER 71 business houses about as readily as the money of the coun- try. They are issued to the traveler $10, $20, 150, $100, and $200, to suit the con- venience of the purchaser. When issued, they are bound into a small check-book, and may be car- ried about as or- dinary checks. Pre caution against loss and for identifica- tion of the holder of a trav- eler's check is provided by having the pur- chaser sign his name in the up- per left - hand corner at the time of issue. When the check is presented for payment he is again required to sign his name on the lovi^er left - hand cor- ner. The sig- natures must agree in denominations of e&sS The success of the American Express 72 WHAT ARE FUNDS? Company has led other foreign exchange houses to issue travelers' checks. A notable example is that issued by Brown Brothers. This house, with its international con- nections and long-standing reputation for honorable deal- ing, has an established credit which will be taken in trade anywhere in the commercial world. Its checks have the advantage of being more difficult to forge. Instead of having both signatures of the customer written on the face of the instrument, -where one will serve as a copy for the other, the one selling the check to a foreign house must in- dorse his signature on the back. The cashier may then fold the paper in such a manner that the writing may be com- pared, as shown in the accompanying cut. It will be noted that on the face of the check is indicated its money equiva- lent, or exchange value, in each country where it may be used. Another house prominent in international exchanges which has adopted this method of securing patronage from serving the foreign traveler is Knautli Nachod & Kiihne. It will be noticed by reference to the exliiliit on page Y3 that their check is, in form, almost identical with that of the American Express Company. INSTRUMENTS OF TRANSFER 73 The money-order business of the country is enormous. As shown by the report of the Postmaster- General, the business done by the postal money-order de- changlaiie partment, in 1901, was $274,500,000, while the bank money- same class of business transacted by the express companies is estimated at $150,000,000 per year. With an aggregate of sales of money-orders amounting to $425,000,000 per year ($1,400,000 per day), the popularity of the traveler's check suggested that by use of an inter- changeable money-order the banks could handle a large part of a business which produces in fees about $3,300,000 per year. Mr. Percival Kiihne, of Knauth Nachod & Kiihne, was among the first to recognize this opportunity. Calling {S 50— 10 4 1 755-5 -'08 30 la.'S Wli;2 55 245 10 96 W) » U- ' m^ Jb/s ^igr£!a.-^ 'n^4srcorr^2pondw.:n 'ibcve together the secretaries of the various State bankers' associ- ations, a bankers' money-order association was organized, with Mr. Kiihne as its president. The avowed object of the association is to compete for the enormous money-order business, by allowing every bank which becomes a member of the association to issue interchangeable certificates. The Western National Bank of New York acts as a clearing- house for the other members. In other words, the order is in the form of New York exchange which will be accepted anywhere in the country. The banks are in a position of 74 WHAT ARE FUNDS t advantage over the express companies, for the reason that the public is accustomed to dealing with the banks, and will find it an added convenience to purchase money-orders there. miumv. IIIIIIIIIH lisiiiiiiir CljpSankrrsllimfO^Vi'f TMcA-o^r-TorT-iifftoNEv Order ' . ^rL^-^ lAi^siiriatiun. N*? "^ 0CHASSOCIATIOH,P„.0CC.. 1 | | '°^^^^=^ c^^ ^ TMCYtCSTCRm NATIONAL BAINK METnOPOHTAIM BArvK ■ MPCRIAL eAiNK or CANADA BAnCO nACIOINAL DC MEMCO |T.i5i?, ^^'^ #^ ^"'^ E ' " ^^)&' <\(6')^ Dale ""• HHtBtVCBPBtSCHUD.BANK; AB[>e»MKEHS*BC<.COJ Di:>.RCH[>CHS.TVaiD The promotion and capitalization of the United States Steel Corporation furnished the leading sensation of the Place, of opening year of the new century. The prin- credit in cipal dramatic feature, however, was not its modern magnitude, — other concerns of large proportions finance. i & r r had been developed, — it was the suddenness of its rise. Within a few months scattered and isolated plants were reorganized financially, and grouped under wider and still wider management, until finally, with a rapidity that fairly staggered the world, all concerns were absorbed by one gigantic corporation — a billion-dollar "trust" was formed. Under a system of finance more primitive than our own this would not have been possible. The develop- ment of our whole modern system of economy lay back of it ; the growth of great financial institutions was a neces- sary prerequisite. Let us suppose, for example, that we had lived in an age of strictly money economy ; let us assume that it had been necessary to deliver coin to the amount involved in the transaction. If silver dollars had been used it would have taken one man fully five years to count out the change with business accuracy ; five-dollar gold pieces would have shortened the process four years, but still a year would not have been too long a time. Under a money economy, this one necessity — the difiiculty of count- INSTRUMENTS OF TRANSFER 75 ing and making change— would preclude, absolutely, the large transaction of to-day. By the use of modern devices, the effort involved in this element of business is reduced to a minimum ; a transfer of any size may be made by a simple stroke of the pen. Using more primitive methods than at present prevail, the process of accounting necessary to a consolidation such as that above referred to would have employed an army of men for months. Modern financial devices, modern financial institutions, modern systems of accounting, make the transferring of large interests a matter of a few moments. The settlement and adjustment of con- stantly changing business relations are quickly effected. The process of " clearing," for example, allows the financial interests of the whole continent to be adjusted weekly. By modern financial institutions, and modern methods of com- munication, the world's business may be brought into daily contact and adjustment, if need be. In ISTew York, busi- ness to the amount of $150,000,000 per day is transacted and settled by the actual exchange of about $6,000,000 in coin. Between London and New York, business of some- thing like §3,000,000,000 is kept in constant adjustment with the transfer of only about $150,000,000 in gold, and a large part of this is shipped for manufacturing purposes. Even a country store doing a $20,000 business, by modern economy is able to effect its exchanges, serve its customers, and settle its accounts in various parts of the world with the actual use of only $500. "With a metal reserve worth a few billion dollars, held for safe-keeping in the vaults of the large cities — and with this reserve practically undis- turbed — the commercial world is enabled to do its business without the use of any considerable amount of money-metal. Communities and nations are bound together by such finan- cial and commercial ties that the merchant or the farmer in western Colorado or South Africa may purchase goods in Hongkong, New York, or Amsterdam without offering a grain of gold or silver in exchange, and with no greater 76 WHAT ABE FUNDS? inconvenience than that of going to his local financial agent. Whether it be the organization and capitalization of a billion- dollar corporation or the purchase of a spool of thread, the same commercial solvent is applied, the same instrument of economy is employed. It is the use of a universal system of credit that distinguishes the business methods of the I^ew World from the Old. PAET II HOW FUNDS ARE OBTAINED CHAPTEK V FUNDS OBTAINED BY GIFT AND INHERITANCE It has been observed by writers that exchange did not exist among the most primitive people. This may not seem Primitive strange when we take into account the chief economy— motives for their association. The family, per- ejamiy. j^^pg^ represents the most primitive group, but its purpose is not industrial ; its bond of union is found in the instinct of love; its race purpose is the propagation of kind ; its plan of organization is one of cooperation for mutual comfort and for the rearing of children. To the family, industry is incidental rather than an organic prin- ciple. Its cooperation is based on the sacrifice of self-in- terest — on the devotion of the substance and energy of ancestors and adult members to the young and to the com- fort of one another. As between members of such a group the necessities of life do not admit of commercial exchange without impairing the bond of sympathy and harmony which draws the members together and holds them in domestic relations. When, vrithin the family, commercialism comes to be a dominant motive, when self-sacrifice and mutual devotion are relegated to a subordinate place, the family group itself breaks down — its component members attach themselves instead to commercial and industrial con- cerns, and the family organization is lost. Within the fami- ly, " gift " is the prevailing method of obtaining the means necessary to comfort and enjoyment. 79 80 HOW FUNDS ARE OBTAINED A larger and broader association is developed. From motives of mutual aid families group themselves into clans and tribes ; but in this, as well, industry is not Theclmi and ^j^^ dominant interest. Mutual protection is the tie that binds. Security against external foes and internal dissensions is found necessary to the high- est welfare of all. "Within this larger group puUic welfare forms the dominant principle of organization ; but the race advantages of a smaller group for the propagation of kind (the family) cause it to persist within the tribe ; this still remains the unit for the care of the young, the unit of co- operation in ministration to want, of common devotion to the comfort and enjoyment of its members. Both princi- ples, however, being essential to the race, the clan or tribe (based upon the principle of protection), and the family (based upon the principle of common devotion), are brought into harmony one with the other. The protection secured by political organization gives more favorable conditions to the family, — conditions better adapted to the highest devel- opment of the individual members of the race ; the social training within the family, the authority exercised, the order established and maintained among its members, better fit them for the broader tribal relations. In the family group the various dependent members are supported by " contributions " of those in control ; with the larger politi- cal group those in control are supported by " contribu- tions " of their dependents. Other groups may be cited in which exchange is not necessary to harmonious and effective cooperation ; but Other non- these, it should be observed, are also non-indus- industrial trial in character. The Church, the club, so- groups. cieties — religious, educational, fraternal, and social, of which many might be enumerated — have for their dominant principle interests that are non-industrial. Each of them is dependent upon an industrial group for main- tenance and support. Each of them has a significance in FUNDS OBTAINED BY GIFT AND INHERITANCE 81 industrial development, and to each, iadustrial cooperation is essential. These social groups have a bearing upon our subject, in that thej strengthen the bonds of association, and in their purpose give direction and character to the organization of industry. Being non-industrial, however, without independent income for their support, a large part of their " maintenance " must come from " gift," or some other form of " contribution," as distinguished from " ex- change." It is out of a condition of industrial " dependence " that " gift " and " contribution " arise ; as before suggested, it is ^.„ „ , with this method of obtaining funds that we funding ^^st become acquainted. The helplessness of method of the child, the necessity for care and protection ■ during that period of life when he is attaining strength and vigor, throws on the parent the duty and ne- cessity of providing for his maintenance. In primitive societies both males and females are industrial. With the development of art and invention and the means of supply- ing want in greater abundance, the father becomes the directing agent of productive enterprise, while to the mother is given over the care and training of the child. This increases the number of dependents ; to the infant dependent class is added the adult females of the family ; and with the increase in the number of dependent members arises an increased necessity for contribution by "gift." As civilization advances, as the period of training lengthens, the period of dependence also grows. Children get their first spending money from the hands of their parents ; as they grow to maturity, that instinct which is so necessary to the maintenance of the child during his infancy follows the ancestor; the interest which the parent feels in the development of his offspring is consideration sufficient to cause him still to extend the means necessary to mainte- nance and comfort. This first goes out in the form of pro- viding training which would better fit the youth to move 82 HOW FUNDS ARE OBTAINED and act with his fellows in the varied circles of life. In this the aim of parents is so to equip their oflEspring that they may enter into the complex relations of life capable of making judgments and of understanding the conditions necessary to highest success. Their hope and their aim are to raise the young, through a longer period of dejjendence, to a place of highest independence. This preparation, from the beginning, involves the use of funds, but in most cases the experience of the young is limited to the one way of acquiring them — viz., voluntary contribution. Where " exchange " becomes established as an essential part of industrial economy, " contribution " necessarily takes the form of " funds " as the more effective means of grant- ing support. Mother, child, missionary, priest, chiirch or- ganization, social or fraternal society — every person, or non- industrial institution, that holds a position of contribution dependence, must look to the gifts and other usually take forms of contribution of those in control of in- "fmids!" dustrial income for their means of support; they must rely upon the strength of the " ties that bind " the possessors of funds, upon their regard for kin, their desire for social advancement, or their response to ideals of higher civilization and progress, as a basis for their claims. Inheritance is simply one form of acquisition by "gift." It rests on the assumption that the properties acquired by the ancestor, which he himself does not use during his hfe, and which are not disposed of to others during his life, are intended to be given to obtained by ^^^ ^eirs. The child, during his minority, has '■inherit- been a dependent; for his support he has re- lied upon gifts. When he has reached his maturity, the same interest and regard which caused the father to give support and provide social and educational advantages, suggest the propriety of giving the boy his "start" in the business world. He recognizes the ad- FUNDS OBTAINED BY GIFT AND INHERITANCE S3 vantage of capital for business — of initial funds for the organization and management of industry. He knows that without some contribution of this kind his son for years will be unable to exercise his highest talents in the enterprise which he has undertaken as a life work. Funds are therefore provided by the parent for the business activity of the son, as they have been given before for support. "With the family as a unit in social organization, with the law of property as the underlying industrial -principle, inheritance passes into our system as a part of the law governing our institutional and social life. It is assumed that the ancestor, unless he otherwise bequeaths his property during his life, would have divided it among those dependent upon him at his death ; that it is in their interest and for their welfare that he has put forth the effort to obtain the funds and properties which he possesses, and that this advantage would be pre- served to the members of the family were hie will ex- pressed in a formal act. An acceptance of the principle of '•'■ tricsteeshij}" however, as laid down by Mr. Carnegie in his Gospel of Wealth, would give quite a new applica- tion to the law of inheritance. Mr. Carnegie says that the acquisition of wealth is the result of a great cooperative process in which the whole society of workers (dependents as well as non-dependents) take part ; that for the purposes of carrying on this process to the highest advantage of all, some must give direction while others must attend to the minute details. Each and all, however, have assisted in the production of the means of enjoyment. While coopera- tion is advantageous for the purposes of producing the means of enjoyment, it is only by distributing this to the individual members that the means may be enjoyed — i. e., the meajis, thus produced, must be applied to a use which will give satisfaction to individual want, and this can best be determined by each member for himself. Or, to put it in another way : while there is advantage in cooperation, the principle of personal freedom requires that this cooper- 7 8i HOW FUNDS ARE OBTAINED ation must be voluntary, and both, the pi'oduct to be used and the use to be made of the product must be deteruiined by the individual who feels the want. No man shall be a slave. As a means of securing personal freedom and at the same time of obtaining the benefits of cooperation, the amount to be distributed to each as a return for cooperation must be left to a previous arrangement. Now, as Mr. Car- negie reasons, if under these arrangements or contracts of free cooperation the managers and directors have left to them a large surplus — a surplus disproportionate to their service, and disproportionate to their own needs and the needs of those dependent upon them, — then these men should consider that they hold this surplus as a fund " in trust " for the whole society. To quote the words of tins great direct- or of cooperative industry, ■whose feeling goes out toward his fellows, and who with his enormous wealth has taken a large social view of his responsibility, it is the duty of the man of wealth " to set an example of modest, unostentatious living, shunning display or extravagance ; to provide mod- erately for the legitimate wants of those dependent upon him ; and, after doing so, to consider all surplus revenues which come to him simply as trust funds, which he is called upon to administer in a manner which, in his judgment, is best calciilated to produce the most beneficial results to the community — the man of wealth thus becoming the mere trustee and agent for his poorer brethren, bringing to their service his superior wisdom, experience, and ability to ad- minister." The application of the principle of trt/.tfcesJu'j) to the law of inheritance would very much enlarge the respon- sibility of the man of wealth. If accepted by the ruling majority of our people, the man in control of affairs would be regarded very much in the light of tlie manager of a large corporation in which the whole country were stockholders. Each one who labors in the common cause labors for an agreed salary or wage under the manager ; the managers or directors are also entitled to vote for themselves a fair com- FUNDS OBTAINED BY GIFT AND INHBKITANCE 85 pensation — a competence with which to care for those de- pendent upon them ; these salaries, wages, and deductions should be considered in the nature of expense of operation ; net earnings, however, belong to the whole corporation ; they should be considered as a fund in the hands of the manager for distribution according to the obligations of the corporation to society, and are not for the benefit of its directors. On dissolution, the full assets of the company should be converted and distributed to the community as its stockholders. The importance of the principle of inheritance, however applied, can not be overlooked. For the dependent — the , , , . , recipient of funds obtained from ancestral con- Jndustnal _ ^ _ importance tribution — an inheritance often obviates the ne- of gift and cessity of securing capital equipment bv means inheritance. •' » r ■'■■', of a long process of accumulation (or saving) out of earnings ; it shortens the time necessary to acquire a fund suifieient to equip any business enterprise to be under- taken. It increases the opportunity and advantage of those members of the community who, having been well supplied with funds, have had opportunity to avail them- selves of the highest training, and who may therefore be best able to give direction and control to the affairs of the community. This advantage, however, may be lost. Op- portunities may be wasted ; absence of necessity may re- move the stimulus to effort which is essential to the devel- opment of cooperative industrial capability. The one to whom capital has passed by " gift " or " inheritance " may show himself unable to utilize capital to advantage. In such cases, by the very contest into which the business man is ever thrown and in which capital itself must be employed in order to become productive and return to its possessor an income for support, the properties of the incompetent pass over and become subject to the control of those who can use them to higher advantage. But when large productive estates or interests descend to those who have not a proper 86 HOW FUNDS ARE OBTAINED appreciation of tlieir responsibility, or who have not the abihty or energy to give the best direction to their use ; wlien, by incompetence or waste, productive properties finally pass over to the control of those who are " not fit," there is a loss to the whole society, not only from the " waste " of the wealth which has come into the hands of the socially unfaithful, but by the " waste " of social force which comes from the disorganization and displacement occasioned by the breaking up of one scheme of cooperation and the readjustment and reorganization made necessary by the new. The law of inheritance is a rule which has grown out of the common impulse to care for and support dependents ; this impulse was evolved at a time when the inheiitance. producing power of a group did not more than suffice for support of its members — when the family was the all -important i-ace factor. It is an expres- sion of the common experience and common motive of the race directed toward its own perpetuation. Eefore the death of the ancestor all property acquired during life "belonged" to him ; by operation of the law of inheritance the property of the ancestor passed to his natural heirs according to an estaljlished rule of descent, unless the common law or rule is varied or set aside by a formal expression of the " will " of the ancestor, in whicli case " the last will and testament " governed. The formal expression of the decedent's " will " is known as a " devise," and the property or funds inherited in this way are said to be "■ devised " — i. e., they are passed on by him to others in the same manner as if he had disposed of them during his life. Laws controlling inheritance are necessary and wholesome. Laws controlling inheritance, however, may have the effect of protecting the use of funds and properties in the hands of the incompetent. Where such laws exist, the effect is to change the relation of dependence from one based on social welfare to one carrying with it social degeneration. Industrial dependence which is found to exist FUKDS OBTAINED BY GIFT AND INHERITANCE 87 between members of a famil}', and which is incident to the maintenance of the church, to tiie support of fraternal and social organization, is the result of the sacrifice of a lower to a higher interest. The perpetuation of race in greatest strength and vigor, the fostering of social and educational ideals, mutual protection and general welfare, are as neces- sary to a people as is physical maintenance and support. To this end many persons in our society have accepted places of industrial dependence in their devotion to higher interests. For this reason it is held by many of the great social and industrial leaders of to-day that those who are engaged in control of the industrial or business pursuits, and into whose hands the properties and incomes of the in- dustrial society come for distribution, must be regarded as holding them "in trust" for all the members who are de- voting their lives to common well-being. Laws of gift and inheritance which stand in the way of such a distribution as will further this interest, which condone " hreaehen of trust" — laws which have been developed from ideals of private monopoly, and which have come down from those legal sys- tems in which " arbitrary power " took the place of the more modern notion of free cooperation based on " general wel- fare" — are constantly the subject of legislative modification and political interest. Many changes have already been made, notable among them the abolition of the rule of primo- geniture. It remains only for the great political society to determine in this, as in all other matters of public interest, what rules of social cooperation they shall establish. Funds obtained by " Appeopeiation " The idea of appropriation is one quite different from that of gift. As before observed, gift is based on relations of industrial dependence. " Appropriation," on the other hand, proceeds from a notion of superiority or control. It is the method commonly employed by government as a means of obtaining funds for its support. It is the method 88 HOW FUNDS ARE OBTAINED commonly employed by those engaged in many forms of industrial pursuit for obtaining those things from nature wliich will be useful to mankind but which have not yet been reduced to the control of others. Man has certain wants which he would supply. Around him is nature en- dowed with all the materials which are necessary to the satisfaction of want. To make these materials available to this end, however, they must be " appropriated " ; the ore must be extracted from the mine, fish must be taken from the sea, the timber of the forest must be reduced to owner- ship in forms which will be useful for supplying human " Appropria- needs. In primitive times among a primitive hon"apnm- fishing people, when dried fish was used as itive method ii • t ■ i i _p _li -j. of obtaininq money, the mdividuals of the community pro- funds. cured their funds by means of appropriation. Among a hunting people, skins of beaver and mink or the hides of other animals which served as money were pro- cured in the same way. Among a primitive agricultural people wheat and barley served the members of the tribe for funds, and under a primitive industrial regime the met- als obtained by the various members of the tribe or clan were passed from hand to hand as money, with no common stamp, design, or official voucher for weight or fineness such as is known to our modern systems of finance. When, how- ever, commerce and industry developed to such an extent that more careful judgments and closer estimates of value were made in exchange ; when the uncertainty of weight and fineness of the coins or metals used came to be an ob- struction to commercial and industrial progress ; when by common consent some uniform standard of judgment was demanded in trade, and the coinage of money was placed in the hands of a central agency of government which would give it character and undoubted integrity, then appropria- tion as a means of obtaining funds was abandoned. The only method other than that above described as pertaining to industrial dependence, was that of "exchange." CHAPTER YI FUNDS OBTAINED BY EXCHANGE " Exchange " is the common method of obtaining funds — the only method that belongs properly within the field of business. A young man may have capital given to him by his father with which to begin a business career ; by " will " or bequest he may receive a certain amount of money or other funds. Usually when other property is inherited, this will not serve the purpose of the one inheriting it unless he takes up and carries on the business of his father. Except in such cases, therefore, he will convert into funds the property inherited and then apply these to his own uses. An inquiry into the prevailing financial methods of ob- taining funds, therefore, is limited almost wholly to ex- change. The significance of this fact is that (except when funds are received by gift) the only way in which a work- ing capital may be obtained is by having something to sell — one must have something to oifer, something for which others will give money or credit which may be used as funds. In this appears the limitations of men in their efforts to secure capital ; in this may be found the reason why each ^ . ., , of us may not obtain all the capital funds that J^iwit to funding may be desired. Before we can fund our en- power. terprise we must have something which those possessed of funds will receive in exchange for them. The idea so often found in the literature of money and credit that certain forms of funds need have no value, that they 90 HOW FUNDS ARE OBTAINED may be created by "fiat" of Government or by the "dic- tum" of some arbitrary or influential person, is absolutely without foundation in business experience. The capitalist of to-day is the man who has funds for sale ; he is a funds merchant. He sells his funds only when in his judgment he gets something in "i^ ' ' ■ return which will be more valuable to him than the funds sold. lie trades on precisely the same principle as the hardware merchant or the fruit dealer; the only difference is that the latter offers his wares for funds, while the capitalist offers his funds for other properties — usually for investments. One should no more expect to obtain capital funds without offering something in return than one should expect to obtain groceries or clothing with- out giving a (luld pro qua. Let us suppose for a moment that you were about to begin business ; that you had not inherited any property Wliatnidii he f'-'^n'i ancestors; that you had received nothing offered for by way of gift with which to "make a start in capital. Yd^y How would you proceed to raise the funds necessary ? What would you have to sell ? What could you offer to the man of means — the capitalist, the funds merchant ? This question may seem entirely out- side the field of finance. Not so. It is here that finance begins. It is this beginning that takes thousands of men and boys to the workshop. Sales of Laboe In going out for employment laboring men are an- swering this question in a practical way. What have they to sell ? Their labor ; their ability to serve those who have capital. Funds to them, as to others, have a double signifi- cance : (1) The first necessity that the laborer must face is that of maintenance. His power to serve others depends on his maintaining himself in strength and vigor. His in- come depends on continuous service. Unless he can so sus- FUNDS OBTAINED BY EXCHANGE 91 tain himself as to serve with abilit}' those to whom he sells his labor, income will cease. The iirst necessity, therefore, is for " maintenance funds." Let income fall below this mark and all possibility of industrial independence is gone. (2) The second problem to be solved in the funding scheme of the laborer is so to dispose of his services as to leave a surplus over and above the expense of maintenance — some- thing which may be laid by as " capital surplus." It is by use of this surplus that his industrial equipment must be procured. To procure the capital funds necessary to equip 'a business undertaking requires a long-continued process of exchanges of labor for wages, of saving a surplus, of accu- mulating this surplus into a fund which will be sufficient for his purpose, of expending it for " investments " or for " betterments." Assuming that you have nothing else to offer, this is the only means possible by which you may procure capital for business. Saving is the process whereby capital funds are accumu- lated from surplus earnings. Capital funds acquired from earnings are the remainder after the subtraction Saimig. ^^ expense and recoupment of losses. In the early part of the last century, when industrial capital was small, the problem of saving was the most important one considered by economists and writers on finance. At that time the problem was one for the individual to meet single- handed ; to-day large financial companies are organized to facilitate saving — to help the laborer accumulate a capital. The small savings of the many are accumulated into large funds, which not only serve as a protection to the laborer himself, but which in the mass of accumulations furnish capital to large enterprises that give him further employ- ment. In this relation appears the importance of business training. The man who is trained only as an ordinary laboring man, the man who can not do more or better in serving those who possess means than any other man on 92 HOW FUNDS ABE OBTAINED the street can do, must compete with him in the market. Among the many competing for work, some will be found who are willing to exchange their services for a wage barely sufficient to maintain them in bodily strength and comfort. If one is able to do only such work as these Importance offer to do, then one must bring his standard of training. ' . ° of life below theirs ; otherwise no margin or surplus will be left for capital use — a fund can not be acquired by saving. It is only by adopting a low standard of living that the Chinaman is able to " save." But what is your advantage if you have superior training ? While per- haps you have inherited no money, have had no capital funds given to you by family or friends, you have a " gift " which has quality quite as productive of income. More than that, while you retain your faculties you may always maintain an advantage over the ordinary laborer. It is this in part which has inspired your natural guardians to devote so many years to your training. Without a dollar, you are able to go out into the world, to maintain a standard of life that allows you still further to develop your faculties, still further to handicap your competitors, or to lay by " in investment " an increasing fund with which you may finally equip yourself for the successful employment of the skill and labor of others in the management of a business of your own. Sales of Tangible Peopeett and Business Inteeests Instead of selling your labor to others, instead of ex- changing your services for income in the form of wages. Sale of goods JO" "1^.7 decide, after the first funds are saved, produced hy to begin business in a humble way on your own labor. i -n -1 1 i -,■.-, . account. _rossibly you may undertake the busi- ness of shoemaking. Having saved enough to buy a small outfit, a few sides of leather, and having enough for a month's living besides, you may leave the factory where you have been employed and open a shop of your own. Let us FUNDS OBTAINED BY EXCHANGE 93 suppose that one pair of shoes may be made in a day, and that the cost of materials and of Uving were $:> per day. It would not be long before all your funds would be exhausted ; but, instead of funds, you would have the products of your labor. Funds for future production must come from the sales of these products. If each pair of shoes might be sold for $5 per pair, then, if there were no items of loss, you would have a profit of §2 on each. This amount, by a strict economy, might be added to your capital. Accumu- lated funds from sales of shoes would allow you con- stantly to increase your business equipment. If, on the other hand, you were unable to dispose of your product in com- petition with the factory for more than $3 per pair, then a bare living would remain — your business would just pay expenses. A further reduction in price would cause your capital funds to disappear ; it would become necessary for you again to fall back on the sale of your services to others. To those successfully employed in the management of industry, the chief source of revenue is from sales of the products of labor. It often happens that one has properties not adapted to capital use. A private residence or a large private park is inherited ; investments that yield a fixed inter- pfopeHynot ^st or rental may be owned. These are not adapted to funds for business : they can not be utilized to '^Immlnr' advantage in the enterprise about to be under- taken. To one so situated the most practicable way of obtaining funds may be by the sale of these proper- ties. By conversion of these forms of wealth into capital funds a business may be equipped which will produce in- come in the form of profits. The shoemaker after equipping a factory may recog- nize a better business advantage in another locality. He may find that by moving to an inland point he can get water power where now he is required to use steam. The growth of population in new territory and the building of 94: HOW FUNDS ARE OBTAINED new railroads may give advantages for obtaining raw mate- rials, and at the same time place liim within range of a general market for his goods. He can not remove his plant, however, to advantage. Much of the Themhof machinery would not be adapted to water one business ^ t i . interest to power. He decides to sell his plant for what capitalize j^ ^j^ bring, as a means of obtaining funds for anottier. o' o the new enterprise. A miller may have in- herited a cotton factory from a brother. Every business advantage suggests the propriety of disposing of the cotton plant and using the funds to further his milling interests. This is one of the most common methods of obtaining funds in a country where industries are constantly shifting, as in our own. Labor and tangible property are not the only things that may be exchanged for funds. Business interests may Tfie s le of likewise be disposed of. Let us suppose that business the miller has been making a considerable interests. proiit out of his business. But it appears that a still larger return may be had if he doubles his capital. His plant is a comparatively old one ; he is now grinding 50 barrels of ilour per day at a cost of $1 per barrel. Yet, owing to his favorable location, he is able to make a profit of $1 per barrel in competition with others. By the addi- tion of as much more capital (say $50,000), by using it to put in improved machinery and labor-saving devices, he would be able to grind at a cost of 50 cents per barrel and turn out 200 barrels per day. Instead of having a profit of $50 per day with a capital of $50,000, he would with his better equipment get a return of $300 per day on a capital of $100,000. But how is he to obtain funds ? He can not hope to raise the money from the sale of his serv- ices. His profits are already greater than would be the return in wages. He can not afford to wait until, by sales of goods produced, he may accumulate $50,000 more in funds. He has no properties other than those already FUNDS OBTAINED BY EXCHANGE 95 employed in his business. He decides, therefore, to obtain the additional capital by selling an interest in his enterprise. Fortunately lie finds another miller who has $50,0(10 in funds, and who is looking for a business opening. The S hof books of the mill are gone over and its present partnership earning capacity is calculated ; the cost of im- in c-rest. provement and the probable increased earning power is computed ; the whole situation is carefully can- vassed. Each of the two men looks into the business stand- ing and reputation of the other. They finally come to an agreement. The first miller sells a partnership half -interest in his concern upon the condition that the second miller will put in §50,000 more of funds. With this the mill is newly equipped ; there is an increased return in profits to each. "With the development of the wheat supplies and the wheat-growing resources of the vicinity in which the mill The sale of ^^ located, the partners find that they are still corporate unable to Supply the market with flour at a Slaves. price that gives them a handsome return in profits to the company. Three-fourths of the wheat grown in the vicinity is shipped away for grinding, ^vhile they are not using more than one-third or one-quarter of the water power already developed. The question again arises. How may they obtain the capital with which to equip their in- dustry in such a manner as to take advantage of the pres- ent business situation ? To do this will require an expendi- ture of four or five times the amount expended in their present plant. They find no other miller who wishes to join with them in the business ; they have no properties to sell by means of which they may secure the funds. They finally decide to incorporate the business — i. e., to ofl'er shares to those who have capital to invest, but who are not millers, and who would not care to participate as partners. By placing shares at $100 apiece on the market, they are able to sell 2,000 shares. In other words, they find that they are able to obtain $2o0,000 additional capital made up 96 HOW FUNDS ARE OBTAINED of income from the sale of proprietary interests in the cor- poration to stockholders. With the additional $200,000 they build two other mills of capacity and equipment simi- lar to the first. Capital stock is the total amount of capital funds of a corporation invested by its shareholders. The certifi- cates of interest held by investing members are called stock. Another term commonly used is "shares." This term is almost exclusively employed in England. There, " stock " has the same significance that the term " Govern- ment security" has in America. The stockholders of a corporation are those who make the joint con- CopiiaZ tributions to the capital funds or capital stock of a corporation. They have (1) such cor- porate rights as : To participate in the organization of the company, to attend meetings of stockholders, elect oflicers, to hold meetings for the purpose of determining the powers to be granted and the rules governing their ofiicers and agents, to give direction to the general policy of the cor- poration through the oflicers elected, etc. ; (2) the financial rights, first, to share in the dividends set apart for the share- holders out of the net profits of the business of the cor- poration ; and, secondly, to have a share in the capital dis- tributed to the stockholders after the corporation proper has been sold and its afl^airs wound up. While the cor- poration exists, however, the stockholder has no right to touch a dollar of its assets or transact any of its business. The capital once contributed becomes the property of the corporation absolutely. The stockholder may be said to have sold a certain amount of his money, or credit, or other property, to the corporation, and in return has received one or more shares of its capital stock, the amount being esti- mated in the funds-equivalent or price of that which has been sold. For example : In the organization of a corpora- tion a certain amount of the stock may be issued in ex- change for plants purchased at an agreed price, while other 'ft 'hi m i: n in rvfS?^-^ 98 HOW FUNDS AKE OBTAINED shares may be sold for " cash." No one may transact any business for the corporation except a duly authorized officer or agent. The business of a corporation is in the hands of its officers. The assets of a corporation belong to the cor- poration as fully and completely as the moneys in the Treasury of the United States belong to the Government.' A stockholder has as little right to appropriate assets and to attend to the business of the corporation as has a private citizen to take money from the public treasury or to attempt to do the business of the Government. A stock certificate is the written evidence of a propor- tionate amount of the total capital which has been invested by a single stockholder in the stock of a corpo- certifiaates. nation. The capital stock of a corporation is usually divided into shares having a funds- equivalent of $100 each. That is, if a company were or- ganized with a capital of $100,000 they would have 1,000 shares of stock to sell. Each person who buys or sub- scribes for " stock " receives a " certificate " which indicates the number of shares which he has purchased by exchange of money or other property. The differences between a corporation and a partnership are many. In the first place, each partner may transact any business for which the partnership was organized, and each partner is liable for all the debts of the partnership. In a corporation, however, the stockholders have no right _.„ to transact any business of the concern, this Difference , ■ ^ f ^ ■ -, between cor- bemg left to the properly appointed agents, porahon a,nd ^nd the stockholders are not liable for the debts partnersnip. . of the company. With the death or with- drawal of a partner the partnership becomes dissolved, and the business of the partnership must be wound up. The death of a stockholder does not in any manner affect the life of the corporation. Its business may go on regardless of stock ownership. A partnership interest may not be sold without the ■ consent of the other partners ; a stock 100 HOW FUNDS ARE OBTAINED certificate may be transferred at the pleasure of the owner. The responsibility of a stockholder is generally limited to the amount of his stock purchase. If the business is poorly managed he may not receive dividends on his stock; through the bankruptcy of the corporation he may even lose his invested capital ; beyond this, however, he is sel- dom held liable. In some cases, as in banking concerns, stock liability is somewhat enlarged, and the stockholder is held responsible in double the amount of his investment. Aside from those above enumerated, the advantage of corporate organization is found in the amount of capital funds or funds-equivalent of property that may advantage of ^^ secured in this way. So long as it is made the corpora- to appear to the investor that he can obtain a fair return in dividends, there is practically no limitation to the amount' of capital that may be drawn to- gether by the sales of stock. Being assured of competent management, the man with $100 may contribute with the same degree of confidence and the same prospect of re- turn as the man with $1,000 or $10,000. The only limit to capitalization is found in the hmit of profits. The fact that the business itself is a local one, however, may so far confine the knowledge of its management and of its profit- able character to its managers that but few persons having funds to invest will care to purchase shares ; such an indus- try as milling, therefore, is usually confined to a local investing constituency. The partners to the milling enterprise had found a mar- ket for 2,000 shares of stock. Besides, the old plant of the partners was turned into the corporation at a stock! " valuation equal to $100,000 ; in the new cor- porate concern each of the partners was given $50,000 worth of stock. This made the total capital stock $300,000. These contributions were all made under simi- lar conditions and conferred on the purchaser similar rights. The common stock of a corporation is that repre- FUNDS OBTAINED BY EXCHANGE 101 senting the interest of contributors of properties or funds who are entitled to dividends and to exercise corporate powers without preference. After the expenditure of the $200,000 contributed, tlie wheat-growing region suffered a drought, and the supplies of wheat for milling fell so far short of former yields that 102 HOW FUNDS ARE OBTAINED the plant could not be run to more than one-third its ca- pacity. Moreover, the wheat was of inferior quality, and ->~-^N *^.^ -^J? ^^ 9) IS i ?w il the flour produced could not be sold at a profit in competi- tion with flours ground in other places. At the end of a year it was found that the milling company had sufliered a FUNDS OBTAINED BY EXCHANGE 103 loss of $50,000 — had incurred a floating debt, payment of which was demanded. This gave rise to a new situation — 4 ^|4|Tt5l1ii|4 ^^vtfiN'j^l jss$.i a new demand for funds, one which could not offer _ a "profitable" business as a funding base. Under such cir- cumstances the common stockholders decided to hold a 104 HOW FUNDS ARE OBTAINED meeting to determine how the $50,000 might be raised. They did not feel disposed or able to purchase more shares in the stock of the corporation. Another expe- ^toih'^^^ dient, however, was at hand — the issue of pre- ferred stock. The preferred stock of a corpora- tion is usually given to secure some obligation of the company or to meet ^ome special demand for capital when common stock may not be disposed of to advantage. To this class of stock are given special dividend privileges — that is, this kind of stock is entitled to a preferred claim against the profits of the company. If a man holds a shai-e of pre- ferred stock he will receive dividends on it before any divi- dends are given to the common stockholders. .The con- tract of pi-eferment, as in the case of the Loder Brewing Company, may also give a first claim to holders of preferred stock on' distribution of funds in the dissolution of the com- pany — tbe preferred stock may be given a right to have its proportion of capital repaid before any distribution is made to the common stock. This being a bad year for the mill, and there being a prospect for a future profit, such an arrangement allowed the common stockholders to dispose of preferred shares for funds with which to pay the float- ing debt of the corporation. There may be several kinds of preferment — e. g., the common stockholders together may decide to offer to those Kinda of ^^^ ^'^'^ contribute new capital, a preferred preferred right to have 6 per cent dividends paid to them * °^ ■ out of the funds set aside for the payment of dividends before the common shareholders shall receive any- thing at all. Again, an agreement may be made whereby the preferred stockholder may have a first distribution of 6 per cent in preference to the common, and then after the common stock shall have received 5 per cent, if thei-e be any profits remaining, the preferred stockholder may have a preferred right to 3 per cent more. If, later, another contribution becomes desirable, and the 106 HOW FUNDS ARE OBTAINED common together with the first preferred stockholders are not able to furnish the funds needed, they together may agree to offer for sale another series of shares ferredmid which shall take precedence over both former second pre- issues, and in which the new issue shall stand jerre . ^^ ^^^^ preferred and the others in their former dividend-paying relations. The new preferred, therefore, would have first claim, the old preferred second claim, and the common would have third claim to dividends. The conditions of preferment may be such (in case divi- dends are not declared at a regular time agreed upon and to the amount provided) that the amount of Cumulative j- -j j x.- r. • a j jj j.i_ j. • !.• i and noti- dividend which is " passed, that is, which passes cumulative over as not paid, shall " cumulate " and become piefene . ^^ additional charge against the amount set apart as dividends to be paid to the preferred stockholder out of future profits before the common stockholders may participate. If no such provision be made in the con- tract of preferment, however, the stock is "non-cumula- tive," and a " passed " dividend will be lost to the preferred stock. Under the cumulative feature of preferred stock, it will readily be understood, a number of " passed " divi- dends may become such an enormous charge upon the future earnings of the company as to render the common stock practically worthless. On the other hand, the " non- cumulative " feature may allow the common stockholders, through their ofiicers, to delay the payment of dividends on preferred until such a surplus has been acquired by the company that the common stockholders may receive much more than their proportionate share of the profits ; without a cumulative preferment, the representatives of the common stock may continue to apply the profits to improvements until the industry shall become so highly profitable through added capital that the regular return to the common stock may far exceed that which is fixed for the preferred. l^i lit t't^t* ^ 1 =? ? I"? «^iii i I i ^^^ •' -" s 0i -*M ^l i| 108 HOW FUNDS ARE OBTAINED It sometimes happens that a number of stockholders may wish to pool their, holdings in a company for purposes of control. To this end the stockholders agreeing '^^Tn t ^"^ appoint a trustee to hold the stock and exercise all rights of control for them. The trustee gets his powers from a written trust agreement, un- der which he pays to the several stockholders the dividends declared, and finally delivers the shares after the trust agreement is terminated. When such an arrangement is made the trustee issues to each stockholder depositing his stock a trust certificate. One of the trust certificates issued by J. P. Morgan & Co. as trustee for Reading First Pre- ferred is given on page lOY. An examination of the certifi- cate will further explain its use. Other special forms of stock, such as guaranteed stock, founder's shares, treasury stock, etc., are allowed under the laws of some States. These might be enlarged Other forms yy^Q^^ jj^^t for the purposes of this treatise it is sufiicient to call attention to the principal pro- prietary interests which may be sold as a means of obtaining funds for enterprise. We pass now to a consideration of sales of credit. CHAPTER VII FUNDS OBTAINED BY SALES OF COMMERCIAL CREDIT Theee are still other ways of obtaining funds by ex- change — methods which do not involve the sale of labor, tangible properties, or business interests. If one has salable credit, this may be disposed of to meet the funding needs of business. In Part I credit was discussed as a form of funds. We will now discuss its use as a means of obtaining funds. Credit is bought and sold in the market in the same manner as are services, or stocks of merchandise. Before The extent a sale of credit may be made, however, one of credit must find a purchaser — some one who is will- U^f*i Oil thiG, laboring ing to exchange money or credit funds for a ™'*"- promise to deliver money at a future time. In this is found its limitation ; it is this that places it beyond the reach of the ordinary laborer as a means of obtaining capital. The day-laborer goes to the man of means (the capitalist), and proposes to give him his promise to pay $110 one year hence for $100 in gold. 'The man of means says " No." Some such reasoning as this goes on in the capitalist's mind : " You have never been able to do more than main- tain yourself." " Yes, it is true you have paid your account at the grocer's ; you have kept faith with those who have furnished the means necessary to ' maintenance ' on credit, but you have never displayed any ability to acquire ' capital.' " " "What surplus earnings you have had were dissipated." " You have not the ability nor the integrity to make your 109 110 HOW FUNDS ARE OBTAINED credit good." In other words, in the judgment of the capi- tahst, the credit which the laboring man tries to dispose of for capital fuads is seldom considered worth as much as the money for which it is offered. The capitalist will not trade. One with thrifty habits and good training, on the other hand, may meet with greater success. On leaving college you may go to a banker to whom you are known and offer him your note. At first he may be unwilling to buy your credit. You may even have trouble to find a business man- ager who is willing to buy your services. But eventually you get employment. Tou demonstrate your ability. Yoa show yourself to be a man capable of performing a service for which employers are willing to pay $1,000 or $2,000 per year. You exhibit some special fitness for the manage- The man of ™®"t ^^ direction of some industrial function ; ability and perhaps you have invented something, the use integrity. ^j which will be of advantage in production; you demonstrate that you have the power to form judg- ments of such superior quality that a business dependent on such decision may be handled with increased profits. Now, without capital, with nothing but this ability displayed, and a reputation for habits of industry and integrity, you again approach the man of means and offer your credit for funds with which to capitalize your advantage, and he is willing — even anxious — to exchange. Why is this ? Why are you able to procure capital funds " on credit," without awaiting the slow process of saving, while thousands of others are required to depend on the surplus accumulated from wages earned ? The answer is plain. The capitalist believes that he is making a good trade. You have something to sell, besides your ability to work for others, which he values more highly than he does the amount of money for which credit is offered — your ability to use capital in such a way that you will be able to deliver the amount obtained " with interest." The man of means sees in the transaction a profit to himself. In exchange for funds sold, he gets a SALES OP COMMERCIAL CREDIT 111 claim to future income which, in his judgment, will be to his own advantage. One possessed of tangible property or business interests has still less difficulty in convincing the capitahst of his ability to meet his contracts for future delivery. He offers to sell credit because he does not care to sell his tangible The man property or business interests. The property with gives a double advantage : by its use a larger income is assured; if this larger income does not suffice, the -property is still capable of being sold as a means of obtaining " funds " with which to meet credit con- tracts. All of this is taken into account by the one to whom the man with property offers to sell his credit. Credit Insteumen-ts used as a Means of OBTAINING Funds A promissory note is a wi^itten contract for the future delivery of a specified sum of money. The contract is similar to that made between speculators in not™^^^°^^ grain or securities known as futures, except that the "note" is for the delivery of money instead of a particular grade of wheat or a particular class of bonds. The delivery must be made on or before a stated time, and nothing will satisfy the contract except the de- livery of the particular thing promised. There is nothing fixed or prescribed about the _form of the promise ; it may be expressed in any way so long as its essentials are present. These essentials will be set forth in detail. Being a contract in writing, the parties must be set forth in the instrument. There must be at least two parties named — the one to whom the promise is made and the one making it. The 1. As to makine; the note is called the mulier ; the parties. o _ _ _ ' one to whom it is made is called the payee. The maker usually signs his name under the writing which carries the promise. There may, however, be two or more 11-2 HOW FUNDS ARE OBTAINED iftakers of the same note. A note that has two or more makers is called & joint note. Joint notes may be made by each individual signing his name individually, or in case several persons are combined in business relations as part- ners, one of the partners, or one authorized to sign the partnership name, may subscribe the name of the partner- ship and bind them all. The payee may be the one whose Johnstown, Pennsylvania, June 30, 1900. Thirty days after date ive jointly promise to pay to Sylvester Jones, One Thousand Dollars, with interest at the rate of six per cent per annum. BiEDWELL, Smith & Brown, by Vaughan Beown^. name is inserted in the note at the time it is made and de- livered. Commercial usage, however, has allowed the words " or order " to be added. Such expressions as " Pay to [name ^^^^*^>» of payee] or order," or "Pay to the order of [name of payee]," indicate that the one named may, in writing, di- rect payment, or delivery, to be made to some one other than himself. Above is a form of note that is defective, for SALES OP COMMERCIAL CREDIT 113 fhe reason that no payee is named in the instrument. This defect may be overcome by negotiating the note. Baltimore, Maryland, January 10, 1899. On the first day of September, 1899, we promise to pay to Martin Lowden, or order, the sum of One Hun- dred Fifty Dollars, with interest from date at four per cent till paid. Louis Sampsok. J. L. McKekzie. The right granted to the payee named, to order jpayment to he made to another, does not make tlie contract any less 3 Words of certain as to whom payment is to be made, but transfer- it gives to the instrument higher value by mak- abihty. j^g ^^ negotiable. Negotiable in the commer- cial sense means transferable; a negotiable note is one which may be transferred from one person to another by such acts or writing as is necessary to give evidence of the right of the person presenting it to receive payment. The insertion of the words "or bearer" instead of "or order" effects the same end. This makes the note negotiable with- out assignment or indorsement ; nothing need be added to it to show title or a right in the one presenting it to receive payment. A note that has no such words as " or order " or New York City, July 5, 1900. One year from date I promise to pay to John P. Lar- kin, or learer, the sum of Two Hundred Fifty Dollars, gold coin of the United States of present weight and fineness, at the Chemical National Bank. Charles 0. Pastokius. "or bearer" added after the name of the payee, but on its face makes the money promised payable to a definite per- son, is not transferable and is non -negotiable. 114 HOW FUNDS ARE OBTAINED The promise clause contains the essence of the agree- ment, and though it may take any form of expression, the meaning must be an unconditional obligation I'firomZ^'^^ on the part of the makers to pay a definite sum of money. In case there be more than one maker, the expression " we promise," or " we jointly prom- ise," means that each of the makers agrees to pay a certain proportion of the amount of money named ; while " we jointly and severally promise " means that each one of the makers will pay the whole amount if the others fail to pay their proportion. The promise clause may be simply a $2,346.22: We jointly and severally promise to pay to the United States Trust Company of St. Paul, Minnesota, the sum of Two Thousand Three Hundred and Forty-Six Dollars, on the tenth day of December, 1893, with interest thereon at the legal rate till paid. George P Austin St. Paul, Minnesota, Makshall Mehan. September 10, 1893. AlONZO Poetee. promise to pay an amount stated at a given time. In this case no other amount may be collected at that time. But that part of the contract which contains the promise is usually in two clauses : the one contains a promise to pay a definite amount called the "principal" sum, and the other states a second proportionate sum to be paid as " in- terest." This later claim is sometimes in words which re- quire a mathematical computation in order to determine the amount due. The principal, however, must always be a fixed sum ; otherwise the amount of interest may not be deter- mined, and any uncertainty as to the amount due would de- stroy its character as a promissory note. Sometimes the addi- tional sum, called " interest," is made the consideration for a separate note, in which case the interest sum appears as a SALES OF COMMERCIAL CREDIT 115 definitely determined amount. A contract made payable in anything but money is a form of obligation that would be enforced, but it would not be a " promissory note " ; it $50.22; Peoria, Illinois, January 27, 1898. On the 27th day of July, 1898, I promise to pay to Ja- cob Straussner, or order, the sum of Fifty Dollars, at his office, Xo. 231 Main Street, with interest at the rate of 6 per cent, after maturity, the same being for an instalment of interest due on that day upon my principal promissory note, of even date herewith, payable to Jacob Straussner, or order, three years after this date for the sum of Two Thousand Dollars ($2,000). j^ g French. would not pass as commercial paper. Sucb contracts are common in the market-place, but they are not usually made negotiable, and would not be called " credit instru- ments." They are not in any wise treated as such. The date of making and issuing a note has a double sig- nificance. In the first place, it is the common custom to 4 As to date ^^^^ * '^ote payable a certain number of days of making a or months after date, though some bankers and ""'"■ business men now consider it better form to draw notes and time drafts payable at a certain time stated in the instrument, as, "On the 10th of March, 1897, I promise to pay." In this case a date of making is not necessary. In the second place, the date of the note may affect its validity. In most Christian countries a note made and issued on Sunday is void. The date of maturity is the day on which a note becomes legally due — the day on which the payee has a right to demand the money prom- ised. The date of maturity can not be left indefinite ; no doubt must be left as to the time when demand for pay- ment may be made. In finding the date of maturity it is im- portant to remember that when a note is drawn ''days after 9 116 HOW FUNDS ARE OBTAINED date^'' the actual dajs must be counted, and when drawn " vwnihs after date " the time is reckoned by months. At common law a note is not legally due till three days after the expiration of the specified time. These are called " days of graceP The party making a note may waive the right to days of grace by express contract in the instrument itself. Some jurisdictions have made this unnecessary by statutory enactment. Where " days of grace " are abolished by statute the note falls due on the day stated in the contract. ^25.= Stokestille, Montana,- June 20, 1808. I hereby promise to pay to the Stokesville l^ational Bank the sum of Twenty-Five Dollars, three months from 'date, interest at one per cent per month, without grace, the usual three days of grace being hereby specific- ally waived by me. Lawrence Logan. The maker's signature must appear in some form upon some part of a promissory note. It usually appears imme- diately after the written promise, though it siqnature ^^J ^^ placed on any part of the instrument and still bind him to the performance. It need not be afiixed by himself, however ; signature may be made by any aiithorized attorney or agent. It may be the full name or only the initials. The usual business signa- ture should be used as a matter of avoiding doubt or ques- tion. "When a man who can not write is asked to sign a note or other legal instrument, the usual custom is for some one else who can write a legible hand to inscribe his name. This should be so written as to leave space in signature *''® written line for a cross. After explaining the nature of the instrument the signer or maker is asked to place a cross in the space left, as shown in the exhibit. Above and below the cross, and in the presence of his the signer, is written X . Such a signature should also be mark SALES OP COMMERCIAL CREDIT 117 ■witnessed. A witness is essential for the reason that the signer may afterward deny that he executed the contract. Li eicuSwX^ Kri/iwj^ — — Aside from the essential parts, there are various clauses added from custom or local practice that do not affect its ,, , . , validity nor add to its oblii^ations. One of the clauses. most frequent of these is the phrase "for value " Value ^^ received." Thousands of good notes made without any value consideration stated in the instruments themselves are handled daily. Notes contain- ing this phrase are an old foi'm of written evidence of the credit contract ; the newer forms drop this word- "j^l'l^'V^^ ', ing. In Pennsylvania the words "without def- defalcation. ,''.,, .•' i mi • • i n alcation are inserted. 1 his is wholly super- fluous. " Credit the drawer " is sometimes inserted in the lower left-hand corner with the signature of the payee. •4 \m\^ \ U-o-o<.K of Bett^leljem. J^f^ yyd^^t^ .^*^t*-»-.-^(lt^,X^«<.^ "^^-^ -.DoUnr without defalcation for value received Cr.dli Ih. Dnwci of his wife. He therefore executes his note to her. She enters on its face, " Credit the drawer," and then indorses it. This allows John to obtain the funds needed by dis- counting it. Ostensibly John is the maker of the note ; in reality it is Augusta that is the responsible party. Another peculiar use of this form of note is given opposite. A number of parties are commonly interested in raising funds. They arrange for accommodation by co-signature. The names of all the parties who are to sign are entered on a marginal slip, with the understand- ing that the note will not be complete till all have signed, it being understood that each is to become responsible for a pro rata only. The first to sign is understood to be the drawer, while all the others are accommodation signers. SALES OF COMMERCIAL CREDIT 119 Date Amount, $ Time Due Discount . . . Days . . . $ . Eenewal of $ Leonard Grafton. Hiram Hadley. Peter Mclntyre Brown. Tyson & Mowbry. William A. Custard. L. A. Marks. Latshaw Grocery Co. J. B. Samuelson. B. Browning. Alonzo Parkinson. Uriah Lundy. P. B. Cornlee. Reading, Pennsylvania. We, the undersigned, promise to pay to The Garden City Steam Paper and Box Manu- facturing Co., or order, month after date, the sum of Dollars, without defalcation for value re- ceived, at the Keystone Na- tional Bane of Reading, Pa. It is understood andagreed, however, that the liability of the subscrib- ers hereto is limited in such man- ner that each shall be obligated only to pay such an amount there- of as is ascertained by dividing the whole amount of the note by the number of subscribers. [Signed] Credit the Drawer. The Garden City Steam Paper and Box Manu- facturing Co. Treas. fA 120 HOW FUNDS ARE OBTAINED The parts of a note containing contracts of security for payment when due (expressed or implied) are found : (1) In „ , „ its signatures of accommodation, indorsement, Ji^dTis of nots . containing or guarantee — i. e., in contracts for personal se- contracts of curitii. (2) In its special clauses carrying trans- SBCUTit }J «/ \ / J. t/ o fers of collateral, powers to enter judgment hy confession, without action, rights to levy execution, etc. — i. e., in contracts for lien security. An accommodation signature is given as security for the payment of a note by one having no interest in the funds obtained by means of the instrument sold. For P 7 security example, one may apply at a bank for a loan. He offers his note for $105 (principal and inter- est), due one year hence, in exchange for $100 in cash. The banker refuses to take the note at that price, and the one offering it does not care to sell it for less. He has a friend with him, and the banker offers to give $100 for the note if the friend accompanying him will become an " ac- Accommoda- commodation signer." His friend agrees, and tion signa- the trade is made. In form the note is a joint '"'''*' one — in fact, it is "accommodation paper." The maker's fi'iend becomes jointly liable with him for the pay- ment of the note, but his obligation is purely one of " ac- commodation " — that is, the value of his credit (of his ability and integrity) is added to the principal maker's as security to the banker for the payment of the sum contracted for. Indorsement is another form of contract of security. Samuel Johnson is owner of a note or contract made, where- by Alonzo Grey agrees to deliver $1,000 to the order of Samuel Johnson one month after June I7th. Johnson takes the note to a " commercial paper man " and offers to sell it for $995 — i. e., he offers six per cent discount as an inducement to purchase. The dealer, however, does not know Alonzo Grey, and is not willing to purchase his contract to pay without secui-ity. He is willing to purchase Johnson's credit, however, at the price SALES OF COMMERCIAL CREDIT 121 offered. He therefore proposes that he will give the amount asked for the note provided Johnson will indorse it — write his name across the back. When a note is $lltSPJSr: BellUelum. Pa^U*iU //.^ ii)o/ Pay to the order of THE FIRST NATIONAL BANK OF BETHLEHEM, ■udllunit defalcation for value received. made payable " to order," the writing of the name of the payee across the back performs two services. In the iirst place, this is necessary in order to assign or transfer the right to receive payment ; a note which is made payable "to bearer," however, needs no assignment, and indorse- ment is not necessary for this purpose. In the second place, the " indorsement " is a contract of security — it carries with it an implied promise of the indorser that he will pay the amount promised on the ^^I^^^-^^/C^ Without recourse. day it is due, if the maker fails to do so. Indorsement is usually made in blank — that is to say, with- out the words " Pay to the order of." The purchas- er of the note is then free to pass it on from hand to hand without further assignment. In such case, further in- dorsement could be for security only. If the owner of a note wishes simply to assign it — that is, to transfer the right 't^>-<-iy 122 HOW FUNDS ARE OBTAINED to receive payment from the maker, without also becoming responsible for the fulfilment of the promise — this may be done by adding the words " without recourse." The effect of this is to deprive the indorse- ment of its character as security. \ . |iC> Release from liability on contract ^ v*^/A/Krvi^ of indorsement after it is made may be by separate agreement. One may guarantee the pay- ment of a note without indorsing it — i. e., by entering ^^^^i-t^.^.^fCJ' -^ r>~^^^^^^ IfnoZ!'''^ into an additional writ- ^ Z^w>^ .a^.^^,,,^ ten contract. If there L , ^, . has been any advantage gained, ■' " any new consideration passed at d^"^ "^ -^ '^"f^ m^/, the time such guarantee is made, ^^^' the contract will be valid and the /^^/t^ ^'^mW- guarantor may be held for its pay- 4.^aiJ^^^ z^y ment. Without consideration the guarantee is void. The guarantee is usually in form of a separate writing and not made upon the note itself. FOfR V-ALVE iHECEIVE'Dr hereby guarantee the prompt payment, at maturity, of the following described note , executed under seal — and endorsed by .; and hold. abound by this guarantee and endorsement, the same as though such note were not executed under seal. It often happens that it is of mutual advantage to pledge " collateral securities " (stocks, bonds, or mortgages) for the SALES OF COMMERCIAL CREDIT 123 payment of a loan instead of asking personal security or executing a mortgage. This is done by offering a regular promissory note, to wliich a contract is added Collateral note. setting forth the "securities" delivered and the conditions attached to their delivery. The one granting the loan will hold these securities subject to the agreement; In case the contract for payment is not ful- filled, the contract of security may be relied on and strictly i_ - II " |C\ e ii i •= 's ■S 5 ^> J!!6.o •>'Sjj"v-«,". so- il 'i a V? slt-a .^ ' •s I g o ; i C ■o S. = 2 '^ £ a — - ^ S m ^ S a - •SS«iia--'5.e„'aj.5{ i^ 124 HOW FUNDS ARE OBTAINED enforced. These contracts of collateral lien security have many forms. The one above given, it will be noticed, authorizes and empowers " the holder of this promissory note (provided the same is not paid at maturity) to sell at auction or private sale, and transfer, without further refer- ence or notice," to the maker of the note, "and apply the proceeds in payment " of the note, " together with interest charges incurred thei-eon." Provision is also made for the disposition of the surplus. This contract, together with the property on which it constitutes a lien, serves as security to the purchaser of the credit promise and thereby increases its value. It enables the seller of credit to obtain a higher price for it in the market. The accompanying form of note was largely used by banks making call-loans to customers during the time that the Ifemomn- Stamp revenue act was in force. It was thought dtim collat- to contain no promise, therefore to avoid the eral note. -t. j: • xi x x ■ j necessity of paying the stamp-tax imposed on promissory notes. In form it is simply a memorandum made by the cashier to the effect that the bank had advanced The Bank, Pa. las this day of^ „ ,. . advanced to . Dollars, collaterally secured, being entitled to demand a return of the said amount, with interest ai the rate of, per cent, per annum, on demand. Collaterals deposited herewith listed on back of this note. a certain amount of funds to the customer for which cer- tain collateral had been deposited. The memorandum was then marked " O. K." or "Correct" by the customer over his signature. This constituted an "account settled," and was enforceable at law as an instrument of collection. Had the revenue officers brought this form of instrument before SALES OP COMMERCIAL CREDIT 125 the eoiu'ts it is liiyhly probable that for the purposes of the aet it would have been declared an evasion of the tax. Added to the ordinary form of note of pronnse for the f atiire delivery of money is often found a clause in the na- ^ , , ture of a confession of iudgment for the prhi- Judgment . . , . , „ ' note. cipal amount, with interest, and cost of suit. $250.2; Jacksboko, Tennessee, May 1, 1897. One year after date, for value received, I promise to pay to Jonas Greer, or bearer. Two llundred Fifty Dol- lars, with interest, without defalcation or stay of judg- ment. And I do hereby confess judgment for the above sum, with interest and cost of suit, a release of all errors and waiver of all rights to inquisition and appeal, and to the benefit of all laws exempting property, real or per- sonal, from levy and sale. p^^^^ y^^^ -q^^^_ Another form of judgment note is one authorizing some one to act as attorney for the maker— to appear and confess judgment for the amount due in case note with of default. The eifect of this contract is to power of allow the holder, at any time after the note is due, to enter judgment and to seize upon any property of the debtor by process of execution, thus secur- ing a lien upon any and all property found that may he \ $MooiS: <^^^^i4 ^y'^ d--=- -y^// r HOME iHflTlONftL BANK o! Roysrsiorfl, Pa. l^^^s^aU i)^^#— —^§.&^ ■ WrmOUT DEFALCATION. VALUE ReCElvED A-..f )' '"'f"j"r,'";V' *""7:' ^l^^'i'ooroV'n-I'. wr c"Jni'fS"c"l?e^uVn'"f«^lil^ of er™™..odw»houiiinyyfe««oMc>n .nddo^w^^^ ,„^ sinie oD flcrl bcliL ' t,. 12^. HOW FUNDS ARE OBTAINED Becessary to satisfy the amount of the contract. It is a very severe form of agreement by way of security, and some States on this account have made it illegal for reasons of public pol- icy. The following form is unusual in that it combines a con- tract of collateral security with one giving power to enter judg- ment without action for any deficiency on sale of collateral. for Value received, wllhout Derulcation. And wiih ihe foregoing Obligation ./ barfl delivered to said I...,, I«v ^nd "Ic. Inqulriltan ..J eondrmr.ll.n, .rd .hrulj .. r.ec.rbr l« ^.rl^crrby .„« dr^l " .tr.m.,'. ccmmL.l.T. ^^Ji^lT a L p.. «m A promissory note performs a double purpose as a funding instrument : (1) It is a form of instrument which allows the maker of the note to dispose of his credit in exchange for funds. (2) As a contract for the future de- livery it is an instrument in the hands of the holder by means of which he may obtain funds througli sale or through pnyment (the delivery of the funds promised). It is this second use that we still have to consider. Payment is obtained through presentation, and depends as much on the punctuality of the holder as on the punctuality of the maker. A note should be presented on the exact day of maturity. When made payable at a bank, or at any other place, notes must be presented for payment at ^forpaym°nt. ^^^^ P^^c^ named. If no place is specified, a note should be presented at the maker's place of business or at his residence. The fact that a note is not presented on the day of maturity does not affect the obli- SALES OP COMMEECIAL CREDIT 127 gation as between maker and payee ; but unless there is an express waiver of rights, the note must be presented upon the exact day of maturity if the indorsers and guarantors are to be held liable under these contracts. A maker may usually pay a part of his obligation be- fore it is due. It often happens that it is not convenient to pay the whole amount when due, in which pmiment ^'^^^ *^^^ holder may take a part and grant an extension of time on the balance. This is in reality a new contract. If a part payment is made, such payment should be indorsed on the back of the note. In- dorsement of this kind requires no signature ; the usual form is, "Eeceived on within note," stating the amount and date of payment. An ordinary separate receipt does not give notice to a purchaser that a payment has been made. A receipt indorsed on the back reduces the face of the note. Only payment of the obligation in full — i. e., payment of the exact amount of money promised^will sat- isfy its conditions, unless the payee enters into a new con- tract whereby he agrees to accept something else in place of the money. For example, suppose the maker's check were accepted. Usually, acceptance of a check and the surrender of the note constitutes a new agreement whereby the payee relinquishes his right to receive the amount of money prom- ised ; the consideration for the relinquishment or cancelation of the contract is an order on the bank to transfer funds from the account of the maker of the check to the one sur- rendering the note. Such a settlement is what is called an " accord and satisfaction " between the parties. If there is a controversy as to the amount to be paid, the maker may offer (i. e., he may make a tender of) such an amount of money as he may think due. If Legal ^j^|g -g j-gfused, and a court to whom the con- troversy is referred decides that the correct amount of money has been tendered, the maker will be entirely released. If, again, the dispute be with regard to 128 HOW FUNDS ARE OBTAINED the kind of money offered, the maker need only offer that which by law is made " legal tender " for the payment of debts. In the United States gold and silver coins of the United States and greenbacks are "legal-tender" money for the satisfaction of credit contracts, unless some other kind of money is specified in the agreement ; in such case, the kind promised must be delivered if the creditor insists. It often happens that there is a failure and refusal on the part of the maker to meet his promises. He may have re- fused payment because he was unable to secure mm'/of^note ^^^ necessary funds ; he may dispute the amount claimed on the ground of failure on the part of the payee to indorse a part payment already made, or for some other reason ; he may seek to avoid his debt. In any case, the fact of failure and refusal gives to the payee a " right of action " in the courts not only against the maker, but also against all " cosigners," " indorsers," and ■ "guarantors," to compel them to make payment of the money promised and for which they became surety. New York, 189 . To You are hereby notified that a certain note made by for I in favor of dated , and by you indorsed (or guaran- teed), was this day presented to for payment and payment was refused. [Signed] The holder of a note which has been indorsed, or the payment of which has been guaranteed, must notify the in- dorser or guarantor if payment is not made nmi-pamnent ^^^6" ^ue. When one becomes surety for the fulfilment of another's credit contract, he is entitled to know of the non-payment in order that he may SALES OP COMMERCIAL CREDIT 1-2',) take Steps to protect himself. If he receives no notice of non-payment he has a right to presume that the contract has been met and that he is released from the security. On page 128 is the usual form of written notice sent. This right to have demand made on the day that the note is due and to notice of non-payment, however, may be Waiver of waived by indorsers and guarantors at the time demand and the contract is entered into. " Call-loan " notes and many of the " short-time " notes taken by banks very commonly have a clause in the instrument of this kind. The law simply protects the indorser in case he does not sign away his rights. When waiver is made the contract may be strictly enforced by a hona-fde holder. $500. LoGANSPORT, Indiana, .June 30, 1897. We, or either of us, promise to pay to the order of John Hartwell Bates, on July 30, 1897, the sum of Five Hundred Dollars, with interest at the rate of (yfo from date, for value received. And the cosignors and guarantors of the above note hereby severally and specifically waive all rights and ex- emptions that would accrue, for failure of the holder to present this note for payment when due, for notice of non-payment, notice of protest and of demand upon them for payments, in case this waiver and exemption had not been specifically made. Louis Strai^gee. Petek Longfellow. JoHK E. Ckandall. An indorsed or guaranteed note which is presented for payment outside of the jurisdiction in which it is made, and is not paid, is usually ^^yv^Myffr/; this is done to give formal evidence that the note was present- ed for payment and that payment was refused. Protect is a formal declaration made by a notary public into whose 130 HOW FUNDS ARE OBTAINED hands a note has been placed for official and formal presen- tation, together with a formal record of the fact by the notary. The notary usually attaches the certificate of pro- test to the note; he may also mark upon the face of the note tlie fact of its dishonor. When a note is sent to a bank or other agent for presentation and collection, the greatest precaution must be taken before protest ; the bank .. (-J-«<^. ^rfe^^'£^Z^^^<_^::7^*^ty# after date. \,/^.^..promise to Pay to the orikr q/^.^ WlWm NATIOMLBAM OF BETHLEHEM Dollars, without defalaiioi^nr value received. a: e or other agent should never have it put into the hands of a notary for official presentation and protest until it is made certain that the non-payment has not occurred through mistake ; usually a messenger will be sent out with the note At the request of the Holder, ^be Centennial Bational Bank J, the undersigned, Notary Public for the Commonwealth of Penna. have this day protested a ./TCtCS. for j JO OO , &a.ttA/ClM4,jy_\Q0l^ drawn by.. A-^-r c^ct^ a/^:;: a^uii J/->^wU^-7^/L-jfr- BE IT KNOWN, That on the day of the d^le hereof, at the request of THE CENTENNIAL NAT. BANK, the holder of the original n-O^CZ . of which a true copy js above writicii. I. the undersigDed, Nolary Public-for Ike Comniomvcall/i of Pennsylvania, by lawful authority duly commissioned by the Governor of Penna., and swom, residing in the .City of Philadelphia, during the usual hours of business for such purposes, caused the same to be preicnted at P^^^^^fVyy^ '7ui^^lLA;4^T-*'<«^^ fi-^^^^ Whereupon, I, the said Notary, at the request- aforesaid, have Protested, and do hereby solemnly Protest, against all perdbns and every party concerned therein, whether as Maker, Drawer, Drawee. Acceptor, Payer, Endorser, Guarantee, Surety, or otherwise howsoever against whom it is proper to protest, for all Ex- change. Re-exchange. Costs, Damages and Interest suffered and to be suffered for want of payment thereof .—Of which-demand and refusal I have duly notified the parties interested. ^ £jr Thus done and ProtesUdit the City of Philadelphia, ie ^7^ diyof A.^ /fC/ ^yyy\^oJJ. Notary Fu^ owner; one wishing not to have protest made should in- struct the bank to that effect. Such instructions are com- monly attached to the left end of a note-form, with the in- 10 132 HOW FUNDS ARE OBTAINED junction that the instraction is to be clipped off before presentation. It will be observed that the notice of protest is sent out by the notary public, to the maker of the note and to each of its indorsers and guarantors, making formal Notice of ^^^ official demand. The form of notice used in Pennsylvania is given, on page 131. All forms of credit are contracts for the future delivery of money which have been " sold " or exchanged for some- Advantaaes thing else of value. That which is received in and disad- exchange or " paid " for a credit contract is using prom- called the " consideration " or price. A prom- issory notes, igsory note, as a form of credit contract, has the advantage of being a formal agreement expressed in writing and signed by the party making it, as well as by the ones in- dorsing or guaranteeing it. It is thei-efore less likely to be disputed, and more likely to be complied with than is a simple verbal promise, for which there is no written evi- dence, or a memorandum of account made by the creditor and not signed by the promisor. Being a written agree- ment also, it may be protested ; such public dishonor is likely to injure the credit of the maker and cause his future offers of credit to be less salable ; on this account the maker will usually be more prompt. The disadvantages of a promissory note are found in the fact that delivery may not be enforced till the note is due. The only way that the holder can obtain funds on a note not due is to sell it again. When it does come due the maker of the contract may have sold everything that he owns and thus have de- feated the enforcement of the contract. An open account, on the other hand, is due at any time. An overdue note (although dishonored) may be a better form of paper for the holder to obtain funds with than a note not due, be- cause action for collection on an overdue note may be begun at once. But a note that has been acquired after it is due is not a safe investment ; the one holding it can not raise SALES OP COMI\[ERCTAL CREDIT 133 the plea of "innocent purchaser" against any defense which the maker might have raised against the payee if it had re- mained in his hands. Suppose, for example, that the maker had made part payment, and the holder, failing to indorse the amount, sold it after maturity without knowledge on the part of the purchaser that a part of the amount had been paid. In such case the maker would be allowed to set up the payment as a defense in liquidation of the amount. Instruments foe the Collection of Credit Accounts The commercial account has already been discussed in its character as/'totds — i. e., as a form of credit used for the purpose of making purchases and payments. The promis- sory note, on the other hand, has been treated as a form of credit used to obtain funds. Both are evidences of contracts for the future delivery of money. The first contract, how- ever, is one for which there is no evidence except the mem- oranda or memory of the parties, while the second is evi- denced by a writing setting out the contract in full, signed by the party obligated. The promissory note, therefore, as has already been observed, serves a double purpose : (1) by its original sale the maker was able to obtain funds for his immediate use ; and (2) the note being a signed and formal- ly executed statement, it may be presented to the maker for payment ; it thereby saves the payee for funding pur- poses by resale or by collection under the contract when it comes due. To restate the difference : The commercial account has for its end the purpose of serving its maker as "funds" — as means of purchase or payment; the prom- issory note performs the double service of obtaining funds for present use for its maker, and that of obtain- ing funds for future use for the payee. The commercial account, however, being a contract for the future delivery of money, must have some form of expression of this side of the agreement. There is no written evidence of the con- tract for payment or future deUvery. In exchange for it 134 HOW FUNDS ARE OBTAINED goods are given ; how will the one who has given goods for this form of credit obtain money in payment under the con- tract ? This has given rise to a whole class of instruments of collection. The most common instrument of collection is the aocouni stated. This is simply a copy of the memorandum, or a statement from memory, of the items of ci-edit stated ^^^ amount received in exchange. This state- ment is presented to the purchaser for pay- ment. It thus becomes an instrument in the hands of the one receiving the credit, which is used to obtain funds in payment of the credit given in exchange and for which there is no other evidence. After an " account stated " has been presented for payment, if no objection is made to the items of credit contained in it, it is taken for granted that the party receiving the statement accepts it as correct. New York, July 1, 1897. Mr. Joseph GRATSOisr To John E. Black, Dealer in Boots, Shoes, and Gents' Furnishings. T)r. 1897. June 3 2 2 11 11 28 One pair boys' shoes One pair " Eex " tan boots. . . . Two neckties 1 Monarch shirt 2 pairs black hose 1 pair trousers Total, June account 117 00 00 50 00 50 00 00 In the above exhibit is a copy of memoranda taken by John R. Black in regular course of business with Mr. Joseph Grayson. The " account stated," or copy of his memorandum, shows that on June 2 Mr. Black received $1 of Mr. Grayson's credit for a pair of boys' shoes, SALES OP COMMERCIAL CREDIT 13;; $5 of bis credit for a pair of "Hex" tan boots, $1.50 of bis credit for t^vo neckties, etc. During tbe montb be bad receiv.ed, according to bis own account, $17 of Mr. Grayson's credit in excbange for goods. He now " states " tbe account to Mr. Grayson — i. e., presents a copy of memo- randa to bim for payment. Tbe fact that accounts stated are simply tbe memoranda of one party to tbe transaction leaves room for question as to tbeir accuracy. For example, Mr. Grayson settled.^ ^^1 ^®°J t^at lie gave $8 of bis credit for tbe trousers purchased on June 28 ; be dis- putes tbe account, claiming that be agreed to pay only $7.50. Mr. Black's clerk may recognize tbe mistake and correct tbe error, thereby reducing tbe account stated to $16.50. But Mr. Grayson prefers to have tbe account stand over for another month before payment of tbe amount acknowledged to be due. To place tbe account stated beyond future controversy, and to show that the amount due has been settled or agreed on, Mr. Grayson marks on tbe face of tbe statement " O. K.," adding bis initials " J. G." Now the " account stated " takes tbe form of a written contract for payment of $16.50. At the be- ginning of the next month Mr. Black renders a new state- ment of account, in which he enters tbe amount agreed on as balance due as "balance as per account stated," adding tbe amounts of credit purchases subsequent to July 1. In Mr. Joseph Geatson- New York, August 1 To John R. Black, Dealer in Boots, Shoes, and Gents' Furnishings. 1897. Dr. July 1 14 14 Balance as per account stated. 1 suit of clothes lie 30 5 50 00 00 1 Knox hat Amount due August 1 . . . $51 50 130 HOW FUNDS ARE OBTAINED order to place an account beyond question, and at the same time to have it in form of a " settled account," bills may be rendered at the time the parchase is made or long before the account is due ; the party receiving it will go over the items for the purpose of correction, and then return the memorandum with a statement that it is correct, or with " O. K." marked on its face over the signature of the one buying on credit. The account is then in form for col- lection when due the same as a promissory note. Id I = - S J = 5!H § ■Mo, ..e:;?^:- ..li^,<,:££cJ:,M,l^,rrm.... \Z:. Philadelphia, January J, \')a / ^o^Tlje pmerieai) fleademy of politieal aijd Soeial Seieijeef^mT For Annual Dues for year ending December 3T, 19 tf / , $5-00, Received payment,... Accounts Accounts may be paid by the tender of the amount of money due, or by ofEer and acceptance of something else, as, for example, the acceptance of a " set-ofE," a " draft " for the amount, a " check," or a "due-bill." The payment is very commonly evidenced by a "receipt," or a written statement of the fact of payment received. If one has a claim against another who also has a claim against him, this claim is called a set-off — that is, something to set or cancel off part of his claim. Under or- dinary conditions it is impossible to have a set- off against a note not in the hands of the original payee, but with mutual accounts it is the common method of payment. A due-bill is a written acknowledgment or evidence of a due account. The ordinary form of due-bill is not nego- Due-hills tiable, as it is not made payable " to order." It differs from a promissory note in another par- ticular, viz., that it may be made payable in merchandise. A set-off. SALES OF COMMERCIAL CREDIT 137 $51.50. New York, August 1, 1897. Upon settlement of account, this day, with John K. Black, I acknowledge the sum of Fifty-One Dollars j%\ to be due and owing to him by me. Joseph Grayson. A commercial draft is an instrument for the collection of funds, through a third party, due on account. It is in the form of a letter from the person to whom dr^"r™*"^ an account is due, directed to the party owing an account, requesting him to pay the amount of the draft to a third person and to charge the same to the account of the writer. For example : one Jacob Koss has purchased from William Jones $500 worth of merchan- dise on account, to be paid on November 1, 1898. On October 30, Lawrence Williams presents an " account stated " to Wilham Jones for $300, and demands payment. Jones has not the money, but tells Williams that Eoss is owing him $500 due on iTovember 1. WilHams thereupon offers to take a draft on Eoss for $300 in payment of Jones's account to himself (Williams), which is agreed to by Jones. He thereupon writes to Eoss as follows : Springfield, Massachusetts, October 30, 1898. To Jacob Eoss: After Xovember 1, please pay to Lawrence Williams Three Hundred Dollars, and charge to the account of ^300 — William Jones. Upon the receipt of this letter, Williams " receipts " the account against Jones. He presents the draft to Eoss and receives payment ; Eoss charges the amount to Jones's account. It will appear from this that the draft on Eoss not only serves Williams as an instrument of collection of 138 ■ HOW FUNDS ARE OBTAINED Ms account against Jones, but it also serves Jones as funds for the payment of his account to Williams. This double relation is always found in a draft. It is primarily an in- strument for the collection of funds in the hands of the one receiving it, but it serves the party making the draft as funds for the purpose of payment " on account." It often happens that a party living, let us say, in Boston, owes another party in New York. The New Yoi'k party, wish- ing to collect the amount due on account from the Boston man, will "draw on him" through his bank. The bank's correspondent in Boston will present the draft, upon the payment of which the amount will be placed to the account of the drawer. The New York man will be considered as having made a payment to his bank " on account " by draw- ing on the Boston customer who owes him. When a bill or draft is drawn on some one living in a foreign country, it is usually drawn in duplicate or tripli- „ . , .„ cats, so that in case one is lost the other will Foreign nils. , ,, , , , . , . , , , ^, . reach the party to whom it is addressed. This grows out of the increased uncertainty of delivery of a foreign bill. In the foreign bill, more clearly than any other, appears the true nature of the instrument. Primarily, it is a simple request. It is not, when drawn, a credit instrument. Sev- eral requests may be made at the same time for the same funds. No promise or contract for the delivery of money may be found in a draft before it is presented. The whole credit quality of a bill depends on " acceptance " — i. e., on the undertaking of the one of whom the request is made to make payment to the party presenting it. The accom- panying exhibit is the " First " of exchange, drawn by the Bank of the United States, January 25, 183S. This was one of three bills of like " tenor and date," each bearing on its face the stamp of its relation and significance. On the left end of the exhibit is engraved " First." Each of the other two had engraved upon it " Second " and " Third," respectively. The Bank of the United States, through SALES OF COMMERCIAL CREDIT 139 its President, Nicholas Bid ■ die, and its cash- ier, J. Cowper- thwait, issued three bills requesting S. Laudon, of London, to pay to M. Robin- son £1,000, and charge the same to the account of the drawer. This payment was requested "sixty days af- ter sight " of the bill first presented. The "First" was presented on May 1, nearly three months after the three bills were drawn. Dur- ing all of this time there had been no obliga- tion on the part of Laudon, of London, to pay the amount. On that day, however, he 140 HOW FUNDS ARE OBTAINED " sighted " the " First," and wrote on its face his acceptance — i. e., S. Laudon undertook to pay £1,000 to the one pre- senting it sixty days hence. The bill at that moment, and not till then, became a credit instrument— a promise to pay a definite sum of money at a definite time. The " first " request having been honored, the acceptance of either the " second " or the " third " would have been at the risk of the acceptor and not of the drawer, as the request was for the payment of £1,000 only and not for £3,000. A sight-draft is one requesting payment at the time that it is presented. Let us suppose that Louis Borg had an account against Patterson & Co., of Phila- and drafts delphia. He wishes to pay an account to Peter Sterling for $.500. He draws on Patterson & Co. for the amount payable " at sight." A time-draft is one made payable on a certain day, as, for example, " on November 1," or a certain length of time after presentation $500. Pittsburg, Pennsylvania, January 23, 1899. At sight pay to the order of Peter Sterling Five Hun- dred Dollars, value received, and charge to the account of To Messrs. Patterson & Co., LOUIS BOEG. Philadelphia. for acceptance. It is very common to make a draft payable ten days, or thirty days, " after sight." The time of pay- Tim d- ft ™^'^*' of the draft is usually governed by the conditions of payment of the account for the collection of which it is drawn. If a bill of goods were payable ten days after delivery, then a draft might be drawn and sent at the time that the goods were sent, to be pre- sented for acceptance on delivery of the goods, but not pay- able till ten days afterward. The acceptance of a draft, like the " O. K." of an ac- count, makes it a written evidence of debt against the one accepting it ; it is then in the nature of a promissory note. SALES OP COMMERCIAL CREDIT Ul to which the drawer becomes the indorser, and the acceptor is the principal party to the contract. Acceptance is made by writing across tlie face the word " Accepted," together with the name of the party accepting. It is usually dated, and very often the place where payment will be made is added. If the place of payment is not entered, it is payable, like a promissory note, at the office of the acceptor. "When the one on whom the draft is drawn accepts it, he is said to " honor " it. If not accepted or paid, it is not more bind- ing on him than a letter or oral request would be. His re- fusal to honor drafts made for the payment of accounts due, however, will injure his credit in the community — i. e., make it less salable in the future — and thereby will handi- cap him in using credit as capital in his business. A draft, before acceptance, is much like a promissory note that has been negotiated before it is executed. It is taken by the payee, or his assignee, on the faith acceptance Or judgment that it will be accepted. This and payment judgment is based on the contract, or contracts, of security that go with and are attached to or made a part of the bill at the time that it is drawn. As in the case of the promissory note, the contracts of security are of two kinds, viz., (1) personal security and (2) lien security. Unlike the promissory note, however, the con- tracts of security are for both acceptance and ior jMyinent. In the first place, the drawer enters into a contract (not written, but understood and enforced by law) at the time that the bill is drawn by which he guarantees that the drawer will both accept it and pay the amount when due. To this may be added still other personal security by " in- dorsement" or "guarantee." But since the bill is negoti- ated and enters the channels of trade before the credit con- tract has been executed, since it is offered for discount and exchange in a foreign land, personal security may not be considered sufficient. A foreign exchange house will usually require that collateral or Hen security be added to the con- U2 now FUNDS ARE OBTAINED tracts of personal securities. These collateral contracts may be oiSered as security for acceptance only, or, as in case of " siglit-drafts," for botli " acceptance " and " payment." o o o O O o o o o o o irt CJ iH «o O r* r* «-l « §• M 00 «J bO ^£ w Nj" u >i .r4 J » •q ei 2 •H ^ « ^« O Pj !E ^* c: • O TJ o O ^ ^ X • 13 c ci •rl ''lU » Vl V? # a> » tf> m C ■2 s V o s n +• hS * c: M * Pi o b ■H • bO P <1> «) «> f* •0 fS W> ■a 4 H » H rf fi ■H h J3 Pk t-l •S O V > ^ a< (3 IS r* ■0 M a w a e i]> .-4 :3 u 1-1 «i Pl. o •h 'n U n +» u o v> w M CQ 03 o u» c« •rt •J-l tH SALES OF COMiMERCIAL CREDIT 143 A draft thus secured is called a "documented bill." The exhibit here offered is of such a bill "secured of ex- »bH)pC&, m appawot Ko«l order o^ndiUon. by. ^\^d^C''Z'^-t^CC^tMiy' , ^-^^uXZc'^-^ J->^''2A?"" "x"*^ °' U« PANAKA RAD. KOAD ««m.r . (N,^C.i^^^S«-^^^^ ^ __ .„,,„,,,, ti„ Com ^^n,". Bteamere. or St*«mn-omplor«d br said CoropnnfTnow ^g in the Port or Vrw Tort, nod bound for Colon, D. ». O..-T0 saj ^5^- ^ -^^5^v2^ ^^^^^U'-L^^ ^^41-^. ..^c---X<^.. -U^^uc^^^. 'fZZZZ^^ .. L^!^'.M// ~~y72M^<^Z£^.i.:(.^£ta.~x.tLa^A^^^ ..„.r\^.r/d?*. .-_....■... , . IS??^ii^™i^^™i' ?™* ^'"? "Dart*! M per ronrtrln, to bo carrlftd npon euid Shsamer or atwioerii etnplorwl by nMcl Company, (with ™Xf-,SJS°r^'"" **""' ymwUfii JlBirtfss; Co Bnll wltb or without Pilots; to tmiiaUu to any Otbcr of boIU ConipiuiVii HteunHn, or htoamor omplorM b* or connoctfjil with thum. to llghtor froni Stumar t« Btssuwr. hM Irom Btouaer to shoro, and to touch al Port or Porta), auto :? _1 . r^''"J*'"' "*lralnla ot gosrommonte, acta of Ood, cmenLlag, awcallug, brat of hoMB, TormlD, ruin or epray, nor barratry, flro 5£ifS^. .P"^ dUmtcrjor duanera ot the teea. or of goU or steam navigation, of what naturo or kind soovor uicopusll; there to ho (ftllvf nrf to Ow Agem 01 the PANAMA RAILROAD COHPANT. for tranjportatioti to tlw Port of pAnanu. and from fhcooo Ibdna Huht- S^ ? J??.??^ .y'lPf*"' ^^ Sloamer or Steame™ ott ho FACIFIO 8TKAK NATiaATION OOMPANX. and or HOUTH AMKBIUiUI HTKAUbBJP QJl^A>i-i QjSloamEr cb^oyed Ay^i^er of the Uhl Corapanlea, with tho llttpeicei.Uons,priT!log« and Mom pilous unto the Poiwj»-^_/^^^,i?;:Crtl^ ; l.^^t-ti'LJi)'^— .Ml^-^i^-^^i^,^ .anil {hero In UkoaRparcot good order and condition, to bo dolh-crod •"•o Cj;i^:£--«:;l2i-^-t:>t.i,,-MC--_ ^j:-~r^^^tfrtiilil In ffguYilrkin Oiiltwt St5t«s dold Coin. •V Said Irelghc to be coo»idored aBosrnod,TBssolori»rgolo«t Qrnotlott; and oi^lhe hnppenlngot nny of tbo obovo-oxooptcd contlngoocle*, theaaldSteBineliipCompiinleaHro tohave the righi to forward the abov»-mon tinned psckagcs to cho porta ot dwtlnalltinoB Omlrowd routei and Rhall r«cDli'c citnicompcn.»aUon for sui:h nirrlce. whcttior performed by their owTi vetaols 0- *' ' '' ■-•■ ' ' ~' Krriccs rendered to aroresald iDCrchandlw; or treaMiro.du-'--'" "- ' '- ' paid tor as tally as If moh eslrlng vcsaci or vcsaols belong c It IseipreeBly underwood that iho arUt-ira named It. : coaslgnec Immodlately after tbc veaad la r«ady Cb dlachargg. or otbnrwUo tbcy may be lejided al ODotlgne«. k Tbeee Compaoies iriU ^ot t« icsponalblo for AITT DAMAGES to goods tn BAIJBa. '.' BUTTER, LARD, OII^, TALLOW. Ac— TboCOmpankamantloned tn thie Dill of Lndlna will not bl by leakage or demote Inoldont to the tranEportAtlon ot Bottra. Lord, Oils- and Ihllow, ftc, or similar goods In It la exinesslT undorstood that the CataamtiXtm mDnUoned In thin BUI of Lodlnir ore not oooountable lor wulfrbt, IcaJcage, faroak aKiv i_i — ^_ ,p^^ (p^ „[. daniuKo from Insecurity of paoliaaea, Inacuunicy nr oroiasloo In marks or do»oflptioD«, oaucU r* -'■ — • -■ ..: ::;.:;„_ :_..t;s,? :.-:::- that amount and Laxioipreaicil In tlib Din of Lading. ihrinkBge, rustTToK or dnmmro from Insecurity of paokagia, Inacuumcy nr oroiasloo In marks or dosoflpti rwoatloe. beat of holda. vermin, ntln or spray, nor (i>r articloi porlahnbla In tholr naluro, or from uuayaidabiB uuiuouou c>r uviay, uou [msD Companna will not tiecomc llulilo fur ner value ciocedlag one hundred dollars (JIOO.) upon eaob of tho abuvo-namml paclugos, uuloalha valuo ezpresdy nirulaicd that a dcllTory on tho wharf at tbo'Port of PuiBniA, ot tho gnod« and merehandlso .c/ruwnrrilnir I.Mhn rrririH thi-rmr. Uk thn PACIirin ATKAM NAVinATinN f^HTPANY. ami or MIIITH . la thereof, to tbo PAOiriO 8TKAM MAVIQATION COBCPANY, and or SOUTH AMEBIOAN STBAn. ■ -■■ r liabilities whatci-cr. Thf PAMAMA KAIL ROAD OOMPAXY irUl not berc^jonslbio for lOM or daiQflg? to goods from Bre In dirMn I And It Isfurtbi-r Kilpulnittl nnd nttreed, that Vewels am warrnnted atawortby only so far lu duo eaie in (lie nppolnimflnt nr Bel<)ct(nn r-t Agents. Suvertntt-ndenis, Pliots, Mastcra, Offlcera. BasLncon and Crrw eun Bocuroit; aod tbO Coropanieo monrloood lo this Bill of I(Bdlng will Dot be iiBbii^foT low. docentlon nr daoingos nrUlDH' directly or Indirectly fruni latent doIcctA In boUera, machinery, or aiiy port of the VeaM), provided oil rcnsonablu maosunB hero tjoin taken to secure offiotency. A nd it 1» farther sClpuiated. tbdt In sll cnsea Of loss Of TOch goods and mercbondlso. tho amount of claim and domago shall be restricted %o liie cash vUue of su>:h jroucls or mercharidiR'. at the pen of shipment, at tbo tlmo of shipment: and that all oialnui for partial loss or dantage ahull be aaocrtained and adjusted upon, the Bnmo ImuIb of vsluo. Mot accountabln tor dotonilon at porta of transhipment. Incoseof tb« bloehade or (nierdlct ol tho port Ot delivery. Or It withont suoh^blfMlud* or iBtardlct, thecnterlnit nf tho port ahonW be oonsitlerod by the Moswr unsafe by reanoo 01 dlHi>i>e, war aE dIstUTbaueen, be b to havo the option of landing ibo goods at any otbot' inrt which he loay consider safe, at Fhipper's expense and rlak, and in anch case tbo receipt of tho Cualom Qougo nr other port authorltlfB to' be accepted by tbo owners or cnnsifmees as a legal and thorough canecOIog of this fllU of lAdlng. h^\ qiianuitliKid expensD Inourmd upoo the goods, of whaleoeiTJr oaiuro and kind, to be paid by sliippera or conslifnoeB of the goodB, In an eases the ship's responsibility ia to cmso trben gooda have left tlic ship's dedu Sblppcra of tbo goods named In this TUll of I^dlnic must oomply with all Consular Begolations for UontTcata, Inrola and any One Im posed by Authorities at port of IX-nlnallon, or damegu rctLdtinr from tho failure In this respect, or for%roi9 pr Omla^na therein, ehali be at risk and expense ol ttw coTuirneca of Goods, aud shall bo paid by them. Thee lid Goodd or Merchandise are ahlpped and received upon tho conditions of the stlputatloas and prbvldDHS hei«lab«fora exprESBOd. the onderalinKd undertaking lo behalf of tho said parties, severally, sad to tboeUtuit only, ot tho Ualjllltiat herolasUitod to bo omumod by - h of tbem tespccUFCly. I ■ ^^, 1 tX TKIlUnCSS THUbCrCOf, the Acent ot said Steamer bach slgBed. j—'^ ^^1^£l!7. BUI. of Lftdinc all of this teoor and dale, one w be root being ac^Ejppllsbod^ Dated at New York, thU .j^.^X^^^^Mi^^.. VmiMIIAMi RAIL ROAD COMPASr, PACIFIC STEAM NAVTOATIOK COMPANT, »r iJOUTH AUBUlpAN BIEAHeHIP COHFAHV. change," drawn by Burnham, "Williams & Co., of Phila- delphia, on the Peruvian Corporation, Ltd. The Baldwin Locomotive Works had sold a consignment of A docu- machinery to the Peruvian Corporation. At the time the goods were shipped, invoices were taken to the ofBce of the Panama Railroad Co., and bills of pa>'a^le ''v gold. J T-l,. , 11 \P-ji- s ,^ CO l^.'ti- H. VLBUHT DeBAUY & CO . \ A, C. FU.i^liK S: CO., Roll-rd.n 2 ■v. ^ « o < Q % o ^1 ■^A -^5 nVNIOJtiO C4 IJR^S EUUBj:; ||f ,i..,| ■BONVtiflSNI ^O 3JLV01dliy30 SALES OP COMMERCIAL CREDIT 145 lading were taken out bj Burnham, Williams & Co. in favor of them- selves — i. e., they shipped the con- signment by the steamer Orizaba to their own order, and had five copies of the bill of la- ding made out. At the same time du- plicate ninety-day drafts were drawn, and an insurance policy was pur- chased from Lloyds to protect the prop- erty against loss. These — the in- voices, the bills of lading, the insur- ance policy, and the two drafts — were taken to Browm Brothers & Co. for discount. Satisfactory ar- rangements having been made for the sale of the bills, Burnham, Wil- liams & Co. in- dorsedand assigned them all over to 146 HOW FUNDS ARE OBTAINED Brown Brothers & Co. ; that is, they executed a contract or bill of sale to Brown Brothers & Co., with instructions " that if the said bill be accepted, the bills of lading are to be given up to the Peruvian Corporation, Ltd., without prejudice," but " if the Peruvian Corporation, Ltd., declines to accept," then Brown Brothers & Co. were authorized to retain the ■ ft 'Vi' ?///;/. i^^r^yf- .^ ^W--^i U/,y MAY 9 - 1902 „/„„y/,„„ ,,, //„ /„,,„■:',, y,„„, '/'„■/,, .Y'-'-""''-'^-/"" "''■"■■^/'' " .'/''/'? '/^^^ry- «//, ,/-„„., „ ./,„/-„y .,,/,„„^j„„., -i'l ,„/r ,„„/y„„„^„/,;- „„r//, .//'/y //„/,>r^,^,/i .„ ,: /,,'„>,6/,„y,„.„/,/ //:, /Jz/y/,', „r„ „„/,/' ///,^;„ ./,„„y „'„^, l,' /- ' y/ ■ y — ■ bill of lading and to place the said material at any time in the hands of their brokers for sale at their discretion, and to charge all expenses, including commissions for sale and guaranty, and to apply the proceeds on or toward pay- ment of the draft for account of whom it may concei-n. In negotiating a documented bill, it is necessary that all copies of drafts and documents be turned over to the party buying it, otherwise a stranger having duplicates might forestall the owner and defraud the parties in interest. It is to be noted that the collateral here given was in the nature of secui'ity for " acceptance," only. After acceptance, the only contracts remaining were the ci'edit contract, or prom- ise to pay on the part of the Peruvian Corporation, Ltd., and the personal security of Burnham, "Williams & Co. and SALES OP COMMERCIAL CREDIT 147 tlieir indorsers for payment of the credit contract ninety days after acceptance. The indorsements and other collateral contracts of se- curity attached to drafts make these instruments of high Secured commercial value. In the negotiating of for- drafts used eign bills, such precautions are taken that one as fun s. liouse doing several millions of this kind of business per annum has the phenomenal record of having lost only $600 during forty years of dealing. By sale of his draft on ISTew York, the St. Louis merchant is en- abled to obtain funds with which to pay for grain sold. On receipt of the grain by the New York merchant, he may at once trans-ship it to a Liverpool customer, and on his bills of lading draw for the amount. By sale of this he obtains funds with which to meet the St. Louis draft. The Liverpool merchant meets the draft on him by drawing on a Belfast brewer, who settles the draft on him by a bill on a New York importer of Irish stout. These international drafts or bills are settled by setting one off against another. Americans having accounts to meet in London, buy drafts against England, and Englishmen having American ac- counts to meet will buy drafts against New York. These secured bills, in their capacity as instruments for the col- lection of funds due " on account," come to serve in the capacity of funds for the payment of other accounts and avoid the necessity of shipping money from place to place in payment of credit obligations. Drafts which are not paid at the time for which accept- ance is made, or which are not accepted, may be protested. In fact, this is the usual custom when instruc- Non-pay- ' . „, ment and tions are not given to the contrary, ihe pro- protest. ^gg^ Qf ^ ]3i]] p^^g on itg face notice of its dis- honor, and thereafter it ceases to serve as funds. No one will receive it in payment. It will be returned to the party drawing it, and he will be required to make good the amount, and pay all costs and expeases. "When the drawer does not 11 14S HOW FUNDS ARE OBTAINED wish to incur the expense of protest, lie will have printed or attached to the end of the draft a detachable sUp with the words, ^ No protest. Tear this off before jpresentingP This* is in the nature of private advice to one presenting. Except as between the most reputable houses, such drafts are not taken as readily in exchange for the reason that the very instruction itself may cast suspicion on the value of the paper. CHAPTER VIII FUNDS OBTAINED BY SALES OF LONG-TIME PAPER The credit instruments thus far described are those commonly used as a means of obtaining funds for current use — i. e., for commercial transactions ; they are generally referred to as short-time or commercial paper. When funds are desired for more permanent use quite a different ar- rangement must be made. Instead of the credit being due on demand, or in thirty, sixty, or ninety days, it is made payable in five, ten, twenty, or perhaps fifty years. This precludes the use of accounts ; it makes necessary a definite or formal, written contract — one which will place the terms and amount promised beyond all question. In form, all the instruments used fur long-time credit transactions are in the nature of promissory notes. The credit contract itself does not differ from the commercial note except as to time of maturity ; the essential difference between long- time and short-time paper is found in the contract of security given. One can make a conservative business Form of judgment of the value of a promise to deliver long-time money thirty or sixty days hence ; in this the "" * ■ personal ability of the one offering his credit for sale to obtain funds with which to redeem it, and ques- tions of integrity, can be determined with practical cer- tainty. The incidents and accidents of life, and the shifting fortunes of business, however, make uncertain all judgments of personal condition to deliver funds twenty years hence ; judgment as to the value of a contract for the delivery of 149 150 HOW FUNDS ARE OBTAINED money twenty years hence, one which, rests on personal ability and integrity alone, must he unfavorable. The credit contract in itself would be little valued ; the one to whom it was offered in exchange for funds M-ould refuse to buy it. A contract of security is added. Uncertainty being thus obviated, the long-time credit may be sold. To illustrate the different characters and uses of long- and short-time credit : Edward Strong and Leonard Wil- Ulustrations -'^*™® decide to engage as partners in a general of difference grocerj' business at "West Point, on the Hudson. tslsoflong^ Each has $1,000 to put into the enterprise. and short- This will give the firm $2,000 as cash capital. time paper. ^^^ they have no stock; they have no store building, no office fixtures, no counters or shelves, and no provision made for service. Besides, they estimate, a stock worth §2,000 would be too small a one to give profitable employment to themsel\-es or to their capital. They need a stock of goods that will cost fi'om $3,000 to $5,000, a building, and other business equipment. How shall they obtain the funds ? By consultation with the West Point National Bank they find that funds may be obtained there to finance their stock purchases ; an arrangement is made through the president and cashier of the bank whereby the grocers are to keep their account with them, and, on bills being presented for stock 'purchases, Strong & Williams will execute their promissory notes, the bank to give the firm a credit on its books in exchange for stock notes to an amount not to exceed $."i,000, as occasion may require. As a part of the agreement, the grocery company is to " deposit " all cash received from customers — all money and checks received from sales as fast as tliey are made. This arrangement will enable Strong & Williams to buy for cash, and to take advantage of the trade discounts offered by the wholesale house. The notes are to be made payable on or before ninety days, for the reason that it is estimated that the stock will be turned over, or sold, SALES OF LOXG-TIME PAPEK l.'il once every three mouths. In juch a transaction the bank reqiiircB no ^^tcuriii/; it is willing to rely on the iiiteo-ritv of the partners and theii- aliility to make payments out of smiles — in other ^Yords. it is willing to rely on their unse- cured credit. Strong vV- "Williams now have established a line of credit good for s.3.( ion for stock purchases, and, besides, they have their original si'.imiu for working capital. But how about a building and other equipment '. A well- located stijre-room is found which they may rent at s:,i i per month — s.iiMj per year. Just aero^s the street is a vacant lot. however, which may be purchased for sI.imjii. If they buy this vacant lot instead of renting the store-room, they can put up a suitable one-story building for sI.Oimj more. The whole property will cost only s2.i hjQ ; the interest on this will be slmi per annum. By such an arrangement there ^vill be a clear gain oi s.'iji) per year. They decide to buy the lot for sl.ijnii, and to spend the other sl.uuu of the original capital for a building. But having done this they have no funds left. To complete their equipment, some provision must be made for current funds. Current expenses must be paid : the partnei's themselves must live ; they must pay clerks, delivery, obtaiu supplies of fuel, meet incidental expense-, etc. At least 81.i)o0 more of perma- nent capital is required before they are ready to begin business. The "West Point Xational Bank is ^villing to take their short-time I'utes for funds with which to make stock purchases, but it is not willing to contribute permanent capital — its own business is -C) organized that it must be able to collect funds whenever demamls are made by depositors. The problem of getting more permanent funds is solved by arrangement with the Dime Savings-Bank. This institution is wilting to give Stron-- it William* sl.ijori for their note, due five vears hence, bearing interest at the rate of ii per cent and secured by a mortgage on the building and lot. Current funds being provided for in this manner, they take the sLCiiiii received from the sale of the mortgage note, de- 152 HOW FUNDS ARE OBTAINED posit it in the West Point National Bank, order a $3,000 stock of groceries in New York, execute ninety-day notes for this amount, and pay for the goods by cheek on their account at the bank; they begin business, make payments to the bank from sales, and execute new notes for add- ing to and enlarging their stock as trade and sales may require. If we look at the balance-sheet of the Strong-Williams Company on the day that they first received their $3,000 stock and paid for it, the following financial summary would appear : BALANCE SHEET, July 1, 1897. Assets (or business equip- Liabilities (for funds con- ment procured by expend- tributed). iture of the funds contrib- By Proprietors: uted). Edward Strong . . . $1,000 Store building and Leonard Williams . 1,000 lot $2,000 By Creditors: Stock 3,000 The Dime Savings- Cash (West Point Na- Bank, Mortgage tional Bank) 1,000 Loan 1,000 Loans, West Point Total value of assets . $6,000 National Bank.. 3,000 Total liabilities.. $6,000 This gives a picture of the financial arrangement, the sources from which $6,000 of funds were procured for the enterprise, and the equipment procured by the use of these funds. From this, it appears that $2,000 were contributed by the proprietors themselves, while $4,000 came from the creditors of the concern. Of the credit sold (as a means of obtaining these $4,000) that for $3,000 was in the form of short-time (commercial) credits, and that for $1,000 was a long-time credit contract secured by mortgage. SALES OP LONG-TIME PAPER 153 There are two classes of long-time credits, viz., ^^mort- gages " and " hon<7.s." Each class may have the same kind of Classes of security, but the first takes its name from the long-lime contract of security, the second from the char- acter of the note or credit contract given. It is stated that each may have the same kind of security. This follows as a necessity from the length of time agreed upon for payment. Each requires that the ultimate performance of the credit contract be assured, and any security which would be sufficient to assure the payment of one form of long-time credit obligation would be sufficient for the other. The difference in the two classes of instruments arises from the advantages of sale of the credit contracts secured, and from the form which the credit " issue " takes. When it is desired to have the secured obligation for future delivery of money divided into a large number of small credit con- tracts, and sold separately, a bond issue will be resorted to ; if one party is found who is willing to purchase the whole amount secured and hold it in lump sum, or in the furm of a few large credit contracts, the "mortgage" will be offered. Mortgages That which commonly goes in the security market as a " mortgage " is a misnomer ; it is in reality a credit obliga- tion secured by a mortgage. The mortgage is only a part of the thing bought and sold ; in fact, if one held only the " mortgage " or security contract it would be of little value. The promise for the delivery of money is found in a "promissory note" or other evidence of debt. The mort- gage is only a collateral contract which gives to the creditor a contract of lien on the property named as ^ort^a"'e''? security for the payment of the contract of credit. If there are several credit contracts secured by the same mortgage, these may be sold to dif- ferent persons, and the one who holds the mortgage will be held to be the trustee for them all. When the credit 154 HOW FUNDS ARE OBTAINED contracts are paid the mortgage has no further validity, and may be declared void if action is brought to clear the title to the property against vi^hich it is given. There is no more reason for the secured debt of one individual (or of a part- nership,) being called a " mortgage security " than there is for the debt of a corporation issuing bonds, except that usually the mortgages and credit contracts are kept together. The term " mortgage," however, is sanctioned by commercial usage, instead of the descriptive phrase, " a credit contract $1,000.= West Point, New Yoek, June 1. 1897. Five years after date we and each of us promise to pay to the Dime Savings-Bank of West Point, or order, for value received, One Thousand Dollars, with interest pay- able annually, on June 1 of each year, at the rate of i^fc per annum. This note is secured by mortgage, of even date here- with. Edwaed Steong. Leonakd Williams. secured by a mortgage." A mortgage is a contract which gives to the one in whose favor it is made the exclusive right, on default, to sell the property named in it, as a means of procuring funds with which to pay the credit contract thus secured. In form, the mortgage is a conveyance of property, with the condition that if the debt is paid the conveyance is to become void. When stripped of its legal phrases it is, in substance, as shown on page 155. It will be noted that the contract is one of sale. It is, in fact, a deed to the property, and if a regular deed is drawn to which the condition of security for payment is added, the mortgage will be complete. By making the mortgage a conditional sale, and making the sale a matter of public record, so that the public may have notice of the transaction. Strong & Williams can not sell the property to any one else and pass a good title. This guarantees to SALES OF LONG-TIME PAPER 155 This contract -witnesseth : That Whereas, Edward Strong and Leonard WiLiams have this day executed their promissory note to the Dime Sar- ings-Bank of West Point, or order, for the sum of One Thousand Dollars, due five years from date, with interest at the rate of 4^^ ; Now, THEREFORE, the Said Edward Strong and Leon- ard Williams, in consideration of the aforesaid One Thou- sand Dollars to them in hand paid, as evidenced by said promissory note, and for the securing of the payment of the same unto the said Dime Savings-Bank, or its as- signs, have sold and conveyed to the said Dime-Savings Bank of West Point the following described property, to wit : Lot numbered 246, in Block numbered 36, on Lau- rel Street, in the Town of West Point, in the State of Xew York, according to oificial plate thereof, filed for record in the office of the Auditor of the County of Kings, in the State of Xew York. The condition of this contract is, that if the said Edward Strong and Leonard Williams shall pay to the said Dime Savings-Bank, or its assigns, the sum or sums promised in said note according to the tenor thereof, then this contract shall be null and void, otherwise to remain in full force and effect. In witness whereof we have hereunto set our hands and seals this 1st day of July, 1897. Edward Strong. [Seal] Leonard Williams. [Seal] ( Lincoln Stetson. ^^^^^^'^'MjohnM. Bromley. 156 HOW FUNDS ARE OBTAINED the Dime Savings-Bank the sole power to sell the property of Strong & Williams ; it also reserves the property to ,r , them as a means of obtaining funds with which Mortgage i i n contracts one to meet their note when due live years hence. of sale. rpj^g result is that the Dime Savings-Bank has confidence that their long-time note will be paid. They can pass a conservative judgment as to its value, and hav- ing the payments of principal and interest secured, the bank offers to Strong & Williams $1,000 for their contracts, to deliver $1,000 five years hence, together with current in- terest payments of $45 annually. Sometimes a memorandum of credit is included in the mortgage itself instead of being in a separate instrument, in which case the two obligations may not be separated. The laws of some States make a difference in the content of such agreements. The laws of the State of Washington, for example, provide that when the credit contract is not j^ , widened by a separate instrument, the creditor without sepa- may not collect any deficiency remaining after rate note. ^j^g g^jg ^f ^j^g property mortgaged. Gener- ally speaking, however, the funds derived from a sale of the mortgaged premises are to be applied to the payment of the " note " ; any amount that remains unpaid is still a charge against the maker of the note. When one wishing to sell his note has no property of his own, he may get a friend to give a mortgage on his property , , as security. In this case, one person will execute Accommoda- •' . , „ » tion mart- the note and receive the benefit of the funds, gage. while another will execute the mortgage con- tract of security. This is the same kind of accommodation as the indorsement of another man's note, except that it gives to the creditor a lien security instead of a personal one. In Pennsylvania, Delaware, and several of the States that still follow old English practice, a promissory note is seldom used as evidence of the credit contract to which a mortgage on real estate is given for security. To illustrate : SALES OP LONG-TIME PAPER 156a Enom all illen bg tljcsc |)resents That /, j^ynhmn Whitt, of the City of Ptiiladelphia, Contraclor (hereinafter called the Obligor), am held and firmly bound unto John Doe of the same City, Merchant (hereinafter called the Obligee), in the sum of Five TJwusand Dollars lawful uxoney of the United States of America, to be paid to the said Obligee, his certain Attorney, Executors, Administrators or Assigns; to which payment well and truly to be made, I do bind and oblige myself, my Heirs, Executors and Administrators, all and singu- lar firmly by these Presents. Sealed with my Seal, dated the First day of Ajiril in the year of our Lord one thousand nine hundred and three. The Condition of this Obligation is such, That if the above- bounden Obligor, his Heirs, Executors or Administrators, or any of them, shall and do well and truly pay, or cause to be paid unto the above-named Obligee, his certain Attorney, Executors, Administrators or Assigns, the just sum of Two Thousand Five Hundred Dollars lawful money as aforesaid, within three years from this date, together with interest payable half yearly at the rate of six per cent per annum, without any fraud or further delay; and shall produce to the said Obligee, or his Executors, Administrat;ors or Assigns, on or before the first day of September of each and every year, receipts for all taxes of the current year assessed upon the mortgaged premises ; then the above Obligation to be void, or else to be and remain in full force and virtue: JProiiroeS, however, and it is hereby expressly agreed, that if at any time default shall be made in payment of interest as aforesaid, for the space of thirty days after any half-yearly payment thereof shall fall due, or in such production to the Obligee or his Executors, Administrators or Assigns, on or before the first day of September of each and every year, of such receipts for such taxes of the current year upon the premises mortgaged, then and in such case the whole principal debt aforesaid, shall, at the option of the said Obligee, his Executors, Administrators or Assigns, become due and payable immediately, and payment of said principal debt, and all interest thereon, may be enforced and recovered at once, any thing herein contained to the contrary notwithstanding. anTi J3tobmetl futtlier, however, and it is hereby expressly agreed, that if at any time hereafter, by reason of any default in payment, either of said principal sum " at maturity, or of said interest, or in production of said receipts for taxes, within the time specified, a writ of Fieri Facias is properly issued upon the Judgment obtained upon this Obligation, or by virtue of the warrant of attorney hereto attached, or a writ of Scire Facias is properly issued upon the accompanying Indenture of Mortgage, an attorney's commission tor collection, viz., five per cent, shall be payable, and shall be recovered in addition to all principal and interest then due, besides costs of suit. Sealed and Delivered I D. S. LiNDSAY. J. WiLLiAM White. \ Seal r in the presence of us: ( Jqn BdwAKDS. — ■ — 1565 HOW FUNDS ARE OBTAINED Mr. J. "William Wkite desires to obtain $2,500, and, as security, offers a mortgage on real estate estimated to be worth $5,000. Instead of executing a promissory note — an unconditional contract for the future delivery of $2,500, with interest, etc. — he executes an " indemnity bond," i. e., a conditional contract for the payment of $5,000, the con- jee mtZemni- '7u/, ,///■//, .j/, /////»/■< r/,i//r// ,/i/// ,rf/>/r/iA /'"■r/."'j' /■'//'■"/r/ //,n/f /r> ,/ i/'n/.t //„ „/:ir/'//, .'/ry,,) //„/■/'/. '/'iy";/^"y //'"/'/'-"'''■' ^""//"'7 /w^ >////"/// >'>u/Y'i/itr/,//„/,r r,'/7/yni,/ //j/^//yiy- /'.ir/urty, ,-//x/. 'r/r,- ■^}f^ar7ti\;'M'my r/i^-r'///> y/yt^j^/'/'^' )/y. „.', /A A. „,„//„'/«, J // ff//' /'f/ A' /A/ /r ;/,„/ ,///,' . W, , .Jy'/A^i'iv/i/iy/'y.r, V ,//j/l/''v/A /A/ ////r/r,,/ A ///j//f ///■//, /'y\y,///,j , . ^"//(j, /fUf//'/f/- ■//ry/,, ''/' /,/.,/,/,//, //iiiifi/' .j/r/t; r///,. l//r ,/ //j/'nr, , t^i, /i/u/ r:6/- iiy>n.l /A// „A,„ ,/.,/,„//'/, /m„yrm//, ,-,,/y ,y, //„' A,/u /7,.: /<•//-/,///// /,:,,^,;r.,,,;/ ,/,y. .0,';:.,„/., /„ /■', j,y,>,y /y /'/;■ ry',/., Oy/Arr)., „yi /Aa SALES OF LONG-TIME PAPER 159 him to default in his payments. It is a judicious exercise of investment judgment not to contribute large capital to such an enterprise on credit ; it encourages the fai'mer to become encumbered in obligations which he can not meet, and involves the investor in trouble, loss of time, and loss of capital. Among the best kinds of mortgage securities are those held against improved city real estate, but of this class well- 3Iortaaaes located " business property " is usually prefer- on" business able to residence property. The reason for property. ^^^^ jg ^-^^^ business property is a regular and necessary part of business equipment, and credit promises secured by liens on such property become a first claim against " net income " of business ; residence property, on the other hand, is not used for the purpose of income ; the rents which support such investments must come from the "net profits" of other business after the expenses, interest, taxes, etc., have been paid. Fluctuations in values of resi- dence properties are usually greater than those of well- located business properties, and they are not as good secu- rity on this account. The exercise of proper judgment and a sufficient margin of safety may make either class of secu- rities equally good ; failure to exercise such judgment may make either equally bad. Mortgages on mines are peculiar. By utilizing the resource against which the mortgage lien is given, and on ,, . which the industrial manager must rely for his oil mines and income — in fact, by pursuing the very object timber lands. £qj. -^^i^jIqI^ ^he capital contribution is obtained — the mine becomes exhausted and the security depreciated. This must be taken into account in estimating the value of the security. Generally speaking, provision should be made for a sinking fund — i. e., for annual reduction of the prin- cipal loan. Another method of protecting the mortgagee's interest is to make the whole principal due within such a time as to prevent exhaustion of the property. It is never '"/" ' /; •, ,./.. '/ ■ ,/m„r„/j,,m/.- r,/, /y //m«/,n, '"/■ ■■///.> SALES OP LONG-TIME PAPER lOl safe to allow loans of this kind to run twenty or iifty years, as is common in some classes of mortgages. Mortgage-notes are usually in large amounts — they com- monly cover the whole sum borrowed, unless there is some Parti- advantage in having the principal sum paid at mortgage different dates. This may make them difficult receipt. ^^ transfer, for the reason that the investor may not have the amount of the note available ; if available, then he may not wish all of his available funds in one property or credit instrument. As a means of finding a more ready market for mortgages, financial houses have devised what is known as a " parti-mortgage receipt." This is a certifi- cate of the company holding the mortgage that the holder has purchased a fro-rata interest in the mortgage. Let us suppose that a note is given for $100,000, due in ten years, secured by mortgage. For convenience of sale, 20 certifi- cates of $5,000 each will be issued and sold by the com- pany taking or holding the original security. These cer- tificates of interest in the original mortgage-note are sold, and thereafter the company holding the mortgage becomes trustee for the holders of certificates (see page 158). In further application of this principle the collateral certificate has come into use. This is a certificate of in- terest in a number of securities held in trust. eral certifi- A collateral trust is formed — i. e., certain col- c"^"- lateral securities are placed in the hands of a trustee. Against this, collateral certificates are issued and sold in denominations to suit the demands of the market. Both of the above forms of financial instrument bear a close resemblance to bonds ; in fact, they may be said to be a "cross" between a bond and a mortgage security. The form used by Eufus Coffin & Co. is exhibited on the opposite page. A copy of a $25,000 collateral trust certifi- cate issued by the trustees of the American Asphalt Com- pany (see page 162) is of special interest in this relation, on account of the recent failure of that company. 13 lO'A HOW FUNDS ARE OBTAINED Bonds Bonds, as credit contracts, are not to be confused in thougM with bonds as contracts of indemnity. Bonds, as in- struments of credit, where negotiable, may differ from prom- issory notes only in this, that they are issued in series. For example : Mr. Russell Sage may wish to build a large office building in New York. Let us say that he owns a lot at the corner of Broadway and Fourth Street, which is valued at $500,000. The office building that he has planned for fj-*:<-»:<->::ales, aggregating S 2.S"ooo''*»^— - ~. .", which Certificates were deposited in trust subject to th^ terms of the above described agreement, and subject to the crier of the Committee therein named, cr a majority of them, or their suscessora: and the holder hereof assents and becomes a party to said agreement by recstsing this Certificate. The k:ider hereof is entitled to receiae all the eecuritles. lenefUs. and advantages coming to the depositor of said Certificates under said agreement The interest reprcaenled herein is transferable by delivery of this Certificate, subject to the terms and conditions of said agreement This Certlfi':ats may be registered as to ownership, but after registra- tion no transfer, except on the books cf registration, shall be oalid, unless theJtst transfer be to bearer, when this certificate shall be transferable by delicery an before. x////// ,;„/// CANCELED 1|n^ OCOOC<)) « „/„„//.,,„„.,,„„„.,,/,„..,/,„„///.,,„„,„/>, ,„,,,/,/ «% !„/../m '/„,■„,/.//./„„ A.,//,.., .„.,,,/ ,...^j,.»„ „„„/. ,,,,.,„.„,„. ..„.,„ .,.,,., j.g -.'_ '-^ V ,V^ X'-'^ .\y V w i^^i^ ;^ The similarity in form of bonds to promissory notes, as well as the advantage of serial issue, is illustrated by the first mortgage real-estate bonds of the Philadelphia Mortgage and Trust Company (page 16S). This company has loan offices in different parts of the country. The bond here shown is one provided for its Birmingham agent. One wishing to obtain $20,000 on imjjroved real estate in Ala- bama, will issue 20 bonds or notes in series, each of which is' a contract for the payment of $1,000. These will be secured by a mortgage executed to the Philadelphia Mortgage and Trust Company. The Philadelphia company will buy the entire issue. It will then hold the mortgage, or assign it in SALES OP LONG-TIME i'APKU 167 trust to some trust company to be held as security for the pay- ment of all, aud sell the notes thus secured to customers in ^■: ssssEE-Ennsss^^^^^si^ such nuuiher; arran<»;ement and disposed or amounts as its customers may desire. This allows the notes to be placed on the market of to better advantage to all parties than if 'w ? a::. J 5 ^ r ^/ . ■ ^ -^ X x^ vv ^ "- C 1 5 < is ^*J v\^ % ~?s ^ M^-llll^ n^ ■^ .V V ^ '^^ £^m M: 9mm m <' immm$imm *' »m*Km m 9 » .»m!im-m*m' 4 imif . SALES UP LONG-TIME PAPER 169 the contract for payment were in one instrument. An ex- hibit is also shown on page lYO of a form of bond issued by Mr. William E. Bailey, of Seattle, Washington, as a means of obtaining a part of the funds necessary for the erection of an office building in that city known as the Bailey Building. The only way that a bond is distinguished from an ordinary promissory note is by the fact that it is issued as Bonds dis- ^ P^^* '^ ^ Series of like tenor and amount, tinguished and, in most cases, under a common security. from notes. g^ j,y]g ^^ common law the bond is also more formal in its execution. The note is a simple promise (in any form, so long as a definite promise for the payment of money appears upon its face), signed by the party bound, without any formality as to witnesses or seal. The bond, on the other hand, in its old common-law form, required a seal, and had to be witnessed in the same manner as a deed or other formal conveyance of property, and though assign- able was not negotiable. This is still the rule within many jurisdictions. The contract of security for the payment of a bond issued may be one giving to the holders a lien on property, or it may be entirely personal. For example, forlonds. o°e may wish to obtain $100,000. To this end one may offer for sale 1,000 bonds for the pay- ment of $100 each. If the purchaser or purchasers are not content to rely on the unsecured promise of the maker, per- sonal security may be added — they may be guaranteed, or, when negotiable, indorsed. The security for a bond issue, like that of a note, may be found written upon the face or back of the bond itself. On the margin of the certificate of indebtedness (or bond) of the Ocean View Cemetery Company will be found the written guarantee of the Metro- politan Land Company, as follows : FOR VALUE RECEIVED THE METROPOLITAN LAND COMPANY HEREBY GUARANTEES THE PAYMENT OF BOTH PRINCIPAL AND INTEREST ON THIS CERTIFICATE WHEN DUE. NEW YORK, SE PTEMBER IOT"l90i METROPOLITAN LAND COMPANY. B^ „ „ PRESiPCNt ^'^ ^ §- SALES OF LONG-TIME PAPER 171 This is a personal se- curity in the nature of a guarantee, which is add- ed to the credit contract or hond. This particular bond also has lien secu- rity in the nature of a trust deed and a sink- ing fund. The contract made by the Keading Terminal Company, guar- anteeing payment of Eeading Eailroad Com- pany bonds issued for funds with which to build the depot at Philadel- phia, is exhibited on this page. Indorsement of a ne- gotiable bond carries with it the same signifi- cance as indorsement on a note. It may, how- ever, be qualified by writing in any manner agreed on by the parties. The form of indorsement found on the back of the bonds taken and sold by the Philadelphia Mort- gage and Trust Com- pany, before referred to (page 168), is reproduced on page 1T2. When the company wishes to assign a bond ^ ^ 5 1 -1)^ 172 HOW FUNDS ARE OBTAINED witliout being bound as an indorser or guarantor, another form of indorsement is used. It may be assigned without recourse, or may speciiically limit its liability. A mortgage security given for the payment of a bond issue is usually executed to a trustee — some disinterested Trustee of W^'^1 "^^^^ holds the security for the benefit of land seen- all concerned. This becomes necessary from " ^' the fact that the bonds are held by a number of persons ; all of them are interested in a common se- curity. If one of the bondholders were to hold the mort- atju///,j //r/f/'/Aj/ /h/^//f- - -^ -:-■— ■ .^rcoJtd--Mr/f///////r/j/r///»////j/r///ff//rf////u Ar^ //rrrfj//rjjt»/f-///rf//// Fim Merh. Mr////r//r///// ////if ///r.M///,Mi/m/i-M//m //r//f/YMf/i//f/.,J)/./j/Kr//y'/fi//u j///////i'//f4-'/ ///r ////////f'/Yiy//'/J^//r//^f'^//'/^ 'y//'f//////////////////ff/ //y///'^^/ //'//// /^^ ' '^f ^//////r//// '/.jw////^'''//////r// r//r/yv''j//////r/jj//////r//r///rj'M/^/i-/r/'//i'/a. //r/-/hi-/f//-r///r/(.^MMf/-//y/iii/i/, n //'///i /////////rMf /j//a///~/r// //f/Zr ///'.jr. ////// ////,/»//a>r////rf:j//r////m'/Mr //j/r/~ ////-///•//r/-/// /r //u//r/^/f/ / r/?/. ^J/ y/////cj.)/r///-/f'('/y///-j///f/'//f'^////^/^Y////f/- /ur/t7f/f//'f/////-y///.u//r/////i'////////zj /r///.Mr///jrr/y/r/r//f\M///^yfy^^/i^r/M.fr//M/J r/////r/ - - /// ///r ///•/// ///'■//>^yr/'/-/^f '//r ///mj/o/a tv////////////-//r//// ///■/ ■ y////r//-////////^/. //r//^/-//vrr/^///.^///.}/ /////y/////// ./ii'/r//"///'^"^/'//'''//''^/'//'""'ffy 1 , ^ ' ■/'/// •////■V --/'.-..,.,<„/■ gage he might derive an undue advantage over other hold- ers. Such an arrangement would deprive a bond issue of its special advantage. The rights of all parties are pro- tected by making some disinterested person trustee for the purpose of holding and administering the security. SALES OF LONG-TIME PAPER 173 Since the trust company has come to be a prominent feature of financial life, it is the usual thing to liave mort- Whomaybe gage security of a boirl issue made to such a bZfisme^ company in trust. It is from this class of rela- tions that the trust company derives a large part of its business. Any one who is capable of receiving title to property, however, may become a trustee. It some- times happens that one of the bondholders will hold the mortgage for himself and all others. This makes him responsible as trustee to the other bondholders. Very often stocks, as well as bonds, are called " securi- ties." On this account it may be well to distinguish between Sow corpo- corporate shares and corporate bonds. The cor- ^iiferfrmn po^ate share is a certificate of proportionate pro- corporate prietary interest in a corporation — that is, it is received m exchange for contributions of funds made by a proprietor. The bond, on the other hand, is a credit obligation of the company. The stockholder stands in much the same relation to a corporation as does a partner to an unincorporated company — i. e., he is a joint owner of the concern. The bondholder, however, has no interest in the company ; he simply holds a contract which binds the corporation to pay him a definite sum of money. The bondholder usually has some kind of security for the fulfil- ment of his contract ; the stockholder has no security, and can have none, (1) because his contract is not one for the payment of a definite sum of money ; (2) because his income, as a proprietor, can be nothing but a share in the divi- dends declared out of the profits of the company after the payment of all credit demands. Definition and Classification of Coepoeate Bonds With reference to the nature of security, corporate bonds fall under two classes, each of which has several subdivisions. Those which are based on personal security are either 174 HOW FUNDS ARE OBTAINED "guaranteed" bonds or "indorsed" bonds. These have , , been discussed and distinguished at such length and indorsed that nothing further need be said except to call bonds. attention to the fact that they form a part of the classification determined by the nature of the security offered. The different kinds of bonds based on lien security are numerous. Many of these take their names from the charac- n , , , ter of the property against which the lien runs. on lien Among the most commonly found upon the seeunty. market are the following : It may happen that a corporation will have large hold- ings of real estate which may be separated from its other properties. Many of the railroads have received londf'^^^'^^'' land grants from the Government, and desiring to use these lands as a basis for security instead of selling them, a separate issue of bonds has been made upon the real estate as security. They are called real-estate bonds, to distinguish them from the other bonds issued by the company having a different kind of lien security to assure payment. Instead of dividing the property, however, and issuing one kind of bonds on the security of one property, and an- 3 General Other issue on another property, an issue may be mortgage made the security for which is a mortgage on bond. g^u q£ ^jjg properties of the corporation. This is commonly called a " general mortgage " (page 175). If mortgages have already been given on particular parts, and subsequently another mortgage is given for the security of a new issue covering the whole property, mwigage! ^^^ '^^^ general mortgage is called a " blanket mortgage." That is, it is a mortgage which covers the properties held as security for the payment of all previous issues. Several independent properties or corporations may be consolidated. Each of these companies consolidated has SALES OF LONG-TIME PAPER 175 creditors to be paid, and the new company has need for new funds. In order to provide for the redemption of 176 HOW FUNDS ARE OBTAINED bonds outstanding against the old companies, as well as for financing the needs of the new one, the whole debt is con- 4 Consoli- solidated and bonds are issued under a common dated mart- security to this end. A consolidated bond, gage. therefore, is one of an issue secured by a gen- eral mortgage on properties consolidated, the purpose of the issue being that of refunding the outstanding obliga- tions of the several concerns combined. A large system of railroads is commonly made .up by consolidating or uniting a number of smaller companies. The New York Central was organized in 1854 hondT^^"^'''^ as a consolidation of seven or eight short local lines running along the Erie Canal. The Penn- sylvania system is made up of a large number of smaller systems. The New York, New Haven & Hartford is an- other example of this kind. When these consolidations are made there are usually several bond issues already out- standing on the several roads that enter into and become a part of the new consolidated system. These old roads be- come divisions of the new system, and their separate out- standing bonds are called " divisional bonds." The term applies to railroad bonds of this kind alone. The bonds so far discussed have had for security a mortgage on some form of real property. Very often the bond issue is based on personal property. One tustbonl"'^ ^^ *^® ™°^* common of this class is the col- lateral trust bond. This is the same as a col- lateral note, except that the whole issue has for security other stocks, bonds, or mortgages placed in the hands of a trustee under a contract which provides for their sale. These securities are placed in trust for the payment of principal and interest. They may be sold and the proceeds applied in case of failure of the one issuing the bonds to make pay- ment at the time that interest or principal of the issue be- comes due. These contracts of trust, or collateral security, usually allow the maker to substitute securities of equal ^^ * $ ^/••m ^ J-. $C ^v^'s^ ^^>^" ujf 1 iMf- = ^Q ^^ ; ; si : 5 5 *- - ^^ -^ :i *^ ^ *^ ^>^ ^^liij^im *^'^ ^ \,\ 178 HOW FUNDS ARE OBTAINED value in case tie wishes to use or dispose of any part of those originally deposited; such substitution, however, is subject to the discretion of the trustee. Another form of bond, the security for the payment of which is a mortgage on personal property, is what is known as an equipment bond. A company wishes to menrbmd Purchase machinery or equipment. It has not funds enough to pay for the amount needed. The company therefore makes an arrangement with a manu- facturer of equipment, or some company having machinery to sell, to take bonds, secured by a mortgage on the ma- chines purchased, in payment. This is one of the devices commonly employed in buying "rolling-stock" for rail- roads and machinery for manafacturing plants. The bonds run for a comparatively short time, and usually bear a good rate of interest. One of the most highly specialized forms of railroad securities is what is known as the car-trust bond. This is quite different in form from all other classes of bondJ''^''"'^^ bond obligations. The car-trust, as it is called, is a concern which purchases cars from a manu- facturer. It will then sell them to a railroad on the instal- ment plan. Or, to speak more strictly, the car-trust will lease the cars to the railroad under an agreement which provides that when the railroad company has paid a certain amount of rent the railroad company shall become the owner of the cars, but until such time the car-trust shall own them. Let us suppose that the Ontario & Western Railroad should arrange with the Central Car-Trust for $100,000 worth of cars. It might be provided that the Ontario & Western would pay $.5,000 per month as rent, and that when it should have paid twenty months' rent at $5,000 per month it would own the cars. The car-trust bond is simply the obligation given by the ear-trust company, the security for which is the cars rented to the railroad, the payment on the bonds being secured by payments of rent. The form of SALKS OF LONG-TIME PAPER 1Y9 car-trust issued by the American Transportation Company is I'eproduced here in line engraving- : tyZ/fSW^^f/yrm^ L//n/U//rr/a//r/i S/'^^Aa/zj/./frt^crSe' .//i ^/t/Yr //// r/^\r//- :^/^r/, . ^/fj//f /:'f/f/,//^[ JANUARV 1902 .j///4^ S/J /r'/ff/./jf Jfr//rr' './ .A./. . /'^.. ...J'/./^ :'///■/././ /^ , / ^ / y^^/'. /. '(T a//HArra r^i/j '/a ^/r//,jrirrf///i/, ^e^^^r//^ Jf//rr//f /// /A ,d0»ie; r^i''Jid^/^/4'r/t}A The term debenture bond is the most loosely used of any of the terms descriptive or suggestive of financial in- struments. Debenture means debt, and might ionds 'of "'' be applied logically to any kind of a credit in- financial strument. Its uses, however, have come to be companies. ^^j^^g strictly defined in certain financial rela- tions. The " debenture bond " of a financial company is a form of collateral trust or credit obligation, secured by deposit of bonds and mortgages owned by the company. These "debentures" are used to obtain funds for per- manent use in the purchase of other bonds and mort- gages, which may again be used as a security for a fur- ther " debenture " issue. A facsimile copy of such a bond issue by the Equitable Mortgage Company is given on page 180. From a reading of this it will appear that the Equitable Mortgage Company of Kansas City, Mo., "to secure the payment of this debenture and all others of this series, ... has deposited with the American Loan and Trust Company of ISTew York certain real-estate securities ISO HOW FUNDS ARE OBTAINED equal in amount to tlie dobcntures issued, . . all of which are tirst Hens upon real estate appraised at not less ^■1t."^"" "*"'.'! ^ ' " •'::-:-■-• '-'-'-.'-" :. 'Vt"^'^ ^''*'~''''^i^^^^^^'^,^'^*'^''^.-^'^'^~'^'d^~^~^'.-~T.''\ST.-^i^ than two-and-onc-lialf times the par value of such securities.' A scliedule or list of securities deposited with the tj'ust SALES OF LONG-TIME PAPER 181 company is indorsed on the back of each bond. The de- bentures of financial companies are regarded as first-class investments. Railroad companies issue a form of bond called a " de- benture " which is quite different in character. These bonds 10 Railroad '^^^J often have no security for the payment of dehenture interest ; many times the principal also is unse- ""■ ^' cured. The payment of interest is dependent on the surplus net earnings of the road. Instead of being a first lien on the properties and incomes of the road, they are a last claim, and stand in a rank inferior to all other bonds of the company ; they are in some respects inferior to the unsecured short-time credit obligations of the road ; they lack the advantage of paper maturing at an early date, and have little or no advantage from contracts of security. An income bond is one the interest on which is payable out of the surplus net earnings of the company issuing it. The interest therefore is contingent on a re- hondT°^^ mainder of earnings after the payment of all expenses, cost of maintenance, taxes, interest, rentals, and other fixed charges. If there be nothing left, then the company is under no obligation to pay interest for the year. The interest, however, may be made cumulative — that is, while there is no obligation to pay interest if there be no funds with which to do so, yet the amount of interest contracted for cumulates as a charge which stands ahead of all dividends on the common or preferred stock. The income bond usually has the payment of the principal secured by a mortgage, which, although junior to other mortgages, gives to the income bondholder a rank ahead of the general, unsecured, creditor (see page 182). Other bonds take their names from the purpose of the issue, as, for example, the Purchase-Money Bonds issued in substitution for the indebtedness of the Virginia Central Rail- road Company (page 184). In 1878 the Chesapeake & Ohio got control of the Yirginia Central and arranged a consolida- •*=- j#a222?-^ I^^I^^ STAtE tjf mfj im'A. Rider&Diiver //^/ - '9//f/f /■ /l/ /7/rv. //f/Z/.j/n/i'/''' /■'//////r////, ^ -- ■//,//,/,,,///,/,/„„/. FIVE HUNDRED DOLLARS. ,« ,,,/,/r,,„ ,///„ //.M.'/'i'a '■,„j,,/,„,//,//,/f///f/,/j^f/W. tlVE HUNDR tiU DULL ; ■ l/„/,.. /■/„„,„„,///,,/„, „„/,/,>„'/:,„/, /,r,„,/,/ »,„//,„. A./, ,„„/,/./,,,„/«, //,!„„,rj,„/,j^/„ ,„/„„■„„„,:-///„ i',,/,.,„/u„/;,//:,/,„r„/„„y/,,,/,, „„„//,,,,,, ,„„/„/;, ,//„,,/„,u!i,f,/„„r/«„ ,„„/,„„,„A„„„„ ,„„//,,„/,/,„„/,,/>, /-/r// /„,„,/,//„,/•,- „„„//,,,„ J m,/i,„/,ni, „,«,,,/«,///, »/:/'/l,r//r lA, /,„',„„„/,/,„/, ,r,/ ,„ ,■, /, ,Ay ,,/„„,„//, /„„,.„ ,„ ,ri/„r/, '/„„,, :,„„ ,„„/,:,/,//„ ,„/„„l,„„,„///„ 0;/„m I , ■,/!,, ■/>,„/,/•, r,„,, ,,„„ .,/„M /, /,m,/ »/„■„ //,, 1/,,/, ,.///„/,.,/.,■,,,/,<■„ „,,/,/,„/,„,/„/ ///, „,/, ,//„,/,,,„„/,, '/„//r, //,„/,,„„ X///fm/ /„«/„«,/„/„„ //„ .9,„f„„ /AMyl,;,,/., JUiA //,< /<,y,>///„// ^/>:r/ >„/.'/.,,/ //i'^ //,/«///// /,y,,yy///y jri//i/'t'/ '/• >/'f//'r t' /'■/ fif/ 1/ /fu f'r /„,r,,-///„ //j„A'/'/^r,.',i,, ,1 ,. '■■' , ., I,„ l/,W, , I ,/r,„l/ ')'"""'/"'^"'/ A/" "-,"■ N^ < ^ ^ x^ \^ J. x^ 5 5. \y \ \ ~$ ,. S^X x« ^ ^^ ^^^^JK^I ■^ S X ^-^ ^ )^^CV 4^^ >^^^^ ^*0 ^^ ■^ J ^ ■^ ^-^v? X ^nXX X S ^ X* i x^_ x^ > > ,^ x^ : M x^ , ^ "^ .^ ~ ,St V .^^ * ^^ r^^■^^^^1:1l^<^ ^.:^^ Nv ~i'«; -;x ■; » , C ^ ^ v- J ^Xx:^ ~- X X N ^ ? ^ >-* A _ > > X Vi*.- X -^^ J .5 ^ - ^; ^ , ? i X V'ts- X > J :s H "^^ - 5 r-^ ^ - ^ ? ? -- ^■ ^ $ X v :; ,X X > X i ;^, V ■^ - 1 C _x ^ > > ^ X ^^v. > ^ ^ Zyu-^ ^ ^ <>: X ^ X ^ X sj X J. i ^ <^ ^ S''i x^ '^ X- ^^ >. (Tji X X X ^ ^ * V"^^ ^ '- ^ - X X *■ X- ; ^ ,-= x$ i^lUl^^ I r:^\ci^ \ X ^ J .V .N x% xfe x^ X X4 X^ SALES OF LONG-TIME PAPER 189 the first claims paid. The expenses of receivership are in the nature of court costs. In the management of a railroad Security of *^® receiver may be required to obtain millions receivers' of dollars to pay for operation, maintenance, ijica es. supplies, etc., and to meet current demands. To obtain these funds the receiver issues a special kind of credit obligation known as a receiver's certificate. These are very often issued in uniform amounts and in series, so that they appear in the form of bonds. But although they have no contracts of security for payment, by virtue of their being issued for court costs, they are a prior lien on all the assets and incomes of the company. The financial advantage of the receiver's certificate to the business concern for the operation of which it is used is apparent. By its use the receiver is enabled tages of to obtain funds when the ofiicers of the com- receirers' pany can not. Quite as marked are the ad- vantages to the purchasers of the certificates. By obtaining a first lien on the property the holders may force all other claimants to terms, and even drive a first- mortgage bondholder to settle. This brings the parties to the conflict to an adjustment of interests, when otherwise a settlement could not be reached except by selling out and winding up the affairs of the company. The Lease — its Relations to Finance A lease is a contract entered into which allows one per- son, called the lessee, to use the property owned by another, called the lessor. Brown wishes to engage in the business of manufacture of cotton cloth. Jones has a factory which will suit Brown's purpose. Jones will sell the factory for $100,000. Brown has not the funds to purchase the fac- tory. His capital is limited to $50,000, and he will need this to run the plant. Brown proposes a plan whereby he can obtain the use of the factory, and pay for its use out of 190 HOW FUNDS ARE OBTAINED earnings. He oilers $10,000 per year to Jones for tlie use of the plant, the amount to be paid as follows : $5,000 in six months and $5,000 one year hence. This Jones accepts. The use of the lease is plain. It avoids the necessity of raising funds with which to purchase that part of Brown's business equipment. Instead of the factory being a capi- tal asset, and the funds represented as a liability, the rent becomes a fixed charge against the net earnings from opera- tion. The value of the lease is, that it makes it possible for Brown to obtain a business equipment without raising additional funds. Credit transactions are carried on under the guise of a lease. The use of the lease by a railroad as security for the purchase of cars has been described under The lease as ^^ ^j^jg u Car-trust Bonds." The same prin- secunty. t • -, ciple IS employed m sales " on the mstalment plan." One wishes to purchase a piano. The price is $500. This may be paid for at $10 per month. Instead of the seller taking a note with a mortgage on the piano as security for the payment of the note, he leases the piano to the purchaser for $10 per month, the agreement being that when the purchaser has paid $500 in rent he shall become the owner. Some merchants make a special feature of sales on credit secured in this way. They advertise extensively, The uses of a-sking people of small means, laboring men, the lease by etc., to deal with them on credit. Instead of credit stores, jjj^king a direct sale, however, they simply lease the cook-stove, the carpet, the wall-hangings, the crockery, etc., and retain the. title to the goods; they col- lect rents till an agreed amount has been paid, when the merchant gives the title to the purchaser. This allows a man without accumulated funds to set up an establishment, and surround himself with comforts of life which otherwise he could not afford. He is limited only by his inability to pay the rent. SALES OF LONG-TIME PAPER 191 While the lease gives to the merchant the best security possible, it threatens the purchaser with loss of the goods Danqei-s of '^'^^ ^'^ previous payments on them in case of lease pur- default of One rent payment. In the case of the piano purchase above refei'red to, the pur- chaser may have paid $1:50 in rents, at $10 per month, and have still only a S5(i balance before the title would pass, but failure to make the next month's payment would give to the owner (the piano dealer) the right to take the instru- ment away, and confiscate the whole amount paid in. This is the method commonly employed by company stores in the mining districts. The miner can get what he will within the limits of the judgment of the company store- keeper as to the ability of the employee to make payments of rent. But the laborer stands in constant danger of losing his all by having his wages stopped for a month. PART III INSTITUTIONS AND AGENTS USED IN FUNDING OPERATIONS u CHAPTEE IX THE UNITED STATES TREASURY The Government stands in a double relation to modern systems of finance. In the first place, it must provide a uni- Belations of form system of money ; in the second place, it Goveniment must give attention to its own financial needs — systems of niust arrange for its own support. The first finance. we may call its money function ; the second its fiscal function. In this study it is its money functions with which we have to deal — its fiscal relations belonging to the realm of public finance. With a primitive people, formal acts of Government may not be necessary to the choice or use of a common commodity as money ; out of expediency a general practice may grow up ; commodities which in their nature may be used as a common standard for the comparison of value (such as cattle or furs) may serve the purpose of exchange. But those substances which best lend themselves to the more exact judgment necessary to JVeed for broad and complex commercial relations, have coined not the marks of individuality and of quality money. stamped on them by nature — such as are common to cattle, or furs, or wheat. The trader, there- fore, may not so easily protect himself against decep- tion and loss. For example : One of the characteristics that makes gold so serviceable as money is the high value imputed to small quantities of the metal ; another is the exact uniformity of weight and quality that can be given to each piece. But these divisions and refinements are 195 196 FINANCIAL INSTITUTIONS purely artificial ; by nature they have not uniformity ; they have no individual completeness as have cattle or furs, and a few grains added to or taken from a piece of gold may so materially affect its value as to destroy the service- ability of a coin as a standard for judgment. Some com- mon unit of weight and fineness is essential. The par- ties to an exchange, being controlled by mo- tives of gain, could not be relied on to give character to coin ; the Government — the agency of the peo- ple devoted to general, as opposed to private, welfare — must give the metal ofiicial stamp, which will stand as a guarantee and protect the people against the wiles and arts of indi- vidual traders. Reference has already been made to the advantages to be gained from the adoption of a single standard or unit for judgments of value in exchange. This advantage „ „ . , . would suggest the use of a single material for 2. Providing ^^ ^ . ^ . f , for a complex money. J3ut a single material does not serve system of ^q]} a,ll of the uses of money. The necessity for carrying about and transferring such quan- tities of money material as will be of great value suggests the use of a " precious " metal for the larger transactions. Materials which would best serve in this capacity, however, would require such minute subdivisions for small transac- tions and "change" as to be wholly unpractical. Thus gold serves well the main purpose — transfers of larger value than $2.50. But the pieces representing smaller values would easily be lost, and inconvenient in use. Silver does not serve well for large exchanges because it encumbers the trader ; but it is convenient and more prac- tical than gold for transfers ranging in value from 10 cents to $2. Below this, however, silver is not a convenient money. The subdivisions necessary for smaller " change " make it impracticable, and some such metal as nickel has superior advantages until the minimum of 2 or 3 cents is reached, when a still " baser " metal is found to be more THE UNITED STATES TREASUEY 197 convenient. Bronze may be subdivided to represent values of fractions of a cunt, but would be too heavy for trans- actions of larger amount. There is economy, therefore, in a variety of metals in the money system. The practical question to the nation, and to the com- mercial world at large, is, How can the advantages of a 3. JIaiiite- single standard (or a definite unit for the judg- nanceofa ment of value) be preserved, and at the same time tlie unquestionable economy of variety m our system of money ? Long and bitter experience has driven men to the conclusion that there is only one solution, viz., t/w eddblishment of a unit, or standard, ui a more jtreciouH metal, and a system of redemption of all other forms of money used, at a fixed ratio. The adoption of such a system, however, makes necessary a redemption agency, and this can be established and maintained only by act of Government. Kedemption, however, has the eifect of reducing all moneys, other than the standard, to forms of credit. They constitute in themselves promises to pay a definite amount of standard money according to the ratio stamped on their faces. If, for example, silver dollars are made redeemable in gold whenever a silver dollar shall be presented at a redemption agency, then every time a silver dollar is put into circulation the Government has put out, with this silver dollar, its promise to pay to bearer $1 in gold on demand ; the possessor of the silver dollar holds By redemp- ^ Credit obligation on the Government for the tion of infe- payment of $1 in gold coin of the United nor coins. gtates Stamped on silver instead of having the promise written on paper. As a credit instrument, the advantage of having the promise to pay stamped on the silver coin instead of paper is this: that it adds to the promise of the Government a collateral security equal to the value of the silver used, and on redemption of the promise the Government has this collateral for use again ; this increases the assets of the Government held as the 198 FINANCIAL INSTITUTIONS means of meeting promises to pay gold. The gold price of silver coin increases the ability of the Grovernment to get gold with which to meet these promises. But the use of credit money does not logically stop with redeemable coin. If a system of money is developed whereby coins become promises of the Government to pay gold, what is there to prevent it from writing these prom- ises on paper and passing that in payment ? There is no reason at all, provided the Government at all times keeps in condition to meet these promises ; and if it does not. By redemp- *^®^ silver dollars or copper coins would depre- tion of paper ciate as well. Government credit stands upon money. ^^ different footing than private credit. The value of the promise depends on the judgment of the indi- vidual receiving it as to the ability of the Government to fulfil its obligations. In our system, paper money is noth- ing more or less than a demand obligation on the Govern- ment to pay gold on call ; there must be gold available, however, so that no doubt will be entertained on this score. The only manner in which Government credit difEers from private credit lies in the different methods which may be em- ployed by the Government to obtain gold with which to pay, and this applies as well to its redeemable coin as to its paper. The machinery with which a government must equip itself to perform its monetary functions embraces three The United distinct plants : (1) A mint for giving official States stamp and gu.arantee to its coin. (2) A re- leasury. demption agency for safe keeping of the re- serve, and for the free interchange of the several forms of money used, as the one or the other may be considered more desirable. (3) A revenue department by means of which necessary funds may be procured to keep the reserve intact. In our own Government all three are combined in the Department of the Treasury. The Independent Treasury may be said to be the key to our whole system of finance. THE UNITED STATES TREASURY 199 In tHs respect our monetary system is somewhat unique — enough so to warrant an account of the conditions lead- ing to its establishment. Before the panic of 1837 and the financial depression which followed, the government had made various incorporated banks the depositories of its moneys, as well as its disbursing agents. Moreover, the banks depended on these moneys for the maintenance of their system of credit money. The first Bank of the United States was chartered in 1791, and continued in operation twenty years. In 1816 a second bank was organized by the Government of the United States under a twenty-year charter. During forty years of this period (1789-1837), therefore, the Government had a bank of its own creation. _. , . At three different intervals, coverins: in all a History of • i p • i , ■ , i n , , r-, the Inde- period ot eight years, it had to depend on State pendent ' banks. The State institutions, however, were so far from the direct control of the central Government that the currency and finances of the country were left in a state of uncertainty which paralyzed industry, and seriously handicapped private as well as public transac- tions. The charter of the second ^National Bank expired in 1836, the crisis of 1837 proved fatal to State banks, and with their failure the whole system of public and private finance was involved. The Government lost through its deposito- ries |28,101,6M.91. The losses of the people through un- certainty of credit and the fluctuation of their money stand- ard was many times greater than that of the Government. There was a general demand for a change. Van Buren had just come into office when this financial ca,lamity oc- curred. In national politics he and his party represented State and local interests as opposed to central functions ; they were adverse to the chartering of a third Bank of the United States. To meet the public demand for a sound and stable currency, and at the same time not to antagonize State institutions and local interests, an Independent Treas- ury was proposed. After three years of political contro- 2O0 FINANCIAL INSTITUTIONS versy, Van Buren's measure became a law, but so unpopu- lar had the Administration become by reason of the finan- cial and industrial depression of the time, that in ] 840 the opposition carried the country and Harrison and Tyler were elected. The opposition was a fusion party ; Harrison Avas the representative of the old-time Whig — a nationalist in sentiment ; Tyler was the choice of the " Nullifiers," an ul- tra branch of the States Kights party. These two political groups — hostile to the Administration — joined forces to de- feat the party in power ; but when their common enemy had been overthrown (being hostile in doctrine and inter- est) they fell to fighting each other. The Whigs favored a central bank. Had Harrison lived, the large Whig major- ity in Congress, under the leadership of Clay, without doubt would have given us a different financial history. But a month after inauguration the President died, and Tyler came to be our Chief Executive. The breach between the two factions was at first not a wide one. On his acces- sion Tyler announced his intention to carry out the policy favored by Harrison and his party. President and party agreed to repeal the provisions for the Independent Treas- ury and to incorporate a third Bank of the United States. But while the measure creating the bank was under confer- ence and discussion, the breach widened, until finally open war was declared, and when the bill had passed both houses the President vetoed it. From this time on no quarter was given. The " JSTullifiers," having the Administration in their own hands, but being opposed by Congress, went back to the old party whence they came. The next presi- dential election resulted in favor of the Democrats. Polk's administration i-evived the Independent Treasury scheme of Van Buren, and in 1846 it became a well-established part of our financial system. Through the agency of the Independent Treasury our money system has gradually become a highly refined system of credit. The United States Treasury is an institution THE UNITED STATES TREASURY 201 possessed of "issue" powers far exceeding tliose of any bank ; and the reserve required is smaller in proportion to circulation. Only one successful bank ever ap- system'a''^ proacbed it — tbe Bank of Amsterdam — and i-ejined that ignominiously failed when the veil of ^crldit. secrecy was drawn and its reserve was made known. It is necessary only to refer to the re- ports of the Secretary of the Treasury to appreciate the full force of this fact. In the Treasury there is held for redemp- tion purposes a reserve of $150,o(H),(i(,)0 in gold. Primarily a reserve of $100,000,000 was created to give confidence in the ability and willingness of the Government to redeem its outstanding debt in the form of United States notes (green- backs) ; but by the ISTational Bank Act, and by the adop- tion of the gold standard, it came to be the redemption basis of our whole monetary system. On this account the amount of the reserve was increased (in 1900) to $15(),- 000,000. Summarizing the credit moneys in circulation at the end of the fiscal year 1901, which stood as a charge against the §150,000,000 gold reserve, they appeared as follows: 1. United States notes (greenbacks) |346.0sl,01G.0O 3. National bank-notes 345,1 2(i,521.00 3. Silver coins in circulation 146,287,981.00 4. Silver certificates 435,014,000.00 5. Treasury notes of 1890 47,783,000.00 6. Currency certificates 7. Fractional currency notes (shinplasters) 15,353,349.96 8. Old demand notes 53,847.50 9. One- and two-year notes 58,535.00 10. Compound interest notes 165,850.00 11. Minor coins (nickel and bronze) 33.!l36,470.;j8 $1,369,359,570.84 Besides these several forms of money which are supported by the $150,000,000 reserve, provision was made whereby the gold coins and bullion may be deposited in the Treasury and certificates issued in like amount. Of these there were 202 FINANCIAL INSTITUTIONS outstanding $281,6Y8,659, but this was considered a special deposit and not available for tbe redemption of other money obligations. The transactions of the Treasury in maintaining its credit moneys at a parity with gold are illustrated in the work of the redemption agency for this year. Redemptions and Exchanges. 1. United States notes 187,862,110 2. National Bank-notes 60,730,773 3. Silver coins : Standard dollars 39,604,974 Subsidiary silver 37,066,500 4. Silver certificates 151,026,473 5. Treasury notes of 1890 21,298,927 6. Currency certificates 7. Fractional currency notes 8. Old demand notes 9. One- and two-year notes Compound interest notes 10. Minor coins (nickel and bronze) 4,140,496 Total redeemed by exchange $401,730,253 Redemption and destruction 373,852,928 National Bank-notes redeemed from the 5 per cent fund 129,100,946 1904,684,137 Against the account of redemption and destruction new credit money was issued to the amount of $292,532,000. „ , ,. In exchange for the $129,100,946 bank-notes Kedemphons , , ,, ,■■,-, of credit redeemed, the same amount of new bank-notes money ^ ^Q_g issued. Although there were $401,730,- 263 paid out for redemption and exchange of forms of money other than gold coin or gold certificates, standard metal was not actually used to any great extent. In most cases exchange of one form of credit money was made for other forms of credit money. Demands for payment were met in such forms of money or credit as best suited the wishes of those making them. The amount of gold THE UNITED STATES TREASURY 203 actually paid out in the redemption of the $401,730,253, on account of redemption and exchange, was as follows : 1. United States notes $819,415 2. National Bank-notes 191,259 3. Silver coins : Standard dollars 10,213 Subsidiary silver 244,782 4. Silver certificates 99,897 5. United States Treasury notes (1890) 562 6. Minor coins 62,093 $1,428,320 -At the same time (making allowance for gold certificates) there were taken in by way of exchange for other forms of money, $1,419,923 in gold, leaving a net balance of gold ac- Oold actually dually paid out during the year on this account used for of only $8,297. "With this net amount of gold redemptio7is. actually paid out of the Treasury during the year, $694,262,253 of credit money was again put back into circulation, at a par value with gold. During that year, therefore, the net gold drawn from the general fund to keep up the reserve was only about xrVir '^^ *^^^ P®^ cent of the $150,000,000 held for redemption purposes. Not only are all forms of money made interchangeable by the redemption system, and $1,369,359,570.84 of credit ,. . , money made to circulate at a parity with gold, Itl fJ'h'}litP7h(l71iC6 L iJ CD ■/ of integrity but through the redemption agency our cur- of our rency is kept in good condition, old and tat- nioney. ^ , .,, ^ " , i ■, , , i tered bills are received and destroyed, and new bills issued in their stead. The mint may be said to be the coin factory of the Gov- ernment. It is here that gold and silver bullion is received Th ' i a ^°^ coinage, and mechanical processes are car- money ried on necessary to the reduction of metals to factory. standard fineness and to the production of legally prescribed coins. The mint service is distributed over the country in such places as will best meet the demand. In this service there are five mints and seven assay offices. '2oi FINANCIAL INSTITUTIONS The mints are located at Philadelphia, San Francisco, ISTew Orleans, Carson City (Nevada), and Denver (Colorado). The assay offices are located at New York, Boise City (Idaho), Helena (Montana), Charlotte (North Carolina), Dead wood (South Dakota), and Seattle (Washington). According to the report, only three of the mints — those at Philadelphia, San Francisco, and New Orleans — are employed in coinage, the others receiving deposits of bullion in exchange for coin. The principal assay office is at New York. It is to be noted that the coinage plants are located conveniently near to the commercial centers, while the assay offices are in centers of metal production and importation. Minor coins are made in Philadelphia alone. In 1899 the pi-oduc- tion was as follows : Institutions. Gold coinage. Silver coinage. Minor coinage. $49,919,180 58,258,000 19,918,311.65 5,604,275.00 12,199,000.00 $956,910.14 San Francisco Total $108,177,180 $37,731,586.65 $956,910.14 Refined bars were produced at all the mints and assay offices, however, as follows : Deposits of metal. REFINED BARS MANUFACTURED. Institutions. Gold. Silver. Philadelphia $84,936,261.38 61,315,442.48 13,447,938.39 306,976.30 21,180,138.38 62,336,445.67 1,564,698.73 3,077,991.34 244,737.45 111,779.35 31!».748.69 6,550,698.16 $868,013.48 $117,478.08 17,188.38 New Orleans 3,870.75 3,950.85 9,342.24 Denver 21,114,763.13 53,170.116.54 1,380,657.17 3,036,679.36 343,431.68 110,837.83 317,301.58 6,395,250.11 62,872.07 New York Boise 8,195,351.06 25,141.67 Helena 39,061.26 Charlotte St. Louis Deadwood Seattle 1,305.77 951.52 2,447.11 111,660.72 Total $254,393,856.32 $85,540,910.53 $8,586,710.63 THE UNITED STATES TREASURY 205 A laboratory is maintained at the mint for making tests of weight and fineness. Tliis work is continuous. A spe- , „ , cial committee is appointed as a further safe- mint. ^ guard. Coins are standard at .900 ; .003 is tlie limit of tolerance. In no case was a newly coined piece found to be outside the limit in 1899, while only one was discovered in 1898. But few coins depart more than .001 from the standard. These figures show the exactness with which the unit for judgment of value is preserved in the standard money of the United States, while the redeemable coins are watched quite as closely. When a reserve of gold is not kept, equal in amount to the credit money outstanding, a revenue department of the Treasury is essential. The present reserve fund the Revenue serves only to give confidence in the ability of Department the Government to- meet present demands. *°- For the time being, $150,000,000 of gold in the ]S[ational Treasury is deemed a sufiicient guarantee that the Government will be able to meet its money obli- gations. But it is quite as necessary to give assurance of ultimate ability to meet all outside obligations. Under or- dinary conditions a few millions of dollars in gold will suf- fice to keep the whole $1,369,000,000 of credit money val- ued at par. There are times, however, when for business reasons, those holding this credit money may wish to have a large portion of it redeemed in gold. Demands for gold for private use, demands for export, or some shock to public confidence in the credit system may cause an extraordinary strain on the Treasury. The possibility of such unusual de- mands dictates that some means of maintaining the reserve intact should be provided. In 1893 the Government found itself in a position where the reserve was not only impaired, but its very existence threatened. The result was the im- pairment of all the credit relations of the nation. All pri- vate as well as public credit depends on confidence that the Government will be able to redeem its promises, and 206 FINANCIAL INSTITUTIONS pay gold in exchange for credit money outstanding. It is tliis that links the monetary promises of the Government to its fiscal transactions — that makes necessary a revenue power as part of its credit money system. The Report of 1901 shows that on June 29, 1901, the Government had in hand $385,642,560.46 of gold coin, and $109,205,736.96 worth of gold bullion— $494,- Possible dp- • mands on the 848,297.43 in all. As against this, the Gov- Treasury for ernment held a special 6 per cent National ^°^'^' Bank-note reserve fund of $13,267,236.27, a special fund of $289,017,689 for the redemption of gold certificates, and various other special deposit and redemp- tion accounts outstanding to the amount of $8,545,644.24. Add to these amounts the $150,000,000 reserved by law for the redemption of the credit money of the United States, and we have a total special reserve of $460,830,569.51 which must be subtracted from the gold in the Treasury to determine available funds. This leaves a net balance over and above the redemption funds mentioned of only $34,017,727.91, which at that time might have been devoted to the maintenance of the Government and to meeting its fiscal obligations. The receipts for the year from various sources were $3,011,031,891; the disbursements, $2,993,795,160. The moneys received and disbursed were as follows : Kind of Monet. Received. Disbursed. $178,319,548 59,898,211 42,966,427 490,060.380 58,918;520 195,676,393 1,368,944,399 717,587,461 4,760,652 $166,484,087 Silver dollars Fractional silver 49,741,106 41,325,039 United States notes Treasury notes 506,035,348 58,361,616 National bank-notes 196.670,339 1,256,329,229 719,497,448 Silver certificates Minor coins 4,450,958 Total «3,011,031,891 13,993,795,160 THE UNITED STATES TREASURY 207 From all sources, including redemptions, clearing-house balance and transfers, and expense of Government, during Sources of *^''' 7®^"" ^^•^^' *^11> '35,461 more of gold was rei-enue to received than was disbursed. As before sliown, ^demands *^^ actual demand for redemption was only, about ^ of one per cent, while the net demand for gold for this purpose was only about -^-^ of one per cent. Suppose, however, that under our system of interchange- able credit money the net demand for gold had risen to 5 per cent — a very usual demand in times of business adver- sity and financial strain : this would have made a difference of over $140,000,000 in the amount of gold in the Treasury. Not only would the surplus be wiped out, but two-thirds of the gold reserve also. To meet such an emergency the Government must rely on its revenue powers. Of these it has three : (1) Taxation, (2) sale of available assets, and (3) sale of its bonds. That it may not always rely on taxation is evident from the nature of the money in which taxes are payable. For example, in the year 1901, $622,606,298 of gold were received through customs and customs deposits. Yet, with these receipts, only $11,735,461 more of gold was received than disbursed. When the demand for gold is strong the gold receipts from customs and i'na'^quatT ^^'^^^ become small. Through its taxing power, the Government is unable to secure gold with which to protect its reserve. "When the taxing power is inadequate, disbursements in payment of officers, etc., may be made in forms of credit money, but this can not do more than temporarily protect the Treasury. The credit money disbursed soon finds its way through the redemption agency. The excess of credit money paid out during times of sti-ain sets in motion the "endless chain" of redemptions that draws away the surplus. A decrease in the expenses of government may somewhat lessen the demand, but if the demand for gold through outstanding credit currency be strong, the reserve may fall to a low point, and in such an 208 FINANCIAL INSTITUTIONS event Beither present economy nor power to obtain future revenue through taxation can avail to maintain it. In the Treasury at the time mentioned there were $453,- 702,931 silver dollars, $10,587,556.93 in fractional silver, ■2 Sales of ^"*^ $-±9,396,841.98 silver bullion— $513,687,- assets of 329.91 of silver coin and bullion as an asset. Government, jjad this been sold for gold, and relief found by conversion of quick assets, the silver owned would have produced something like $250,000,000 in gold coin, and would have reduced the credit liabilities of the Govern- ment to the same extent. But the Treasurer had no legal power to dispose of the silver in his possession. He might have turned to his bank assets, of which at the time he had $100,010,493.95 on deposit in the National Banks. This might have been turned into cash, but it would have given no relief, for the banks would then have converted the United States notes and the other credit money reserves held by them into gold by presenting them at the redemp- tion agency. The gold reserves of the Government would have been reduced in like amount. The third revenue power, loans, must now be resorted to. From this alone can relief come when the other powers fail to meet monetary credit demands. Without this power our whole credit currency system would have failed in 1893. In time of stress, with $1,369,000,000 of credit money out- standing against the $150,000,000 reserve, the loan power may be as essential to the maintenance of the United States Treasury as is the power to contract loans necessary to the maintenance of the credit accounts of a commercial bank. The service performed by the United States Treasury is at once apparent. Upon it depends the integrity of our c^,^,,. whole money system, and out of the integrity of the of the money system grows our system of pri- dovennnent. ^,^^g credit. From the United States Treasury we now turn to the private institutions and agents used in funding operations. CHAPTER X THE SAVINGS-BANK Under a system of exchange, based on consent of par- ties, any kind of business may be profitable to the extent, „ , and only to the extent, that it renders a service L very ousi- ■ /-> i ness based on to society. One who can not offer to others service something which will give them greater eniov- ment or greater business advantage than can be had elsewhere at the same price, must either keep the thing offered or reduce the price until, in the judgment of some member of the community, an advantage is to be found in exchange. But one can not sell at a price which will yield him no profit and remain long in business. A business man must get a return which will pay him for his effort, as well as offer some advantage to others who deal with him. The formula of successful business is : Price must equal cost, plus a profit. Again, one who offers to sell goods at a price which will yield him a profit must compete with all others in the market. The fact that there are buyers is proof that, in the judgment of those buying, a service is rendered to them by the one offer- ing goods ; the fact that the one who offers goods at a price which brings customers — i. e., remains in a business — is proof that he produces and sells at a price which yields a profit. In other words, the business man is able to continue the particular business in which he is engaged under these circumstances only : that he can both serve the community and at the same time serve himself. 15 209 210 FINANCIAL INSTITUTIONS His profit can not be greater than the total service rendered, for when he offers goods at a price which leaves no advantage to buyers, they will refuse to deal with him. The amount of his profit on a particular sale will be the difference be- tween the cost of the thing sold and the price obtained — his profit is the margin of advantage which he is able to retain for himself through the organization, equipment, and man- agement of his business. Let us take for illustration a primitive agricultural community, such as may be found in many parts of Europe. In such a community a man with a hoe is able to obtain an income from his occupation suf- ficient to allow him to eke out a miserable existence. This is made possible because the European farmer has his busi- ness so organized that, at the price paid (a life pittance), " the man with the hoe " is a more profitable laborer than any other at his command — the European farmer therefore employs him. In the Mississippi Valley, on the other hand, the man with the hoe is useless at any price ; here the business of agriculture is so organized that a high-class machinist (a man of high-grade intelligence) is the more profitable. " The man with the hoe " leaves Italy and goes to Ohio. In doing so, however, he finds his old occupation gone ; he must either change his implements of toil or he will soon find himself in the almshouse. In parts of France and Spain, in fact through a large portion of Europe, the machine-laborer of the American farm would be quite as helpless. There, to find employment on a farm, he must forsake his old method of labor and become a man with a hoe. To follow the sentiment of Mr. Markham in his re- markable poem, " the man with the hoe " is doomed ; while he is tilling a garden spot (a few acres at most), the West- ern farm-hand is " tending " 30 or 40 acres of oat-land and seeding as many acres of wheat, 30 to 50 acres of corn, and has in crop rotation 40 to 60 acres of meadow-land and 60 to So acres of pasture. He has in productive use from 200 to 300 acres of fertile land. The peasant has for THE SAVINGS-BANK 211 his labor a few tons of produce, all told. The American, with his horses, engines, machines, and tools, is producing from 2,000 to 3,000 bushels of corn, from 1,200 to 1,600 bushels of oats, from .SOO to 1,400 bushels of wheat (i. e., '1,()00 to 6,000 bushels of cereals), and from 60 to 80. tons of hay ; he also is keeping from 50 to 80 cattle and from 50 to 100 swine. The peasant produces little more than enough for his own keep ; the Western farm- laborer reaps a harvest of foodstuffs large enough to feed a whole regiment of laborers who are working in other fields. The American farmer has a large surplus of food to exchange for things produced by others, while other producers, being free to devote their time to their occupa- tions, are as liberally provided with a surplus of useful products. In the competition between Europe and Amer- ica in the markets of the world, the equipment of the Western farmer is so far superior to the equipment of the farmer of the Old World that even the small pittance must be denied to the peasant-laborer, while the American "farm-hand" may demand good wages and still leave a wide margin of profit to his employer. An iron-founder builds up a large and profitable business in a community where before only a blacksmith shop was found. How, it may be asked, is this made possible ? There can be but one answer : the founder is able to shape his materials better or more cheaply than his competitors. To do this he must so organize, equip, and manage his plant that he can offer better services to the community than did the blacksmith. Profits are made by obtaining funds with which to equip some business based on service to be rendered. Some busi- Increased ^^^ss advantage is recognized ; some service may profits the jje rendered for which others will pay ; to per- IncreJed form this service a new form of equipment is capital needed. In obtaining funds for this purpose, however, the one who undertakes it must so organize his service, furnish himself with such mechanical appliances. 212 FINANCIAL INSTITUTIONS and direct his business in a manner to put him on a footing superior to competitors. There must be a better adaptation of means to end. The means at hand are not entirely material and mechanical. He needs the assistance and skill of his fellows; his scheme of success must be one which ■will allow him to call in the services of others ; for this he needs funds. Even the things necessary to his mechanical equipment can not be obtained to advantage except by ex- change with those whose business it is to furnish them; this requires funds. In other words, one must have capital to work to advantage, or to do business at a profit. The larger the capital the more highly developed the industrial organization, the greater are the opportunities made possible to him possessed of the intelligence to avail himself of them. In recognition of this advantage men direct their ener- gies toward obtaining more capital. It has been before ob- served that the only way that a laboring man Saving as a ■, .-,,.. ■ , -, • ^ i means of has ot obtaining capital is by a process known ohtaining as saving. For the purpose of his own income capital. the laboring man is a business concern. He is 'ti governed by the same rules of success or failure as a busi- ness corporation. Let us take, for example, the New Eng- land Telephone and Telegraph Company. It has equipped itself for serving those who have messages to be sent from place to place. In order to do this more effectively, it has provided itself with wires, poles, buildings, instruments, etc. The earnings of the company received during the year 1899 for services performed were as follows : Exchange service (telephone) $2,934,075.59 Toll service 818,459.73 Private line service 68,325.36 Messenger service 51,778.14 For rents (real estate) 1,802.93 Interest on stocks and bonds of other companies owned 50,402.50 Miscellaneous 31,610.39 Gross earnings for year $3,946,354.68 THE SAVINGS-BANK 213 The expenses incurred in performing this service were as follows : General expense, including taxes 1640,107.95 Operating expense 653,075.64 Maintaining the plant 1,384,258.83 Rentals and royalties 220,724.28 ■ Private line expense 12,399.54 Messenger expense 50,693.51 Real estate expense 1 038.90 Total expense of year 13.961,389.34 Net earnings for year 985,065.39 „ . The carpenter iinds it necessary to equip him- sell with the tools of his trade. His earnings for the jear are : Work on Jacob Keiss's barn 1184.00 Work on the Emerson house 365.00 Shingling Patterson store 67.00 Repairs on First Nat'l Bank bldg 138.50 Shop work during year 214.25 Total earnings for year ' . . . As a means of carrying on this service, however, the carpenter must pay out a certain amount in expenses. He „ has clothes to buy to protect himself from wind and weather and to make himself pre- sentable in society ; he has a poll-tax to pay ; he needs shelter, etc. His working plant must be maintained — i. e., he must provide himself with food and repair tools broken or worn out. At the end of the year his expense account closes with the following summary : Clothing $89.00 Taxes 3.00 Board 368.00 Repairs of tools, etc 27.75 Room rent 96.00 Shop rent 100.00 Incidentals 53.00 $635.75 Net earnings for the year 233.00 214 FINANCIAL INSTITUTIONS The net result of service in the New England Telephone and Telegraph Company was $985,065.29. But this com- pany had an equipment that represented a capi- '^'"■^''*' tal of $19,000,000. The carpenter's net earn- ings were $233 ; his e(|uipment cost him only $500. Dur- ing the year an outhouse burned, where he was working, and he had a set of planes and some other tools destroyed. It will cost him $50 to replace the loss. This must be made good to place him in the same position he was in at the beginning of the year. The $238 — the net result of his services — are not, therefore, clear profit. His profit and loss account will appear as follows : PROFIT AND LOSS. Loss by fire $50.00 Net profit for year 183 . 00 $333.00 Net earnings $238 . 00 The question now arises. What will he do with the $183 profits on the year's business ? One of his expenses incurred was $100 for the rent of shop. He had paid out this amount for the use of a building as a means of provid- ing better equipment than he could have furnished with his own capital. He also recognizes that he could Savings work to hififher advantage if he had a steam- from labor. _ '^ a engine and some lathes. I^one of these things will be of use, however, till he can get all of them together. He decides to lay by the $183 and add to the amount the profit of each year till he has $1,0(M) — the sum that it will cost to buy his machines. It is this process of laying l>y the surplntK earnings or net profits for capital use that is called saving. The service rendered by the savings-bank finds illustra- THE SAVINGS-BANK 215 tion in a story told of a journeyman blacksmith. He was a man of more than ordinary ability, but addicted to drink. His employer, becoming interested in the man, thought that he might induce him to reform his habits. He pointed out to the journeyman that he was a man of tal- ent ; that he could get regular employment and good wages ; that he was spending his income in a way that would add nothing to his comfort ; not on]y was he not improving his mental condition, but he was contracting a habit which would finally render him morally irresponsible and physic- ally unsovmd. Continued indulgence of appetite would so far unfit him for service that no one would care to employ him in his present capacity. He would ultimately be re- duced to the ranks of the incompetent and end his days in poverty. All this the dissipated journeyman admitted frankly. " But," said he, " what is there for me to live for and work for except the present ? What encouragement have I to try to get on in the world ? At one time I enter- tained some hope for better things, but this hope is gone." He recounted that after learning his trade he had started out with the best of resolves. When young and strong he had determined to devote himself industriously to his trade, to work as a journeyman until he had laid up enough to buy a shop of his own. He hoped ultimately to become an employer of men, to profit from the skill and labor of others, instead of having to sell his own labor to those who had the capital with which to make the most of it. By in- dustry and thrift he had the first year saved $200. This he rm. ■ deposited in a commercial bank. The second The service * ofthesav- year added §250 more to his account. A few ■ings-hank. months later, however, after he had saved some- thing over $500, the bank failed, and an insolvency proceed- ing of two years left him about $100 in dividends from the bankrupt estate. He resolved to trust banks no further. The only service which they could render him was to pro- vide a place for the safe-keeping of his savings. They had 216 FINANCIAL INSTITUTIONS failed in tliis. The banks had everything to gain from his patronage ; he had everything to lose from failure. He now purchased a wallet and in this decided to carry his sav- ings until he had accumulated the requisite amount. Coin was heavy; he exchanged all money of this kind received for paper money, and small bills were traded for large ones ; these he could easily tuck away in his wallet. The wallet he kept with him while at his work, and for safety guarded his sleeping-room with a strong bolt. He finally got to- gether about $600. Again he thought the time at hand when he might become the proprietor of a shop. One night, while asleep, a fire broke out in the house where he lived ; the smoke thickened around him ; he became stupefied. Neighbors coming to the rescue forced the bolts and carried him out in time to save his life, but his wallet was left be- hind. Nearly six years of industry and sacrifice had come to naught. In despair, he determined to enjoy his earnings as fast as he received them. Here was a man of skill ; a man of indiistrious habits ; a man who needed only the encouragement of protection to rise to a high plane of industrial efficiency. But the condi- tions were unfavorable to his rise. During the last part of the eighteenth century and the first part of the nineteenth the laborer's lot was a hard one. In Europe, wages were still low, and a quarter of a century of almost Conditions ,. ,. ,,-, j: at i \ fjiving rise contmuous warfare (the wars oi JN apoleon) fo the made foodstuffs high. There was small oppor- savinqs-hank. , -. j- ,-, i i j j^ • tumty lor the man who had no means oi usmg his own labor and no means of support other than the sale of his skill. England, the most prosperous among nations, was overrun with paupers. American conditions were some- what more favorable to the laborer, on account of the oppor- tunity oifered to get out on new lands and to possess himself of resources from which he might earn a living, regardless of employment and employers ; but even here there was little care for the wage-earner as such, the man without capital. THE SAVINGS-BANK 21Y Tile first savings-banks were started as benevolent insti- tutions, purely and simply. Prof. Albert S. Bolles sum- marizes the history of their rise in the following admirable manner : " When a great want is felt in the world men begin to try to solve the problem of how to satisfy the want. This question of dealing with simple men and women, of taking care of the humble who had no assets, or taking care of the poor who come to want by improvidence or by misfortune, appears to have received the studious notice of the econ- The first omist and the philanthropist at the same time. savings- When Jeremy Bentham and Malthus enforced the benefits of saving in the interest of the great body of the people, as Avell as thope who saved, about the opening of the century, an English clergyman and a Scotch minister, each in his own jjarish, set in operation a plan for his parishioners to save money which embodied in substance the fundamental principle of the savings institu- tion. Contemporaneously, a woman, Mrs. Priscilla Wake- field, established such an organization in England. Similar ideas were also advanced at the same time by a London magistrate, Patrick Colquhoun, who wrote upon the ques- tion of popular indigence and measures for its relief as early as 1806. In America, in 1816 and 181Y, the needs and the claims of the poor awakened attention at Boston and N^ew York, and thought was immediately directed to- ward a savings institution, because it was deemed most help- ful. In Boston, in 1816, it was proposed ' to form an insti- tution for the security and improvement of the savings of persons in humble life until required by their wants and desires.' The first savings-bank in the State of New York was the direct result of a meeting of citizens at the ISTew York Hospital on December 16, 181T, to take into consid- eration the subject of pauperism. A committee was ap- pointed to report on the prevailing cause of poverty. The report recites, among other causes, that ' prodigality is com- parative among the poor ; it prevails to a great extent from 218 FINANCIAL INSTITUTIONS inattention to those small but frequent savings when labor is plentiful, which may go to meet privation in unfavorablp seasons. When the constitution of this society was drafted, it declared that one prime purpose of the organization should be ' to hold out inducements to those people to economy and savings from the fruits of their own industry in seasons of great abundance.' The earnestness of the men who were members of this organization is proved in the passage of the act upon their petition, by the Legisla- ture in 1819, for the incorporation of a bank for savings. In each of the two years thereafter a savings-bank was in- corporated in that State. The Philadelphia Savings-Bank was incorporated in February, 1819." The service to be rendered by the savings-bank is quite a different one from that rendered by the commercial bank. With the wage-earner the principal financial service to be rendered is not one of providing current funds to him who ™ J. already has capital ; it is one of providing a investment of safe investment for the small savings, or sur- savmgs. ^-y^^ ^^^ earnings, of the wage-earner in the form of an interest-bearing credit account of men without capital, men who are toiling for others in order that they may accumulate capital funds. The first prerequisite of a savings account is safety ; the second is a return of income on the investment compatible with safety. A man with a shilling or a pound, a dollar or even twenty dollars, can seldom find opportunity to invest such a sum to advantage. But when the shillings and pounds and dollars saved by the The invest- many are exchanged for interest-bearing ac- ment of sav- counts, the fund brought together in the bank inqs-banks. r i ii -n t, i i j. each week or month will be large enough to enable its officers to invest them safely at a still higher rate. This furnishes a source of income, and immediately con- verts the small savings of the laborer into an investment capital. The laborer need not wait until he gets a large fund together before he can use it. Moreover, he does not THE SAVINGS-BANK 219 feel that his saving is a sacrifice, but that he is rendering to himself a service and providing himself with tlie means to higher enjoyment. "With safety and earning poiver com- bined, the inducement to saving is vastly increased — the industrial community becomes more highly capitalized, more efficient, more highly cooperative, and farther re- moved from \rant. The motive to extraordinary efforts and saving is shifted from that of self-sacrifice to one of higher enjoyment. The laborer is encouraged to strive to acquire a working capital which will give him either high- er industrial efficiency or an investment fund, the income from which will yield a larger competence. The service which it is possible for such an institu- tion to render in an ordinary community may be illus- trated from the industrial organization of a typical town. In the place referred to is a flouring mill, a foundry and machine shop, two implement factories, a brewery, and a wagon factory. These establishments employ about 500 men ; besides these, there are railway shops which give em- ployment to some 250 more. Some of these receive large salaries, others are common laborers. The 750 emploj^ees receive, ou the average, about $2 per day. Altogether they earn about $1,500 daily — over $35,000 per month. Out of this income they have to pay living expenses. With each, however, there is a possibility of saving something. Some of the better paid ones may save as much as $25 per month ; others may not lay by more than $2 or $3 per month. Let us suppose that on the average $5 o/lhelervice per month might be saved. This would give a of a savings- gross saving fund of $3,Y50 per month for de- posit in savings accounts. But there are also between 500 and 600 domestic servants in the town that earn on the average $3 per week — about $6,500 per month, besides board and lodging. Let us say that $2,500 of this amount could be made available for investment. This would increase the monthly income of a bank to $5,000. 220 FINANCIAL INSTITUTIONS While $1 or S5 could not be conveniently kept or otherwise judiciously invested by the laborer, the bank, with $5,000 in hand at the end of each thirty days, could do either. Sixty thousand dollars each year for five years only would give an institution $300,000 for investment. If each laborer contributed but a mite, the possibilities of such an enterprise through the long course of years would prove attractive to the best financial managers, and the services of such would prove highly beneficial, not only to the individ- ual depositors but to the whole industrial community. In a large city, contributions of nickels and dimes from the many, in time produce an enormous fund. The Philadel- phia Savings Funds Society to-day has accounts which amount to over $60,000,000, and this fund has been built up largely by the savings of the servant class. The commercial bank must of necessity keep a large percentage of its capital funds available for meeting its demand credits. It is organized to serve a commercial constituency by providing current funds in this form. As a means of maintaining its demand credit, capital contri- butions of money are essential. The savings-bank needs no capital stock. A savings account is not a current fund. Savings depositors do not ordinarily withdraw their accounts except in emergencies, or for some better ultimate use to which the savings may be applied. The demands for withdrawal, therefore, are ordinarily smaller than new in- vestments of savers. Provision is usually made for with- drawals in excess of income, but a reserve of money is Savings are ^^^ ^^ ^^^ essential to maintaining the credit of capital the institution if proper steps are taken for its ""^' protection. The People's Savings - Bank of Pittsburg, for example, at the time of making its report to the State Commissioner of Banking, November 19, 1900, had accounts to the amount of $0,913,472.84, while it had on hand only $1,776 in cash and cash items. The Dollar Savings-Bank of the same place and on the same date had THE SAVINGS-BANK 221 ),8-i4:,617.'rl in accounts, and only $37,432 in cash and cash items. There are in the United States about 1,000 savings institutions, of which YOG are " mutual "—that is, they are institutions operated by trustees for the exclusive benefit of savers. They are not organized to make money for the corporation, but to provide safe investments in the form of interest-bearing accounts. The officers and em- ployees receive stipulated salaries for services rendered, and no dividends are paid except to those who have funds on deposit. Nearly all of the early institutions are of this kind. The first function of the savings - bank — that of safe investment of small funds — may not be performed by building vaults and storing away the money as it comes in, and then paying it out again when requested. The bank not only could not pay interest on accounts, but would suffer a net loss. This is incompatible with the prime ob- ject of the savings institution. It is only when safety is associated with income-producing power that the funds may be preserved safely and undiminished. The second How to deal function — that of paying an income on savings udth a sav- accounts — may be performed only by allowing ings-banh. ^|^g managers of the bank to use its funds in a way to produce revenue for the institution with which to pay expenses, repay the amount of the accounts, and add thereto an increment of interest or dividends. The success of an institution depends upon keeping its funds invested. This may be done only by establishing credit relations with the depositor on the one hand and with borrowers on the other. The credit relation with the de- positor is established in the following manner : The laborer receives his weekly wage and is able to lay by out of the amount received, we will say, $1 after paying expenses of living. In case he is employed during business hours, his wife may take this dollar to the savings-bank. On entering the bank she may meet a janitor or usher, who, learning her purpose, will show her a small wall-desk upon 222 FINANCIAL INSTITUTIONS which are pen and ink and proper blanks to be filled out. By following his directions, or those which she may find printed before her, the " deposit ticket " will be filled out, giving name, address, date, and amount to be deposited. (Many of the banks make out the deposit tickets themselves on account of the difiiculties experienced in reading the entries of depositors. But the self-executed ticket is con- sidered preferable by others on account of the evidence of the amount deposited being in the handwriting of the de- positor, if dispute arises. This is oftentimes of advantage in allaying suspicion of dishonesty on the part of an ingtitu- tion dealing with ignorant people.) The ticket vsdth the money is passed in at the window labeled " Receiving Tell- er." The depositor is now asked to step to the signature- book and write her name, and give such information as to residence, age, color of eyes, occupation, domestic relations, etc., as may be considered necessary to identification. On the signature-book a number is placed opposite the name by which the account thereafter is to be known in all trans- actions of the bank. The " Keceiving Teller " then makes out a " Pass-book " on which this number is stamped, enters the amount deposited, and hands it to the depositor. There- after all moneys deposited ai;e entered in similar manner. Now, what has the woman in exchange for her dollar ? The bank has one dollar more of money than it had before. In making the exchange, the woman has bought a credit obligation of the bank to pay her one dollar. To be paid when ? Not on demand, as in the case of deposit in the commercial bank, but after the prescribed notice (perhaps ten days) to be given to the bank of the intention of the depositor to withdraw. This rule is made in order that after notice is given the bank may not invest the money paid in by depositors until sufficient has been held back to pay withdrawals for which notice has been given. After sufficient coin has been retained for this purpose, how- ever, and for current expenses, the bank has no need for THE SAVINGS-BANK 223 holding a reserve, and the other money deposited is free for investment. But what kind of investment shall the bank make ? Will it buy commercial paper, as does the commercial bank ? Rides gov- It would not be to its advantage to do this. erning in- ^he " deposits " sold are not for current use ; vestments of - i i i i t • • the savings- they are bought by the depositor as an mvest- *""^"- ment — a long-time investment. Nor can they be used as current funds on account of the notice necessary for withdrawal, unless the bank elects to have it so. Since the deposits are not to be used as currency with which to produce or to buy goods, and since the purchase of com- mercial paper would not create new deposits at the savings- bank, it would only involve itself in risk and trouble by so doing. The managers of the savings-bank do not come into immediate business contact with merchants and manu- facturers, and have little opportunity to kncn- of the con- dition of their afEairs. But even if it could keep in touch with them, such transactions would be one-sided, and the investments in commercial paper would have to be renewed every thirty, sixty, or ninety days as the case might be. There are many reasons which argue against such a dispo- sition of funds ; there is little in its favor. Of all things that the savings-investment manager must take into account, the element of safety is of most impor- tance. The bank wants none but safe invest- investnent ments. It also wants long-time instead of short-time investments. An investment that combines these two qualities, however, is usually one of com- paratively low rate of income. The amount of investment capital seeking that kind of employment is larger in pro- portion to the amount of "gilt-edge" invest- Rate of ments on the market than the amount of capital seeking investments in which there is a higher element of risk — therefore the lower rate of interest. The character of investments made by the conservative savings- 224 FINANCIAL INSTITUTIONS bank is best shown by published reports of these institu- tions themselves. For the Philadelphia Savings-Fund So- ciety the general classification of its investments is as fol- lows Deposits with other banks and bankers $1,028,274.98 Call loans upon collaterals 3,800.00 Time loans upon collaterals 3,500.00 Investment securities owned : Stocks and bonds 145,505,169.75 Mortgages 13,319,592.38 Total investment securities owned . 58,824,762.18 Total 159,860,337.11 This accounts for its entire assets, except cash on hand, real estate, furniture, and fixtures. A smaller concern, the Isa- tion's Bank of Savings of Allegheny, may be used for illus- tration. Its investments appear as follows : Deposits with other banks and bankers |105,333.84 Call loans upon collateral 264,025 . 00 Time loans upon collaterals 45,625.05 Investment securities owned, viz. : Stocks and bonds $38,350.00 Mortgages 510,966.28 Total investment securities owned 544,316.28 Tolal $959,300.17 The first institution is an old-line " mutual " company. The second is a " joint-stock " company with a capital stock of S10(»,()(iO. The first is operated by trustees aniUhejiiitit- for the benefit of depositors. The second is s foci- fill'- operated by managers who offer a certain per- iiiijs-/i(nih: '■ ., ; nil 1 centage on deposits, as a fixed charge on the gross earnings of the corporation, the profits going to the stockholders in the form of dividends. The policies of the two banks with reference to investments is evidently quite different. The Philadelphia Savings-Fund Society has about iiy per cent of its funds invested in bonds and mort- THE SAVINGS-BANK 225 gages— 75 per cent being in the form of first-class bonds. The bond investments appear as follows : United States loans, reg. 4 per cent 11,967,187.50 Dist. Columbia, guaranteed by United States 3. 65 per cent 1,000,000.00 Total United States bonds |2 967 187 . 50 Pennsylvania State, rog. 3i and 4 per cent . $860,000.00 Philadelphia City, f eg. 3i, 4, and 6 " . 3,635,275.00 Chester City, reg. 4 per cent 40,000 . 00 Allegheny City, reg. 4 per cent 006,000.00 Pittsburg City, reg. 4, 5, C, and 7 per cent . . 1,544,900.00 Reading City, reg. 4 per cont 60,000.00 Baltimore, Ji a.,reg. an dcomp.4, 5, and 6 per ct. 330,000 . 00 Boston, Mass., reg. and eomp.4 and 5 per cent 50,878.60 Wilmington, Del., reg. 4, 4^, and 6 per cent. 34,500.00 Louisville, Ky., comp. 4 and 7 per cent 170,000.00 Zanesville, Ohio, comp. 4-1 per cent 70,000 . 00 Cincinnati, Ohio, comp. 7 and 7-A per cent.. 55,000.00 Cleveland, Ohio, 4 and 5 per cent 203,000.00 St. Paul, Minn., comp. 4}, 6, and 7 per cent 212,000.00 St. Louis, Mo., comp. 4 per cent 101,000.00 Toledo, Ohio, comp. 4-| per cent 115,775.00 Woodbury, N. J., comp. 4 per cent 62,000.00 New York City, reg. Bf per Cent 800,000.00 Total city and State bonds 18,095,328.60 Bonds of counties and boroughs, 4 to 6 per cent 549,000.00 Total municipal and Government bonds .f 11,923,615.10 First-class railway bonds 38,581,554.65 Total , 145,505,1 69?75 Of the railway bonds, about one-fourth were held against the Pennsylvania Railroad, financially one of the strongest corporations in existence, and another one-fourth were held against the New York Central, the Erie, the Lehigh, and the N"orthern Pennsylvania Railroads. JSTo shares of stock whatever were held. [N^early all of the bonds are what are known in the market as " gilt edge." The Nation's Bank of Savings had only about 3 per cent of its funds invested in bonds, and these were entirely local and industrial. It had 50 per cent of its assets invested 16 226 FINANCIAL INSTITUTIONS in mortgages. It is to be presumed that these were also largely local and industrial. Fifty-four per cent as against 92 per cent in bonds and mortgages, and those Comparison ^^ ,^^ inferior type in the general security mar- ket ! About 10 per cent of its funds were '■' on deposit " in other banks, while 30 per cent were invested in commercial paper — short-time loans secured by collateral. The loans of this character made by the Philadelphia insti- tution amounted to about one-tenth of 1 per cent. Whether this difference grows out of the joint-stock interest of its managers will not be said, but certain it is that the Alle- gheny concern is quite as closely allied with the commercial interests as it is with the interests of the working man. The deposits that go to the savings bank are usually in the form of minor coins, silver, and what is generally con- D , ,. J, sidered "change." The collection of such Uelanons of _ '^ savings-bank money gives the bank a double importance in to the money -^g relation to the money system of the coun- system, ■' >' try. It reduces the amount of small change that the Grovernment would otherwise be called on to fur- nish to the people. By providing a method for the safe- keeping of funds, (1) it reduces the amount of money that would go into hoards, and thereby reduces the demand on the Government; (2) it indirectly sets up a chain of re- demption through the Treasury. The savings-bank also has an important relation with the fiscal side of the Treas- ury. When an issue of bonds is offered for sale, these institutions are among the largest purchasers. They there- fore facilitate the funding process of the Government. In 1899 the savings-banks had investments amounting to $137,000,000 in United States bonds. The total deposits of that year were $2,179,468,299. Their income amounted to over $5,000,000 per month, while cash on hand averaged about $100,000,000. These banks are therefore, under ordinary circumstances, in a position to absorb a large issue of public securities. THE SAVINGS-BANK 227 The business relations of tlie savings institution to the commercial bank are largely represented by its " deposits " in those banks. There are times when with- savilgl-baik ^rawals exceed deposits ; in periods of panic- to other times when those having securities and other inslitutions. Properties must realize on them at once in order to meet present credit ol)ligations, when sales of securities are made at a sacrifice — many depositors of savings may find it to their interest to exchange their sav- ings investments for the properties ofEered for sale; in times of depression also, when the laboring constituency of the savings institution is out of employment, large withdraw- als may be necessary to meet living expenses. If, upon such occasions, the savings institutions do not have a part of their investments in such form that they may be readily con- verted without loss, they may become embarrassed. Their constituency may become frightened and begin a " run." Such occasions of emergency and adversity suggest to the savings manager the desirability of keeping a considerable part of the institution's funds " deposited " in one or more commercial banks at a low rate of interest. The percent- age of funds "deposited" will vary with the circiimstances of each institution. The commercial banks are always ready and willing to sell credit accounts — that is, to buy cash from the savings-banks with their own demand ci-edit, and pay from l-J- to 2^ per cent for the time that payment is deferred. It is of advantage to the commercial bank to receive deposits from the savings-bank, because the money thus deposited strengthens its reserve, and enables it to exchange a larger amount of bank credit for loans. The low rate of interest paid by the commercial bank to sav- ings institutions on dejaosits, however, makes it quite im- perative that the savings-bank keep only such amount in- vested in this way as business safety requires. It sometimes happens that those who manage savings institutions have a personal interest in keeping deposits in other institutions. 228 FINANCIAL INSTITUTIONS When tliis is the case they are wholly unfitted to remain in fiduciary relations to depositors. In some States, statutes have been passed regulating the qualifications of ofiicers in savings institutions. Past experience has suggested the propriety of such laws. CHAPTER XI THE BUILDING LOAN ASSOCIATION Little more than a quarter of a century had passed be- fore the principle of saving was appHed in a different way. The savings-bank gave to the wage-earner an opportunity safely to invest his surplus dimes and dollars until he wished to use his capital for industrial purposes or until he conld employ them to greater advantage in an independent way. This gave the best of encouragement to saving and to the accumulation of funds for capital use. The Building Loan Association was an invefsting institution which advanced to the wage-earner funds for his immediate use on the se- curity of his future savings. It has been noted that the savings-bank sells interest-bearing book-accounts to cus- tomers and then invests the funds deposited in " gilt-edge " securities of other concerns which bear a slightly higher rate of interest than the rate paid to depositors. The Build- ing Loan Association receives a definite amount of money each month as a payment on stock held by members of the association ; the company then invests the amounts received in loans to its members — the members having the profits from the loans applied to the balance due on stock. For example, an association is formed with a thousand mem- bei-s ; each member takes one share, the par value of which is $100 ; he pays down $1, and agrees to pay $1 per month on the stock till, with the accumulated profits, the stock is paid for. This gives to the association an income from stock payments of $1,000 per month, which may be loaned 339 230 FINANCIAL INSTITUTIONS to its members on such terms as may be provided under its rules. The distinguishing characteristics of the Building Loan Association are the following : (1) TJsuallj every borrower „, , . , . from the association is a stockholder — that is, Ihe dtntm- . . i- , i- guishing the Company can not mvest in any credit obli- featuresof orations or securities other than those of its tke JiuUding o . , , Loan members ; it is a close corporation both as to Association, membership and as to dealing. (2) The capital of the corporation is not represented by the amount of stock outstanding, but by the amount of the combined sav- ings, interest, and premiums paid in by its members after deducting expenses. To put it in the language of the Ninth Annual Keport of the Department of Labor : " The stockliolder or member pays a stipulated minimum sum, say one dollar, when he takes his membership and buys a share of stock. He then continues to pay a like sum each month until the aggregate of sums paid, augmented by the profits, amounts to the maturing value of the stock, usually $2U( », and at .this time the stockholder is entitled to the full maturing value of the share and surrenders the same. It is seen clearly, then, that the capital of a building loan association consists of the continued savings of its members, paid to the association upon shares of stock, increased by the interest and premiums which the association has received from loans made by it from the savings of its members thus paid to the association, and from all other sources of income. The amount of the capital of the association, therefore, in- creases from month to month and from year to year. Shares are usually issued in series. "When a second series is issued, the issues of stock of a prior series cease. Profits are dis- tributed and losses apportioned before a new series issue. The term during which a series is open for subscription dif- fers, but it usually extends over three or six months, and sometimes a year. Prior to the maturing of a share it has two values : one is called the holding (or book value), and THE BUILDING LOAN ASSOCIATION 231 the Other is called the withdrawal value. The former is ascertained by adding all the dues that have been jjaid to the profits that have accrued— that is to say, the holding value is the actual value of a sliare at any particular time ; the withdrawal value, on the contrary, is that amount which an association is willing to pay to a stockholder who desires to sever his connection with the association prior to the date at which his share matures. Every association has full regu- lations on all such matters, as well as on matters pertaining to expenses, notice of withdrawal, and all the methods and processes necessary for safe conduct of the business. The purchase of a share binds the stockholder to the necessity of keeping up his dues, and this secures to him not only all the benefits of a savings-bank, but the benefit of con- stantly accruing compound interest." The character of the institution is especially adapted to real-estate loans and to the service of a home-buildins: con- Conditions ^tituency in a community where funds for this out of which kind of investment are scarce. In fact, it is $?l"'™f"' o*it of iust such a situation that tlie Building 110/1/ QjtOSB, t 1 . Loan Association arose. The first oi-ganiza- tion of the kind about which we have any information was founded January 3, 1831, in Frankford, a suburb of Philadelphia. Philadelphia was a fast-growing industrial center. Frankford was an industrial suburb. As compared with other large cities, Philadelphia has little interest in public institutions; the center of interest for a Philadel- phian is his home. It is not strange, therefore, that the home-building corporation found its first development there. The laboring population at that time could obtain little aid from established institutions ; reliance on future savings, as part security for a loan, w^as not looked on with favor. The Oxford Provident Building Association was organized to meet the demand for funds for home building among people who relied on wages for income. It was not until a decade later that the success of the Frankford institu- 232 FINANCIAL INSTITUTIONS tioa commended the general adoption of such a plan to meet the demands of other home-building constituencies. Be- tween 1840 and 1850 the Building Loan Association took a place among the financial institutions of most of the indus- trial centers. The great growth of associations of this kind came later ; their numbers gradually increased till, in the latter part of the century just closed their popularity began to decline. This was largely due to the fact that the sav- ings-banks and other financial institutions had accumulated such enormous investment funds that interest on well-secured loans fell below the rate which would make the special building fund profitable to its members. The savings-banks, especially, devised plans for application of savings to the reduction of principal in such a way that they found a safe plan of investment and could offer a low interest rate. In 1893, at the time the special report was made to the Grovemment by the Department of Labor, there were in the United States 5,838 associations with assets amounting to something over $500,000,000. Through the aid of the 5,440 associations reporting to the Commissioners of Labor, 314, Y55 homes and 28,459 other structures had been built. Magnifuds "^^^ history of the loans showed only 8,409 fore- of business closures, with a loss of only $449,599, or less transacted. ^j^^^ ^ ^^^ ^^^^ ^^^ ^-^^ ^^^^^^ j.^^ ^^ ^^^ ^^^_ panics. The magnitude of the business transacted, together with the stability and success of their undertakings, suggest a more detailed description of financial plans. As stated before, loans are usually confined to members. While this is the general rule, it finds variance in some of Plans for *^® companies when there is no demand from making members for loanable funds. From the stock- holders two classes of security are taken, viz., (1) mortgage liens on the property to be improved, and (2) collateral deposits of stock in the association. Usually, however, the holders of unencumbered shares may obtain temporary loans on security of their stock alone to the THE BUILDIKG LOAN ASSOCIATION 233 amount of its withdrawal value. There are about 70 plans employed for the making of loans among the various com- 1. Loans at a P^^ies. A few of these associations loan money fixed rate by to the members at a fixed rate without premium. These usually give the privilege of obtaining loans in order of application or by lot. In most cases the loanable funds are put up at auction and sold to the highest - „ , .^ bidder. One of the favorite plans of auction 3. bales at i • ,i j. n • t • /• , auction— sale IS the following : interest is set at a faxed iuereT "^ ^^*® ^'®* ^^ ®^^ ^'^^ ^®°*^ P®"" ^®®^ *^" $100). A member secures a loan of $1,000. To do this he subscribes for 5 shares of $200 each, which en- titles him to become a bidder for the amount desired. He then enters the field of competition at an open meeting of the association, offering to pay a certain number of weeks' interest in advance. Let us assume that he gets the money on a bid for prepayment of 25 weeks' interest. The bor- rower would then receive $1,000, less $31.25, the amount covered by this bid, or a net sum of $968.75. Then for the first 25 weeks he would be exempt from interest pay- ments, after which he would pay the regular interest con- tracted for. By a number of plans loans are awarded to stockholders bidding a premium on the stock instead of competing for loans by advance of a definite amount of in- terest. One of the most used of these provides UM^rof *° ^^'^ ^ premium to be paid in the nature of a highest fixed percentage of dues — the amount bid to be S*"™"" ^^^^^ *o *® regular monthly dues on the stock. In this case the borrower receives the full amount of the loan and pays an interest rate established by the rules of the association. To illustrate: A person wishes to obtain $2,000. He becomes an applicant for 10 shares of stock which have a maturing value of $200 each. Attending the meeting for the auction sale of money to be loaned, he makes a bid by which he agrees to pay the regu- lar dues of $1 per share per month and 10 per cent addi- 234 FINANCIAL INSTITUTIONS tioual as premium. That is, on 10 sliares he will pay per month dues, $1 per month premium, and interest on his loan at the rate of 6 per cent per annum (if that is the established rate), or |10 per month interest. The $2,000 will cost him $21 per month until the stock matui'es, by ap- plication of dues and profits, when he may cancel his loan by surrender of his stock if he chooses.. By another plan the interest ^jayments are proportionally reduced with each application of dues to principal. In this case the member foregoes his right to participate in the profits of the associa- tion. Again, the interest rate may be reduced periodically. The variety of plans for maturing loans is such that chap- ters might be written without exhausting all the details. The illustration as given will serve as an expose of princi- ples. A more complete analysis will be found in the report above referred to and in the special treatises on the subject. An interesting feature of the Building Loan Association is the plan for the distribution of profits. It has already been said that the dues and profits are added to Flans for . i i i x' i i i i i the distribu- the maturing or book vahie oi shares held by tionof members. That is to say, the amount of the earnings of the company after payment of ex- penses is distributed to the credit of the balance due to the company on deferred stock payments. The appli- cation of items of profit, therefore, hastens the time when the borrower may surrender his stock in full payment of his loan. With a company having only one series of stock — i. e., a company which terminates with the comple- tion of the stock payments of its members and the conse- quent maturity of its loans — the plan of profit-sharing may be a comparatively simple one. Let us suppose that a com- pany were organized with 1,000 members, each holding one share, the maturing value of which will be $200. If each member pays $1 at the time of taking out the stock, and then pays dues at the rate of $1 per month till the stock matures ; if, also, interest on loans is fixed at 6 per cent per THE BUILDING LOAN ASSOCIATION 235 annum, payable monthly, then at the time of organization the company would have in its treasury $1,000. At the end of each mouth $1,000 more would be added by pay- ment of dues. In estimating the book value and time of maturity of the stock, however, interest received on loans would have to be reckoned with. At the end of the first month the amount paid into the treasury would be $1,000 + $5 interest on the loan of the month before. This $1,005 would be loaned at 6 per cent interest payable monthly, as a result of which the treasurer would receive $5 -|- $5.02, or $10.02 in addition to the $1,0U0 dues. Again, this $1,01(1.02 would be loaned at 6 per cent. At the end of three months the return would be $5 + $5.02 + $5.05, or $15.07 in addition to the $1,000 payments of members. Assuming, therefore, that the borrowers would pay the expense of making loans, and that the entire amount re- ceived were put at interest, the dues and profits for the year would be as follows : Length op investment. Amount of dues paid in by members each month. Amount of interest paid each month. Total amount paid in each month. Total book value of each share. Profits per share. 1st month. $1,000.00 $.5.00.5 $1,005.00.0 $1.00 *.O05 2(1 '• 1,000.00 r,.02.s 1,010.03.5 2.01 .01 3d 1,000.00 5.05.0 1,015.07.5 3.03 .03 4th " 1,000.00 5. 07. ,5 1,020.15.0 4.05 .05 5th " 1,000.00 5.10.0 1.035 35.0 5.07 .07 6th " 1,000.00 5.13.6- 1,030.37.6- C.IO .10 7th " i.ono.oo 5. 15.;.' l,0:!o.53.S 7.14 .14 8th " 1.000.00 .5.17.7 1.040.70.5 8.18 .18 9th " 1,000.00 5. 30. J 1,045. 111. 5 9.23 33 10th " 1,000.00 5.23.9 1,051.13.7 10. 3H .38 11th " 1,000.00 5. 35. .5 1,0.56.39.,? 11.. ".3 .33 12th " 1,000.00 5.38..? 1,061.67.5 13.39 .39 Total 113,000.00 $61.67.5 ifl3,897.33..9 In this the problem is simply one of computing and com- pounding interest on loans made, and dividing the total interest received during a definite period by the number of 236 FINANCIAL INSTITUTIONS shares outstanding, thus giving the rate of profit per share. By adding profits to dues paid in, the booh valuatio7i is de- termined. The withdrawal valuation is fixed by the rules of the company. It is usually something below the hooTt valuation, and for this another column may be added and the oflice record is complete. With interest and other tables at hand, the entries may be made by the secretary at the end of each month before the monthly meetings. When, however, new series are started each year, the computation becomes more complex. There are between 20 and 30 plans employed by the associations for the dis- tribution of profits to serial stockholders. One of these plans is the same as that commonly used for the determina- tion of partnership profits when partners have entered a business at different times, each series representing a part- ner. To illustrate : Let us suppose that an association whose monthly dues are $1 per share has three series in force at the end of the third year, with a fourth series -just issued; that the number of shares in each series and the book valuation per share at the end of the third year are as follows : (1) Series 1 500 shares, value per share |38.87 (2) Series 2 600 shares, value per share 25.27 (3) Series 3 400 shares, value per share 12.32 (4) Series 4 4,500 shares, value per share 00.00 Let us suppose that the net profits for the fourth year are $3,000. It is evident that a fair distribution of profits must have reference to the value of the shares. To deter- mine this, however, the profits of previous years are also taken into consideration. The total net profit of the com- pany up to this time we will assume to be $5,325. The problem is to find the earnings on each share at the end of the fourth year. Justice to all parties requires that the holdings of members be reduced to some common basis. Since each stockholder pays in $1 per month, the first dol- lar paid on Series ISTo. 1 has run for 48 months ; the sec- THE BUILDING LOAN ASSOCIATION 23 ond, 47 aionths ; the third, 46 months, etc., to the last dol- lar, which has run only 1 month. The average length of time that each dollar has run in this series, therefore, is •iS -I- 1 — ——, or 24^ months. In Series 2 the first dollar paid has run 36 months, while the last has run but 1 month. The average length of time for this series is found to be — 2 — ) 01" l^i months. The average for Series 3, by the same process, is found to be — ^^, or 12|- months, while 12-1-1 the average for Series 4 is only — ^7—, or os)tiun of its credit funds that it builds up its clientage, renders the THE COMMERCIAL BANK 2."il highest service to the coimuimitv, fiuds its own greatest proteetiou, and makes the greater part of its iueouie. Let r. ■, I J ^^* *'^^' tli^^'^ Browu sells on the average s:)0,iiOO on inctfit- worth ot mill product per month. Some of Trl'dir ^"''* ^* ®^'^^ ™ Chicago, the remainder in Xew York and Liverpool lie deals with first- chiss wholesale houses. But it takes time to deliver goods after a sale is made ; then, too, his business arrangement with his customers is that bills shall be post-dated — that is, if a sale is made on January 20, ten days, perliaps, may be allowed after delivery and the bill will be post-dated May 1. This is the date upon which it will be due and payable. It is also a rule of business with him to allow 5 per cent dis- count from the price stated in the bill for '' cash " on de- livery. When Brown has a small stock of grain on hand he may be able to meet all the demands of his business and at the same time carry such of his customers as do not avail themselves of the 5 per cent discount. In this case, the miller may be able to get 5 per cent on the " cash " price for the ninety days" delay. But in the fall, when the best milling grains are coming into the local market, Brown may find it to his advantage to buy a large stock ; otherwise it may be shipped out of the country, and later he would have to pay Chicago prices for his grain, besides freight charges back again. Xow, having made local purchases of grain, he is not in position to " carry "' his customers. He there- fore goes to his bank and enters into an arrangement whereby he is to turn over to the bank " bills "" against his customers for mill products sold ; he makes the bank his agent for collection, and at the same time he arranges to borrow from the bank such amounts as he may need in his business (not to exceed 90 per cent of the amount of bills placed in their hands). The amount borrowed from the bank is represented bv Brown's promissory note payable on or before ninety days, with interest at fi per cent per annum until paid. In other words, the bank arranges to sell its credit (a deposit) 252 FINANCIAL INSTITUTIONS to Brown in exchange for his interest-bearing ohligation to the bank. That is, Brown has exchanged his own promise to pay at a future time for the bank's promises to pay at once ; but Brown also stipulates that he will pay an addi- tional sum to the bank, as interest, in consideration for the length of time that his payment is deferred. By keeping a money reserve, the bank is able to sell some three or four times as much of its " demand credit " (deposits) for the "time credit" of its customers (commercial paper) as its stockholders had money invested in the baidc, and gets an income of interest on its " loans " of credit, just as it would have done had it " loaned " money instead. In this appears the answer to the question. Why does the bank keep Brown's account and collect his checks free of charge, be- sides doing various other services for him at its own ex- pense '': Obviously it is because by so doing it will be able to do other business out of which a profit may be realized. Brown's first deposit may have been created by a sale of money to the bank in exchange for " bank credit." Again, it might have arisen from a transfer of the " credit " of some one else for " bank credit." In either case the bank has gained a business advantage. If money is obtained, this adds to the reserve ; if the credit of others, then their credit funds are l)eing reduced and new demands created for bank credit. The ones from whom the checks were received had bought " deposits." These are being exhausted. More than that, Brown is constantly exhausting his own account. When further funds are needed by him the bank will be able to sell its credit and make a profit on the sale. This raises another question. What kind of /'!"/'/ purchases may a bank make with its credit? thill a hunk Tts busincsfi is organized to serve a class of "I'li'iir ' '' ])eo])le engaged in trade and production. With tlicm it must deal and out of tliis service it must obtain its profits. V>\\i while the bank serves the com- munity, it must at the same time serve itself. For the bank THE COMMERCIAL BANK 253 there are only three kinds of property in which its credit may be invested with safety and profit while serving the industrial community : 1. It may sell its credit (deposits) for money. That is, if a merchant or manufacturer has taken in money that he may not find convenient for use in his business, he deposits it — takes it to the bank and sells it for " bank credit," which he finds more convenient. The bank's interest in this exchange lies in its ability not only to give bank credit for the money received, thereby main- taining a constant flow of coin, but by thus strengthening its money reserve to sell some two, three, or four times as much of credit on the sale of which it may make a profit. 2. It may sell its credit for such credit '■'■securities^'' and credit rights as it may deem necessary to strengthen its re- serve, and relieve it from the necessity of carrying a larger sum of money. These investments are usually in some form of low-rate interest-bearing obligations. They may be in the form of Government bonds or securities that may be realized on at any time in the open market without loss of principal invested, and at the same time bring in a small current income. They are usually deposits in other banks (as with reserve agents), or in the form of " call loans on collaterals " — investments that may be realized on at once, investments that usually bear a low rate of interest, but which grow out of commercial transactions. 3. It may sell its credit for commercial paper — the short-time in- terest-hearing or discountable credits that arise in the course of the business of its customers. The manufacturers and merchants of a community are constantly selling goods " on time." They, however, sell at such a mai'gin of profit that, in case funds are needed in their own business, they may dispose of the bills at a discount, convert them into current funds, and purchase their stock for manufacture and sale rather than hold the accounts for final payment with inter- est. Their business is that of production and sale of goods. Credit to them is only one of the means employed in the 25i FINANCIAL INSTITUTIONS equipment of their plant for larger profits. Credit is a con- venient means of exchange, and it is out of the exchange that the profit is to come, and not from the income in the form of interest on deferred payments. The hank, on the other hand, is organized for the purpose of making a profit on the purchase and sale of credit ; hut the only kind of high-rate interest- hearing credit that it may safely handle and at all times maintain its own stock unimpaired are the short-time obligations of its customers. The observ- ance of this principle is a condition necessary to success. This is imperative, on account of the opportunity vehich is thus afforded the bank to press for payment claims which may become doubtful through the shifting fortunes of merchants. It is also to its advantage to maintain a constant flow of payments from its commercial credit as- sets due as a means of protecting its money reserve in case this is at any time threatened by those who hold deposit accounts. According to the report of the Secretary of the Treas- ury for 1899, the amount of capital stock paid in by the 3,595 national banks (September Y) was $605,772,970. The amount of money reserve actually held at that time was $487,524,937. But besides the capital stock paid in there were $248,449,235 of surplus and $1(»2,066,430 undivided profits — a total capital fund of $956,288,635. It appears, therefore, that an average of only 51 per cent of the capital funds were actually held in money reserves, while against this money reserve there were outstanding $2,450,725,598 of individual deposits, and about $1,000,000,000 of deposits in other banks, $414,000,000 of the latter being with author- ized reserve agents. There were besides some $200,000,000 of national bank-notes oxitstanding. Assuming that $400,- 00(J,000 of the deposits in other banks were drawing inter- est, the credit sold by those banks from which an income was derived was over $3,000,000,000, or about six and one-half times the amount of money reserve actually held. THE COMMERCIAL BANK 255 • The income-producing investments made in excliange for their own credit (deposits and notes) were as follows: Commercial paper $2,496,751,251 Deposits in other banks on interest (estimated). . 400,000,000 United States bonds to secure circulation 229,639,610 Total $3,126,390,861 If we may assume that the commercial paper averaged 5 per cent, United States bonds 3 per cent, and interest on deposits in other banks 2 per cent, then the total annual in- come on these investments would be : Commercial paper $124,837,562 Interest on bonds 6,884,188 Deposits in banks on interest 8,000,000 Total $139,721,750 As stated before, the bank's income is not confined entirely to sales of its own credit. Besides being an investor, the banker is a merchant and broker — dealing in bullion, coin, bills of exchange, bonds, and securities. He is also an agent for the collection of bills and notes. He may likewise be a trustee. All of these functions, however, have to do with money and credit in their uses as capital — with the financial operations and activities involved in the purchase and sale of goods ; out of them all comes the gross income of tl.c bank, from which are to be obtained its expenses and profit. CHAPTEK XIII THE TRUST COMPANY A WELL-oEGANizED System of credit involves a great many iiduciary relations. It is to give greater certainty and facility to the administration of these that the trust company is organized. To make the more common trust relations concrete, as well as the more common demands for their administration, let ns recall the experience of a retired banker. At an advanced age he vfithdraws from cares and responsibilities of management ; he intends to devote the remainder of his life to the comforts of home and the care „, . of his own properties and investments. He has The service, >: \ of the trust not been long in retirement, however, when an company. ^j^j friend asks to be allowed to insert his name in his will as executor. He consents. A few months elapse when the probate judge of his district approaches him. An estate has been in his court for several years ; the administrator, a son of the deceased, has not pushed the settlement as fast as his position demanded ; the other heirs complain not only of delay and waste, but also that the ad- ministrator has employed a portion of the assets for his own purposes ; on being cited to appear and render an account of his trust, he disclaims misappropriation of funds, but avers that his own business requires such a portion of his time that he can not give proper attention to the estate. The judge urges the banker's acceptance of appointment as administrator to wind up the estate as rapidly as the interests of all parties will permit. Presently another trust 256 THE TRUST COMPANY 25Y is thrust upon him in such a manner that he can not refuse it. A neighbor has died, leaving an infant daughter. By will he had appointed the banker guardian of his child and trustee of his estate for her benefit. Decedent held in- terest in a number of industrial concerns; these must be sold and settled and the proceeds invested in such a way that safe and sure income will be realized for the education and support of the child. It will be years before his ward will come to such an age that she will be competent to form business judgments of her own. In the meantime, if he accepts the trust, he will be held to account for the proper care of the estate as well as care of the child. One advantage is found in the administration of these trusts : they all call for the exercise of the same kind of conservative judgment, and they fit well into the banker's own business — investment; he now finds himself quite as busy with his new duties as he had been before his retire- ment ; in fact, so fully employed is he in looking after the demands of trusts imposed that his occupation is growing irksome. Such demands, however, increase. The failure of a large private bank brings a further request for his serv- ices. The many creditors, as well as the court having the „ estate in charge, urge his acceptance of appoint- mies of the ment as receiver. They point out his special trust com- fitness ; his acquaintance with the men and pany. ' . business firms involved ; his knowledge of the value of properties and securities held. An experience such as his seems indispensable to an equitable settlement. The parties concerned propose to allow him to employ such clerical service as he may wish, if he will but exercise the business judgment necessary to the proper adjustment of their interests. He accepts this trust also, but, in accepting, it becomes necessary for him to open a down-town office where he can be in regular attendance during a few hours each day and give attention and direction to affairs. Though clerical service is competent to manage the details, an ex- 18 258 FINANCIAL INSTITUTIONS perienced and capable financier must pass judgment upon all matters involving discretion. It is out of just such situations as this, such increasing demands for the competent management of trusts, that the first trust companies arose. The trust company is primarily an American financial institution. It was in this country that it had its origin. Ours was a new society and one in which business activity was a very prominent feature. In America there were comparatively few men of wealth and ability who belonged to what might be called an intelligent, , thrifty, leisure class. But in Europe a large proportion of „ . . „ ,, estates were held, and men found among their Ongm of the ' . ,,. tnist com- fellows those who had the time, intelligence, pany. g^^^j financial standing necessary for the safe and successful managing of trusts. In America the con- servative, well-established, wealthy class — the class whose time and wealth were not involved in the turmoils of trade and the risks of business venture — was so far wanting that some specially created agency to perform these services be- came necessary to the establishment and maintenance of trust relations. But the necessity that gave birth to the invention provided us with a very superior instrument — a financial institution as far in advance of the old-time per- sonal trustee as the modern machine is ahead of hand labor. Quoting from the Revised Statutes of New York, the term trust company signifies " any corporation formed for the purpose of taking, accepting, and executing Methods of /. ^, ,^', ,'^n ^' -, . -, ^ -f organization such trusts as may DC lawfully committed to it, —Legal steps and acting as trustee in the cases provided by necessary. , „ rn • -i ■ ^^ Jaw. io give a more comprehensive notion of the constitution of the trust company and of the care exercised in its formation, the manner of organization in that State may be described : " Thirteen or more persons," says the statute, " may form a corporation to be known as a trust company. Such persons shall, under their hands and seals, execute and acknowledge an organisation certificate in THE TRUST COMPANY 259 duplicate, which shall specifically state: (1) the name by which the corporation shall be known ; (2) the place where its business is to be transacted ; (3) the amount of its cap- j jT^g ital stock and the number of shares into which organization the same is to be divided — at least $luO,()00 certificate. jg required for cities containing less than 25,000 inhabitants, |150,000 for cities containing over 25,000 to 100,000 inhabitants, $200,000 for cities containing from 100,000 to 250,000 inhabitants, and $500,000 for cities con- taining more than 250,000 inhabitants ; (4) the name, resi- dence, and business address of each member of the corpo- ration ; (5) the term of its existence not exceeding fifty years ; (6) the declaration that each member of the corpo- ration ^vill accept the responsibilities and faithfully dis- charge the duties of a director therein if elected to act as such." After the acknowledgment of this organization cer- tificate, notice of intention to organize such a trust company „ ,r,. J, must be published at least once each week for four 2. Notice of ^ intention to consecutive weeks in a newspaper (to be designa- orgunize. ^^^ ^^ ^j^g superintendent of banks) published in the city or town where the proposed company is to be located. " Such notice is required to set forth the names of the pro- posed corporators, the name of the proposed corporation, and the location of the same, as set forth in the organization certificate. If there is any trust company or trust com- panies organized and doing business in such city, a copy of such notice shall also be sent to each trust company so or- ganized and doing business at least fifteen days before the filing of the organization certificate." Within sixty days after the acknowledgment, office of S^i^ one of the duplicate copies of the certificate of perintendent organization must be filed in the office of the of an s. County Clerk of the county wherein the trust company proposes to locate and do business. The other must be sent to the office of the Superintendent of Banks 260 FINANCIAL INSTITUTIONS of the State, together with evidence of publication and service of notice before described. " If such certiiicate is in due iorm and duly executed according to law, and is accompanied by evidence satisfac- tory to the superintendent of the proper publi- tioti " *''"" cation and service in good faith of such notice, he shall forthwith indorse the same over his official signature, ' Filed for examination,' with the date of such indorsement." " When the certificate shall have been filed, the super- intendent shall aBcertain J^7^o?7i the lest sources of info?'ma- 5 Erainina- ^^^^ ^^ ^*'^ command (1) whether the general Hon as to fitness for the discharge of the duties apper- ji ness. taining to such a trust of the persons named in the certificate is such as to command the confidence of the community in which such trust company is proposed to be located, and (2) whether the public convenience and ad- vantage would be promoted by such an establishment." Further, " The Superintendent of Banks shall, before is- suing the certificate of authorization to any corporation, ex- 6 Authori- ^™^"6 Or cause an examination to be made in zation to be- order to ascertain whether the requisite capital gi7i business. ^^ ^^^^^ corporation has been paid in cash ; and if it appears from such examination that such capital has not been fully paid in cash, the certificate of authorization shall not be granted and no such corporation shall com- mence business until such certificate of authorization has been granted. If so satisfied, he shall, within sixty days after such certificate has been filed with him for examina- tion, issue under his own official seal the certificate of au- thorization required ; . . . . which certificate so issued by him shall authorize the persons named therein to become a trust company as designated in the organization certifi- cate." When the certificate of authorization is given by the Superintendent of Banks, the persons named and their THE TRUST COMPANY 261 successors become a corporation, and in addition to the gen- eral powers granted to corporations within the State, liave 7. Trust *^^® following powers : (1) To be appointed and poirers to accept appointment of executor or of trustee gian e . under the last will and testament, for adminis- trator with or without will, in case of the estate of any de- ceased person, and to be appointed and to act as trustee of the estates of lunatics, idiots, persons of unsound mind, and habitual drunkards. (2) To take and execute any and all such trusts and powers of whatsoever nature or description as may be conferred upon or entrusted or committed to it by any person or persons, or any body, political corporation, or other authority, by grant, assignment, transfer, devise, be- quest, or otherwise, or which may be entrusted to it or trans- ferred to it or vested in it by order of any court of record or any surrogate, and to receive and take and hold any propei'ty or estate, real or personal, which may be the sub- ject of any such trust. (3) To take, accept, and execute any and all such legal trusts, duties, and powers in recoi-d, and the holding, management, and disposition of any estate, real or personal, and the rents and profits thereof, for the sale thereof, as may be granted or confided to it by any court of record, or by any person, corporation, municipality, or other authority, and it shall be accountable to all parties and interests for the faithful discharge of every such trust, duty, or power which it may so accept. (4) To act under the order of appointment of any court of record as guard- ian, receiver, or trustee of the estate of any minor, the annual income from which shall not be less than $100, and as the depository of any moneys paid into court whether for the benefit of any such minor or other per- son, corporation, or party. (5) To accept trusts from and execute trusts for married women in respect to their separate properties and to be tlieir agent in the manage- ment of such property, or to transact any business in rela- tion thereto. (6) To receive deposits of trust moneys, 262 FINANCIAL INSTITUTIONS securities, and other personal property from any person or corporation. These we may call the general trust powers conferred. In addition, there are what may be styled the sjpecial trust powers, growing out of modern methods of Fiscal corporation finance, and trust service demanded powers. r _ ' in the organization and management of large business corporations. These are as follows : 1. The power to act as the fiscal or transfer agent of any State, munici- pality, body politic, or corporation, and in such capacity receive and disburse money and transfer, register, and con- sign certificates of stock, bonds, or other indebtedness. 2. The power to act as trustee under any mortgage or bond issued by any municipality, body politic, or corporation; and, 3, accept and execute any other municipal or corpo- rate trust not inconsistent with the laws of the State. To give effect to these trust powers, and enable the com- pany to manage the funds and properties entrusted to it in such manner as to m,ake and secure and at the vowerT^^ same time provide an income to beneficiaries, investment powers are conferred as follows : (1) To loan money on real and personal securities. (2) To purchase, invest in, and sell stock, bills of exchange, bonds, mortgages, and other credits. (3) When moneys or securities are borrowed, or received on deposit or for invest- ment, the bonds and obligations of the company may be given therefor. (4) To lease, hold, purchase, and convey any and all real property necessary in the transaction of its business, or which the purposes of the corporation may require, or which it shall acquii-e in the satisfaction or per- sonal satisfaction of debts due the corporation under sales, judgments, or mortgages, or in settlement or in partial set- tlement of debts due the corporation by any of its debtors. With these authorizations and grants of powers, the trust company, after equipping itself with officers and agents for the safe conduct of its affairs, is ready for business. THE TRUST COMPANY 263 The first trust companies organized did not have their powers so broadly or distinctly defined, nor did they need The arowth ^hem. Before the development of modern of business of methods of corporate finance, before the pmiieT^"^' growth of the present complex organization of business, only the general trust relations were prominent. Insurance companies were the first to under- take the administration of trusts in lieu of personal trus- tees. Gradually, however, as trust relations became more highly developed and more frequent, the business of hold- ing and executing trusts came to be specialized. Within the last twenty-five years trust relations and trust companies have been multiplied. The vast expansion of corporate methods of business, the advantages offered by the trust company in the service of business institutions for the registration and transfer of stocks and bonds, the practise of holding trust deeds and mortgage securities for bond- holders, of receiving assignments of property for the bene- fit of prospective corporations which are in the hands of promoters, and for the purposes of reorganization and for the execution of voting trusts, besides the many services which they are able to render as funding agencies, fiscal and transfer agents for public as well as private corpora- tions, in the underwriting and disposition of stocks and bonds and the disposition of moneys, the demand for such services has directed large investment capital and the best financial ability to the trust company. As investment agents, the trust company acts in a double capacity. In the first place, it acts as trustee for its bene- Double in- ficiaries ; in the second place, it has a large cash vestment capital of its Own. The inducement to the in- relationa. vestment of money in the stock of the trust company — in making subscriptions to its capital stock — is apparent. The character of business judgment and of business enterprise necessary to the successful management of trust estates is the same as that required for the con- 264 FINANCIAL INSTITUTIONS servative investment of the funds of its managers. Capi- tal, therefore, that is seeking first-class securities and invest- ments would be attracted to the stock of such an institu- tion. To return to the concrete : Let us suppose that A had $500,000 of investment funds of his own. The same considerations that would lead men with capital to invest it in the stock of a trust company would induce them as managers of the company to receive deposits from those who had funds to invest, but who were willing to take a relatively small income and be relieved of the risk and trouble of management. By oiiering 3 per cent for time deposits the trust company has exchanged its own credit obligation for funds deposited ; by virtue of its better fa- cilities for safe investment, the company is enabled so to invest these funds that they may yield from 4 to 5 per cent. This on a large line of deposit would also give it a handsome profit. CHAPTER Xiy THE BROKER AND THE BROKERS' BOARD A BEOKEE is a special agent employed to make purchases or sales for another — his principal. Mr. Wanamaker wishes to borrow $500,000 for sixty days, with which to mak§ pay- ment on a cargo of goods received from Paris. ]Mo one person or bank would at the time have that amount of funds free for investment in sixty-day paper; moreover, from considerations of safety, it is the policy of banks and other note-buyers not to have a large proportion of tlieir funds invested in the paper of one person or business firm. To find purchasers for this amount of paper on broker^'^' favorable terms would require Mr. Wanamaker to leave his business house and spend time else- where which he might profitably use in his oflice. Instead of doing this, he goes to a note-broker — a man who makes it his business to find customers of this kind, one who keeps in touch with the note-buying constituency. The broker knows the kind of paper that the hanks and other note- buyers usually take, and about how much ; at this time, in fact, he may have a long list of buyers' wants scheduled on his books. For a small commission he undertakes to sell the notes for Mr. Wanamaker. Turning to the orders of buyers scheduled on his books, he first satisfies these by setting apart enough to fill them. Let us suppose that he already has customers for $200,000 of this kind of paper. He then takes down his " 'phone," and, by calling up one prospective buyer after another, has the whole remaining 365 266 FINANCIAL INSTITUTIONS amount disposed of in half an hour. His delivery clerk is then sent out with the notes, who, in exchange, brings back customers' checks, which are deposited ; thereupon re- mittance of the amount of funds desired is made to Mr. ^1^/^ /^ /^ A^yc ^ .^ ^JT ^ yj ^-^^to^ 7k7». y^fm ^.^ ^^ ffj^* Wanamaker for settlement with his Paris house. The notes usually handled by commercial paper brokers for large houses are made in uniform amount of $5,0( )0 each. They are drawn to the order of the " maker," and with- LETTER OF RELEASE. Philadelphia, 189 ^Ot 3ttu in COnsiaemtion of the sum of one dollar, to us in hand paid, the receipt whereof is hereby acknowledged, agrees to release, and hereby does release, .. from, all Udbility as endorsers on a note of .— ^ „ __ dated in the year eighteen hundred and ninety--. due in the year eighteen hundred and ninety' fcfr — _^ Dollars, and the said farther agrees to hold the said endorsers harmless on said note. out indorsement are what is known as one-name paper. When not executed to the order of the maker and a dealer THE BROKER AND THE BROKERS' BOARD 267 wishes to protect himself, he secures a release from respon- sibility on indorsement. The manner of conducting a transaction through a " commercial paper house " is illus- trated by the following statements of account: The first ■'.■y^i9x represents that Bodine, Altemus & Co. on May 29, 1902, bought of John Smith & Co. a note executed by John 'M Jones & Co., bearing interest at 4-|- per cent, dne Septem- ber 30, following; that the note runs 125 days, which 268 FINANCIAL INSTITUTIONS at 4^ per cent amounts in interest to $104.17. Allowing for discount and commission, the total deduction to be made from the fall of the note equals $90.63. This leaves a net cash payment of $4,909.87 on purchase of the note. The second statement is one of sale by Bodine, Altemus & Co., by which it appears that the terms were exactly the same as those of purchase, except that $1:^.50 is added for com- mission. Upon receipt of tlie $500,000 in funds — the proceeds of the note sale — Mr. Wanamaker has another problem to solve, viz., " How is this amount of money to be transmitted to Paris " ? This may be done by drawing that amount of gold out of the bank in New York where his account is kept, and sending it by express to the parties from whom purchases of goods were made. This would cost him $1 per thousand or $500 for transportation charges. If $500,- 000 of the bills of New York merchants against hrokm-^^'^' merchants of Paris can be found, he may buy these and then send them to his Paris banking- house for collection. By so doing the cost of transporting gold to Paris would be avoided ; at the same time the Paris merchants would avoid the cost of sending a like amount of gold back to New York. The matter of finding such bills against Paris merchants is given over to an exchange- broker. The exchange-bi'oker, who has a constituency that have foreign bills for sale, telephones around from place to place, and within a short time has the desired amount. For a commission amounting to a small fraction of the cost of shipping gold, $500,000 of good trade bills are obtained. After the goods have been sold, Mr. Wanamaker may have $100,000 that he has no immediate use for in his busi- ness, and he decides to invest the amount in stocks and bonds. Looking over the securities of companies on the market, he makes up his mind that Chicago, Burlington & Quincy Consolidated 7 ^ of 1903, @ 102, Chicago & Northwestern Sinking Fund 6's of 1929, @ 115, and THE BROKER AND THE BROKERS' BOARD 269 Central of New Jersey, common, @ 150, will make good in\'estments if they may be had at the prices named. But he does not know any one who has any of these for sale at these prices. To obtain these investments he leaves an order with a stock- and bond-broker. The order broker." '^' ^^ ^^ ^^J ^^J ^^ ^^^ stocks or bonds on the market at the prices named. At the time that the order is given none of them may be offered at the price ; but within two weeks the money market becomes close, and some of the holders of securities are willing to sell at such figures that the order may be executed. The broker charges ^ of 1 per cent for his services on delivery. Again, Mr. "Wanamaker, being interested in a textile factory at Worcester, may wish to purchase a stock of cot- ton for the year. He has contracts for cloth to fill, and desiring to take advantage of a present market for mate- rials for manufacture, he places an order with a cotton- broker for 500 bales at 5 cents per pound. In like man- ner, a person desiring wheat or corn will go to The produce- ■ u i iu i ■ • i. n -n broker. ^ gram-broker ; another, desirmg petroleum, will go to an oil-broker; one wishing to lay in a supply of coal may deal with a coal-broker, etc. Any property or commodity that has a central market may be the subject of a broking business. The business of broking has given rise to a peculiar form of institution known as a Brokers' Board. In early days the stock- and bond-brokers did business in much the same way that coal-brokers or real-estate-brokers do to-day. On receiving a consignment for sale they would go out on the street to find purchasers ; or, receiving buying orders, they would go about from place to place to find owners who had stocks and bonds of the kind wanted, and which might be obtained at the prices offered. The result of a morning's canvass, however, might give but small return. Coming to the coffee-house for luncheon, they would meet other brokers who also had buying and selling orders. It was found by ex- 270 FINANCIAL INSTITUTIONS perience that more business could be transacted at luncheon, or during a half -hour meal-time smoke with brokers than by a whole day's canvass. The advantage of bringing together the buying and selling wants of a community Board" '^^^ ^^ ^ meeting of brokers caused them as by common consent to meet at a central coffee- house to transact their business. But this was oftentimes unsatisfactory on account of the unreliability of some of the traders. The result was that, as business increased, an asso- ciation was formed with rules governing it which would insure honorable dealings among members, and at the same time give to each member the advantage of meeting the leading brokers of the place. The Philadelphia Stock Exchange had its beginning at a coffee-house. The sales of Government bonds and of TT- fg stocks in the newly organized companies after of stock the close of the Revolution was the business exchanges. ^\^\c}\ brought it forth. London stock-broking began with the foundation of the national debt under Wil- liam and Mary. Large corporate trading companies had been organized before this time, but the stocks dehihia' '^ere not traded in to such an extent as to give rise to a regularly organized broking business. With the flotation of the bonds issued for the purpose of raising funds to carry on the wars against France, and the 2 Th L appeals made to the public for investment in don stock these stocks, stock-jobbing became a regular busi- Exchange. ^ggg j^j London. This was soon followed by the flotation of shares in companies organized for taking advan- tage of the new territory made free for British exploitation after the success of the English armies on the Continent. The South Sea Bubble was only one of the projects that gave rise to the issues of shares which flooded the London market and made the business of broking one of the most important branches of enterprise established in the eight- eenth century. The London brokers first found rendez- THE BROKER AND THE BROKERS' BOARD 271 vous in the Royal Exchange, a building erected during the reign of Elizabeth as a meeting- place for merchants. In 1698 these quarters were found too small, and were conse- quently abandoned. For a number of years brokers col- lected in a place made famous by them, which has since been known as " Change Alley." A coffee-house opening on this alley was their favorite retreat for social and finan- cial chat. The New York brokers found their first central meeting-place at what has gone down in history as the " Tontine Coffee-House," at the corner of Wall and Water Streets. New York, like Philadelphia, early became a center of financial interest and, with this, for the business of stock-broking. Much conflict had grown out of the va- riety of commissions charged in the early transactions and ^ the irregular dealings of brokers. The begin- York Stock ning of the New York Stock Exchange dates Exchange. from a meeting of 24 brokers under a tree which grew opposite No. 60 Wall Street. This agreement is dated May 17, 1792, and is one providing for uniform commissions among the contracting parties. The force of such an agreement was to control the market, since the signers confined their trading operations to those who would conform to it. It was not until 1817, however, following the growth of corporations after the War of 1812, that a formal organization was effected. As business increased, with the floating of bank, canal, and railroad stocks, the outside brokers organized what was known as tlie " Open Board of Brokers." This was absorbed by the New York Stock Exchange in 1868, membership in the latter being increased to accommodate that of the older organization. During the civil war a special class of business grew out of the necessity for gold purchases and gold sales for for- eign trade, and for the payment of the obligations of the Government. The " Gold Board," as the association of brokers having charge of this class of business is called, was incorporated as a part of the Stock Exchange in 1879. 272 FINANCIAL INSTITUTIONS Later the New York Mining Stock Exchange was estab- lished, to accommodate the business growing out of the speculative mania for mining shares in the "TO's ; and with the discovery of Leadville and other Colorado districts, a second board, called the American Mining Stock Exchange. The decline of the popularity of mining stocks forced these bodies to look for some other branch of business. The fast- growing demands for petroleum gave them an outlet. In 1885 the two mining exchanges consolidated The Con- -^ith the old Petroleum Exchange as the Con- solidated T-l T TVT Stock and solidated Stock and Petroleum Exchange. JN ew Petroleum York therefore has two large stock exchanges Mxchange. ° . " . as meeting-places for brokers handling this class of purchases and sales. JSTot all the business, how- ever, is done on the floors of these two boards ; a large amount is transacted " on the street," as it is called — that is, the brokers not having membership in these organiza- tions will come together as of old at some customary place, and on the sidewalk or in the street they will bicker and trade, thus making exchanges for their customers. A stock exchange need not be a corporation. The New York Stock Exchange, for example, is only a voluntary „ ... association of members. It must, however, be Organization n . t • of a stock well organized. It must exercise complete con- exchange. ^p^j ^^gj, those. who enjoy its privileges, for it is out of the regularity of transactions that its advantages accrue. In the JSTew York Stock Exchange there is a membership of 1,100. As the membership is full, one may obtain a seat only by purchasing it from a member. One can not become a member, however, until he has passed the most careful scrutiny of the Membership Committee re- garding his credit, his financial responsibility, his business association, his reputation for honesty and fair dealing. In addition to the usual incentive for honesty in business, therefore, the stock -broker has the price of his seat as well as his whole opportunity for doing business staked on ob- THE BROKER AND THE BROKERS' BOARD 273 servance of business propriety and honorable conduct. No other class of men has the quality of business honor so high- ly developed. For contracts involving millions of dollars, only individual pencil memoranda are made, and deliveries of securities and remittances are conducted on these mem- oranda with the utmost confidence that contracts concluded by " finger-talk " will be fulfilled without question. The only possibility considered by members of the board is one of mistake, and as a precaution against this, an oflice clerk is sent out at the end of each day's business to compare notes with houses dealt with, upon comparison of which errors made are corrected without conflict or controversy. For illustration of plan of organization, the Philadel- phia Stock Exchange may be used. At the head of the . . ,. Philadelphia Stock Exchange is a president, Orgamzation ^ i i t i of the Phila- who Opens and closes the board at the regu- delphia larly prescribed time ; he preserves order, an- nounces failures of members, gives notice of contracts unfulfilled, and attends to their execution under the rules of the board. The board opens at 10 a. m. and closes at 3 p. m. Deliveries must be made before 2.15, ex- cept on purchases and sales for cash. The board has vari- ous committees to look after different departments of busi- ness and to see that its rules are properly complied with. These committees are as follows : 1. A Governing Commit- tee, consisting of 21 members, one-third of whom retire each year. This committee has general supervision of the affairs of the association, and is the court of final resort. 2. A Finance Committee, consisting of 5 members, which has charge of the funds of the exchange and the investment of any surplus funds in the treasurer's hands. 3. A Build- ing Committee of 3 members, which has supervision and control of the home of the board— has charge of repairs, service, etc. 4. A Committee on Admissions, consisting of 5 members, to whom all applications for membership, for transfer, or re-admission of suspended members are re- 19 274 FINANCIAL INSTITUTIONS ferred. 5. An Arbitration Committee, consisting of Y members, whose duty it is " to investigate and decide all claims and matters of difference between members of the exchange which may be brought before it, arising from transactions in bonds, bullion, stocks, or other securities, or from any transactions in money." This is one of the most important committees in the organization ; it serves as an inner court, so to speak. Like the courts established for the government of the old incorporated trading companies, it so far controls the conduct of members and arbitrates differences between them that it is seldom any matter of controversy gets before the regular courts of law. Upon their decisions are built up rules and precedents which constitute a code for business transactions, and which by practise and common consent regulate the practises of those outside of the board and find a final place in the written decisions of the courts of record. By reference to the plan below, an idea may be had of the floor arrangement of a board. A large part of the floor space is encumbered with nothing but rangements'' "^hat are called trading-posts. These, as the and office ap- name suggests, are posts set up on the floor ophrok&rs! around which certain kinds of stocks may be traded in ; as, for example, one post may be for railroad stocks, another for iron and steel stocks, another for municipal bonds, etc. (see posts numbered 1 to 8 in illustration). One having stocks or bonds for sale wishes to " offer " them on the general market ; to this end he will go to the post where such stocks are traded in and cry out his " offer " ; or if he wishes to purchase stocks, he may go to another post and shout out his "bid." It is this auctioneering and bidding on the floor of the board around these posts, or, in the case of a produce ex- change, in the " pits," that causes the uproar so often re- marked upon. The board is simply an auction-room, in which every member is an auctioneer as well as a possible THE BROKER .VND THE RUOKKRS' BOARD 175 2 O cnstmner. As a l)oard is a central point to whidi are brougiit the buying and selling demands of a givat city or of a conntrv, on the floor of the hoard may he heard' the concentrated outcries and the uproar of auctioneers of the many places which other\yise would he dealing in stocks and bonds ; it is this that makes a board- room seem so nuich like bedlam. On the floor \yi]l be found the brokers rep- resenting leading houses. At one side of the room are priyate boxes, in whicli will be found the clei'ks or operators, who haye direct communication with the ej O O O offices of members trading on the floor. From these priyate boxes the business of the offices will be com- municated to the floor- man, and purchases or sales on the floor will be returned to the several offices. On the wall of the Philadelphia Ex- change, beside the president's chair, is also an electric indi- cator, on which will lie found consecutiye nundiers repre- senting the various trading numbers of members on the lioard floor. When a member mi the flour is wanted, a button is pressed and a light flashes out the number of this member, to which he at once responds. The memlier on the floor, therefore, has to have his eye constantly turned toward the indicator as well as keep in mind the whole trad- ing situation on the floor ; besides, he must keep in touch with the business demands of the office. When business is brisk this is a difficult part to play. On a side-wall of the 276 FINANCIAL INSTITUTIONS board-room will be recorded the transactions (purchases and sales) of the local market, as well as those of other leading boards. The facilities for business and the business transacted on the several boards are very largely dependent upon the Oraani-atiun Organization of the broker's office. Customers of the bro- are not allowed on the floor of the board. ker's office. rj.^^^ ^^^ ^^^^^ .^^ ^^^ ^^^^ ^^ ^^^ broker. In what is known as a board-room (see page 278), usually in the rear of the broker's ofiice, are tickers, which give the quotations and the transactions on the several markets almost as soon as the business itself has been completed. The customer, therefore, is in possession of the facts of the market practically as soon as the broker himself. He is also in touch with the office members of the firm ; the orders of customers for purchase and sale come in from all parts of the country to the central market. Considerable of mystery surrounds the name broker. This is partly due to the fact that the ordinary individual rr^ docs uot emplov a broker to make purchases Tke specu- J_. •' '^ kitive side of and sales. When he wishes to purchase, he broking. g^gg ^q ^ merchant — i. e., one who has for sale a stock of things desired. When he wishes to sell, he sells directly to a purchaser without the intervention of a special agent. The mystery associated with the name is in a meas- ure due to the fact that a considerable part of a broker's constituency is made up of speculators. The facilities given to making purchases and sales, the arrangements for the distribution of market quotations and transactions on the various central boards, bring with them a class of dealers who endeavor to obtain an income from taking advantage of market fluctuations. It is this that distinguishes speculation from investment. An investor is one who purchases a property or business interest outright as a result of judgment based on " what the concern has earned." His proflts may come from THE BROKER AND THE BROKERS' BOARD 2T7 a rise in value of the property, or from income in the form of interest or dividends, but in the last analysis it is depend- „. ,. ,. ent upon the income or prospective income of Distinction ■■ ^ ^ between in- the property, ihe speculator, however, cares vestment and not what may be the income-producins; power speculation. . '' . » , . ah or earmng capacity of a busmess concern. All that he is interested in is a market fluctuation ; it makes no difference whether the property becomes more or less valuable — which way the fluctuation may go — so long as he may place himself in a position to take advantage of the rise or fall. Since this is the end, and what one may call his business, it is, usually, not to his advantage to pur- chase and pay for the property. He would so use his trading capital that he may control as large a block of stock or other property as is possible for the purpose of getting the benefit of the change in price. He therefore buys on a margin — a margin sufficient to give him control for such a time as, in his judgment, will allow of a fluctuation in his interest. It is this kind of buying that gives rise to a large part of the business of broking. It is to this class of transactions also that much of the flnancial uncertainty and misfortune of the past and the present is attributable. If one should go to a broker's office day after day, there will be found a constituency in the chairs of his board- ing room, or going in and out, who keep an eye on speculative the market to which may be traced a very large constituencj. ^^^^^:^^^ ^f j^js oj-^ers. The manner in which a market may be affected by these speculative purchases may be seen from a glance at the chart on page 280, which shows the organization of a single broker's business. This map, or sketch, represents the private wires connecting the vari- ous offices of a single concern over which streams of orders flow into the main office for execution and which find their way into the general pool on the board-floor. When fluctu- ations are great then trade is brisk. This is a common observation. Yet this trade is very largely a speculative THE BROKER AND THE BROKERS' BOARD 2Y9 one, and as fluctuations rise and fall, the capital which is used for speculative margins becomes gradually absorbed. The test of one's ability to remain in the speculation is found in his ability to keep his margins good. With these speculative orders pouring in there is a constant flow of capital toward the financial centers, which finally find their way into the conservative financial institutions. The capi- tal drawn from the purses of the speculating multitude finds final employment at the hands of the few who have the prudence and judgment necessary to conservative commer- cial and industrial undertakings. As a means of accommodating speculators who are unable to trade on large margins and yet who are anxious to gam- ble on the turn of the " wheel of fortune " in g^g„ ' the market, a class of business has been organ- ized which has its center in the " bucket-shop." This is nothing more nor less than a room in which quota- tions are given representing the fluctuations of the market which allow one to take chances on price movements. In this it does not differ from the regular speculative busi- ness in the broker's office. The methods differ, however, in that the ones conducting the office or " bucket-shop " are not in any manner regulated by a board, that they do not have their commissions determined by association rules, and that they take margins of any amount. Instead of having a wire or ticker that gives the official quotations of the cen- tral markets in a language that may be understood, and that is open to inspection, the bucket-shop has a private wire over which quotations are received by a telegraph operator. These communications may not be read by the customer, as in the case of the ticker, and therefore the operators are the only ones that have a knowledge of what is going on. At one window, therefore, will be a margin-taker— one who takes the money of customers and records the chances taken. The customer will then take a seat in the room and watch the board for movements in his stocks. Thus gambling in THE BROKER AND THE BROKERS' BOARD 281 New York Central the stock goes up two points. The man who sits at the instrument, beside the clerk who has re- corded his bid, calls out to the boy at the board what Hew York Central is doing. The office has it entirely within its own power to say whether New York Central goes up or down. The customer, therefore, is in a gambling-house which plays with loaded dice. In case there are others in the game who have up more money on the fall of New York Central than he had upon its rise, the returns will probably be declared in his favor. If the conditions be otherwise, he may have his margin " wiped out," and he will then be left to reflect upon whether he will " try the market again." CHAPTEE XIV THE INSURANCE COMPANY In previous chapters the nature of contracts of security has been fully discussed. Contracts of security for the payment of credit obligations are specialized 5'/„?,?r,frf forms of insurance. No better illustration of \}J t /to tt / (.l/vOOu concrete insurance may be found than the forms of personal security heretofore discussed as indoi'se- ment and guarantee. Morgan has taken notes from Gates for the payment of $300,000, with interest at 5 per cent per annum. He offers to sell these to Drexel for $305,000 — terms satisfactory — provided that Morgan will guarantee their payment. The guarantee of Morgan is a contract insuring Drexel against loss on account of default in the payment of the notes by Gates when due. An insurance policy is a contract wherein the insurer takes the risk in- cident to the happening of some event which will involve a loss. The risk on which a policy is taken out may be the non-payment of a credit instrument. A concern whose business it is to issue poli(des on such risks is insurance. called a Credit Insurance Company. A good example of such a concern is the American Credit Indemnity Company of New York. During the year 1900 this company took risks on $15,229,031 of credit contracts, for which it received premiums to the amount of $453,420. Its losses paid were only $75,352 — i. e., about one-half of one per cent of the' risks taken, A wholesaler 883 THE INSURANCE COMPANY 2S3 has an opportunity to sell a bill of goods on ninety days' credit to a retail house that is not well known to him. He recognizes a profit in the transaction, but does not care to take the risk of losing the account ; he therefore takes out a policy from a credit company which is in the nature of an indorsement of the credit of the retail concern. To obtain such a poHcy the wholesale house will make a state- ment or an exhibit of its books, indicating the average loss sustained during the last five years by failure of pay- ment of credit accounts. This rate or proportion is taken as a marginal allowance or " self -insurance " — i. e., the wholesale house will carry its own risk equal to the average for the last five years. In consideration for the premium paid, the credit insurance company steps in and carries tlie risk in excess of this amount. The company may require that the house shall sell to concerns only which have a com- mercial rating specified in the policy ; moreover, it may grade the premiums according to the ratings of customers. A similar form of insurance is that undertaken by com- panies in guaranteeing the accounts of building contractors in house-building operations. Instead of putting the re- tailer or contractor to the annoyance and necessity of hav- ing some friend guarantee his account, the wholesaler or house-owner pays to the insurance company a premium as consideration for the risk undertaken, and then makes this a part of the purchase piice. For the insurance company to have undertaken a single risk would have been as dan- gerous as for an individual to have guaranteed the credit. Perhaps the loss of $75,000 incurred by the company above referred to in the course of its year's business grew out of six or seven contracts. If separate individuals had under- taken and sustained these losses it might have endangered their business and brought them to a condition of insol- vency. The insurance company, however, suffered a loss on only one risk out of each five hundred taken. As shown before, the premiums received from the four hundred and 284 FINANCIAL INSTITUTIONS ninety-nine far exceeded the amount lost on the one policy where credit payment was not made. In fact, the pre- miums received by the company during the year exceeded the losses by $380,000. It is in the multiplicity of risks taken and the experience of business men as to the propor- tions of losses to risks taken, that a basis for conservative judgment is found ; it is from these factors that proba- bility of loss is determined. A highly specialized form of credit insurance is the Security Insurance Company. In this the policy is one of The Security reinsurance of secured credit. The contracts Insurance of security to Credits issued are entered into to oinpany. protect purchasers of credit instruments against loss from non-payment. These credits, together with their contracts of security, which are given to assure the pay- ment of the credit obligations, are then taken to a security insurance company, and, the risk being a satisfactory one, a policy is issued whereby the company undertakes to in- demnify the owners of these secured credits against any loss uncovered by the contracts of security. In other words, the insurance company guarantees that the security is suffi- cient to indemnify the owner of the credit contract against loss from non-payment. The Bond and Mortgage Guarantee Company of Brooklyn is a concern of this kind. A holder of secured credit, however, may feel entirely safe in the value of the property against which his contract of security runs — that is, his judgment may be insurance. *'^*^ ^^ property against which he holds a lien may be adequate to provide funds with which to pay the credit claim held by him in case the debtor should fail to meet his obligation when due. The only element of uncertainty may be one of title. He is not in a position to judge whether or not the party executing the mortgage has a perfect title to the property against which the hen is given. As a means of assuring himself of this he lays the transaction before a title insurance company — a THE INSURANCE COMPANY 285 concern whose business it is to search titles and to take risks of loss for failure of title, and to pay the expense of defending adverse claims. Upon investigation, a policy is issued and the holder of the mortgage is placed in a posi- tion of increased security. Such insurance is more often taken out by purchasers of real estate. A company of this kind usually maintains a complete set of abstracts of title to the real estate in the district where risks are taken by them. Being in a superior position to pass judgment on the nature of the risk, it may otier a low rate of insurance to the customer and at the same time protect itseK against net loss by the receipts of premiums in excess of the amount paid out on policies. To illustrate : The German- American Real Estate Title Company of New York sustained losses of only $25 for the year 1900, while during that time it received in premiums $17,668. The title losses of this organization from the time of its organization have been only $4,778, while the total premiums received by the com- pany have amounted to $598,761. The rates of insurance offered to the public are so low that one taking lien security or purchasing property outright can well afford to take out a policy which will guarantee him against individual loss ; while by apportioning the losses of the few individuals among the many insured, the company is enabled to pay expenses of administration, maintain a large title plant, and have for itself a remainder in profits amounting to something like 7^ per ce«t per annum on the capital in- vested in the business. There may be as many different kinds of insurance as there are forms of risk. Insurance concerns are organized DilTerent around risks incident to honesty or business forms of fidelity ; to injuries sustained in travel ; acci- rishs. ^gj^^ ^Q persons employed in factories or other hazardous callings ; to sickness, casualties, and death ; to risks of loss to property from fire, wind, lightning, water, burglary, breakage of glass ; to dangers to vessels and car- 286 FINANCIAL INSTITUTIONS goes at sea, etc. The associated companies known as tlie Llojds recently gave a notable illustration of the extent to which risk undertakings may be applied. For the corona- tion of King Edward YII many millions of dollars were to be spent in decoration and in preparation for popular spectacles, oa which the linancial return depended upon chances of weather, the health of the sovereign, and many other fortuitous circumstances. Before undertaking busi- ness of this kind — before building the temporary stands for spectators, placing decorations of flowers, and arranging displays of perishable goods that depended upon the occur- rence of the event at a certain hour and place — business conservatism suggested the shifting of the risk to concerns whose business it was to undertake hazards and to distribute loss to individuals over the profits of the many and make them a charge against such profits. Policies on this event, it is said, were written to an amount exceeding $50,000,000. The variety of risks undertaken and the contracts made to cover loss may be illustrated in another way. In the single line known as life insurance, there are issued by the several hundred companies in existence something over 150 different forms of policies, each of which is a slightly different form of undertaking. When we consider the various classes of risks around which insurance has been organized, and the various forms of undertaking within each class, the mag- nitude and complexity of the business can scarcely be com- prehended. B Every individual insurance policy or contract is a spec- ulation. It is a speculation of the most fortuitous kind — a T .T -J 1 form of risk that a conservative business man Individual risk and does not wish singly to undertake. In consid- speculahon. eration for a premium (a very small portion of the amount involved in the risk), a company undertakes to become responsible for loss in event such loss occurs. The company is in no better position, perhaps, to estimate with business certainty the happening of an event which will THE INSURANCE COMPANY 287 entail loss than is the individual himself. Each individual risk is a speculation to the company in the same sense as is a margin deal in a bucket-shop to the margin taker. Neither margin giver nor margin taker can tell which way the market will go ; neither can compreliend to an extent which will enable him to make a conservative judgment the facts and forces which affect the market. Both of them are certain, however, that there will be fluctuations in mar- ket price. If the price of the stock dealt in goes one way, the bucket-shop will get the margin ; if the fluctuation is in the other direction, the transaction yields a return to the customer. If it were possible to mark out the course of the mai-ket for the future ; if any individual could procure the data of business and could so well understand it as to allow him to make a conservative estimate, then for him a purchase would not be a speculation. It is here proposed to show by what method the uncertainty of imlividual risk is reduced to a collective certainty — in other words, how the speculation of business life is largely reduced by the application of the principle of collective insurance. Each individual risk is based on a highly speculative uncertainty. For this no data may be procured by which a conservative judgment may be made. Busi- Saftty of jjggg experience, however, has shown that insurance. -i ' ' among risks of a certam class the percentage of loss is a fairly constant one. For example, no one can tell what hour a particular building will be consumed by fire; lightning may strike it; spontaneous combus- tion may take place in some part where shavings have been left by the carpenters and water has entered, caus- ing fermentation and chemical decomposition; a mouse may have taken a match to its nest and striking it with his teeth may ignite the structure ; a lamp may be exploded ; an electric wire may emit a spark ; a hundred possibilities are present, any one of which may result in fire entailing total loss. While this is true of each and every building 288 FINANCIAL INSTITUTIONS in a city, it has been found by experience to be quite as true that among all buildings of a certain class, constructed of similar material, existing under similar conditions, the percentage of fires that occur within a given time — let us say a year — may be relied on. Among buildings of one class, one out of a thousand will burn down each year. This experience gives to the business man the basis for a conservative estimate — an estimate on which he can make a calculation of aggregate loss that serves as a foundation for one of the most conservative of financial institutions, the insurance company. With each class of insurance the problem for the manager or organizer of the company is one of so adapting its capital and its income as to be able to meet such losses as occur on the risks that his company has • undertaken. With each class of business this adjustment must be a different one, and must be based on experience that lends itself to a calculation that amounts to a business certainty. But having made such an arrangement, he may offer to those members of the community who may suffer from individual loss a perfect security based on the collec- tion of sharing results. If the manager of the company fail in such adaptation, or provision made for payment, then he is holding out an inducement that may lead his customer into a snare. There is nothing more uncertain than the continuance of life in an individual, yet this uncertainty and the risk attend- Tlie principle ^"^g ^^^^ have been reduced to a problem of busi- oflife ness certainty in the organization of the life-in- surance company. In 1654 Pascal and Fermat evolved the mathematical doctrine of probability, and in 1671 De Witt applied this to the probabilities of human life. It remained, however, for later years to establish from well-kept records and classified statistics the ratio of death incident to those living under definite conditions — a ratio which would serve as a premise for the application of the theory of mathematical probability to life insurance. THE INSURANCE COMPANY 289 The result is what is known as the mortality tables. These are the mathematical conclusions, based on experience, as to probability of death among various classes of men. While the life of an individual man, therefore, is uncertain, yet it may be counted upon as a certainty that 15 deaths will occur among a thousand men twenty-one years of age who, at the time risks are taken, are termed " healthy lives." As- suming that a company were to issue one thousand policies on a class of lives on which, as a business certainty, 16 poli- cies would have to be paid the second year, lY the third, and so forth, the number of deaths would increase each year until the remainder had been reduced by the deaths of something like twenty years, when the annual mortality would decrease. Finally, the probability is that between the ages of 90 and 100 years the last of the one thousand would be dead. To apply these results in such a way as to cause those who live to share the losses on those who die is the problem The"natural ^^ 'i^® insurance. For this purpose two meth- premium" ods are generally employed. The first is that ^level pre- known as the " natural premium " or assessment mium" plans, method, which implies that upon the death of each member of a society or group of insured, those who still remain in the society or group will contribute a 2)ro rata in order to pay the death losses on those who have died. If each of one thousand takes out a policy for $1,000, if these are young lives, and if during the first year only three out of the thousand die, than an assessment of $3.01 on the 997 remaining will be sufficient to pay the death claims. Leaving out of consideration expense of adminis- tration, etc., the purely assessment plan is an application of the principle of pro-ration of loss among survivors. The success of such a plan depends therefore upon keeping within the group or society employing the plan an increas- ing number of members, in order that as the policy-holders attain greater maturity of years and by death drop out, the 20 1 290 FINANCIAL INSTITUTIONS assessment may not rise to a prohibitive rate ; for if the society does not increase, with each death the number of survivors will proportionately decrease, and the rate of assessment would necessarily rise to meet future losses until the last survivor will be required to pay an assessment of $1,000 to the one next before him, and he himself would be left without protection. Many examples of the working of this principle are found within what are known as fraternal and assessment insurance orders that provide no reserves for Assessment ^j-,g payment of death claims. The Loyal insurance. -\r • t i- k Mystic Legion of America is an association organized in 1892. The record of death-rates, together with the amount of insurance in force, is shown in the fol- lowing table : Year. Amount of insurance in force. Death-rate per 1,000. 1897 15,419,000 5,903,000 6,:!50,000 7,753,000 .8,560,500 2.4 1898 3.9 1899 3.9 1900 4.3 1901 6.0 Let us compare with this a society that was organized in 1879 which, as to insurance in force, rose to a high rank, (had outstanding something like $130,000,000 in risks,) but which in later years has been losing in numbers, and the average age of whose members has likewise largely increased. An exhibit covering the same period shows the following result: Year. Amount of insurance in force. Death-rate per 1,000. 1897 151,612,500 44,033,500 87,294,500 17,073,500 10,736,500 26-9 1808 . . . 30.2 1899 82.0 1900 1901 40.8 43.3 THE INSURANCE COMPANY 291 These two societies may serve to illustrate the extremes in tlie working of a principle that is as certain as death itself. As stated before, the success of such an organization depends upon the numerical increase of its membership and the maintenance of a low pro rata of old lives. When, however, there is an aging of members or a decrease in numbers and a consequent rise in the rate of assessment, the result is to drive out the young and healthy lives and leave to the order only those whose age or decrepitude makes it to their interest to remain and renders them unac- ceptable to other companies. The second principle around which the business of insurance is organized is that known as the " level pre- mium " plan. The assessment practise is based TOsert'e ^^ what is known as the " natural premium " — companies, . . -r that is, the sum required for actual death losses incurred from year to year. These, as before noticed, in- crease as the insured grow older. The level premium plan provides for the collection of more than is requisite for the payment of losses in the earlier years of the policy and the accumulation of a reserve made up of this excess, which, with interest, will be large enough to make up the deii- ciency of later years. This fund, or reserve, is invested, and the income from the investment is set apart in divi- dends to increase the total amount, so that with this interest and dividends the reserve shall be $1,000 at the age of ninety-nine years, this being considered the date of ter- mination of all policies. ISfo better exjxisc of the working of this principle maybe found than that given in an address by Mr. J. W. ITamer before the Wharton School of Finance of the University of Pennsylvania : " As the reserve upon a policy increases, the amount at risk upon that policy decreases — the loss incurred at death being merely the difference between the accumulated re- serve and the face of the policy. " Perhaps a few figures will afford the best explanation. 292 FINANCIAL INSTITUTIONS " The ordinary life table premium at age twenty-one is $17.90 per $1,000, reduced by dividends. These dividends, improperly so called, are not profits, but savings derived from three sources : " 1. Collection of an interest rate greater than the as- sumption. " 2. A saving upon mortality. " 3. A saving upon expenses. " The salvage from these items, as it might be termed, is, in a mutual company, ordinarily applied in reduction of the gross premium. To simplify our illustration, however, I will, with your permission, dismiss further consideration of dividends and assume that there are none. " Let us, then, turn back to the annual premium, age twenty-one of, |17. 90 Deduct from this the apportionment for expenses, called the ' loading,' which is 4.63 Leaving the net premium $13.27 Out of this net premium is provided the cost of the first year's insurance 7.05 The difference $6.22 is the sum laid by at interest as the year's contribution to the reserve, reducing the amount at risk from $1,000 to $998.78. When this insured member has reached the age of fifty, he is charged the same net premium of 13.27 The cost of insurance for this year has increased to 10.10 Leaving contribution to ' reserve ' $3.17 "Previous years' additions, plus interest, have raised the reserve on this pohcy to $303, which, deducted from $1,000, the face of the policy, has diminished the amount at risk to $';97. "The insured member having attained the age of seventy-five, is still charged the same net premium of $13.27. His reserve has reached $680.07, which, deducted from the face of the policy, $1,000, has brought the amount at risk down to $319.93, but at his advanced age the year's THE INSURANCE COMPANY 293 charge for mortality upon even this small sum has become greater than the premium available. " The account is then made up as follows : " Reserve at the end of the previous year $680.07 Net premium, as before |13 . 27 Interest added to the reserve 27.73 Total 41 .00 Which also added to the reserve makes a grand total of $731.07 Deduct the estimated cost of insurance for the current year upon $319.93 37.06 and you have a balance or reserve of $694.01 reducing the sum yet at risk to $805.99. " The same process is continued until age ninety-nine, when, under the actuary's table, with 4 per cent interest, the reserve equals the face of the pohcy. The various tables used are not identical, the American table, for in- stance, stopping at age ninety- five." Many kinds of policies are offered involving combina- tions of assessment and reserve, of endowment and annuity. Application ^^ ordinary life, tontine, and other plans, but oftheheo through them and in them all may be found ^ifeimur- ^ne or both of these two principles. The ance. " level premium " plan, with its reserve, offers to the insured a perfect security against loss whether mem- bership increases or decreases so long as the reserve be perfectly protected, and the laws of the several States have been framed to secure this end. The rate of insur- ance on the level premium plan for the earlier years of the policy is higher than that of the assessment or " natural premium " plan, yet with this increased rate it offers a se- curity which eliminates speculative risk involved in the futurity of the company itself. Other plans of organization and adaptations to particu- lar lines of insurance might be discussed, but the few pages here given to the subject will allow of nothing more than a presentation of principles involved. The enormous re- 294 FINANCIAL INSTITUTIONS serves kept by the life insurance companies; the capital and surplus invested in fire, marine, and other forms of Tk n ancial ins'^i'^iice organizations ; the resources that are side of deemed essential to security and to the elimina- msurance. ^-^j^ ^^ ^]^g element of speculation from a busi- ness whose purpose it is to take over the burdens of specu- lative risks, have all contributed to make insurance com- panies the largest investors and the most conservative financial concerns in business life. The risks undertaken by insurance companies in the United States amount to betvi^een fifteen and twenty billions of dollars. The re- sources in the hands of the life-insurance companies alone on January 1, 1901, amounted to .$1,T54,662,712. These companies have a premium income of $324,723,954 per annum, and from their investments an additional income in the form of interest and rentals amounting to $75,- 874,303, making a total annual income of over $400,- 000,000. In capital stock within ten years, from 1890 to 1900, the increase has been over 50 per cent, while the annual income has increased from $196,938,069 to $400,- 603,258. The expense of management for the same years increased from $44,190,352 to $98,892,499. The excess of income over expenditure, including death losses, for the same j'ears show the following remarkable increase : In 1890, $62,729,898;. in 1900, $133,023,157. This excess of income over expenditure indicates the enormous increment that is annually being added to that part of life insurance based on the level premium plan. Within the ten years above mentioned the admitted assets of the 76 companies now operating under the reserve plan has increased from The invest- $'^'^0,972,061 to $1,742,414,173 ; in other words, ments of within ten years they have added one billion insurance dollars to tbeir assets. companies. t t i i f • t ihese assets are very largely held m the form of investments. A classification of investments is as follows : THE INSURANCE COMPANY 295 Real estate 1158,119,116 Mortgages 501,498,988 United States bonds 7,190,565 Other stocks and bonds 794,631,743 Collateral loans 64,488,774 Premium notes and loans 88,500,575 Total $1,614,429,761 Besides these items there appears among the assets of companies what is termed "cash in office and in bank." This item has a peculiar status. The laws of items of the several States require the insurance com- msurance panies to make a statement of investments, assets, liabilities, etc., in order that there may be a published record of their doings. Furthermore, the various States have appointed sj)ecial officers for the in- vestigation of the condition of insurance companies for the protection of pohcj-holders. In the rivalry between insurance companies a point is made of the character of their assets. Nearly all of the insurance concerns make advances to their agents. With the numerous agencies scattered through the country small advances made to each will amount to millions in the aggregate. In order that these advances may not appear in their true light — in other words, that it may not be placed on record that they are doing business in this way — many of the large insurance companies, being in control of banking institu- tions, take to the banks under their control the notes of the various agents on which advances have been made and, for the purpose of the statement made to the public, tempo- rarily discount these notes and have the amounts entered to their account as cash credits. These are then canceled by the return of the notes when convenience may serve after they have performed the service intended. While this may, in ordinary business experience, be considered an ille- gitimate practise, yet the practise itself has arisen very largely out of the rivalry between companies and the tend- ency of certain unintelligent inspectors to interfere in 296 FINANCIAL INSTITUTIONS what may be considered a' legitimate business arrangement, and one which does not necessarily jeopardize any of the interests of policy-holders or of stockholders. With the enormous holdings in stocks and bonds, and with investments in such securities limited by statute of the Insurance Several States, it may be well understood how companies as it is that what are called " gilt edge " stocks the security ^^^ bonds command a low rate of interest or market. dividend return on market price paid. The successful investment agent or investment manager of a large insurance company keeps his eye constantly open for opportunity to invest in accredited stocks and bonds at a rate that will return to his company an income which will produce a dividend to policy-holders and to stockholders. Moreover, a certain pr-o rata of the funds of insurance com- panies are loaned to speculators on what may be termed " call " or " collateral " loans. These have as collateral security listed stocks and bonds. The Equitable of ISTew York, for example, has outstanding on collateral loans $25,- 371,587, over one-third of all the collateral loans of the combined companies. Let us suppose that a margin of ten per cent is allowed between the market price of securities held as collaterals and the amount of advance. For a com- pany safely to make loans on a kind of collateral that is constantly fluctuating with the movements of market price, it is incumbent upon an institution making such loans — and most of the old line companies do make advances of this kind — ^constantly to keep watch of the market in order that the margin of safety may not be impaired. The usual custom is for such a company to have a corps of clerks whose duty it is to keep a constant record of all the stocks and bonds in which it is interested. This also serves the company as a record from which investment cal- culations may be made. Such power have the combined insurance companies in the market that were they to con- spire to such an end, every financial concern in the country THE INSURANCE COMPANY 297 might be brouglit to a condition of distress, possibly of bankruptcy. On the other hand, with the strong support of such companies the market, iinancial institutions, and the Government itself iind in insurance companies the greatest tinancial security. The effect of the enormous risks undertaken by the insurance companies, therefore, is not only to relieve the business world of speculative uncer- tainty in the numerous relations to which it is applied, but also, by the financial conservatism adopted to secure this end, the investment companies assist very materially in steadying the market and, in time of strain, relieving finan- cial distress. INDEX Accommodation, signature to note, 120 ; accommodation mortgage, 156. Appropriation, funds obtained by, 8V, 88. Assignment of note, 121. Balance-sheet, 152. Banlc draft, Bank of the United States, i;7. Banlc of the United States, illustration of note of first bank, 42 ; illustration of note of second bank, 43 ; illustra- tration of check drawn by Andrew Jackson on, 57 ; illustration of check drawn by Daniel Webster on the Boston branch, 58 ; draft of, 67 ; un- secured bond of, 167. Bill of lading, attached to draft, 143. Bonds Form of bond, 163; Tnist Company as agent of sale and trans- fer of bond issue, 164; private bonds, 165; unsecured bonds, 165; how bonds differ from other credit instru- ments, 169; security used in bond issues: (1) personal security of in- dorsement and guarantee, 169, 170; guarantee of Reading Terminal bond, 171; indorsement of bond, 172; (2) lien security, trustee necessary to lien security, 172; who may be trustee, 173 ; how corporate bonds differ from corporate shares, 173; real - estate bonds, 168, 174; general mortgage bond, 174 ; general mortgage of the Beading Company, 175 ; blanket mortgage bonds and consolidated mortgage bonds, 174^176 ; divisional bonds, 176 ; Collateral Trust bonds, 176 ; equipment bond, 178 ; car- trust bond, 177-179; car-trust bond of Kailroad Equipment Company, 177 ; of American Transportation Company, 179; debenture bond of Financial Company, 179-189 ; deben- tures of railroads, 181 ; income bonds, and how they differ from preferred stock, 181, 182 ; purchase-money bonds, 183 : improvement bonds, 183 ; gold bonds and legal-tender bonds, 188 ; coupon bonds as distinguished from registered bonds, 188; payment and extension of bonds, 185 ; bond extension contract, 188. Broker. The note-broker, 265 ; foreign- exchange broker, 268 ; the stock- broker, 269 ; the produce-broker, 269 ; other forms of broking, 269. Broker and brokers' board, 265-279. Broking. Nature of broking business, 265 ; organization of broker's office, 276 ; speculative side of broking, 276 ; distinction between investment and speculation, 277 ; the speculative con- stituency, 277 ; board-room of Haight, Freese & Co., 278; the bucket-shop, 279 ; chart of private wires of Haight, Freese & Co., 280. Bucket-shop, 279. Building Loan Association, 229-238 ; service of the building loan associa- tion, 229 ; distinguishing features of the building loan association, 230 ; conditions out of which the institu- tion arose, 231 ; the first building loan association, the growth and pres- 300 INDEX ent importance of the institution, 232 ; plans for making loans : (1) loans at fixed rate by lot ; (2) sales at auc- tion on bids of advance interest ; (3) awards to bidders of highest pre- miums on dues, 233 ; plans for the distribution of profits, 234 ; how profits are computed, 235, 236 ; how profits arc shared, 237 : plans for tlie Avithdrawal of funds, 238. Business. What is business? 3; viewed as a contest for gains, 4 ; necessity for law and order in business, 4 ; business law, 5 ; elements of success in business, 6 ; funds a necessary part to business equipment, 7 ; rela- tion of finance to business, 7-8. Capitalist, definition, 12 ; functions of, 90. Carnegie, Andrew, his theory of trus- teeship as applied to inheritances, 83-85. Cashier's check, 66. Certificate of indebtedness, Chatta- nooga Savings Bank, 46. Certified check, 65. Cheque-bank check, 65. Clearing-House certificate, 46. Coal -shipper's check, 61. Collateral gold certificates, 160, 161. Collateral gold receipt, 160. Collateral note, 123, 124; collateral judgment note, 126. Collateral trust certificate of Asphalt Co., 162. Commercial Banks. The commercial bank as a financial institution, 240 ; obstacles to business without a bank, 241 ; services of the commercial bank in a community, 240-247 ; profits of the commercial bank, 247, 248 ; equip- ment of the commercial bank, 249, 250 ; profits derived from invest- ment of salable credit, 251 ; kinds of investment it may make, 252, 253 ; magnitude of commercial banking business, 254. Commercial Paper. Sales of, as a means of obtaining funds, 109-148 ; promis- sory note. 111. (See Promissory Note.) Copper-sheet money, illustration, 19. Corporation. Financial advantage of corporate organization, 100 ; corpo- rate shares, 96-108. Credit. Definition of, 30 ; credit funds, 30-54 ; instruments of transfer of credit funds, 55-76 ; place of credit in modern finance, 74^76. Credit funds. Definition of credit, 30 ; illustrations of credit uses, 80 ; credit used as current funds, 31 ; essential characteristics of credit, 33 ; princi- ples of e.xchange as applied to credit, 34 ; value and price of credit, 35 ; basis of judgment as to value of credit, 35 ; result of favorable judgment as to value of credit, 36 ; '' security " and its relation to the value of credit, 36, 37 ; credit viewed as a short sale of money, 37-41 ; financial uses of credit, 41 ; forms of credit used as funds, 41 ; bank credit, 42-45 ; bank-notes, 42-44 ; bank accounts, 45 ; emergency bank currency, 45, 46 ; commercial emergency currency, 47 ; scrip, 47- 50 ; public emergency currency, 50- 52; commercial credit funds, 52-54; current credit accounts, 54; mutual credit accounts, 54 ; transfer of credit funds (sec Instruments of Transfer). " Credit the drawer" note, 118, 119. . Crossed check, 64. Definitions. Business, 3, 4 ; finance, 7 ; funds, 12; maintenance fund, 12; capital funds, 12 ; safe deposit, 12 ; capitalist, 12 ; financier, 12 ; funded debt, 12 ; a dollar, 25 ; a silver dollar, 26 ; greenback, 27 ; national bank- note, 27 ; credit, 30 ; credit security. 36 ; short sale, 37 ; bankruptcy, 41 ; panic, 41 ; capital stock, 96 ; stock certificate, 98 ; common stock, 100 ; preferred stock, 104 ; promissory INDEX 301 note, 111 ; protest, 129 ; commercial draft, 137 ; mortgage, 153, 156 ; bond, 102 ; insurance, 282 ; investment, 2T7 ; speculation, 278. Dividend check, 61. Documented bill, 14,2-146. Dollar. What is a dollar? 25; gold dollar, 25 ; silver dollar, 26. Emergency currency of banks, 45 ; commercial emergency currency, 47- 50 ; public emergency currency, 50- 52. Exchange as a metliod of acquiring property, 2 ; importance of funds as a medium of exchange, 3 ; funds ob- tained by e-whange, 89-191 ; ex- change of labor for funds, 90-92; exchange of tangible property and business interests for funds, 92-108 ; exchange of commercial credit for funds, 109-148 ; exchange of long- time paper for funds, 149-191. Exchange Bank of St. Louis, note of, 44. Finance. Definition of, 7 ; the relation of funds to finance, 7 place of credit in modern finance, 74. Floor plan of Philadelphia Stock Ex- change, 275. Funded debt, definition of, 12. Funding, example of, 11 ; limits to funding power, 89. Funds. Importance of funds for ex- change, 8 ; funds as a part of busi- ness equipment, 7 ; funds the subject of finance, 7-8 ; money funds, 11-29; definition of funds, 12 ; credit funds, 30-54; instruments of transfer of credit funds, 55-76 ; how funds are obtained, 79-190 ; funding institu- tions and agents, 195-297. Gift. As a means of acquiring prop- erty, 1 ; the method of non - in- dustrial and dependent members of society, 79 ; its use in the family organization, 79 ; between members of tribes, 80 ; for support of other non-industrial groups, 80, 81 ; gift, the funding method of dependents, 81 ; usually takes the form of funds, 82. Gift and inheritance, funds obtained by, 79-87 ; industrial importance of gift and inheritance, 85. Guarantee, as a form of personal secur- ity, 122 ; example of guarantee by indoreement, 122 ; guarantee by sep- arate writing, 122 ; guarantee as a form of security to bond issue, 169- 174 ; forms of guarantee to bonds, 172 ; insurance as a form of guaran- tee, 282. Ilaight, Freese & Co., Philadelphia board-room of, 278 ; chart of private wires of, 280. Inheritance as a form of gift, 82 ; the assumption on which inheritance rests, 82, 83 ; principle of trusteeship applied to inheritance by Mr. Car- negie, 83-86 ; laws of, 86. Instruments of transfer of credit funds, 55-76 ; customer's cheek, 55-62 ; form of, 56 ; manner of drawing, 56- 59 ; clieek of Andrew Jackson, 57 ; check of Daniel Webster, 58 ; checks drawn for special purposes : for wages, 60 ; dividend check, 61 ; coal- shipper check, 61 ; safety devices in checks, 61 ; receipts used as checks, 62 ; power of attorney to draw, 62. 63 ; the crossed check, 63, 64 ; cheque- bank check, 65 ; certified check, 65 cashier's check, 66 ; bank draft, 66, 67 ; letter of credit, 67-70 ; money order, 68 ; traveler's cheek, 70-73 interchangeable bank money-order 73, 74. Insurance. Meaning of insurance, 282 guarantee of payment of promissory note a species of insurance, the es- sentials of an insurance policy, 282. Insurance Company. Credit insur- 302 INDEX ance, 282 ; risk involved on account of non-payment of contracts, the credit insurance company, 282, 283 ; the principle of community responsi- bility applied to credit insurance, 284 ; the security insurance com- pany, 284 ; the insurance company a guarantee of sufficient security for payment of credit contracts, 284 ; title insurance, 284 ; advantages of this form of guarantee, 285 ; equipment for title insurance, 285 ; other forms of risk made the basis of insurance, the speculative character of individual risk, and the certainty of calculation as to collective risks, 286 ; safety of insurance based on principle of col- lective risk, 287 ; the effect of insur- ance to relieve the business commu- nity of speculative individual risk, 288 ; application of principle of col- lective risk to life insurance, 288 ; the mortality table the scientific basis of life insurance, 289 ; two methods of enforcing collective financial risk : (1) the "assessment metliod," (2) the " level premium" plan, 289 ; con- ditions under which the assessment method may be applied, 290 ; applica- tion of the level premium plan, 291 ; the reserve as an incident to this plan, 291-297 ; financial side of insurance, 294; investments of insurance com- panies, 294r-295 ; significance of what are known as " cash items," 295 ; in- surance companies as factors in the security market, 296, 297. Insurance policy attached to bill of lading, 144. Investment distinguished from specu- lation, 277. Invoice accompanying documented bill, 142. " Ironclad " note, 123. Jackson, Andrew, check on Bank of the United States, 57. Judgment note, 125. Labor. Exchange of labor for funds, 90 ; the problem of the laborer, 90, 91 ; saving as a means of obtaining capital, 91 ; importance of education and industrial training to the laborer, 92. Lease. Kelation of the lease to funding methods, 189 ; the lease as security for credit, 190 ; uses of the lease by credit stores, 1 90 ; dangers from lease purchasers, 191. Letter of credit, 69 ; draft list to letter of credit, 70. Long-time Paper. Long-time credit used to obtain funds for capital employ- ment, 149 ; illustrations of difference between long-time and short-time credit, 150 ; difference in character of security, 151 ; classes of long-time credit: (1) mortgages, 158-161; (2) bonds, 162-185. Memorandum, of note purchase, 267 ; of note sale, 267. Memorandum note, 124. Mint. (See Treasury of the United States.) Money Funds. Definition of funds, 12 ; essential characteristics of money, 13. 14; conditions on which funda- bility and value of money depend, 14-lG ; things that have been used as money, 16-21 ; the development of a standard, 22; the decimal system, 24 ; money system of the United States, 25-29. Money-order of Adams Express Co., 68 ; interchangeable bank money- order, 74. Money system of the United States, 25 ; gold coins of United States, 26 ; sil- ver coins, 26 ; minor coins, 26 ; United States notes, 27 ; national bank-note, 27 ; gold certificates, 27 ; silier certificates, 28; Treasury notes of 1890, 28 ; currency certificates, 28 ; fractional currency notes, 28 ; uni- formity of value of, 29. INDEX 303 Mortgage notes, 154. Mortgages. The term as used in the security market a misnomer, 153 ; illustration of mortgage note, 154; mortgage contract, 155 ; mortgages without separate notes, 156 ; accom- modation mortgages, 156 ; chattel mortgages, 157 ; farm mortgages, 157 ; mortgages on business property, 159 ; on mines and timber-lands, 159 ; parti-mortgages receipt, 161. Parti-mortgage receipt, 158. Partnership— sale of partnership in- terest for funds, 95. Philadelphia Savings Fund Society, 224. Power of attorney, Daniel Webster to his wife, to draw checks, 63. Promissory Note. Definition, 111 ; form of note as to parties, 111, 112 ; as to words of transferability, 113 ; as to words of promise, 114; as to date of making note, 115 ; as to signature, 116 ; non-essential clauses of promis- sory note, 117; "credit the drawer" notes, 118, 119 ; parts of note contain- ing contracts of security, 120 ; ac- commodation signatures and indorse- ment, 120, 121 ; guarantee of note, 122; collateral note, 123 ; memoran- dum collateral note, 124; judgment note, 125 ; collateral judgment note, 126 ; presentation for payment, non- payment, and protest, 126-132. Property, development of the idea of, to respect for " rights of property," race importance of, 1 ; how property may be acquired from others : (1) by gift; (2) by exchange, 1, 2. Protest of note, 130; notarial notice of protest, 130 ; notarial certificate of protest, 131. Eeceipt cut for money deposited on bond purchase, 165; on purchase of Glen Echo Railroad bonds, 166. Keceipt used as check, 62. Receiver's Certificates. Their nature and their uses, 187; distinguished from bonds, 187 ; security for, 188 ; advantages of use, 189. Release from liability on indorsement, 266. Savings - Bank, 209-228 ; successful business based on service rendered, 209-211 ; increased profits the result of increased capital, 211 ; savings as a means of obtaining capital, 212- 214 ; service of the savings-bank ; (1) safe-keeping of funds saved; (2) investment of savings in a form to make them productive of income, 215, 216 ; conditions giving ri.se to savings institutions, 216 ; first sav- ings-banks, 217 ; the safe-keeping of funds, 218 ; the investment of sav- ings, 218, 219 ; how to deal with a savings-bank, 221 ; rules governing investment of savings-banks; (1) as to safety of investment; (2) as to rate of income, 223 ; Philadelphia Savings Fund Society and the Na- tion's Bank of Savings of Allegheny, 224 ; mutual and joint-stock savings- bank, 225, 226 ; relations of savings- banks to the money system : (1) re- duction of the amount of money kept in hoards ; (2) influence on redemp- tions of the Government; (3) the savings-bank as purchaser of securi- ties, 226 ; relation of savings-banks to other financial institutions, 227, 228. Scrip. Of Easton & Wilkesbarre Turnpike Co., 47 ; sutler's scrip, 47 ; store scrip, 48 ; Camden & Wood- bury Railroad scrip, 48; Chesapeake & Ohio Canal, 49; Marion Change Association, 49 ; dividend warrant, 50 ; town scrip, Fayetteville, Ark., 51 : Port Deposit, Pa., 52. Securities. (See Long-Time Paper.) Securities ; definition of, 36 ; relation of security to valuation of credit, 36, 304 INDEX " 37 ; parts of promissory note contain- ing contracts of security, 120-126. Shares. (See Stock.) Sale of corporate sliares, 95 ; difference between cor- porate shares and partnership inter- ests, 98. Shinplastei-s. (See Scrip.) Silver-sheet money, illustration, 23. Speculation, distinguished from in- vestment, 277. Stock. Illustration of share in Bank of the United States, 97 ; common stock of Dnited States Steel Co., 99; non- cumulative preferred stock, 101 ; common stock of Gramercy Finance Co., 102 ; preferred stock, cumulative, of Gramercy Finance Co., 103 ; sig- nificance of common stock, 100; of preferred stock, 104 ; first and second preferred stock, 106 ; cumulative and non-cumulative preferred stock, 106 ; trust certificates, 108 ; other forms of stock, 108. Stock E,\change. Stock-brokers, 269 ; brokers' boards, 270 ; history of .stock- ctchanges, Philadelphia board, 270; London Stock Exchange, 270 ; New York Stock Exchange, 271 ; Consoli- dated Stock and Petroleum Exchange, 272 ; organization of a stock ex- change, 273, 274; floor-plan of, 274, 275. Tioga County Bank, note of, 44. Traveler's Check Of American Express Co., 70; of Brown Bros., 71, 72; of Knauth Nachod & Kilhne, 73. Treasury of the United States, 195- 208; relations of Treasury to mod- ern systems of finance, 195; its mon- etary functions: (1) coinage, 196; (2) providing a complex system of money ; (3) maintenance of a stand- ard as a means of securing uniform- ity of value, 197 ; the redemption of paper money, 198 ; machinery by which the three monetary functions of Government are performed: (1) a mint for giving stamp and genuine- ness to coins ; (2) a redemption agency for the free interchange of different forms of money ; (3) a rev- enue department to provide and maintain funds in reserve, 198 ; his- tory of the Independent Treasury, 199-200 ; work of its redemption agency, 201-203 ; the mint, its work, and organization, 203-205 ; revenue department of the Treasury ; relations of revenue to reserve, 205; possible demands on the Treasury for gold, 206; sources of revenue : (1) taxa- tion; (2) sales of quick assets; (3) sales of bonds of the Government, 207 ; inadequacy of taxation, 207 ; unavailability of quick assets, 208 ; bond sales the only adequate revenue power in time of strain, 208 ; relation of Treasury to private. credit. Trust certificate, 108; of Standard Oil Co., 105 ; first preferred, of Beading Co., 107. Trust Company. As agents of sale and transfer of bond issue, 164; service of the trust company, 256 ; its econo- mies, 257 ; conditions out of which institutions arose, 258 ; methods of organization, 258 ; legal steps re- quired in N ew York, 259, 260 ; general trust powers granted, 261 ; fiscal powers of the trust companies, 262; investment powers, 262, 263 ; growth of business of, 263 ; double invest- ment relations of, 263, 264. Value and price of credit, 35 ; basis of judgment as to value of credit, 35 ; result of favorable judgment as to value of credit, 36; security and its relation to the value of credit, 36, 37. Wages check of Lehigh Valley Rail- road, fO. Webster, Daniel, check on Boston Branch of Bank of the United States, 58.