FUNDS anb I I MilllillMWill iiiiilMwim ———————«—»<»— FA- CLEVELAND HO- '"] '^ .3 \ -1 .y ^ kJ CORNELL UNIVERSITY LIBRARY ^7 DATE DUE ^ lil7JF' ^!aeaatiss»j "*«»-*«— "*M|Mf,,,| 1 1 1 a.viii.iHViMUW i 1 1 CAYLORO PRrNTEDINU.S A. \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/cu31924030171510 Cornell University Library HG173 .C63 1902 Funds and their uses: olin 1924 030 171 510 FUNDS AND THEIR USES APPLETONS' BUSINESS SERIES. Funds and Their Uses. A Treatise on Instruments, Methods, and Institutions in Modern Finance. By Dr. Frederick A. Cleveland, of the Wharton Sclrool of Finance, University of Pennsyl- vania. Illustrated. i2mo. Cloth, $1.25 net ; postage, 12 cents additional. The Work of Wall Street. By Sereno S. Pratt. i2mo. Cloth. Trust Finance. By Dr. E. S. Meade, of the Wharton School of Finance, University of Pennsyl- vania. i2mo. Cloth. In Preparation ; THE MODERN BANK. The Insurance Company. The Trust Company. Credit. Modern Accounting. D APPLETON AND COMPANY, NEW YORK. FUNDS AND THEIR USES A BOOK DESCRIBING THE METHODS, INSTRUMENTS, AND INSTITUTIONS EMPLOYED IN MODERN FINANCIAL TRANSACTIONS BY FREDERICK A. CLEVELAND, Ph.D. WHARTON SCHOOL OF FINANCE AND ECONOMY UNIVERSITY OF PENNSYLVANIA WITH MANY ILLUSTRATIONS NEW YORK D. APPLETON AND COMPANY 1902 COPYEiei-IT, 1902 By d. appleton and company PuhlisJud Octohrr. 190Z 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 this, to modern funding methods. Nearly all of the great banks and banking systems of the past have grown out of public rather than jyrivate 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 afl^airs. 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. Kecognizing the need for the collection and coordi- nation of data in this branch of the subject, efliort 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 first of a series. Under the present title. Funds and Their vi PREFACE Uses, the aim of the author has been to give a wide survey of the field of finance. Looking upon the subject of pri- vate finance as one which has to do with the getting and the spending of funds for private enterprise, the materials of this book have been grouped around three central ideas, viz. : (1) What are Funds ? (2) How Funds are Obtained. (3) The Institutions and Agencies Employed in Funding Operations. The more technical fields of financiering — the several departments of financial operation — are re- served for subsequent essays. In Part I the various forms of money and credit used as funds, and the means of transfer of credit funds, are discussed. An under- standing of the nature of funds is regarded as funda- mental. Part II, which has for its subject " How Funds are Obtained," divides modern funding methods into two classes, namely, (1) those of the industrially and socially dependent, and (2) those of the industrially and socially independent — i. e., those who depend on active participation in business. The only method by which the former may obtain funds is that of gift and inherit- ance^ which is the title of Chapter IV ; in this the considera- tion is one of personal attachment and direct appeal. The funding method of the second class, those actively cooper- ating in industrial life, is that of exchancje. The considera- tion for exchange is one of value. In business there is only one way of obtaining funds — that is, to have some- thing to sell, something for which those having funds are willing to exchange them. To this method several chap- ters 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 train- ing, savings as a means of obtaining industrial capital, are PREFACE vii 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 P. Daw- son, of the banking house of Brown Brothers ; Mr. L. Gr. 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 I. — Introductory PART I WHAT ARE FVMl.^r II. — Money funds .... 11 III. — OUKDIT FUNDS . . 30 IV'. — Instruments of tiianski;r of ciikdit funds . . or) PART II now FUNDS ARE OBTAINED V. — Funds oiitained uy (Uft and iniikritance. ... 70 \'I, — Funds (ibtained uy exc'IIANuh M!t VII. — PUNIIS olvrAIN'ED nY SAI.KS (IK rOMMERCl AL TRKDIT . . 109 VIII. — Funds outainkd hv sales (U' lciN(i-time pai'kr . 140 PART III INSTlTl'TroXS AND AflKXT.'^ EMPLOYED IN FUXDINd OPER. I TJONH l\. — TnE United States Treasury IIT) X. — The sAYiN(!s-nANK . -CO XI. — The DurLuiNO loan associatton 339 XII. — The commercial dank .... . . 3-1(1 .VIII. — The trust company 350 XI \'.— TnE broker and the brokers' board . . . 3G5 XV. — TnE insurance company 383 Index . . """ LIST OF ILLUSTRATIONS Copper-sheet money .... Silver-sheet money .... Note of first Bank of United States Xote of second Bank of the United States Note of Southern Bank of Kentucky . Note of Exchange Bank of St. Louis . Note of Tioga County Bank . Certificate of Chattanooga Savings-Bank Clearing-house certificate Scrip of Baston & Wilkesbarre Turnpike Company Sutler's scrip .... Store scrip Camden & Woodbury Railroad scrip Chesapeake & Ohio Canal scrip . Marion Change Association scrip . Patapsco Bank certificate of deposit Dividend warrant .... Town scrip of Fayetteville, Ark. . Scrip of Port Deposit . Port Deposit loan, 1863 Check of Pulaski National Bank . Andrew Jackson's check on Bank of United States Daniel Webster's check on Bank of United States Wages check of Lehigh Valley Railroad Dividend check .... Coal shipper's check Receipt used as check . Daniel Webster's power of attorney Crossed check .... Certified check Cashier's check .... Bank draft, Bank of United States Express money-order LIST OP ILLUSTRATIONS Letter of credit Draft list to letter of credit American Express Company's traveler's check Brown Brothers' traveler's check Identification signature on same Knauth Nachod & Kiihne's traveler's check Interchangeable bank money-order . Sliare of stock in Bank of United States . Common stuck of United States Steel Corporation Non-cumulative prelerred stock Common stock of Gramercy Finance Company Preferred stock (cumulative) of Gramercy Finance Company Standard Oil Company certificate First preferred trust certificate, Reading Company Promissory note (non-negotiable) " " (without payee) " " (negotiable) " " (negotiable by delivery) " " (Joint and several) . Interest note Note with waiver of grace . Signature " His mark "... " Value received " and " without defalcation " " Credit the drawer " note . Accommodation, credit the drawer note Assignment of note " Without recourse " indorsement Indorsed guarantee Detached guarantee of note " Iron-clad " collateral note Memorandum collateral note Judgment note (simple form) Judgment note with power of attorney Collateral judgment note . Notice of non-payment Note with waiver notice of non-payment Protected note . ... Notarial notice of protest . Notarial certificate of protest Account stated " settled " paid LIST OP ILLUSTRATIONS xin biny hasc 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 Burnhaui, Williams & Compa 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 purch Same, purchase Glen Echo Railroad bonds Unsecured bond, Bank of United Slates 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, Freese & Company Haight, Freese & Company's chart of private wires . FUNDS AND THEIR USES CHAPTEE I INTRODUCTORY Among the first ideas that one gets from early associa- tion is a notion of respect for the " property " of others ; we soon come to know that there is a difEer- 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- trates the force with which ideas of property are early im- pressed on the race. No sooner, however, does the child come to know the use of things, or begin to long for objects that attract his TT notice, than he learns that the " consent " of MOW ' 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 in 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 doing at home. His request is refused. How is he to obtain the coveted fruit ? The shopkeeper helps him out of the difficulty. "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. He soon learns how the " consent " of shopkeepers may be won— a second method he has learned 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 it takes centuries for them to acquire metals for weapons and the few rude implements which they possess. We have but to reflect on the many thousands of things about the modern household, each of which contributes a share to comfort or pleasure, to realize how incompetent man would be to provide for himself. How long, for example, would it require 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 comes from years Exchange the j. . , , . . , . . , , chief method 01 experience and framing, working with pro- 0/ acquiring cesses and appliances that have been inherited from a society that has labored for centuries past — a cooperative society in which, without exchange, co- operation would have been impossible. In every instance, increased facilities 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 factory system, the larger return and more intelligent con- INTRODUCTORY 3 trol, coming from difEerentiation 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 big -with Importance meaning as this one. " If I could get the nec- of funds in essary 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 each 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 What IS ^ ^Q g^jj^ -fj.Q^ 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, 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 deal of truth. Each one has certain wants and desires 4 FUNDS AND THEIR USES which he would satisfy. On all sides are found the mate- rials which will serve. To gain those things which will satisfy desire, in an orderly and peacefxil way, is the aim of business. Under an industrial 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 first throw ; the one who lands his marble nearest center takes first shot. So the rules are laid down for the beginning of the game. After the contest is over each counts the marbles which he has driven out of the ring. Each player had put in two marbles as " counters." At the end, one had scored three ; ., . he is one marble ahead, while the other player Necessity for ' , law and had driven out but one — has lost a marble. order m There must be a rule for every possible situa- uUSiTl&SS tion 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. The same is true of football, baseball, lacrosse — every con- test for points. Not 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 apphed, 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 or 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 I'uns 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 relation. law'"^^^ The laws of business must be common to all people trading together. It sometimes happens that what are known as civilized people attempt to do busi- ness with those who do not understand their rules or who have different ones. This is like two sets of players enter- ing 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, else there will be trouble. The common advantages of trade are so great that no one industrial group can afford to shut them- selves off. In fact, no barrier is strong enough to preclude men from following up a business advantage when it pre- sents itself. This brings the people of all nations into con- stant 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 breach. That "honesty is the best policy " is a saying trite but true; whatever may be said of the attitude of one nation to another, no single individual can afford to raise even a suspicion of dishonest conduct ; by so doing he cuts himself off from opportunity — precludes himself from the advantages offered by the broader cooperation with his fellows,"cooperation made possible by confidence in fair dealing. To quote a saying of Mr. Croker, the Demo- cratic boss of Xew York : " Xo combination can be made 6 FUNDS AND THEIR USES where 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, hut 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 months 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 morality, his success as a politician has depended very largely on his recognition of the advantage of strict integrity between his political followers. The advantage of fair play is even more strikmg in business organization and control. In a game, two conditions are prerequisite to success : (1) An intimate knowledge of its I'ules. (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 " ai"e to be made are just as nec- essary to business success. To the laborer — the one who relies for income on the sale of his labor, he who subordi- nates his own business or talent to help another to work out his play for gain — a general knowledge of law may Ije of less importance than skill in the use of some particular tool ; bnt he must know enough of the rules to play his part well, otherwise he will not be able to render service to Eieiiienfs of ^^^ manager with whom he engages himself. sucer-Ks in The man wlio manages a business plant and seeks to obtain income from the sale of its products must equip himself in a different way. He may have less of skill in the use of some particular instrument than has the man whom he employs, but he must know the use of instruments, and know the manner in which they may be used by others to highest advantage in order to direct the efforts of his working force in such manner as to make largest gains without breaking rules. Like a football cap- INTRODUCTORY 'T tain, he must know how to manage his men and his plant in a way to take advantage of every opening. Business is Funds a cooperative. A man can not do business alone. ""^artof^ He must play a part. Whatever part he plays business he must be properly equipped for it. Business equipment. training, knowledge of the law, equipment adapted to the enterprise, materials, services, all are neces- sary, but in obtaining these the iirst 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 them by gift, as they would also the things which pennies will buy, but others pass them by. Those not moved by affection or, as sometimes happens, by charity, turn a deaf ear to appeals „ , ,, of this kind. In early years, " gifts " based on suhjed of affection afford a means quite adequate, except finance. j^ cases of inability of 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 on endowments of ancestors, 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 the spending of the 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 have in mind ? 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, 8 FUNDS AND THEIR USES and has had do particular use for this, yet he has been carrying 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 questions answered and the whole field of finance will have been covered. PAET I WHAT AEE FUNDS? CHAPTEK II MONEY FUNDS Experience will at once suggest that what we call "funds" must be something that will be ucceptod by others, in <\rch(ii\(» in gold he may i)urchasc the materials and equipment desired. He has " funded " his enterpi'ise. The whole system of finance grows out of the economy of exchange. Where commerce exists as a feature of busi- ness enterprise, where the effort of each member of a com- munity goes to produce that for which he is best fitted and relies on exchange of things produced for other things de- ll 12 WHAT ARE FUNDS? sired, 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. The word " funds " signifies any and all things which may be accumulated and which may be currently used in a com- munity in exchange for the goods or properties of others. As has been suggested before, the consent of funds*'^°^^~ both parties is necessary to an exchange. That which will serve as funds must have such quali- ties as will induce others to give their consent to part with the things which they own, in exchange. Funds which are collected or stored up to pay living expenses, or for the purchase of comforts and enjoyment, may be called " main- tenance funds." They answer the same purpose to the indi- vidual as a fund laid by for the " maintenance " of a manu- facturing plant. Funds which are collected or provided for business equipment are called " capital funds." The capital of a business concern is made up of funds contrib- uted to it for permanent use. A money or a credit reserve laid by for the payment (sinking) of a debt is called a "sink- ing 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 purchases 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 " finan- cier " ; he who hoards money is a " miser." A " funded debt " is one for which some definite and adequate provi- sion is made for its payment when due. To illustrate : A borrows $1,000 from Ji. A thereby procures "funds" for his enterprise ; he funds his undertaking ; he secures a working capital of $1,000. The instrument employed to this end is a contract for the future delivery of money MONEY FUNDS 13 which he sells to B for the funds desired. But before B delivers the $1,000 to A in exchange for the note, he de- mands that some definite provision be made for its pay- ment. 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 condi- tion 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 must be in one of two forms : (1) That which passes in the community as money will serve — in fact, money is a necessary part of a funding system. On the other hand, a funding system is essential to a money economy ; the two are interdependent. Enterprise could not be funded without money ; money could have no current use unless it could be accumulated — offl-^T brought together as a fund. (2) With the development of a system of money exchange and the accumulation of money funds under settled social conditions, another form of funds comes into use, namely, credit. 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 arrangements with them for forms of credit which will serve their financial needs more readily than would money itself. Under all modern systems of fhiance, by far the greater part of business en- terprise is " funded " by means of credit. The manner in which this is done will appear later. Monet Fmros Two qualities or characteristics are essential to money. In the first "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 Essential payments necessary to their business undertak- characteris- ings. A people can not use for their money tics of money. ^^^^ which they do not possess; the thing em- ployed must exist in such quantities that it may be had when needed. //;■ the second place, the money commodity 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 on it ; judgments of value of the thing used as money may differ as widely as its various uses, but value it must 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 profit by an exchange for it. Conditions on which the Fundabilitt and Value of Money 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- fund'must^ tion on which his judgment of value is to be aclnut of di- based. If, for example, some one offers a units. horse for $100, it must be known at once just 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 MONEY FUNDS 15 terms of dollars as we do now, tlie party having all of these 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 the community having sheep woiild 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 with 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 some common standard of judgment in esti- 'fimd'snuist mates of value. Without such a standard one be uniform trader would not be able to make himself im- "' *"" ' ^' 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, but by offer- ing the goods for a definite sum of money both parties find in the price a common standard for judgment. Unless, however, the money funds in which the offer is made are uniform in quality there could be no judgment as to the relative value of the thing offered and of the price to be received. In other words, as between 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 money used, would have no meaning at all. 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 16 WHAT ARE FUNDS? of funds. Lack of durability would render uncertain all judgments of value for future use. It would make exchange itself so far a subject of chance as to render funds must impossible all estimates of an advantage to be have dura- " gained " from the business transaction. When hility calculation of value for future use is made difficult, exchange as a regular part of the industrial system must be hampered to like extent. Money funds must be capable of being carried about or passed from one person to another without great inconve- nience. Nothing can serve as money unless f'undTmust *^® fund accumulated can be easily handled. admit of Lands, houses, and country estates can not be aJo"!"""*"^ used 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 in one degree or another. Some things are more easily carried about than others ; others are more durable. Still others may be more uniform or more easily divisible, but no one of these characteristics can 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 Money In a given community those things will be used for money which 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 pro- SMns vided 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 MONEY FUNDS 17 strength, and skill of those using them. The tribe is migra- tory and often leaves shelter behind. Among such a peo- ple the things best adapted to serve as money 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 fishing. With them the things that best lend themselves to use as money are dried and smoked fish or clams. These vrill last for years, and there is always a demand for them for food. When fish are scarce the dried products may be more highly valued ; when plentiful, they may 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 IjivG stocJc our financial terms have come from such a prac- tice : JMCUS was the Latin name for kine — cattle ; jjeeimia came to be the Latin word for monev ; we have from this such words as pecuniary, pecunious, impecunious, peculation, speculation, etc. They counted their money (cattle) by the head (per capita), and their kine was 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 presumably came from the Saxon scot, meaning cattle, and "scot" was used when taxes were paid in kind. Our expression, to go " scot free," comes directly from this use — 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 Agricultural ^gpg u^ed in Europe for centuries ; maize was products. ITT jTr-,iiA employed among the Indians of Central Amer- ica; olive-oil, cakes of dried fruit, coconuts, and tea have served peoples where they were largely produced. 3 18 WHAT ARE FUNDS? Both the advautages and disadvantages of the use of these primitive forms of money are apparent. By their . , , use many of the economies of exchange were and disud- secured and many of the diiliculties of barter vantages yii y^Q^e overcome : but still commerce could not the use of ' these forms be carried on with ease. All of the things used of money. possessed the equalities 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 division, but division, in most cases, could not be made with exactness. There was little uniformity, therefore judgment as to the value of a unit of kind was hampered. Their durability was not great. Many of them could not easily be passed about from hand to hand. Yet, with all these faults and disad- vantages, they were the best that the people using them could provide ; it required centuries of social and industrial prog- ress for these peoples to acquire those things that 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 hio'her devel- i i'^ opment of industrial processes, with the growth of artistic skill, metals are brought into use which possess qualities better adapted to serve as funds. Copper, tin, iron, zinc, brass, and other alloys, came to have currency. When these were comparatively scarce, and at the same time were to be had in such quantities as to allow of the accumulation of " funds " sufficient to serve the com- munity in exchange, they were so far superior to agricul- tural 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 value of iron, as compared with other things, was so small that one could not easily accumulate 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- change— i. e., it lacked so far the 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 with 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 f our-dollar-bill of 1714. Imagine one 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, follows naturally. The desire for ornamenta- tion is a general one ; it arises out of a desire for distinction among one's fellows. Those things which are used for decorative purposes are things not common. Things which will serve a particular people for ornament will be desired by all — that is, they possess quahties 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 polished the vertebrae of fish and used them for beads ; the American Indian polished the ends of black and white shells and strung them ; wampumpeag (sometimes called wampum, or peag) was used for money by the Indians. In Massachusetts, when the money which the English people were used to, came to be 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 durabil- ity ; they accumulate from one generation to another until they come to be held in sufficient quantities among the members of the tribe 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 tlie only money used. Gold and silver were first used for ornament alone. For many centuries they were too scarce to serve as money — to be accumulated as money funds. This is etill silver"'^^ true 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. They are universally esteemed ; 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. For 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 whicb 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 difficulties 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 f tlie 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 otfer 2 bearskins, 6 raccoon skins, „, , , 10 mink skins, and 15 skunk skins. With such The develop- ..,.„, , . ment of a a money it is diincult 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 would 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 plate on the page opposite is a half-tone 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 exact 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 difEerent 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 are constantly passing judgment on the comparative values of the coins used, and when the values of these do not cor- respond with the ratios intended, each will stipulate the metal he will 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 MONET FUNDS 23 prescribed weight and fineness, for which all other coins may be exchanged at a fixed ratio. The weight and fine- 24 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 on the development of higher intelligence, broader Tlie decimal association, and improved methods of social, system. . . . -„t political, and industrial cooperation. With modern methods even barter would not be as cumbersome as money 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 barter 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 comparison of the complex, lumbering English system of money with our own will serve to illustrate the economies introduced by later experience and better adaptations. Ex- changes and accounts in pounds and shillings and pence necessarily burden English commerce in an enormous ex- pense 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 startling. 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. Auotlier 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 Money System of the United States The central idea of the American money system is the " dollar." What is a dollar ? This question has been the ^ „ subject of volumes of discussion. The answer —The central fo the question has become involved in a wilder- fact in aur ness of theory — lost in a maze of abstractions — as a result of which the reader is led to believe that there is great diificulty 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 Feljruary 12, 1873 (Sec. 14), establishes "25.8 grains of gold" xVj-V 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 avoids all controversy about how much a dollar is worth ; it simply says that the dollar (the printed piece of gold containing 25.8 grains of gold Twww ^^®) "shall be the unit of value" in our money system. 26 WHAT ARE FUNDS'? But what about the other forms of money in our com- plex system ? lu the first place, there are six kinds of gold ^ , , . f coin, viz., the " dollar," the " quarter-eagle," the Gold coins of ' ' ' 1 1 Tc ? 1, 1 ihe United "three-dollar" piece, the "lialf -eagle," the States. u 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 (iVcnr)- The statute does not provide how much the several pieces enumerated shall be xoorth. 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 23ar" 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^^®* how much silver there shall be in each of of the Ciiited j%W fine, and what stamp and impress shall be " ^^' put on them. The law does not attempt to pre- senile 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. "Nickels," "three-cent" pieces, "pennies," etc., add to convenience in making exchange. "What is a nickel?" or "What is a penny?" 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 FUKDS 2T to exchange for gold coins at the rate stamped on their faces. Besides the gold, silver, nickel, and bronze metallic moneys there are nine classes of paper moneys in circula- Paver tion, each of which has a definite provision for money in form and design. Paper money is issued in circulation, 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 ^.^ (greenbacks) are promises of the Government States notes to pay to the holder a definite number of gold or greenbacks. ^^ gjlver dollars "on 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 I' ^hnoilf ^^"^^^^ 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 3. eold accumulated, against which an equal amount of certificates. ^^^^ 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 AEE FUNDS! Silver money is about sixteen times as heavy as gold money. The carrying about of large funds becomes impossible ; even small sums are very inconvenient to handle. By ^- '''!'/''"' allowins; a deposit to be made and certiiicates certijicates. ° . . -, . , . 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 vfhen 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 5. Treasury (Government allows him to deposit the bullion at notes of 1S90. . . „ the coinage value and receive certificates which entitle him to withdraw silver coin. Thus the Grovernment 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 llrtiflcaU? ^^'^® ™*y '•'^ deposited to the amount of $10,- 000 or multiples thereof, and one or more bills or " currency certificates " may be issucil to repi-esent the amount deposited. Thus, for the transfer of $1,000,000 it would require only one hundred hills of the lowest denom- ination. These, as may readily Ije 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 ^^^J "Were issued in fractions of a dollar, and rnrmt.cij Were derisively called "shin plasters." They notas. have been canceled as fast as presented at the Treasury, but there are still about $1.5,000,000 out- standing. MONEY FUNDS 29 Old demand notes and coupon interest notes are forms 8. Old de- '^^ currency similar in character to the green- mand notes, back, except that the latter were made to bear 9. Coupon in- interest ; the interest obligation is represented terest notes. ^^ ,^ coupon attached to the bill itself. They are in the nature of promises of the Government to pay gold or silver in exchange on demand. With none of these forms of money does the Grovernment attempt to say how much it is worth. It simply deter- T7ie uniform- ™™6s what a " dollar " is — i. e., it presents that a ity of value dollar is :33.'3:3 grains of fins gold with one-tenth incur system, of alloy added to prevent abrasion. It then agrees to exchange all forms of money, other than gold, for coins of that metal, and supphes itself with a reserve fund of gold to this end. The public are left to place their 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. CHAPTEE III CEEDIT FUNDS Cefdit 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, express 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 contract for future delivery of money) is exchanged for something Definition of j f ^^^ 'o^^g ^^^^^ u ^^ credit"— he credit. deals on his own promises to pay, or contracts for future delivery, instead of money ; one buys for (or on) credit — he purchases goods and gives his obligation to pay in exchange ; one sells for (or on) credit — he transfei's his goods to another in exchange for the promises of that other to deliver a definite sum of money at a definite future time. Illustrations of Ceedit Uses Morgan is a young man of sober, industrious habits, is well trained, 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 liis 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, llorgan 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. No 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,()00 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 tij Chicago, where he has the credit account transferred to a bank. He rents and equips an office. 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- C red if as cur- tisement 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 came to net him $10,000 per month. Dur- ing 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 valuable properties and securities. All of this has come to 32 WHAT ARE FUNDS? him from the use of credit, from untiring energy, from thrifty habits, and an unimpeached integrity. He now wishes to retire from the business of broking and to lead a more quiet hfe, devoting only such time 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 broking. He would not 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 recognizing an opportunity, a trade is made, whereby Gates agrees to pay $50,000 for Morgan's seat on the Board, and $250,000 for the business name of his firm. That is, Morgan retains all the securities, accounts, and investments ac purchase. " '' ' quired by him in course of business ; he sells his 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 ? ISTo. 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 respectively. This ($300,000) is agreed on as the purchase price of the business, but in consideration for the time that payment is deferred. Gates further prom- ises to pay 5 per cent interest on the respective amounts until 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 second year, and $105,000 at the end of the third year — $330,000 in all, principal and interest — instead of $300,000, the price agreed on, if payment had been made in money at the time the business was delivered. Now notice just what has taken place. Morgan has sold what ? E'othing tangi- CREDIT FUNDS 33 ble ; nothing that may be seen ; nothing that may be 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 broking. 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? No. What is it? ^^ Paper." One shp 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, except as to date of payment. But suppose that 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 evi/lence 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 Chaeacteeistics of Credit 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 have been exchanged for the other— they have not 3 ^ 34 WHAT ARE FUNDS? been bartered, yet no money has passed. They have been bought and sold, full payment has been given and received, (jj-^^H and the full title has passed. What represents arises out of the other side of the transaction ? As a result exchange. ^^ ^j^^ 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 till paid, or their values are lost by depreciation. To understand the nature of credit it may be woW 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 . ■ , strain and the responsibilities of an active pnnciples ^ of exchange broker. In his judgment he would rather have Z credit $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 price. 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 CREDIT FUNDS 35 why does Morgan accept them ? Gates offers them because he values $300,000 in gold more highly than the notes. Morgan accepts the notes because in his judgmeiit they are Value q^ite as valuable as $300,000 in gold. Morgan and price. indorses the notes and sells them for $305,000. -^jjy (jQgg ^.j^g 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 Avish 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 iude- ntdament o .» o ' ^ ■ ment is that Gates's promises to pay $300,000 with interest at 5 per cent are more desirable than his own business as a broker. But why ? Before an exchange can take place the conclusion must be reached ; but by what process? The thing to be considered is a con- obtain money tract for future delivery of money. The prom- for future igg is that Gates will pay $330,000 in gold at a 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. 36 WHAT ARE FUNDS? He sells his business ; he receives a claim against the future income of Gates ; he must, in estimating Gates's ability, therefore, consider his facilities for obtaining monej. But this is not all. There is a second consideration. Morgan must not only pass judgment on Gates's ability, InUnHtv^'^^ but he must also take into account Gates's dispo- 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 loilling. 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 i^ Morgan has "confidence" in the future Judgment— delivery, he is in a position to make a business onjiiince. ggtiniate as to the present value of a future 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 37 of tlie notes raise the purchaser's valuation to such an ex- tent that he was willing to add $55,000 to his offer ? 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] Morgan. This contract is one of the obligations known as personal security. ISTow the purchaser has confidence that the sev- „ , ,. , eral amounts promised by Gates will be paid security to at the time speciiied, and he offers Morgan credit. $305,000 for them. The effect of security is to obtain a more favorable estimate as 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. Credit viewed as a " Short Sale " oe Monet 'So 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 ^ (jo. are millers. They enter into a contract of 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 S8 WHAT ARE FUNDS? which he will receive for his output. Another factor he is able to calculate with substantial accuracy from business experience, viz., the cost of manufacture. If, therefore, 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 of wheat ^^ 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 & Schaifer, produce-brokers, for the future delivery of 50,000 bushels " So. 2 Hard Spring " wheat " on call " after thirty days, at $1 per bushel. But Brown & Schaffer 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 & SchafEer 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. have 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 & SchafEer sold " short " of " 'No. 2 Hard Spring " wheat at $1 per bushel for delivery on demand Settlement of ^^^^^ }^^^J ^^7^- ^hey did this because in tJie short sale their judgment wheat was " going down " ; they of wheat. ^shed 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 25,000 bushels. Nothing will satisfy the contract under which the call is made but " No. 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, wliich on that day happens to be $1.50 per bushel. In other words, before Pillsbury & Co. will agree to "settle," Brown & Schaffer 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 & Schaffer 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 & Schaffer), giving his fii-m's note for $25,000 (principal) and $500 (interest), due in ninety days in payment for the balance. The wheat tfmone^"^'^ 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 i In exchange, the company, in part consideration, has sold its contract for the delivery of $35,000 " 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 fiour, before the maturity of the note. Thus, the calculation is, the return 40 WHAT 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 tlemeiif the ' I'emaining 25,000 bushels of wheat due from same as in Brown & SchafEer ; he grinds his flour and de- 'mleof wheat, divers 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 delivei'y of the flour Kimball & Co. become bank- rupt. Nevertheless Pillsbury & Co. must meet their " short sale " of money — their two notes for $2.5,000 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 beheves 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 — iu other words, at a time when demands for delivery of money on credit con- tracts are large — the price of money may he forced uj) ; 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 pav anv A corner on . n ■ i i r ./ ./ money— Ft- price 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 simply 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. FiKANCiAL Uses of Ceedit 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. Very 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 Credit used as "Fottds" — Eakk Credit Bank credit is a form of contract for the future delivery of money especially created, to serve the business commu- 42 WHAT ARE FUNDS? nity 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 obligation 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 made 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 JjCti7liC~7lOtBS A O O 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 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 as:^- — -^ — .- ^J^i certain legal regulations and under such guarantees of government as to cause it to pass from hand to hand as " money." Till 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 ^■^^^^m^ijim\:^:^'^^ out its own notes. At the present time, however, the most common form of bank credit is the bank-account — a credit fund represented on the books against which the person owning it may draw checks in any amount desired. The " notes " of the bank are purchased by its customers, be- cause they may be passed from hand to hand in the com- munity as current funds. They are considered as good as 44 WHAT ARE FUNDS 1 money because tlae community believes the bank issuing them to be so conducted that it can at all times deliver the money contracted for if demand be made, and, being more ^GXBANKsrt - convenient to carry al^out than gold and silver, the notes are preferred. The bank-account adds to this convenience that of allowing the business man to draw for the exact amount needed. In the early half of the last century there were many abuses of public coniidence on the part of banks. Each State had its own peculiar laws, and many projects were devised to flood the country witli bank-notes that proved worthless. This caused the Federal Govern- W ., ^:->::,:^sQj.- -. ■-/ I •^^^rJ ment to pass stringent laws regulating issues and deposits. In the United States, at present, " national banks " alone issue notes. These notes are also called "circulation." CREDIT FUNDS 45 A bank-credit " account," sometimes called a deposit, is in reality not a deposit in any sense of the word. The cus- Bank- tomer of the bank takes to it money and accounts— " checks " (or other promises and orders to pay ejjobi s. money) which are owned by him and sells them ; he exchanges these for an " open account " at the bank. The customer desires a credit at the bank because it will serve him better than any other form of current funds. The exchange takes place by reason of the fact that each gains a business advantage by so doing. The bank can use the money and checks purchased (" deposited ") to greater advantage than can the customer, while the cus- tomer can use the current credit of the bank to better pur- pose in his business than can the bank itself. It sometimes happens that the banks are 2-educed to a condition in which their money reserves are threatened, and with this their contracts for delivery of money — i. e., their outstanding credit. Various temporary expedients are at such times resorted to, such as the creation of credit instruments that will l:>e received in " settlement " in lieu of money, but which are not contracts for the immediate pay- ment (or delivery) of money over the counters, f rrrr^ For example, during the financial crisis of 1893 the Marine Bank of Buffalo issued to its em- ployees a form of certified check for payment of wages and salaries ; instead of giving them money in payment of credit accounts, they issued a new contract for future de- livery of money, which the owner or borrower could pass in the community, in settlement of his own credit obliga- tions, until the bank should be able to take up these checks without impairing its reserve. Likewise, the South Chatta- nooga Savings-Bauk, not having money to deliver, on de- mand, to those wishing to withdraw, in August of that year issued a new contract for the delivery of "current funds " four months hence, a copy of which is given on page 46. This form of currency temporarily answered as funds to 46 WHAT ARE FUNDS? those receiving it, and the certificates were taken in " set- tlement " of the contract of the bank entered into at the THIS IS TO CERTIFY, THAT THERE HAS BEEN DEPOSITED IN THIS BANK FIVE DOLLARS, PAYABLE TO THE BEARER OF THIS CERTIFICATE, IN CURRENT FUNDS FOUR MONTHS FROM DATE. CHATTANOOGA, TENN. Auo. 19, 1883. SOUTH CHATTANOOGA SAVINGS BANK. THIS CERTIFICATE WILL BE RECEIVED ON DEPOSITfi!! ^.°F ANY DEBT OR OBLIGATION TO THE FIRST NATIONAL BANK, /jv ^ y^CITIZENS BANK & TRUST CO., THIRD NATIONAL BANK, (^ '"' J;WIEHL, PROBASCO &. CO., CHATTANOOGA NATIONAL BANK '^S^af CHATTANOOGA SAVINGS BANK, SOUTH CHATTANOOGA SAVINGS BANK. THIS CERTIFICATE IS SECURED BY THE DEPOSIT OF APPROVED SECURITIES IN THE HANDS OF T. G. MONTAGUE, PRESIDENT FIRST NATIONAL BANK, AS CUSTODIAN TO DOUBLE THE AMOUNT ALL SUCH CERTIFICATES. MANAGER, CHATTANOOGA CLEARING HOUSE ASSOCIATION, time the deposit was made. During the financial strain or " panic " in 1893, the enforcement of contracts for delivery of money would have caused the banks of ISTew York to sacrifice their entire securities to obtain the gold or other forms of " current funds." They had sold to their custom- o a •a B ta "1 3 O C No. 0000 $20,000. Loan Committee of the New York Clearing House Association. N^civ YorJc,_ This Certifies, that the. has dtposifed icit/i this Coi/uniftee, fnci/nti('si in accordance with the proceed- ings of a M':eiing of the Association, held June IStJi, 1S03, upon which this Ce?-t/ffcate is issued. This C'Ttiflcafe iniU be received in payment of balances at tlm Clearing House fo?^ the sum of TWENTY THOUSAND DOLLARS, from any ^frmbei' of the CleaHng Rouse Association. On f,he surrender of this Certificate by Iho . . . ... . depc-jiting Bank fibove named, the Commit- lee will endorse the amonnt as a pavment on _— the oblination of said Rank, held by them, ^____ and surrendiT a proportionate share of the collat-eral securities held Iherofor. $20,000. ers '' demand credits," " short-time " current funds with which to meet them ; to tide over this emergency, clearing- house certificates were agreed on, to he taken in settlement between each of the clearing-house banks. Since these cer- tificates were taken by the banks themselves, those owing CREDIT FUNDS 47 the banks also received them for "settlement" of credit claims, and they passed in the community as funds. Tlu rvtsidtiU andManajcvs |,roii..si to pj, the ham, on demand, .1 th« Offi. of Lhtii- Ticj^urtr, in bills currtnL id fcnnflyl. mi T>VE1ST\ PWE tEK'IS. Wllkuabarrc, Mircli Ut IfilO. Merchants and manufacturers may I'esort to the same kind of expedients during periods of financial stress as that above described with reference to issues by banks. They may "settle" their wages-accounts by means of "scrip," Emerneticy ^® ^^ ^^ called — i. e., pay a credit contract which funds— Com- is due with another contract for delivery of meicia . money or goods at a definite future time; and the various merchants or business men of the community, believing that the one issuing the " scrip " will be able ■■/'■'/. iK'Y to meet it after the financial strain is past, these will be taken in payment for goods and will pass current as funds. Every period of financial strain or business depres- sion since the Revolutionary "War has had its issues. After 48 WHAT ARE FUNDS? the "War of 1812 there was great financial distress, during which time the country was virtually without metallic cur- Fm D:-p,iM, July ^i «^.lSS->k-2%^-««^^-' It.'LJJJ^tt'^ ;! £> A - .165->-S«ii-^-*^^t>^' < reney. To meet this emergency business houses and con- cerns of e^ery 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 M'ere almost the only currency in use. The scrip of the Camden & Woodbury Kff//,l/>/i/VV//.("'''''"''"^i™""^^''''xJC ^ ■ ,-P Transportation Company and that of the Chesapeake & Ohio Canal Company are good illustrations of the form of funds in current use l)y 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- 1^ €ftT;sAu*.ElS?!; A Ai) OHIO TAN U sS ^ ^ s;- 0) ?», ^^ .Sfe-s^ ^ ;■ • •■■■'•|sf '^ff I posits of savings-hanks wei'e also j^ut into use as money in denominations to suit the eonveiiieuee of customers. An- T>1 li\B]D>l SMIfif^MlQSJATlDJ^j, Will p>y 'he lit.>ir.r. Twclvc .tiid a iflalt' tent*, i;/ /Ar - coufUer of either memhcr of /'<^ A.'^-rin'ioo. or at the Ojpci of ^^)- MMle, in Slal< Bank Xole.K wh,-n ^^ .-^^.v-.,^ j (ie amount of Fie- DoU-ars i.i presfifUtd. ^^"-^i^^^ Marum, Aluhowa, \'^:i i ; , ' '-" Trcax' rn . other form of currency is what is known as a dividend war- rant. It is intended to serve as funds without putting the i^S!KiSS53K^^KffiKi^^r:?i'5ss?!:':^:!a:5 p^ — "=^^^p^'WKKfS'?;*i'*r':":''-:*;^;*:*:'*;*z;i ''/,//,//, //^- Ay/if/ ./// ty///'r/////A^ /, ///, /I ./,ry/,// ^y y/r^ (///cttEi)fUc 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 officers 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 185Y, 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 52 WHAT ARE FUNDS? of money one or two years from date given, in settlement for credit claims due, and on which demand for payment l];i the wishes of the bank — it is an unnecessary encumbrance of whCn countersigned bv JH'Wuhelm PA-y^/ 'i. T b. « ONE HUN DRED awdFIFTY DOLLARS the paper which is intended to represent relations between customer and l)!mk only. The trimsactions between Jones and the bank's customer may be represented in some other way. A baidf will make no objection to the matter on the face of a cheek if it is printed or engraved, and has not to be written or inserted at tlie time it is drawn. The above form states the object foi- which the transfer is made. The large corjKirations of to-day liave clK^cks esp(^ciidly printed for nearly evei'y ai'connt against which drafts a,re made. Other forms, quite as unobjectionable and more IX-TEUME\T< OF TEAXSFEK simple in =ry".e. have iLe pai-|:i-jc5 of :li^ir :-;■_: red ink acrv.si the face, or e:-^-:-..-. ^-._l in Lalr-rvn. J22-" --. irBSf \/ — % 'zZ'.c-i^/c;^'/.^ l^^ Manv -..reTv device? have beea u-ed :•;■ prevent the fraad- tilent ajTeran;:. -f ■;-::e is. A cu-:> 'j.er may have an en- V -.- t-r ve'i check-form of Lis own. and will ii :i:v -;■ -r-' '" --'- bank thtir it may honor th'_.-e 'jnlv -n-hich are drawn on ihi- p:->?-/r:bed f-rm. Eu: even ti-en the p:es;r: .ei blank; may ire: into ::.e haod- of ino-e who -^vot:. ; ;i-e :keia for pnr;;.ose- of fr.ud. A^ a niean= of prevenring alierarion and ror^ery. the amonnt n.av be pnnche'i or cnt •'.■'zr. of *ne paper. Tk: been circumvented bv having.' the koie pnlp and new kirnre? cat or pnn'he-i : of -"^nk.er?. >'jn:e comnanies have :ke ■I witii paper :-nec^= .ini-.Te'i on ^ - '^f.^/-f£^Y ^ tkeirface=. The ' e?* device ver adC'rce'.k hovrever. "o preven: •■ raising ' it ika: employe-l by rke exnrc-;; corn:;a!ke- and rke Po=T-Okice Deparrnien:, Tkese will ke 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 aslhects"^'^'^ 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 ff^J^a^ '^^:l^d^^X ^..^^^QU- "^O. yf.,- T ii,i.i'& 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 lousiness to give to some one else the power to check against one's bank-ac- How to count. This may be done by giving to another aiithonze .^ power of aUofneiJ — i. e., the riajht or author- others to . ^ ^ '' '' ' " . , draw on one's ity to be your attorney, to represent you m 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 OP TRANSFER 63 The " crossed check " is a form of customer's check not commonly found in America. In England, however, it is 7 ™ 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 clieck 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? wliose 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 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 first be presented to that bank for payment. A law has been enacted in Eni;land which prohibits the payment of a crossed clieck by a bank against which it is drawn until it has been presented through another bank. If the drawer of a check knows the i)ayee's bank he will usually " specialize " it ; if his bank is unknown, the check is crossed " in blank," and the bank paying it is held for proper indorsement. The " crossed cheek " 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 foi- 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 TRANSFER 65 The cheque- bank check. which 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 meuts of to make them acceptable. It often happens, transfer of however, that a customer will find it desirable Jim s. ^^ ]2ave 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. ioiM^ciR^. 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 5 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 official signature, and charge The •• cei-i i- the same against the customer's account. This fied check " amounts to a transfer to the bank of the amount "■Cashier's drawn, and a guarantee on the part of the bank check." that 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 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 G-overnment 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 Cm Tlie letter of credit. fled. 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-Oflice. A photo-engraved copy of an Adams Express Company order is exhib- ited on page (iS. One may wish to travel in a foreign land — let us assume the esti- mated cost to be $1,000. It may not be conve- nient or safe to carry money enough to pay the expenses of the entire trip. For this reason 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 " 68 WHAT AKE FUNDS? instead of a " certified-check." It has its advantages over a certified -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 check. With the increase of foreign travel the letter of credit has become such a com- mon instrument for the transfer of credit funds that every one should be famihar 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 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 officer himself at the time that the draft is paid, and give a complete account 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 Li'^t" — 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 OF TRANSFER (ji* 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 J,',*7b*J V „ /. .., : yTi^. <^0i[^ I LONDON: .„. ■', .k'„//A /. ^ \ '/"'/"■ i.:r:'-: ..- , .. I fo Oji^^ SSSS^tsS'S^n.k&Si.'^- 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- TO WHAT ARE FUNDS 1 cation List " ; thereupon tlie cashier will ask him, in his presence, to sign a draft for the amount desired. After 25 «PR. nn\l> BY UORSAH. MBJES so: PABIS ; 8 MAy.iaiz mm,, mfia & cii. lombbk. 0^/) T,&mmi l!MIHEBfe&(!0.,?HIUD£L?affi, 2, 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. ljjy|oi[l»(l,-.l«r.ltf<^i.--t«. 49170 ■■§%W'^-: ,/y NOT aoOD. 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 TJie " travel- ers clieclc." INSTRUMENTS OP TRANSFER Tl business houses about as readily as the money of the coun- try. They are issued to the traveler in denominations of 110, $20, $50, $100, and $200, to suit the con- venience of th€ purchaser When issued, they are bound into a small check-book, and may be car- ried about as or dinary checks Precaution against loss and for identifica- tion of the holder of a trav eler's check is provided b\ having the pur chaser sign hib name in the up - per left - hand corner at the time of issue Whenthecheck is presented for payment he is again required to sign his name on the lower left-hand coi W)^ ner. The sig- ' ' . . -r^ natures must agree. 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 5^''y^^. 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 Knauth Nachod & Kiihne. It will be noticed by reference to the exhibit on page 73 that their check is, in form, almost identical with that of the American Express Company. INSTRUMENTS OP TRANSFER 73 Tlie 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- changlab'le partment, in 1901, was $274,500,000, while the bank money- same class of business transacted by the express ovd&v companies is estimated at $150,000,00< t 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 Kiilme, of Knauth Nachod & Kiihne, was among the first to recognize this opportunity. Calling TR.\VJiLEfrS CHECK. g£feS> So.nay flFTiQioZ/m's or EOf/IVA/JiXT r;.s lnII»; ^V: S > "ill 50i-'l»4 1 >53K -5 '208 30 1831 *9 1122, IS 2^ 10 »0 B(i ^ U- -—^- '*,« ■:-' ' ^ -#^^^yt '-.'■s ^/ar^.'u.-v "lus'' ccr^espor'tf w: P 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 JSTational Bank of New York acts as a clearing- house for the other members. In other words, the order is in the form of JS^ew York exchange which will be accepted anywhere in the country. The banks are in a position of WHAT ABE FUNDS? 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. €l|f BankrrsMmifl) @rilfl]Wsoriation. N? AHOu«rtM- r-is fllONEY ORDER 'Z.-i occ^ occcveo or r«c iu-.n of isiuc, ' 1 O O < 3 - ron TBAr.5MissiON •BO MYM t NT o» THE BANKERS MONEY OHOEH ASSOCIATION. ?frA ^^^^ HiHllllii'-™-''' — .^^"—ff^ S||SS||S||I ;;*r"2. BANCO NAC The promotion and capitalization of the United States Steel Corporation furnished the leading sensation of the p, opening year of the new century. The prin- nedit 'in cipal dramatic feature, however, was not its modern magnitude — other concerns of lai'ge proportions tl'7lCtflC6 o JL J had been developed — it was the suddenness of its rise ; within a few months scattered and isolated plants were reorganized financially, were grouped under wider and still wider management, until finally, by rapidity of change that fairly staggered the world, all concerns were ab- sorbed by one gigantic corporation — a billion-dollar " trust " was formed. Under a system of finance more ])rimitive than our own this would not have been possible. The de- velopment of our whole modern system of economy lay back • of it ; the grovrth 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 as- sume that it had been necessary to deliver coin to the amoimt invohed in the transaction. If silver dollars had been used, it would have taken one man fully five years to have counted 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 difficulty of count- INSTRUMENTS OP TRANSFER 75 ing and making change— would preclude, absolutel}-, 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 he 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 $(3,000,000 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 jJurposes. 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 financial and commercial ties such that the merchant or the farmer in western Colorado or South Africa may purchase goods in Hongkong, ISTew Y'ork, or Amsterdam without offering a grain of gold or silver in exchange, and with no greater it; WHAT ARE FUNDS? inconvenience than tliat 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 marks out the business method of the New World from the Old. PAET II HOW FUNDS ARE OBTAINED CHAPTEE 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 strange when we take into account the chief Primitive motives to their association. Tlie family, per- The family, haps, represents the most primitive group, but its prime purpose is not industrial ; its uniting bond is found in the instinct of h/ti' ; its race purpose is the propagation of kind ; its plan of organization is one of co- operation for mutual comfort and in the rearing of children. To the family, industry is incidental rather than an organic principle. Its cooperation is based on the sacriiice of self- interest, on devotion of the substance and energy of ancestors and adult members in the interest of the young and to the comfort of each other. The necessities of life, as between members of such a group, 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, within the family, com- mercialism comes to be a dominant motive, when self-sac- rifice and mutual devotion are relegated to a subordinate place, the family group itself breaks down — its component members attach themselves to commercial and industrial concerns instead ; the family organization is lost. Within the family, "gift" is the prevailing method of obtaining the means necessary to comfort and enjoyment. 79 80 HOW FUNDS ARE OBTAINED \ 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 the^trihe "" ^^^ dominant interest. Mutual protection is the tie that binds. Security against external foes and internal dissensions is found necessary to the high- est Avelfare of all. Within this larger group pulilie welfare forms the dominant principle of organization ; but the race advantages of a smaller group for the propagation of kind (the family) causes 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 vi^ant, of mutual devotion to the comfort and enjoyment of its members. Both principles, however, being essential to the race, the clan or tribe (based on the principle of protection) and the family (based on the principle of mutual devotion) are brought into har- mony one with the other. The protection secured by political organization gives to the family conditions more favorable — 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 " contributions " of their dependents. Other groups may he cited in which exchange is not necessary to harmonious and effective cooperation ; but Other mm- these, it should be observed, are also non-indus- industrial trial in character. The Church, the club, so- cieties — religious, educational, fraternal, and social, of which many might be enumerated — have for their dominant principle interests which are non-industrial. All of them are dependent on the industrial group for their maintenance and support ; all of them, however, have a FUNDS OBTAINED BY GIFT AND INHERITANCE 81 signilicanee in industrial developuient, and to each indus- trial cooperation is essential. These social groups have an importance to our suliject in that tliey increase the bonds of association, and in their purpose give direction and char- acter to the org-anization of industry. Being non-indus- trial, however, without independent income for their sup- port, a large part of their •• maintenance '" must come from " gift " or some other form of " contribution " as distin- guished from •• exchange." 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 ftuuling fii'st become aci^uainted. 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 for providing. In primitive societies both male and female are industrial. "With the development of art and invention and the means of supplying want in greater abundance, the father becomes the directing agent of pro- ductive 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 time 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 durinii- 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 maintenance and comfort. This first o-oes out in the form of providing training which would better fit tlie youth to move and act ^vith his fellows in the 6 82 HOW FUNDS AKE OBTAINED varied circles of life. In this the aim of parents is to so equip their ofEspring that tliey may enter into the complex relations of life capable of making judgments and of under- standing the conditions necessaiy to highest success. Their hope and their aim is to raise the young, through a longer period of depend e nee, to a place of highest indejxndence. This preparation, from the beginning, involves the use of funds, but in most cases the experience of the young is lim- ited to the one way of acquiring them — viz., voluntary con- tribution. 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, church or- ganization, social or fraternal society — every person, or non- industrial institution, that holds a position of ImilaiUiln /'0 quid quo. Let us suppose for a moment that you were about to begin business ; that you had not inherited any property ]\ltat mmi fron^i ancestors ; that you had received nothing he. offered for by way of gift with which to " make a start in capital. Yde." 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 c[uestion may seem entirely outside 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 Labor In going out for employment each laboring man is 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- tain himself as to serve with ability those to whom he sells FUNDS OBTAINED BY EXCHANGE 91 his labor, income will cease. The Urst 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 had 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 of 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 accumulation 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 the ordinary laboring man, the man who can not do more or better in serving those with means than every other man on the street can do, must compete with him in the market. 92 HOW FUNDS ARE OBTAINED Among these many competing for work, some will be found who are wilhng 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 they iffralninq °^^'^' *° *^'^> *^®^ '^'^^ '^^^* bring his standards of life below theirs, or he will have no margin of surplus — will be unable, by saving, to accumulate a fund for business capital. This is what we see the Chinaman and the Russian Jew doing in this country. 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 that 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, maintain a standard of life that allows you to still further 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. Sa.les 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, Sail' of noods J*^" ^^7 decide, after the first funds are saved, produced % to liegin business in a humble way on your own account. Possibly 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 hving were $o per day. It would not be long before all Yonr 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 8"> per pair, then, if there were no items of loss, you would have a profit of S^ on each. This amount, by a strict economy, might be added to your capital. AccmnuT- 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, and your ca])ital funds would gradually 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 re\"enue is from sales of the products of labor. It often happens that one might have propei-ties not adapted to capital use. A private residence or a large pri- vate park is inherited ; investments that yield Sales of ^ fixed interest or rental may be owned. These property not ^ i • i adapted to are not funds for busmess ; they can not be capital em- utilized to advantage in the enterprise about to ploymeiit. J~' •, , i ,, be undertaken, io one so situated the most practicaljle way of obtaining funds may be by the sale of these properties. By conversion of these forms of wealth into capital funds a business may be ecpiii^ped whicJi will produce income 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 could 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 him within range of a general market for his goods. He can not remove his plant, however, to advantage. Mnch of the The sale of machinery would not be adapted to water interest to power. He decides to sell his plant for what capitalize ^^ ^j]j \^y\^-^„ ag g, means of obtaining funds for ClllOttlB7', 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 nsing 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 The sale of likewise be disposed of. Let us suppose that iusiiiess the miller had been making a considerable in eies s. profit out of his business. But it appeared also that a still larger return might be had if he doubled his capital. His plant is a comparatively old one ; he is now grinding 50 barrels of flour per day at a cost of $1 per bar- rel. Yet, owing to his favorable location, he is able to make a profit of $1 per barrel in competition with others.. By the addition of as much more capital (say $50,000), by using this 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 services. 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, tlierefore, to obtain the additional capital by selling an interest in his enterprise. Fortunately he iinds another miller who has $5U,000 in funds, and who is looking for a business opening. The Sale of books of the mill are gone over and its present parlnership earning capacity is calculated ; the cost of im- in ei es . provement and the probable increased earning power is computed ; the whole situation is carefully can- vassed. Each of the two men look into the business stand- ing and reputation of the other. They finally come to an agreement. The first miller sells a partnership half -inter- est in his concern on 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 s ares. price which gives them a handsome return in profits to the company. Three-fourths of the wheat grown in the vicinity is shipped away for grinding, while 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 offer 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 $200,000 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- '^"^"/-'^ tributions to the capital funds or capital stock of a corporation. They have (1) sucTi 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 officers 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 affairs 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 :i \ i!'. i'.i 1 I ! '1 98 HOW FUNDS ARE OBTAINED shares may be sold for " cash." No one may transact any business for the corporation except a dnly authorized oiBcer 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 G-overnment. 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- certificates. 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 i • i /■ i • -, behoeen cor- being left to the properly appomted agents, poraiion and ^^d the stockholders are not hable for the debts partnership. . 01 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 who holds its stock. A partnership interest may not be sold without the consent of the other partners ; a stock 100 HOW FUNDS ARE OBTAINED certiticate may be transferred at the pleasure of the owner. The responsibihty 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 amoimt 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 oe secured m this way. bo Jong as it is made the corxmra- -jq 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 limit of profits. The fac- that the business itself is a local one, however, may so far confine the knowledge of its management and of the profit- able character of the business that but few persons having funds to invest will care to purchase shares. Therefore, such an industry as milling 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 dTk!"" 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 purchasers 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, the 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 ■v ^-. ^ ^ V ^ ^V H^ J. HIT 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 suffered 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- nfi> 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- '^toik'^^^ dient, however, was at hand — the issue of pre- ferred stock. The preferred stock of a corpora- tion is usually given to secure some obhgation of the company or to meet some 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 share of pre- ferred stock he will receive dividends on it before any divi- dends are given to the common stockholders. The con- tract of preferment, 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 — the 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 Kindu 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 there 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 ferredand which shall take precedence over both former second pre- issues, and in which the new issue shall stand ' ^'^ ' as first 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 that in case dividends are not declared at a regular time agreed on, and to the amount provided, that the amount of and non- dividend which " passed " — that is, which passes cumulative over as not paid — shall " cumulate " and become ■ an 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 officers, 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. ; $ 3 ; > '- -^V i ^ * J ■ ^ - -«: % i? «-^ ?W. * 5 ^ •^.S 1 *i!l5^<*it''s't ^ §1 108 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 erme i ^^^ 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 107. A reading of the certificate 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 OtJi-er forms ^p^jj^ ]y^ii fgj. ^j-^g purposes of this treatise it is sufficient 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. CHAPTEE VII FUNDS OBTAINED BY SALES OF COMMERCIAL CREDIT There 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. Like Tlie extent services and tangible properties, however, one of credit must find a purchaser — some one who is will- laboruiq ^ iig to exchange money or credit funds for a man. 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 " ISTo.'" 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 funds 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. You 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 "^^^^ 0^ direction of some industrial function ; ahilityand perhaps you have invented something, the use m egri y. ^^ which will be of advantage in production ; you demonstrate that you have the power to make 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 OF 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 capitalist of his abiHty to meet his contracts for future delivery. He offers to sell credit because he does not care to sell his tangible The man pi'operty Or business interests. The property icitli gives a double advantage: by its use a larger propel y. 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. Ceedit Instruments used as a Means of OBTAINING Funds A promissory note is a written contract for the futui-e delivery of a specified sum of money. The contract is similar to that made between speculators in ^romissory gi-^^jj qj. 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 ■ ^? '" one making the note is called the maker •. the parties. o . ' one to whom it is made is called the ^jayee. The maker usually signs his name under the writing which carries the promise. There may, however, be two or more 11^ HOW FUNDS ARE OBTAINED makers of the same note. A note that has two or more makers is called a 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 then 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. BiEDWBLL, Smith & Beown", by Vaughan Brown. 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 ' (^j^rf/ori ^/iUyU^*'^^ 1903, id thu^ m. 'demand' ■^iU. /A'€>-i^a^^ <%d<^^^- of payee] or order," or " Pay to the order of [name of payee]," indicate that the one named may, in writing, direct that some one other than himself is entitled to receive the payment. Above is a form of note that is defective, for SALES OP COMMERCIAL CREDIT 113 the reason that no payee is named in the instrument. This defect may be overcome by negotiating the note. Baltimore, Maryland, January 10, 1809. 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 Sajipsok". J. L. McKen-zie. The right granted to the payee named, to v^ — „, ^ ^Jtje First l^atioijal BaijK of Bett7lel7em, without di'falcalio)i for value trcrirrd ^^-^ y. ^ V^ of his wife. He therefore executes his note to her. She enters on its face, " Credit the drawer," and tlien indorses it. This allows John to obtain the fnnds 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 ai-e mutually interested in raising funds. They arrange for mutual accommo- dation by co-signature. The names of all the parties who are to sign are entered on a marginal slip, with the under- standing that the note will not be complete till all have signed, it being underst(.)o(l that each is to become respon- sible for a pro riitii only. The first to sign is understood to be the drawer, while all the others are accommodation SALES OF COMMERCIAL CREDIT 119 Date Amount, ^i! Time Due Discount . . . Days . . . $ . Eenewal of $ Reading, Pennsylvania. Leonard Grafton. Hiram Hadley. Peter Mclntyre Brown. Tyson & Mowbry. "William A. Custard. L. A. Marks. Latshaw Grocery Co. J. B. Samuelson. E. Browning. Alonzo Parkinson. Uriah Lundy. P. B. Cornlee. We, the undersigned, promise to pay to The Garden City Steam Papek and Box Mantj- FACTUEING Co., Or Order, month after date, the sum of Dollars, without defalcation for value re- ceived, at the Keystone Na- tional Bank of Eeading, 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 Drawee. The Garden City' Steam Paper and Box Manu- facturing Co. Treas. tf 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, Parts of note , . . ^ x x> 7 containing or guarantee — 1. e., m contracts xor j)ersonal se- contracts of ctmty. (2) In its Special clauses carrying trans- * ^' fers of collateral, powers to enter judgment by confession, without action, rights to levy execution, etc. — i. e., in contracts for lien sectirity. 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 securitf 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- Aecommoda- commodation signer." His friend agrees, and tion signa- the trade is made. In form the note is a joint tures. ^^^ — j^ ia^ct^ it is "accommodation paper." The maker's friend 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 G-rey agrees to deliver $1,000 to the order of Samuel Johnson one month after June lYth. Johnson takes the note to a " commei-cial 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 security. 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 $ll!J>.OJ?-_ BclUihem. /Vi2**t/ /^ ^ ii)0/ „,(^«^_ Ji't'tryizA — '^^Cdnyt after dak^ ^ _ f^omn^ I Pay to tlu order of J. THE FIRST NATIONAL BANK OF BETRLEHEM, witlwut defalcation /(»' value received. made payable " to order," the writing of the name of the payee across the back performs two services. In the first 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 by the Without recourse. order of." maker on the day it is due, if he fails to do so. Indorsement is usually made in blank — that is to say, with- out the words " Pay to the 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 y>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 clone by adding the words " without recourse." The efEect of this is to deprive the indorse- ment of its character as security. \ . [£> Release from liability on contract ^ v»^/>n.^ ^^^ ^^^..^ ten contract. If there L , -^^ ^ has been any advantage gained, '^ ^ any new consideration passed at /'-^ '^ -^ A,^ MyO' /. the time such guarantee is made, '^^^^' .^ the contract will be vahd and the /^«4^ ^^^t^-tt^ guarantor may be held for its pay- <:^,i£^^5 /^_^ ment. Without consideration the guarantee is void. The guarantee is usually in form of a separate writing and not made upon the note itself. FO'^ VALUE 'RECE/VE'Df. -- hereby guarantee the prompt payment, at ■matttriiy, of the foUounng described note , executed under seal, — oiid endorsed by- ; and hold bound by this guarantee and endorsement, ike same as though such -.wte were not executed under seal -i8g It often happens that it is of mutual advantage to pledge "collateral securities" (stocks, bonds, or mortgages) for the SALES OP COMMERCIAL CREDIT payment of a loan instead of asking personal securit}- or exeenting a mortgage. This is done by offering a regular promissory note, to which a contract is added notl^*""'^ 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 s s c.a|5 § ■== -3^ sV 5-s ! «> ° ^ o o _ .P 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 to notice," to the maker of the note, " and apply the proceeds in payment " of the note, " together with interest charges incurred thereon." Provision is also made for the disposition of the surplus. This contract, together with the property in 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 Memoran- stamp revenue act was in force. It was thought dum collat- to contain no promise, therefore to avoid the 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. Has this day oL _ advanced to the sum of___._ Dollars, collaterally secured being entitled lo demand a return of the said amount, with Interest ar 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 " 0. 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 OF COMMERCIAL CREDIT 125 the coiirts it is highly probable that for the purposes of the act it would have been declared an evasion of the tax. Added to the ordinary form of note of promise for the future delivery of money is often found a clause in the na- T , , ture of a confession of iudsrment for the prin- Judgment -, note. cipal amount, with interest, and cost of suit. ^250.= Jaoksboro, Tennessee, May 1, 1897. One year after date, for value received, I promise to pay to Jonas Greer, or bearer. Two Hundred 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^^^^^ ^^^ j^^^^_ 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 notewith of default. The effect 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 be {^^U^'C^^ f^Z^^t^ iTi'C^^ ' ^ . ' . . ' . - - ' - - -«« /A^ HOME mm\V 5flNK ot Roiersiord, ra. wrmotrr defalcation. ^*Lue^EceivED^ jjid '^■^n"cna"r'lZll'^'^A!\t!^^"%V«l^^^^ "r TX.' , Vr ID Bert CuliL with reiCJiM m^^ 1-2P, HOW FUNDS ARE OBTAINED necessary 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 ha\e made it illegal for reasons of public policy. The following exhibit is unusual in form in that it combines a collateral contract with power to enter judgment without action for any deficiency on sale of collateral. y fey? p i,M«ffu/,i./ A'tc^'.-fix^ T^ctdaLe-c^. for VaJu« recclveil, wllhout Deralcation. And wilh Ibe Torcgoing Obligation ^ hai4 delivered to eald ^■. wll.>l.rjl KCurlly foi iti. p.rmFal of IhV iimf on Ihf Jiy il btcome. dui. whirh colliKrab J hereby lUllioriK arj cm(H,l..r the hotdti of ihU P.0 mliiaTV Sole lpio.[Jed ihi umc be nol p-ild SI maliiillvl lo idl li>d tnn>rc> 11 pubUc or priviu ulc,wilh°ut funtiir i.ollcc or icr'a, 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 6j^ from date, for value received. And the cosigners 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. ^^^^^ Stkaxger. Peter Loxgeellow. John E. Ceaxdall. 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 jcro^es-^ec/; this is done to give formal evidence that the note was present- ed for payment and that payment was refused. Protest is a formal declaration made by a notary public into whose 9 130 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 the 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 S BdtJehem. Pa.. Qt^^t^Ui ,/ 7^1- ^■t{tty» after date \/:.-..,pr(mtise to n ^ -^ " ^ - A.. Q^l Pay to tke crif^ .^.-S^^&ft»fcif*:^^^J_«=?^r:J<*r^*<=!^^ THE Wm MWrnis Biffl OP BETHLEHEM ^oz AC Dollars^ witlumt defala^oi^or value received. 9l, e F.O. ADDiESS.. 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 /f /I J Philadelphia, /(t<^./ 7 190/ At the request of the Holder, ^be Centennial IRational ffianf? J, the undersigned, Notary Public for the Commonwealth of Penna. have this day protested a _...Z''Xr^-2_ ^or %J... Q O , AnttdJaM^JJ. 190/, drawn by. /r'^^^tVp J^TT"-^ 'k__ (the same being due, demanded and refused), and you as endorser, will be looked to for payment, of which you hereby have notice. D. S. LINDSAY. Real Estate Broker. ^rPlease notify the other oarttes «..,>. No. 14 South Broad Street to the maker to make formal demand before turning it over to a notary, even though the note is made payable at the SALES OF COMMERCIAL CREDIT 131 bank. For self -protection, banks make it a rule to protest all paper received from another State for collection which is not paid when due, unless ordered not to do so by the T^ O T TMTNC A "V J NOTARY PUB C, 1 No. 14 South Broad Street, U. O. LiJNUoAY,! REAL EST..T& oROKER, f Rolhsoiilld Building. ^nitcd plates afj ^ntijrica. .^-nM^-^/(c^-^ 1 ^ ^^.4^.^v^. p^^J,^^^ BE IT.KNOWN, That on the day of the date hereof, at the request of THE CENTENNIAL NAT. BANK, the holder of the original ^tO-^^ . of which a true copy is above written. I. the oudersigDed, \oljn' Putlic-for th£ Ccn.momvejith of P:nnsyli:Jnu, by lawful authority duly commissioned by the Governor of Penna. , and swom, residing io the .City of Philadelphia, daring the usual hours of business for such purposes, caused the same to be presented at ^!ct^3Tv>£^ '^l^Z/^tcTvA^ /aituJ^ and demand made for the payment thereof, which was refused and answer made Whereupon, I, the said Notary, at the request- aforesaid, have Protested, and do hereby solemnly Protest, against all persons and every party concerned therein, whether as Maker. Drawer, Drawee, Acceptor. Payer, Endoraer, Guarantee, Surety, or otherwise howsoever against whom it is proper to protest, for all Ex- change. Re-eichange. Costs, Damages aod Interest suffered and to be suffered for want of payment thereof :-Of which' demand and refusal I have duly notified the parties interested. Thus done at^ ProtesUdga the City of PhUadelphia, the jy^ d«yof AcA. tfO/ A^. Notaty Puj/t 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- 132 HOW FUNDS ARE OBTAINED junction that the instruction is to be clipped ofE 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 mhce 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- Advantages 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, iggory 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 therefore 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 tlie credit of the maker and make his future offers of credit contracts 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 COMMERCIAL 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 indoi'se 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 Ceedit Accounts The commercial account has already been discussed in its character as/^tnds — i. e., as a form of credit used for the purpose of making purchases and payments. The promis- sory note, on the other liand, has been treated as a form of credit used to obtain funds. Both are contracts for the future delivery of money. The first, however, is an un- written or oral contract, for which there is no evidence ex- cept the memoranda or memory of the parties, while the second has a note or writing which is signed by the party bound as evidence of the agreement. 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 formally executed contract, it may be presented to the maker for payment ; it thereby serves the payee for funding purposes by resale or by payment made under the contract when it comes due. To restate the difference : The commercial account has for its end the single purpose of serving its maker as " funds " — as means of purchase or payment ; the promissory note performs the double service of obtaining funds for present use for its maker, and that of obtaining funds for future use for the payee. The com- mercial account, however, being a contract for the future delivery of money, must have some form of expression of this side of the agreement. It is an unwritten contract for future payment which is used as funds ; in exchange for it 134 HOW FUNDS ARE OBTAINED goods are given. How will the one wlio 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 account stated. This is simply a copy of the memorandum, or a statement from memory, of credit received in exchange for goods or services. This statement is presented to the purchaser for payment. It thus becomes an instrument in the hands of the one receiv- ing 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 pre- sented 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. Accounts stated. Mr New York, July 1, 1897. Joseph Geayson To John E. Black, Dealer in Boots, Shoes, and Gents' Furnishings. Dr. 1897. June 2 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 K. 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 135 85 of his credit for a pair of "Eex" tan boots, 81. 5t) of his credit for two neckties, etc. During the month he had received, according to his own account, 81 T of Mr. Grayson's credit in exchange for goods. He now " states " the account to Mr. Grayson— i. e., presents a copy of memo- randa to him for payment. The fact that accounts stated are simply the memoranda of one party to the transaction leaves room for question as to their accuracy. For example, Mr. Gravson Accounts J ii . "i - , „ , . settled. ™'\^' <^eny that he gaye S,s of his credit for the trousers purchased on June 2^ ; he dis- putes the account, claiming that he agreed to pay only giT.oU. Mr. Black's clerk may recognize the mistake and correct the error, thereby reducing the account stated to 816. on. But Mr. Grayson prefers to have the account stand over for another month before payment of the amount acknowledged to be due. To place the account stated beyond future controyersy, and to show that the amount due has been settled or agreed on, Mr. Grayson marks on the face of the statement " 0. K.,'" adding his initials " J. G." Xow the " account stated " takes the form of a written contract for payment of 81''. 50. At the be- ginning of the next month Mr. Black renders a new state- ment of account, in which he enters the amount agreed on as balance due as "■ balance as per account stated," adding the amounts of credit pm-chases subsequent to July 1. In ! i Mr. Joseph Gratsox ^'ew- Yoke, August 1. isy:. To JoHx E. Black, Dealer in Boots. Shoes, and Gents' Furnishings. Br. July 1 Balance as per account stated. SI6 50 14 1 suit of clothes 30 \ 00 14 1 Knox hat 5 00 Amount due August 1. . . -Sol 50 136 fiOW 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 purchase 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. ■^ ° »- u O I i3 ^ ■« no. cjTZ>Tf.._ Philaielphis, Janoiry % (?^ / ^T!Je pflierioap /leademy of politieal aijd Soeial SeieQeef^sT For Annual Dues for year ending December 31, 19 (J / 1 S5'<30. Received payment,- « 19 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-off," 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- Diie-Ulh 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 OP COMMERCIAL CREDIT 137 $51.50. • New York, August 1, 1897. Upon settlement of account, this day, with John R. Black, 1 acknowledge the sum of Fifty-One Dollars /•„% to be due and owing to him by me. Joseph Geayson. 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 drafts. ^^ 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 Eoss 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 Ross is owing him $500 due on November 1. Williams 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 November 1, please pay to Lawrence Williams Three Hundred Dollars, and charge to the account of $300.2; 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 I3y HOW FUNDS ARE OBTAINED his account against Jones, but it also serves Jones as funds for tlie payment of his account to Wihiams. 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 recei\dng 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 ISTew York 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 l\ew 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- „ . , .„ cate, so that in case one is lost the other will Foreign hills. ' , , , , . , . , . , „, . reach the party to whom it is addressed, ihis 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, 1S38. 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 OP COMMEECIAL CREDIT 139 its President, Nicholas Bid- die, andits cash- ier, J. Cowper- thwait, issued three bills requesting S. La u don, of London, to pay to M. Eobin- 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 4, 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- Sight-htlls 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- ment 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 OF COMMERCIAL CREDIT 141 to which the drawer becomes the indorser, and the acceptor is the principal party to the contract. Acceptance is made by writing across the face the word " Accepted," together with the name of the party accepting. It is usually dated, and very often the place that 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 Security for . •' ^ -T . .n , mi 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 acce-ptance and im payment. 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 lien security be added to the con- 14:2 HOW FUNDS AEB OBTAINED tracts of personal securities. These collateral contracts may be ofEered as security for acceptance only, or, as in case of " sigbt-drafts," for both " acceptance " and " payment." a 2 § o o o o O O o (0 N r< to o <^ 1-t t-l S „ » §> ^ 05 *■ bt /^ © v^T' u .r* 9 , *J • ev» ■H « O <^ Z e • o tS s X • 73 •ri s ei W (l> c ■2 V o ta £> Q) a li H H rf ;: •rl h JS CU H -H o » w O. H p a. .>« bn >> a, c pi <0 U e o •H ■S H e u tM § H •0 w (D W O e !!> .-1 rf U p^ «! P. O «H <« «s •H o ■!> 04 o o in (M d b Id g s^ s^ ^,^ 05 a Q x: * V V3 ■P +> o V) +> <0 « o Vi &1 05 W o U) c» •rt tH rH SALES OF COMMERCIAL CEEDIT 143 A draft thus secured is called a "documented bill." The exhibit here offered is of such a bill " secured of ex- SbljPPet), Id appannu gonl ortcr '^V*<^aMtloa.bj^\c-'<>t^t..CC^L*^^^'^^ board of thB PAJJAMA KAIL KOAD StemmM. .. (J3(/i..^,>,^;^^ __ , _or BDj Of the OompunT'* Stcamera, 0 rart of New Totk, and boQnd for OotoD, V. S. O.^To Buy J^U- ^ 't^iner to 8t«sm«r, uiiO rromGtcwnaTto Bbore, anil Ia toucli at Ponor Porta), unto toe fort ol Oulon (ttao K-strtdnis of govcmmania, uulH of God, onamlea, swcutlatt, beat Of hDlde, vBtmln, ralti or spray, not bariBtry, Or* at sea or In port, dlsastcra or daoiren of the tens, or of Ball or 3t«mi navtwtioa, ot what naturo or kind noover oicopiGdl; there to bo dellrared to tl» Agent ol ths PANAMA RAILROAD COMPANY, fortraniiportirtlou to tbe Port of Funanu. and from thoQCO (bOirwlLifht^ "J^ntthu rl^of Bhippoca) byBtoamvr or Steamern ottlio PACIFIO 9TBAM NAVlOATfON COMVANI. oml or HODTU AHU&lUiU* "J^ntthu rl^of Bhippoca) byBtoamvr or Steamern ottlio PACIFIO STKAK NAVlOATfON "COMVANI. O] ilTKAUSIuP tJI^PANY m; SJcmnDr employed ^>'.^Hlcr of tho said Coraptmlca, with tho llko exception*, prjvlleg-w and axomptions the Po Kyt*-^/. ^L^T^^rL^^^- - - iJ<^^j ^^■2.''Z..C{C^ and Jhero In llko_oopan;nt Rood older and ooodltlon, to bo dellrtMd "n*o. , C>2-d£;25,-i:-':t>A--»<,.- - ^^''Ty>T^^'T-^^i.X:k...^'T.,<^ .:^:^~^^- „ . - or blsar'lticliBaBivns./rcfaU/arlfuKinuatratuiuvsr^ar^n.loIiepald tnifrsio YarK\n Dnltsd SI^Uib Gvid Coin. Said IrclRbtto bo conaidorcd oscarucd, veseal orcnrBO lost amotloat; and nn tho bapp^oluK of any of the- iibor(s«xocptcd i-outlngendM, thoBaldSteamahJpCompanlesBtB tohuvo tborlKbl to forward tbc above-montloncd pacta«csto tlio porta or dcBtiiiatlon on tbotrowo routes and shall rw:cl\B eit™ compensation for such aerrlcc, whether perfonoal by their own vetBCto or thoee ot strsuKcrB; uod Id OBeo of aalTDHQ Krrlces rendered U\ aforeeold mcrctumdlso or treaiure. durlotftbo voyagv, by woclor vesaeUof Wld CompODtea. sachuUvogOau'vloe ehall be paid foros lolly as IfmcbEalriugvcaMl or Tcsecls belong toM'-aniera. It Is czprcsaly understood that the articles named In this Bill at Ladlog shall bo taken from aloDgslde (at sblp'a umUcsorKOn^waTS) \>J tbeconNinKclmiuedlBtciy utter tho vessel Is ready t»K nr ilmniurn fmni IniRcnritv of packOKGS, liiaoauntcy or omlsiloa )□ mark* Or dGeoflpi Ions, afftctg of climate or decoy, r for articles porisbabia lo their oalun], or from unaroldahln doteutlon or delay, and tbeaa — — II . 1 — • ^„ii„„ .junn > 1. -»•!,(; abovo-nnmed packagoa, unleeithe vnlue , I aod merchandise mcnUoned In this Bill . _ _ _ 'ANY. and or SOUTH AnEKIOAM HTEAH- dnlmiorllabllttitswh ■ - It Is eipnaFly EtUmitiicd that a. diliTtry on tho n-barf at tba'Port of Puiuna, of tt of LwllnE,'^accordlnglotho(erm»ihi-p.of, lo Ibe PACIKIO STKAM NAVIGATION COl 4HIP COUP ANY, ■halla&wtvotboPANAJIABAlL BOAD COMPANY from all claim Thr PANAMA KAIL ROAD COMFAXS n-lU nolberrsponalblo for loasor datOHgo tOBW>4a from lire In cltre. In warehouse or on whlirf. And II Is further stlpuliitL-d mid aKn-t-^- that VcJwIfl are wnjrantt-d seaworthy onlj- ao far II3 duo care In thf apnolntmcnt or selection of Agents. SuyerlnUiMlenis, Pilots, Masters. 'tlf(i>^ra.EuKlnwra and Cr.rw can secure It; and tbe Coropanle* manilowiJ in thlsBlU of tfldlnp irllH not be liable for 1<»\ delRotlon or damages ori^ng directly or Indirectly trODl latent defects In boilers, maehlnery, or any port of the Vcnol,' provided all rcasonablQ measures bare been taken to itccure elBclency. And 11 bi furtbcr stipulated, that In allcasca of low of ancb goods and morcbnadlse, tbe amount of claim and damage gbaU be icstMct4>] to Uiecasli valuoof 3ui;b iroo'lsor mereliniidlfc.at the nortof shipment, at the ttmo ol ollipneot ; and that all elaima for partial 1019 or damage shall t}e ajtoertajned und udiuated jipon che same basis of valuo. Not accouotutilo for dotontlon at porta of transhlpniFnt, Incnwof the blockmle or lnt«rd . \..ijntir j^ I E'Ctiunge Njted bv agfccii i^t bo bc'llr-t-ted lo ! ■ at rupcnsO of ' 22-». I teii! ?3c-5Si ; isq yOjqM Jo •_ '-: iZ "- '^ "' ■ooueir.! ijsHijg JO soSesn oj 3i;;pj033E pe;snfpii ; ,. 5q Jl 'UMOU)l S5ti| .r.,i 10 'r.,pul>| -Jil; spOoS C'tJJ C UOO ,C ■aoNvansNi do 3ivotjiiH3o SALES OF COMMERCIAL CREDIT 145 lading were taken out by 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 landing, the insur- ance policy, and the two drafts — were taken to Brown 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 10 146 HOW FUNDS ARE OBTAINED Brown Brotliers & 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 , , , , , MAY 9 - 1902 // ij //J. f//^/, C-'/ - • /|^ A J^/' //f/'r yo/'Ay/^./ zp^y^^/\y y^'^^;^^P^'. y//f^y^y^Ai^yy^' ^'y ',,i\y /[y/,/ M//, y/i^ 'JA"^ '■ / /// // rP'~^yy /yf/ /, yTy^TWA/,/// )/y, ////// ////-V/.y /' ////'"///' /y> y^/y /i/.'^/y/j/i, /// //^ y/.i'i/// yy.,y .//^// ^/,/,;, ,„/;//,y ,-,//,,/ y,//,/ r/y,y,y/„/, /y, /„y,,,.,/ ^fj/f/ //y/'//y//f"/ y /y^ '' // . ^y ///, //y/^^///j/, /// y y.y y/y.yyyt /// yy, ,.,/,j,yl{, //„ //„y,^///yyy,„y„/ ./ yy, . U, //. ,/„y //;,,/,, ,y, //„',. y/, ,,,/, / /// .y/.y/ . ^/ . /hf/y, yy, y yy/yyy/y ,/ Ay) //yyyyy/y^ yy /y,./ , yy/yyy /y yyy /yy,/,y./y,y/y,yi,yy .i/yyy ,/ //yy . I y yy yyy'/j/yyyyy,y/j.,yyy,y'yy/yy , yy , y,, I yAyyy / y, yyyyy/y Ay>^yyy .y/yy// Ayyyy Ayy ,/ /yyy yyy yyyy/yy /Ayy yy ^ y y/ / y i yyyyyyyy;': ,„/., /,■ /■!.,,/ yyy, y /y y,y; ,/'//, f y//y,. ; , , .„ „ SALES OP 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 farmer to become encumbered in obligations which he can not meet, and involves the investor in trouble, loss of time and of capital. Among the best kinds of mortgage securities are those held against improved city real estate, but of this class weY[ Mortaanes located " business property " is usually prefer- on " business able to residence property. The reason for proper y. ^|^^g ^^ ^1^^^^ 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 sufBcient margin of safety may make either class of secu- rities equally good ; failure to exercise such judgment may make either equally bad. This class of security is peculiar in that by utilizing the resource against which the mortgage lien is given, and on Mortgages which the industrial manager must rely for his on mines and income — in fact, by pursuing the very object timber lands, j. i . i ,i ■, i i -i ^x- • i j. • j for which the capital contn button is obtained — the mine becomes exhausted and the security depreciated. This must be taken into account in estimating the value of the security. Grenerally 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 security. It is never liilii 1' I ) I ; \', \ 1/1- ■7/////^.^ ' r///// / ■ ' /, '^ ' "-;/X;r ^// // /,/,,, /,,- ,/,,r>^l/,,,„ //„ ,/„/, /„!,,/„■,//, ^„/,„.,/ //,,,,,,, ^^/ //ff ',ff/^ '//'fr A,: ^'^///>; ///^,,^(/y, Z'^./"//' uy/>/ //x/////^///y /v/A A,„r,/m/r„„/,„/,l,.j/ /,,„y /myr.//', ,,///„ ,//„, ,/ m,,//',/- /f/, /• y, /,, /!r,/,/, i„ y, /,/,,„, ,///r //„//,r/.//fr/,.j ////,/,:,., - i/>/.jM/yy^i>y,/ ,>'r,y/,/„,jr/ //„,,„ ij „/r„ /f„„„/n/„„ , / //,., ,/. Ay/f//^,/ /^^ >//u/ r///^, ^ ur//^f /^^/^--/^///^ ///--///// ,-///y,//// ^y .^.ru/y,///,, ! y, r,, ,/,„„,■ ,„„/„yh, ,,,/y //„ /,/y,, /,„,//,/„/,/ .,./,//,y,„/y. .„/,„'„/, ,„ ,y,//,„y y,.,,/ /,.,,//,; ,/y„i„,.„,y,y„., ^/ /Ay .jmm .,,,„,/;/ /y„,„ ,,./, y,„,„y „„y/, y,yy,„y,y/r/i/y//y, .jy,„„ ,, /y, /,„„,, y, /A, ^^,/ /, /A, /„,/,„„/,///,'., //Ay,,/,,/, //,„A //y,y /AAu/// /// /^f'y,,/^^,/ A///////^/ ^//// '/'/^h ,/ y^u/// . .„„A rA/„„//„,!/,„-„„yy,' /y,,/y ,A,yj -,//,, V, ,„„.„y //„:,/, , /A, A,A,A, y!„/./A.,y i,r, //„ LyA/y ,A„„„„A/>,,„ .>„Jy,yy,,, '/ y, „„y.j„rryyr//,„ / /? m/i,, /, /^<,„.,/,, ,r„y,yy,',^ /^ /y, y,AAi yr,,,y /y, y/r/uf/y /: .J,, ,,:,/,,./ „,,,,/rr,„,yr,r ,/^//^/ ///v '/ „/, ,, /A, /,„.,, ,y, /Ari,,/ /y,„ ,„ //„', Ay,,„y //„,,,,„ //^/V/z/^/^v/v^^//^; j/'^y y y///',/ y a^ >/,',// y^,,/ /^^ ./,//,>, ^^^z, ,. ,„/,„,/,,' /A, .i''„„ r: „„y ,/ yi, .„,„., ■ A,/,AA,//,„ y /■ , j//f/y /,f^/' y//" /^ ////'/ //^/AAf /'/f,//i^/ y^y//' /'/' '/' ""/ '/ff/f/M/ /,>/„rr/,riyjr//M , / /y/.' r /Ayrr/'r /, //,, A,yA, ry /A/.i fA/,y„/„,,ru i,yr,/.j//,iy /Ay .m/,„ /,, ,, , ,//„y .^y/// A, ,„/,//,, A/, /,y,r, ,/, /A, All,,/ y/yfy y/ Ayy/,/fy//y /y, ryf^y yyyy/ yry,/// //,/ f y / y/yyy/ /// yy /)//yyy/yy ,iyy,/y /my,/ y/„„y„„/„„„A,,,/,/y.,„y.A /',//,„ ,' A, :,,,A/„y/y „,„:,/„,/„ y,y / y /Ayyy, „, „ A/„/,;„A /, /Ay, , A /,yy,/,yy, r,,„A /A. A ,y,, ,, A, ,/..,/,/, „,.,/,„// yyy,, /,y,..„AAy,./y;y,,„ yA,/.,.y,yA,/ 0„/,,A„/ A,',.,/y„ . AAyy,,y/y/yyj,//, /A,., yA„. AA'' A 'A mor rece ipt, SALES OF LONG-TIME PAPER 161 safe to allow loans of this kind to run twenty or fifty years, as is common in some classes of mortgases. Mortgage-notes are usually in large amount — they com- monly cover the whole sum borrowed, unless there is some Parti- advantage in having the principal sum paid at t9<^9^ different dates. This may make them diflicult of transfer, for the reason that the investor may not have the amount of the note available ; if available, then he may not wish to have all of his holdings 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, pro-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, 2(J 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 150). In further application of this principle the collateral certificate has come into use. This is a certificate of in- The cnllat- terest in a number of securities held in trust. eral cerfifi- A collateral trust is formed — i. e., certain col- ^" ^' 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 Cofiin & 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, on page 162, is of special interest in this relation, owing to the recent failure of the asphalt company. 11 162 HOW FUNDS ARE OBTAINED Bonds Bonds are usually issued in corporate enterprise as a means of obtaining permanent capital, though they may be issued by a private individual. They difPer from a prom- issory note only in this, that they are issued in series. For example : Mr. Kussell 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 Certificate of Deposit for Collateral Gold Certificates S||| DepoillfiJ ufOer ami In occonljncf »ilh IHe oroviiion* of > ceMalr. Aorecrnnl. flaled Hafmhtr 14. 1901, msd( bc1«teo HEHHf W eiDDLE, RUDLLPM ELLIS, SLVIN W. K8ECH, EFflNCHflM a MORRIS. anO HEMRY TAINAIL, Comniillee, Dirllt) or the llrsl BJft , kMnn of Collaloral GolO CcrliflcalM or Iht AsohJll Comoa^y of Amtrica, Dirllcs or UiB Jl ecconO part, and Lhc COMMERCIAL TRUST COHP/NV, ot PhllaHtlphla, and THE MERCANTILE TRUST COMPANY, ^ of Nb» York, parlies of Ihe Ihlrd part. The COMMERCIAL TRUST COMPANY herety certifies that it fian rsceii:ei ''^^i<'ixoj,n()0 in cash, which is available for the purpose. How will the remaining $750,000 be obtained ? Mr. Sage calculates that by borrowing $750,0o0, at 4 per cent, the income from the rents will be sufficient to pay interest, meet all expenses for repairs, depreciation, taxes, etc., give to himself a dividend of 5 per cent on the value of the lot and $250,000 invested by himself, and leave a surplus suf- SALES OP LONG-TIME PAPER 163 ficient to pay off tlie $750,000 loan in fifty years. On in- qiury, ho\ve\er, he finds that he can not get $750,000 from any one person or investment company. No one wishes to risk so much on the security of a single property. The center of business may change ; the properties round about $1,000. No I, Russell Sage, an unmarried man of the City of Xew York, State of >;ew York, for value received, promise to pay to the holder of this bond the principal sum of One Thousand Dollars, gold coin of the United States, of pres- ent weight and fineness, at tlie office of the Union Trust Company of Xew York, on the first day of January, 1948, with interest thereon at the rate of ifo. This bond is one of a series of first-mortgage bonds issued by the said Russell Sage amounting in all to the sum of Seven Hundred Fifty Thousand Dollars ($750,000), all of the same date, for the sum of One Thousand Dol- lars each, and each of which is numbered from one (1) to seven hundred fifty (750) inclusive, and all of which are secured without discrimination or preference by a first mortgage duly executed by said Russell Sage on the following property : Lots numbered forty (40) and forty- two (43) of Block numbered ninety-six (96), of the City of Xew York, together with the buildings and improvements erected thereon, or hereafter to be erected, the same being located on the northwest corner of Fourth Street and Broadway in the City of New York. R^.gg^^L Sage. may come to be used for manufacturing purposes ; many changes are possible within fifty years which would cause his property to depreciate in value and impaii- the security of the loan. Those persons who make it a business to loan money on business property will not invest all their funds in one security ; they prefer to invest in a variety of securi- 164: HOW FUNDS ARE OBTAINED ties as a protection against loss. While they are not willing to take the whole amount, they would gladly invest in a portion of the amount if each part were equally well se- cured. In order to effect this, he decides to divide the loan into 750 parts of $1,000 each, and give to the Union Trust Company a mortgage on the property as secur- ity for payment of interest and principal. In other words, he decides to issue a series of seven hundred and fifty first-mortgage notes or bonds, in form the same as the bond or note shown on page 163, but numbered serially. Having executed his bonds and mortgage, Mr. Sage places them, together with $250,000 in cash, in the hands of the Union Trust Company, under an agree- compamj as ment that they may dispose of the bonds to ayents of purchasers, and that when the entire issue has transfer. been disposed of (not till then) a contract will be made for the erection of the building, accord- ing to the plans and specifications previously adopted, the trust company to have the general supervision of the con- struction and of payments. The Mercantile Trust Com- pany, as trustee of the Peter Cooper estate, has funds to be invested, and after examining the security for the payment of the bonds offered by Mr. Sage, it decides to take one of them at $1,000. The Mercantile Trust Company therefore malces a deposit with the Union Trust Company, for which the Union Trust Company gives its receipt in form similar to that shown on the opposite page. Such a contract protects the purchaser against loss on account of failure to sell the entire issue, while the contract of trust which gives to the Union Trust Company the super- intendence of the construction and the disbursement of funds, amply protects the bondholders' security. When the entire issue has been disposed of, the trust company will deliver the bonds to respective purchasers, and as a result of the bond sale will have $750,000. On page 166 SALES OP LONG-TIME PAPER 165 is a copy of receipt used in the bond sale of the Glen Echo Railroad Company. $1,000. New York, November 17, 1897. This is to certify that the Union Trust Company has received from the Mercantile Trust Company, trustee of the Peter Cooper estate, One Thousand Dollars on deposit for the purchase of one bond of an issue of Seven Hun- dred Fifty, each for the sum of One Thousand Dollars, executed by Russell Sage of New York, and secured by mortgage on Lots 40 and 42, Block 96, of the City of Xew York, together with the buildings to be erected thereon, to be known as the Sage Block, at the northwest corner of Fourth Street and Broadway, which said bonds and mortgage, together with a cash deposit of $260,000 made by Eussell Sage, are held in trust by the Union Trust Company. The condition of this deposit is, that if all of the said issue shall be sold at par on or before January 1, 1898, then the Union Trust Company will deliver to the above- named depositor the bond herein contracted for ; but that in case the entire issue shall not be so sold, then the said deposit may be withdrawn, and in any case, without fur- ther authorization, it shall not be applied to the purchase herein described and set forth. The Union" Trust Company, Jacob Fressenden, President. The amount received from bond sales, added to tlie $250,000 cash deposit made by Mr. Sage, provides the $1,000,(10(1 to be expended in the erection of the Unsecured ^^^g building, on the disbursement of which the lot and structure will stand as security for the payment of the bonds. Herewith (page IfiT) is given a copy of bond issued by the Bank of the United States after 166 How FUKDS ARE OBTAINED it was incorporated under the laws of the State of Pennsyl- vania. This was an unsecured bond. It had no mortgage or other collateral contract to vouchsafe its payment. The pur- chaser relied entirely on the credit of the bank. It stands on the same basis as an unsecured note, except that the issue was in even amounts of £1,000 each, and ran fourteen years instead of being made payable in sixty or ninety days. i^^ J\[0 . _ _ _ To Av H II 3^^ ^^UiMUWi^i^-i^U^^^U%^iS0iii'^iMB^<<». 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 168). 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 improved 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 OF LONG-TIME PAPER 167 trust to some trust company to be held as security for the pay- ment of all, and sell the notes thus secured to customers in such numbers or amounts as its customers may desire. This arrangement allows the notes to be placed on the market and disposed of to better advantage to all parties than if 5i ^ ^ ^ ^ -nI $ ^ i'^ 3i ^ f >s ^ S ■ ^ * ^ ^ ~^ - 5: *^ ■*3rafflS^^^^^^^^^^^^^^S^^^^S^S^^S^!SS^S!S^!5^S^^!^'Sfe s^aiig^^^^^a»^jfgj»j^a^^^^^j SALES OP LONG-TIME PAPER 169 the contract for payment were in one instrument. An ex- hibit is also shown on page ITO 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 to 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 Sonds dis- ^ P^^t of a series of like tenor and amount, Ungttished and, in most cases, under a common security. By rule of common law the bond was 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 of witnesses or seal. The bond, on the other hand, in its old common-law form, required a seal and to be witnessed in the same manner as a deed or other formal conveyances of property. This is still the rule within many jurisdictions. In other places the com- mon-law rule has been set aside by statute. The contract of security for the payment of a bond issue may be one giving to the holders a lien on projDerty, or it may be entirely personal. For example, forbmids. ^ne may wish to obtain $100,000. To this end one may ofEer 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 indorsed or guaranteed by some one else. 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 Yiew Cemetery Company will be found the written guarantee of the Metropolitan Land Company, here reproduced. FOR VALUE RECEIVED THE METROPOLITAN LAND COMPANY HEREBY GUARANTEES THE PAYMENTDF BOTH PRINCIPAL AND INTEREST ON THIS CERTIFICATE WHEN DUE. NEW YORK, S E PTEMBER IOT'?l90l METROPOLITAN LAND COMPANY, By -PnESlDEHT SALES OP LONG-TIME PAPER 171 This is a personal se- curity in the nature of guarantee, which is added to the credit contract or bond. This particular bond also has hen secu- rity in the nature of a trust deed and a sink- ing fund. The contract made by the Reading Terminal Company, guar- anteeing payment of Reading Railroad Com- pany bonds issued for funds with which to build the depot at Philadel- phia, is exhibited on this page. Indorsement on a bond carries with it the same significance as in- dorsement on a note. It may, however, be quali- fied by writing in any manner agreed on by the parties. The form of in- dorsement found on the back of the bonds taken and sold by the Philadel- phia Mortgage and Trust Company, before re- ferred to (page 168), is here reproduced on page 172. When the company wishes to assign a bond lUMi^ ,^1^1:^ mil 172 HOW FUNDS ARE OBTAINED without being bound as an indorser or guarantor, another form of indorsement is used. It may be assigned without recourse, or specifically limit its liability. A mortgage security given for the payment of a bond issue is usually executed to a trustee — some disinterested Trustee of V^^^J '^^^ ^o\d.& the security for the benefit of bond 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- in>/^///j //r//v///o/ /ry////r- — - //,r),r//.r/,nvr//w /y //'■ /lyu y y'n/'/«//-' J^r/r/r f///m//a/./^^^^ .'iuv/ut-.yyi'r/mymiit/i///u7/ r//ryiy./t r///f///i///r/ .im///r//r//fYy' ///r / /r'/y/u/ri/Mryi urn ///«/. ir////y///y//yi///f/jj/'yjm//r /A:. ///'/wyr/y'///rr. ^/ry/yf///yf///y/.y'M-'yiryM/M'i/y. 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To this end, and as a means of securing Bonils cliisai- . • i i • i i • i it jied accord- lunds With which to cancel those which could Dig to their ^q^ \jq exchanged, the issue was made. Exhibit purpose. . . / -, n\ ,• 1 T is also given (page 186) of the Improvement bonds of the Philadelphia & Reading. These are issued for the purpose of financing the enormous coal properties pur- chased in the 'YOs, and for improving the equipment of the road for handling its increased business. The bond here shown is an old one ; it has been through four receiverships and reorganizations — has been subject to all the financial extremities of that great system whose destiny has been linked with the development and manipulations of the anthracite coal regions of Pennsylvania. Bonds also differ in the contracts of payment. The contract may be for the payment of gold coin of the P 11 . 1 United States, of present weight and fineness, in which case they are called "gold bonds." They may be made payable in any form of money that is legal tender for the payment of debts. These are called legal-tender bonds. With reference to the Leffal-tender fQj.^^ Qf contract for the payment of principal and interest, there are two classes : (1) coupon bonds and (2) registered bonds. A coupon bond is usually made payable to bearer, and the interest payments are rep- resented by separate interest notes attached to Coupon bond ^|^g principal obligation. When a coupon be- ffuished from comes due, the holder of the bond will clip Imid"''"^ or cut ofl: the coupon which has matured and present it for payment in the same manner as other notes are presented. This is usually done by " de- positing " it at the bank where the holder does his busi- ness ; the bank will receive it " on account " and send it to the office of the company or to the bank where the com- pany does its business. The registered bond, on the other :# rV-^ tl : Mr = ^vX§ ^ V X X ^^ X 5 x^"^ ^ V X X x^ t - x^ '^ ^ - ^ - ' ^, X X J ">-x > ■> s * 5 ;\ 5 J --^- 31?^|tt^KfJf V X XV ^ i <>-x^ ^1" m X r IK 14^1^ K- "S; X . ^ ^ -> I >: "^ f X S^ ^ ^ X ~ -,: X- -•> C X SX.X SALES OF LONG-TIME PAPER ISY -money payment may be taken, or an "extension" may be made. A contract of extension is shown on page 188. This contract is between the Eeading Company (a security-holding concern) and the Philadelphia & Eeading Railroad. Receivers' Certificates In a corporation to which so many have made contri- butions of funds — a company whose proprietors are divided into classes (common and preferred), and whose creditors have distinct rights and opposing interests — controversies very often arise which require the interference of courts to protect the rights of parties concerned. The property is usually in the possession of the officers of the company as representatives of the stockholders. When controver- sies arise, the parties in possession control the earnings and incomes ; they therefore have a marked advantage. The earnings of the Pennsylvania Railroad, for example, amount to nearly $100,000,000 per year. The entire stock interest is only $150,000,000. Let us suppose that those who hold possession represent only $80,000,000 of the stock. During a year they might divert enough of funds to repay to themselves the entire amount of their invest- ment, while the other stockholders and the creditors would be entirely deprived of revenue. It often happens that a controversy will last several years. To leave the property in the hands of any party in interest might prove ruinous to all others. As a means of preventing injustices of this kind, the court to whom the controversy is referred will appoint an officer of its own — some one responsible to the court — to receive the property of the corporation and man- age it pending litigation. Such an officer is called a re- ceiver. Litigation involves expense. When parties appeal to the courts for adjudication of rights and claims, the costs be- come a first charge on the property. Court costs are always f V 1 ;^ X s - 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, 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 take on the nature of a bond. 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 officers of the com- receivers pany could not. Quite as marked are the ad- cerhjicaies. r j -v 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 confiict to an adjustment of interests, when otherwise a settlement could not be reached excejst by selling out and vsdnding 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 leasee, to use the property owned by another, called the leaser. 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 offers $10,000 per year to Jones for the use of the plant, the amount to be paid as follows : $5,000 in six months and $5,000 one year hence. This Jones ac- cepts. The use of the lease is plain. It avoids the neces- sity of raising funds with which to purchase that part of Brown's business equipment. Instead of the factory being a capital asset, and the funds represented as a liability, the rent becomes a fixed charge against the net earnings from operation. The financial importance of the lease is one of avoiding the necessity for funds to the extent that business equipment is obtained in this way. 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 ha.,- as ^j^g ^j^ig u Car-trust Bonds." The same prin- ciple is employed in sales " on the instalment 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 asking people of small means, laboring men, the lease by etc., to deal with them on credit. Instead of ae I sores. jjja].jjjg ^ 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 Dangers of ^'^*^ ^^^ previous payments on them in case of hase puv- default of one rent payment. In the case of c i((Af6. the piano jjurcliase above referred to, the pur- chaser may have paid $1:50 in rents, at $10 per month, and have still only a §5(.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 comj)any 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 simply stopping wages for a month. PART III INSTITUTIONS AND AGENTS USED IN FUNDING OPERATIONS 13 CHAPTEE IX THE UNITED STATES TEEASURY GovEENTttENT stands in a double relation to modern sys- tems of finance. In the first place, it must provide a uni- RelatioHs of form system of money ; in the second place, it iTm^d^r'^* must give attention to its own financial needs— systems of must arrange for its own support. The first finance. ^q jjjay 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 ; from mutual ad- vantage a common 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 broad and complex commercial fundions'^'^ relations, have not the marks of individuality and of qiiality stamped on them by nature such as are common to cattle, or furs, or wheat. The trader, therefore, may not so easily protect himself against decep- tion and loss. For example : One of the chai'acteristics 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 itC, FINANCIAL INSTITUTIONS purel)' artificial ; by nature tliey have not uiiifoniiitj ; tlicy have no individual completeneBS as m the case of cattle or furs, and a few grains added to or taken from a piece of o-old may so ixiaterially affect its value as to destniy the to^ serviceability of a coin as a standard for judgment. Some common unit of weight and fineness is essential. The jiiii'- ties to an exchange, being controlled by mo- ,is account of only $8,297. With this nd used for amount of gold actually paid out of the Treas- ury durmg the year, $694,2(52,253 of credit money was again put back into cii-culation, at a par value with gold. Dui-ing that year, therefore, only about -^-^^-^ of one per cent of the $150,000,000 reserve fund was used for purposes of redemption. jSTot 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 e;old, of integrity '^"t through the redemption agency our cur- of our rency is kept in good condition, old and tat- tered bills are received and destroyed, and new bills issued in their stead. ' " The mint may be said to be the coin faetoiy of the Gov- ei'nment. It is here that gold and silver bullion is received T/ie mint a ^^^ coinage, and mechanical processes are car- mo7iey ried on necessary to the reduction of metals to ce oiy. 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 ofiices. 2U4 FINANCIAL INSTITUTIONS The mints are located at Philadelphia, San Francisco, "New Orleans, Carson City (Nevada), and Denver (Colorado). The assay offices are located at New York, Boise City (Idaho), Helena (Montana), Charlotte (North Carolina), Deadwood (South Dakota), and Seattle (Washington). According to the report, only three of the mints — those at Philadelphia, San Prancisco, and New Orleans — were employed in coin- age, 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 con- veniently near to the commercial centers, while the assay offices are in centers of metal production and importation. j\Iin(ir coins were made in Philadelphia alone. In 1899 the production was as follows : IN.STITUTIONS. Gold coinage. Silver coinage. Minor coinage. Philadelphia 149,919,180 58,358,000 19,918,311.65 5,604,375.00 13,199,000.00 $956,910.14 Sail Francisco New Orleans . . . Total ¥108.177,180 127,731,586.65 $956,910.14 liefined bars were produced at all the mints and assay offices, however, as follows : Deposits of metal. REFINED BARS .MANUFACTURED, Gold. Silver, Philadelphia San Francisco. . . . $84,936,361.38 61,315,443.48 13,447,938.39 306,976.30 21,180,138.28 02,336,445.67 1.564,698.73 3,077,991.34 344,737.45 111,779.35 319,748.69 6.550,698.16 1868,012.48 $117,478,08 17,188, 2S New Orleans Carson 3,870.75 3,950,85 9,342,24 go S70 Q'7 Denver 21,114,763.13 53,170.116.54 1,280,657.17 2,036,679.20 243,431,68 110,827,83 317,301.. 58 6,39.5,250,11 New York Boise 8,195,351.06 25,141,67 39,061,26 1,305.77 951,52 3,447.11 111,660.73 Helena Charlotte St. Louis Deadwood Seattle Total !?3.-)4,393.H.-)6.32 $8.5,.540,910,.53 $8,.586,710.63 THE UNITED STATES TRBASUKY 20:» A laboratory is maintained at the mint for mals:ing tests of weight and fineness. Tliis work is continuous. A spe- cial committee is appointed as a further safe- mi'nf'. * guard. Coins are standard at .900 ; .003 is the 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 tfte Revenue serves Only to give confidence in the ability of Department the Grovernment to meet present demands. ^°' With $150,000,000 of gold in the Treasury, this is deemed sufficient to guarantee, for the time being, 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 1898 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 ])ay gold in exchange for credit money outstanding. It is tliis that links tlie monetary promises of the Government to its fiscal transactions— that makes necessary a revenne power as part of its credit money system. The Keport of 1901 shows that on June 29, 1901, the Government had in hand $385,64:2,560.46 of gold coin, and $109,205,736.96 worth of gold bullion— $49i,- iiiands on'the 818,297.42 in all. A-S against this, the Gov- Treasury for ernment held a special 5 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,O31,S91; the disbursements, $2,993,795,160. The moneys received and disbursed were as follows : Kind of Money. Received. Disbursed. $178,319,548 59,898,311 43.966,437 490,060.380 53,918,530 195,676,393 1,368,044,399 717,587,461 4,760,653 $166,484,087 Silver dollars 49,741,106 Fractional silver. . . 41 225 029 United States notes Treasury notes 506,035,348 53 361 616 National banlc- notes (rold certificates 196,(;70.389 1,356 339 339 Silver certificates Minor coins 719,497,448 4,450,958 Total ... i?3,01 1,031,891 $3,993,795,160 THB UNITED STATES TREASURY 207 From all sources, including redemptions, clearing-house balance and transfers, and expense of Govei-nment, dnrin"- Source, of ^^"^ J^""'" ^^'^^' $11>'^35,461 more of gold wa's revenue to received than was disbursed. As before shown, Temandt *^® ^^^^^^ demand for redemption was only about -1- 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 $lttO,000,000 in the amount of gold in the Treasury. JSTot 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, .S(J22,606,298 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 \nldequatl! ^^xes become small. Through its taxing power, the Government is unable to secure gold with w^hich to protect its reserve. "When the taxing power is inadequate, disbursements in payment of oiEcers, 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 strain 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 iu such an 2()8 FINANCIAL INSTITUTIONS ■event neither 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 ^^^ $19,396,81:1.98 silver bullion— $513,687,- assets of ' 329.91 of silver coin and bullion as an asset. Guvcnvnent. jjj^^ ^j^jg i^gg^ g^]^ f^j. ^^-^^^ ^^^ pg^jgf f^^^^l 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 invoked. 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. On it depends the integrity of our Service whole money system, and out of the integrity of the of the money system grows our system of pri- Govenun.enf. ^^^^ ^^^^^^ ^^^^^ ^j^^ 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 profitaole to that extent, . and to that only, that it renders a service to ness 'based on society. One who can not offer _ to others service something which will give them greater enjoy- ment or greater business advantage than can be had elsewhere at the same price, must either keep tlie 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 not yield him a profit and remain long in business. A business man must get a return that will pay him for his effort, as well as offer some advantage to others from dealing with him. The formula of successful busi- ness is : Price must equal cost, plus a jyrofit. 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. 14 2fl9 210 FINANCIAL INSTITUTIONS His profit can not be greater than the total service rendered, for ^\-hen he oilers goods at a price wliicli leaves no advantage to buyers, they will i-efuse to deal with him. The amount of liis 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 to hin:iself 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 tlie 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 lal>orer 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 4() acres of oat-land and seeding as many acres of wheat, 30 to 50 acres of corn, and has in crop rotation -iO to 60 acres of meadow-land and 60 to 80 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 Amei'ican, with his horses, engines, machines, and tools, is producing from 2,000 to 3,000 bushels of corn, from 1,2U() to 1,600 bushels of oats, from 800 to 1,4U0 bushels of wheat (i. e., 4,000 to 6,000 bushels of cereals), and from 60 to 80 tons of hay ; lie also is keeping from 50 to SU cattle and from 50 to 100 swine. The peasant produces little more than enough for his own keep ; the Western fai'm- 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 lai-ge surplus of food to exchange for things produced by others, while each class of laborers, being free to devote their time to a single occu- pation, is 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 that of the Old World that even the small pittance must be denied to the peasant- laborer, while the xVmerican " 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 pos- sible ? There can be but one answer : the founder is able to shape his materials better or more cheaply than his com- petitors. To do this he must so organize, equip, and man- age his plant that he can offer better services to the com- munity 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 ness advantage is recognized ; some service may profits the \)q rendered for which others will pay; to per- 'increased 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 liis business in a manner to put him on a footing superior to couipetitors. 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 ecj^uipment 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 -, j, , , . . ■,-,"■ ^ i means of has ot obtaining capital is by a process known obtaining as savin ff. For the purpose of his own income the laboring man is a business concern. He is governed by the same rules of success or failure as a busi- ness corporation. Let us take, for example, the Xew 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 wires, poles, buildings, instruments, etc. The earnings of the company received during the year 1899 for services performed were as follows : Exchange service (telephone) $3,934,075.59 Toll service 81.'^,4.-)9.73 Private line service 68,225.36 Messenger service 51,778.14 For rents (real estate) 1,803.93 Interest on stncks and bonds of other companies owned 50,403.50 Miscellaneous 31,610.39 Gross earnings for year 13,946,354.63 THE SAVINGS-BANK 213 The expenses incurred in performing this service were as follows : General expense, including taxes !t;640,107.95 Operating expense 653,075.64 Maintaining the plant 1,384,358.82 Rentals und royalties 230.724.38 Private line expense 13,.399.54 Messenger expense 50,693.51 Real estate expense 1,038.90 Tqtal expense of year $3,961,289.84 Net earnings for year 985,065.29 _ . The carpenter finds it necessary to equip hini- Eannngs. ^J^ ■ -C ^ r- i • i -tt- sell with the tools of ms trade. His earnings for the year are : Work on .Jacob Reiss's barn $184.00 Work on the Emerson house 265.00 Shingling Patterson store 67.00 Repairs on First Nat'l Bank bldg 138.50 Shop work during year 214.25 Total earnings for year $868.75 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 2.00 Board 368.00 Repairs of tools, etc 37.75 Room rent 96.00 Shop rent 100.00 Incidentals 53.00 $635.75 Net earnings for the year 333.00 214 FIXANOIAL INSTITUTIONS The net result of service of the New England Telephone and Telegraph Company was $985,065.29. But this com- pany had an equipment that represented a capi- "^™-^'''' tal ■ol $19,000,000. The carpente]''s net earn- ings were $233 ; his equipment 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 as he was in at the beginning of the year. The $233 — 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 $233.00 Net earnings. 33.00 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 frwulahor ^^ork to higher advantage if he had a steam- engine and some lathes. ISTone of these things will be of use, however, till he can get all of them together. He decides t<:i lay by the $183 and add to the amount the profit of each year till he has $1,000— the sum that it will cost to buy his machines. It is this process of laying ly tlw surplus earniyigs or net profits for capital use that is called saving. The ser\'ice rendered by the savings-bank finds illustra- THE SAVINGS-BANK 215 tion in a story told of a journeymaa blacksmitli. He Avas a man of more than ordinary ability, but addicted to drink. Plis 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 talent ; 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 only was he not improving his mental condi- tion, but at the same time he was contracting a habit which would finally render him morally irresponsible and physic- ally unsoimd. 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 hie 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 OAvn 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 ne service r ofthesav- year added 8250 more to ms account. A lew ings-hank. rnonths later, however, after he had saved some- thing over 8500, 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 1^16 FINANCIAL INSTITUTIONS failed in this. 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 sa\-- 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. jSTearly 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 l cash items. There are in the United States about 1,()(HJ savings institutions, of which TUO are ''mutual'" — that is, they are institutions operated by trustees for the exclusive benefit of depositors. They are not organized to make money for the corporation, but to serve the depositor. The officers and employees receive stipulated salaries for services rendered, and no dividends are paid except to those wlw have funds on deposit. Xearly all of the early institutions are of this kind. The fu'st function of the savings-bank — that of safe keeping of deposits — may be performed by building vaults and storing away the money as it comes in, and then pay- ing it out again when requested. But this would involve the funds deposited in constant exjiense. The savings of the wage-earner would thereby constantly be diminished instead of preserved to him. This is incomj^atible with the prime object of the savings institution. It is only when safety is associated with income-producing power that the funds may be preserved safely and undiminished. How to deal "^^^ second function — that of investment of ■with a sav- funds for purposes of income — supplies this mgs- a . ^ant. It enables the managers and conserva- tors of funds to use them in a way to produce revenue for the depositor with which to pay expenses, repay the amount of the deposit, and add thereto an increment of interest or dividends. The success of an institution depends on keep- ing its funds invested. This may be done only by estab- lishing credit relations with the depositor on the one hand and with borrowers on the other. The credit relation with the depositor is established in the following manner : The laborer receives his weekly wage and is al^le to lay by out of the amount received, we will say, SI after paying ex- penses 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 o"thers on account of the evidence of the amount deposited being in the handwriting of the de- positor, if dispute arises. This is ofttimes of advantage in allaying suspicion of dishonesty on the part of an institu- tion dealing with ignorant people.) The ticket with 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 " Receiving 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 are entered in similar manner. ISTow, 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 de])iisitor 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, however, and for current expenses, then the bank has no need of 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 ? liules gov- It would not be to its advantage to do this. erning in- 'pj^g '■ deposits " soM are not for current use ; vestments of i i i i i • • the savings- tbey are bought by the depositor as an mvest- hank. 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 know of the con- dition of their aifairs. 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 nothing but safe in- inmstment vestments. 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 ; for the amount of investment capital seeking that kind of employment is larger in pro- portion to the amoimt of " gilt-edge " invest- f^.^J!l 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- 2-2i PINxVNCIAL INSTITUTIONS bank is best shown by published reports of tliese 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 $1,028,374.08 Call loans upon collaterals 3,800 . 00 Time loans upon collaterals 3,500.00 Investment securities owned : Stocks and bonds $45,505,169 . 75 Mortgages 13,319,502 . 38 Total investment securities owned . 58,824,762.13 Total !?59.800.337. 11 This accounts for its entire assets, except cash on hand, real estate, furniture, and fixtures. A smaller concern, the Xa- 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 $33,350.00 Mortgages, 510,960.28 Total investment securities owned 544.316.28 Total !j959,300. 1 7 The first institution is an old-line " mutual " company. The second is a " joint-stock " company with a capital stock of $100,nOo. The first is operated by trustees and the joint- for the benefit of depositors. The second is stock sav- operated by managers who offer a certain per- ings-bati/c. "■ • ; ' 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 ;t2 per cent of its funds invested in bonds and mort- THE SAVINGS-BANK 225 gages— T5 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, reg. 3i and 4 per cent . $860,000.00 Philadelphia City, reg. 3 J, 4, and 6 " 3,635,375.00 Chester City, reg. 4 per cent 40,000.00 Allegheny City, reg. 4 per cent 606,000 . 00 Pittsburg City, reg. 4, 5, G, and 7 per cent . . 1,544,900.00 Reading City, reg. 4 per cent 60,000.00 Baltimore,Md.,reg.andcomp.4,5,and6perct. 330.000.00 Boston, Mass., reg. and comp. 4 and 5 per cent 56,878. 60 Wilmington, Del., reg. 4, 4i, and 6 per cent. 34,500.00 Louisville, Ky., comp. 4 and 7 per cent 170.000.00 Zanesville, Ohio, comp. 44 per cent 70,000.00 Cincinnati, Ohio, comp. 7 and 7-,% 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 213,000.00 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. 3f 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 $11,923,615.10 First-class railway bonds 33,581,554.65 Total $45,505,169.75 Of the railway bonds, about one-fourth were held against the Pennsylvania Eailroad, financially one of the strongest corporations in existence, and another one-fourth were held against the ISTew York Central, the Erie, the Lehigh, and the Northern Pennsylvania Railroads. No shares of stock whatever were held. Nearly 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 15 226 PINAJv'CIAL INSTITUTIONS in mortgages. It is to be presumed that these were largely local and industrial. Fifty-four per cent as against 92 per cent in bonds and mortgages, and those ^f"'^tPd'^ of an inferior type in the general security mar- ket ! About 10 per cent of its funds were " on deposit " in other bants, 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 it 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 woi'king man. The dejDOsits that go to the savings bank are usually in the form of minor coins, silver, and what is generally con- R I tin s f si*^^^6*i "change." The collection of such savings-bank money gives the bank a double importance in to the money |^g peiatJQj^ to the money system of the coun- try. It reduces the amount of small change that the Government 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 1^99 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 Tlie business relations of the savings institution to the commercial bank is largely represented by its " depobits " in those banks. There are times when with- favingsVcLk drawals exceed deposits ; in periods of panic— to other times when those having securities and other 'insUtutions pi'operties must realize on them at once in order to meet present credit obligations, when sales of securities are made at a sacrifice — many dejDositors of savings may find it to their interest to exchange their sav- ings investments for the properties offered for sale ; in times of depression also, when the laboring constituency of the savings institution is out of employ, large withdrawals may be necessary to meet living expenses. If, On such oc- casions, 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 consideralde 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 circumstances 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 credit, and pay from 1|- 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 their reserve, and enables them 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 deposits, 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 M'ho manage savings institutions have a personal interest in keeping deposits in other institutions. 2-2S FINANCIAL INSTITUTIONS When tills Is the ease they are wholly unfitted to remain in fiduciary relations to depositors. In some States, statutes have heen passed regulating the qualifications of officers in savings institutions. Past experience has suggested the propriety of such laws. CHAPTEE XI THE BUILDING LOAN ASSOCIATION Little more than a quarter century had passed before the principle of saving was applied in a different way. The savings-bank gave to the wage-earner an opportunity to safely invest his surplus dimes and dollars until he wished to use his capital for industrial purposes or until he could 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 investing 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 on deposit 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- bers ; 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 230 FINANCIAL INSTITUTIONS to its members on such terms as may be provided under its rales adoj)ted. The distinguishing characteristics of the Building Loan Association are the following : (1) Usually every borrower ^, ,. ,. from the association is a stockholder — that is, The distill- . ■ . ■ i-x 1 1- gui.shing the company can not invest m any credit obh- features of o'ations Or securities otlier than those of its the Buildiiif/ o • , T Loan ' members ; it is a close corporation both as to A.-<>!0(-iatioii. membership and as to dealing. (2) The capital of the corporation is not represented by the amount of st(jck outstiiiuling, 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 Report of the Department of Labor: "The stdckholder 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 proiits, amounts to the maturing value of the stock, usually S20(\ 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 paid to the profits that have accrued— that is to say, the holding value is the actual value of a share at any particular time ; the withdraioal 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 prioi- 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-building- con- Conditions ^tituency in a community where funds for this out of winch kind of investment are scarce. In fact, it is Uonal-ose' °''^* °^ -1"®* ^^^^ ^ situation that the Building Loan Association arose. The first organiza- 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 should find its first development here. The laboring population at this time could obtain little aid from established institutions ; reliance on future savings, as part security for a loan, was not looked on with favor. The Oxford Provident Building Association was organized to meet the demand for funds for home building among people who i-elied on wages for income. It was not till a decade later that the success of the Frankford institu- 232 FINANCIAL INSTITUTIONS tion commended the general adoption of such a plan to meet the demands of other home-building constituencies. Be- tween 18-1:0 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 fuuds 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 Government by the Department of Labor, there were in the United States 6,838 associations with assets amomiting to something over $500,000,000. Through the aid of the 6,440 associations reporting to the Commissioners of Labor, 314, Y56 homes and 28,469 other structures had been built. Ilaqnitude "^^^ history of the loans showed only 8,409 fore- of business closures, with a loss of only $449,699, or less transacied. ^j^^^ -^ pgj. ^^^^ ^^^ ^^le entire life of the com- panies. 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 mnldng members for loanable funds. From the stock- oans. 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 secui-ity of their stock alone to the THE BUILDING LOAN ASSOCIATION 2o3 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^'^^^s. A few of these associations loan money fixed rate hy to the members at a fixed rate without premium. These usually give the pi-ivilege 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 2. bales at i . i ,. n . t • <• i auction— sale IS the tollowmg: interest is set at a faxed 'hfterelT °^ ^'^^® *^'*^* ^® ^'^^ ^"^^ ^^^'^'^ P^^ ^^^ ^^ $100). A member secures a loan of $1,000. To do this he subscribes for 5 shares of $^00 each, which en- titles him to become a bidder for the amount desired. lie then enters tlie field of competition at an open meeting of the association, offering to pay a certain number of weeks of interest in advance. Let us assume that he gets the money on a bid for prepayment of 25 weeks' interest. The borrower 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 t'i^HerZf ^° ^'^'' ^ premium to be paid in the nature of a higtiest ' fixed percentage of dues — the amount bid to be f;;;;;;™™"" added to the 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 tional as premium. That is, on 10 shares he will pay $10 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 matures, 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 payments 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, xlgain, 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 ea-pone 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 n, , been said that the dues and profits are added to Flans for . , i i /• i tit, the distribu- the maturing or book value of 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 the 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 SI 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 month $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 $1,000 dues. Again, this $1,010.02 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 of investment. Amount of dues paid in by niembers each month. Amount of 1 n terest paid each month. Total amount paid in each month. Totalbooli value of each share. Profits per share, 1st month. $1,000.00 |5.00.;3 $1,005.00.0 $1.00 $.005 2d 1,000.00 5.02.5 1,010.02.5 3.01 .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 1,025 25.0 5.07 .07 6th " 1,000.00 5.12.6 1,030.27.6 6.10 .10 7th " 1.000.00 5.15.f 1,035.52.5 7.14 .14 8th " 1.000.00 5.17.7 1,040.70.5 8.18 .18 9th " 1,000.00 5. 20. ,5 1,045.91.5 9.22 .33 10th " 1,000.00 5.22:9 1,051.13.7 10.38 .28 11th " 1,000.00 5.25.5 1,056.39.;? 11.33 ..33 12th '■ 1,000.00 5.28..Z 1,061.67.5 12.39 .39 Total 112,000.00 $61. 67.. 3 $13,397. 22. .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 )io6 FINANCIAL INSTITUTIONS shares outstanding, this giving tlie rate of profit per share. By adding pi'ofits to dues paid in, the book valuation is de- termined. The tnlthdrawal valuation is fixed by the rules of the company. It is usually something below the Ijooh valuation, and for this another column may be added and the office 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, then the computation becomes more complex. There are be- tween 20 and 30 plans employed by the associations for the distribution of profits to serial stockholders. One of these plans is the same as that connnonly used for the determina- tion of partnership profits when partners have entered a business at different times, each series rejjresenting 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 their book valuation per share at the end of the third year are as follows : (1) Scries 1 500 shares, value per share |38.87 ('3) Scries 2 600 shares, value per share 25.37 (3) Scries .3 400 shares, value per share 13.32 (4) Series 4 4,500 shares, value per share 00.00 Let us suppose that the net profits for the fourth year are §3,0n0. 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 tlie fourth year. Justice to all parties requires that the lioldings of members be i-educed to some common basis. Since each stockiiolder pays in $1 per month, the first dol- lar paid on Series No. 1 has run for 48 months ; the sec- THE BUILDING LOAN ASSOCIATION 237 ond, 47 months ; 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 — 9^ 5 or 24^ months. In Series 2 the first dollar paid has run 36 months, while the last ran only 1 month. Tlie average length of time for this series is found to be — ^ — , or 18^ months. The average for Series 3, hy the same process, is found to be — ~-, or 12|- months, while 2 12 + 1 the average for Series 4 is only — ~^, or 6^ months. The 2 stockholders of the first series have paid in $600 per month. This multiplied by 48 will give the total amount invested by them. Members holding stock in the second series pay in $600 per month, which amount multiplied by 36 gives their capital investment. The third series pays $400 per month, and is multiplied by 24. The fourth, paying $.500 per month, is multiplied by 12. All of- these shares are reduced to a $1 investment level by multiplying the num- ber of dollars paid in in each series by the average time that the series has run. The result is as follows : Series 1 $500 x 48 = $24,000 x 24i = $588,000 Series 3 600x36= 21,600 x 18i = 399,600 Series 3 400 x 24 = 9,600 x 13^ = 120,000 Series 4 500x12= 6,000 x 61= 39,000 Total investment for one month $1,146,600 Using the total $1,146,600 as a common denominator, an apportionment is made : Series 1, -, ?^«'r!!n »'- tItT x |5,325 = $3,730.77 ^ 500 = |5. 46 per share. l,14b,tiOU 1,911 S-^-2-i|SS°'-i|fl^ '''''= 1,855.81^600= 3.09 " " S--^'l!SS-l|li>^ 5'^^^= 557.30-.400= 1.30 " " S-i-4'lASS-ii?>^ ^'^^^= 1B1.12 -.500= 0.86 " " 238 FINANCIAL INSTITUTIONS Distributing the profits thus determined to the several shares their l)ook values will be : Series 1 $48 + $5.46 = $53.46 per share. Series 3 36+ 3.09= 39.09" " SeriesS 34+ 1.39= 25.39" " Series4 13+ 0.36= 12.36 " " In apportioning the profits by this plan it is necessary to allow compensation for stock sales made at different times, so that all parties within one series may be on a common footing. Other plans of profit-sharing will not be gone into here. The theory of a share in a building and loan association is, "that when the periodical dues paid thereon, together with the profits earned thereby, amount to the Withdrawal t,- , x n ■ n ii j ■ ? j , ultimate, or, technically, the maiurmg value of the shares, the holders shall be entitled to re- ceive, in cash, such value, if the shares have not been pledged for loans ; if pledged for loans equal in amount to the mataring value, then the loans shall be canceled; if the loans do not equal the amount, the maturing value of the pledged shares, then the holder shall receive in cash the difference between the amount of the loans and the maturing value of the shares." It sometimes happens, how- ever, that a stockholder may wish to withdraw before the maturity of the series in which he is interested. This makes the adoption of some plan necessary to render substantial justice. This is usually determined by the rules of the company at the time of its organization and becomes a part of the investment contract. One plan, employed by about 200 associations, allows the withdrawing stockholder to re- ceive only the dues paid in on his own shares, the profits earned being retained for the benefit of those who remain until the series is closed or matured. By another plan the withdrawing stockholder receives dues paid in together with interest on the amount at a fixed rate ; this, however, being below the rate earned by the stock in his series. THE BUILDING LOAN ASSOCIATION 239 Again, the full profit earned may be paid on withdrawal, subject, however, to such fines, penalties, and dues unpaid as may stand on the books, together with a withdrawal fee prescribed by the rules of the company. A com- mon practise is to allow a definite proportion of the earned profits, as, for example, 75 per cent, the remainder reverting to the series. This proportionate rate may be conditioned on the time that the stock is run, the percent- age of discount diminishing with the length of time of the investment. There are 12 distinct plans described in the Government report above referred to. Provision is usually made in the constitution and by-laws of companies for the giving of notice by stockholders desiring to withdraw. It is also usually provided that only a percentage of funds received may be used to pay withdrawals. If notices of withdrawal call for more than the amount available for this purpose, the applicant must wait until there are sufficient funds in the treasury. It is this feature that protects the building and loan association from danger of bankruptcy- When all expenses are paid by fees and charges made at the time that loans are contracted for or stock is issued, the company can not become a bankrupt for the reason that no fixed or cur- rent charges can arise which will shorten the life of the in- stitution ; there are no current liabilities to meet. Obliga- tions are only to members or stockholders. CHAPTER XII THE COMMERCIAL BANK In getting together materials and organizing service for business on a modern basis, of highest importance are ar- Tlie service rangements for current funds — cash resources. of the coin- These are necessary to exchange. Neither mercial bank t • ^ ■ i. n .1, i toacommu- meciianicai equipment, supphes, nor skilled '"'■?/• labor can be obtained to advantage without a working cash capital. He who is prepared to furnish such funds is equipped to render a service for which the farmer, the manufacturer, and the merchant — all who are engaged in the active management of industry — are willing to pay. To illustrate : Brown has purchased a mill and water-power conveniently located on the edge of the great wheat belt. For this he has paid $150,000, but many of the machines are antiquated, and expensive to operate. Sixty thousand dollars more are expended in improvements. He now has his me- chanical equipment. Still there is much lacking. Grain must be purchased ; labor must be employed and wages paid ; transportation charges must be settled, and current ex- penses must be met. All these outlays must be made before return may be had on sales of goods purchased. He must NecessHii for look for profits for the year in the margin of cHrrentfinuU gain between total outlay and total receipts "ai izati'on of from sales measured in terms of the common infJn.itn/. standard of value. The outlay must be made weeks before return is had, and this, too, must be commen- surate with the size of the working plant and the volume of business handled. The element of time necessary to the 240 THE COMMERCIAL BANK 2il most advantageous production and distribution of goods requires that he provide a working capital (current funds) of about $100,000.' The question now presents itself, How shall these funds be carried ? Shall he lay in a stock of money ? A delivery Ob t I t ^^ ^^^^ ^ satisfy demands on contracts for business labor and material ; but the dangers entailed in loithout a keeping such an amount of money as is needed, the breadth of the field covered in his business transactions, the variety of interests involved, and the num- ber of payments to be made, would render this a highly ex- pensive form of cash assets. Every consideration disposes him toward a more economical form of " current funds," if such may be had. But the miller is not alone in this desire. His is not the only business interest in the community. Falls City, the place where Brown's mill is located, is a town of 10,000 inhabitants. There are a number of other industries, each of which is in need of working capital. The town is a local trade center, and merchants of every class are there with stocks of goods to supply the wants of country and town. If money were the most available means of effecting ex- changes, each would suffer the same inconvenience — each would be under the necessity of keeping a " strong box," fire-proof and burglar-proof ; even then they would not be secure against loss. Current funds are an absolute neces- sity ; with a stock of money provided, each would have to keep a guard, for no box is too strong to be " cracked " with modern instruments, and there is no combination lock that may not be " worked " if time and opportunity be given. The expense and risk of the money system would not end here. Brown is doing a business that would in- volve the handling of from $.''),000 to $20,000 per day; much of this outlay is made in transactions of small amount ; it would be necessary to have a comparatively large, highly paid, and responsible clerical force to count out the money and make change. The business organization of the whole 16 ;iJ:3 FINANCIAL INSTITUTIONS place would be encumbered with expense and inconvenience, and transactions at a distance would be made extremely dif- ficult. Such conditions as these furnish -the business oppor- tunity for such service as the commercial bank is organized to render. The service and the profits made and the mutual advantages gained by the first bank in Falls City suggests the organization of another, and still another, until at the present time there are six banks in the place, all doing a thriving business. With tliis equipment, instead of carrying a large amount of money in purses and vaults, and keeping a guard and a IB h f ' l^'i'ge corps of money-changers, the miller has nislies cur- on his desk a " check-book." His $100,000 Tlforml}"' "cash" capital is divided between his local '•lanh town and New York. Temporarily he has credit:- 150,000 in gold locked up in "safe deposit." This he withdraws and sends by express from [New York to Falls City. On arrival at his place of business he orders the express company to deliver the gold to the Falls City Bank ; with this he buys a bank account of $.50,000 — i. e., he '' deposits " the amount, and receives credit to like amount " on the books of the bank." He also takes all moneys received by him in the course of his business to the Falls City Bank and exchanges them g for bank credit. ISTow, when grain is purchased " Jaji/c from the farmers around, or from the local credit " for dealer, or when wages are paid or machinery money. . and suppues are bought, or transportation charges are to be settled, Brown signs a check for the amount involved. He draws against Falls City or ISTew York, as may be to his greatest advantage. For local pay- ments he makes out a local check ; if an Eastern account is to be settled, he checks against New York. It costs him nothing to pay in New York what he owes there, whereas he would have to pay " exchange " — i. e., cost of collection — if he sent a Falls City draft. THE COMMERCIAL BANK 243 But the bank renders another service. JSTearly all pay- ments made to the miller for goods sold are in the form of credit. " Cash " sales are for checks and drafts 3. Alloit:s its J, . ^ i{_ ,' 1^ 1 customers to ot Customers ; sales on "time are exchanges ronvert of goods for notes or credit accounts — credit " business i i-^ _l- j> i credit" into ol)Iigations ot purchasers to pay money at a ••t>ank^^ future time. ISTone of these may be used to advantage by Brown as '' current funds " ; neither can he present them for payment at the time and place siDCciiied ; nor can collections be made to advantage by Brown personally. The places are widely scattered ; it is important also that he give his time to other matters of business than the collection of checks and drafts and credit obligations. He therefore writes his name across the backs of checks and drafts (indorses them) and turns them over to the bank. The bank not only assumes to attend to their presentation and collection, but it credits Brown at once in full with the amount turned over. The miller has a pass-book — i. e., a book of convenient size to be carried in his pocket — in which the receiving clerk at the bank enters the amount of the checks and money received " for deposit" on the debit side. The debit side of this book represents Brown's credit at the bank — the amount that tlie bank is indebted to Brown. Periodically — say once a month — this pass-book is turned over to the bookkeeper at the bank, and he enters on the credit side all the items paid out by the bank on Brown's order. The bookkeeper then strikes a balance and makes a new entry of the amount still owing by the bank on the debit side. Each afternoon Brown's bookkeeper makes a memorandum of all the money and checks received in the course of the day's business on M'hat is known as a " deposit slip." This, together with money, checks, and pass-book, he takes to the bank and hands to the receiving teller for a new entry to Brown's account. In exchange for the checks, drafts, and notes (commercial paper) sent in for " deposit," Brown receives " bank credit," 244 FINANCIAL INSTITUTIONS the l_>aiik relying on Brown's guarantee of indorsement on tlie commercial paper deposited. If, however, Brown does not wish to assume the respon- sibility of indorsing the checks and drafts " for deposit," or if the bank does not care to exchange its credit agent for the " deposit " for these checks, drafts, and notes 2}reseutcition q^ even terms ; or, again, if there are notes and tion of accounts that have been obtained by Brown in " business t|^y course of his business that he does not care to exchange for " cash," these may be turned over to the bank on Brown's indorsement "for collec- tion." The bank in this case does not at once give Brown the right to draw against it. It does not exchange anything for these credits so turned over. It simply assumes to act as Brown's agent for the purpose of presentation and col- lection, and when collection is made sends notice of the fact. The funds so held are trust funds, and they i-emain " in trust " with the bank u.ntil order is received from Brown to place them to his genei'al account ; in which trustee "^ cwe, if the bank acts upon his order, an ex- change is made of " bank credit " of like amount for " trust funds " held, and the trust ended. It may be to Brown's advantage at times to withdraw a cer- tain amount of money from the bank ; in other words, to exchange " credit " to his account for " money," which amount so withdrawn may be placed with the bank in trust for some special use or business purpose. This will also place the bank in relation of trustee instead of debtor, and the funds so held will be held for Brown and subject to Brown's ordei- and direction ; they can not be used by the bank as assets of its own. The bank may serve the busi- ness community in many other ways as trustee in the caring for and handling of current funds. Brown's N"ew York bank account may run low, and he may wish to increase it. For this purpose he may draw out THE COMMERCIAL BANK 245 gold from the Falls Oity Bauk — i. e., may demand jjayment of his deposit in gold or other " legal tender " — and trans- fer this to New York by express. But if he has in mind his own business advantage he will not withdraw gold or other forms of money. It will cost him, exchange. ^^Ji ^^ ^^^' SpljO^IO to ship money to New York. He will instead seek " exchange." lie asks the cashier how much he will charge for a check of the bank on its New York account. The bank could never ask more than the cost of sending gold, for in such case the customer himself would " draw " on the bank. It will usu- ally ask less. The bank is able to do this because demands are made in New York for money to be sent to the West. If checks are drawn for remittance to the "West, then, on set- tlement between the various banks, only so much money will have to be sent from one to the other as represents the balance due. The Falls City Bank ma}' have on its own counter §10,()00 of " exchange " on New York, or may know where it can obtain that amount at par. If Brown wishes to send $15,000 to New York, and the bank has, at par, $10,000 of New York exchange, at $1 per $1,000, it will cost only S5 to send the balance. The bank could there- fore sell $15,000 of exchange to Brown at $6 and make $1 profit on the transaction, while Brown would be $9 better off than if he had shipped the money. He would prefer to pay the $6 rather than spend the time necessary to find exchange elsewhere, even though he might save 50 cents or $1 by so doing. The sale is therefore made. Brown makes out his check against the Falls City Bank " on account of New York exchange " for $15,000, and in exchange therefor becomes the owner of a $15,000 cashier's check, or draft, of the Falls City Bank on its New York " reserve agent." In the course of his business Brown may have contracts for the delivery of grain in Liverpool. As a matter of advantage in purchase he may wish to go to the interior of Manitoba for wheat. To purchase there, it may be to his 24(i FINANCIAL INSTITUTIONS interest to have money instead of banli credit. He witli- draws from the bank at Falls City $5,000 in paper money — 7 Buys and ^® '^^^^ ^"^^ °^^® ^^ ^® encumbered with the sells foreign weight Or run the extra risk of cai'rying gold. iiionajs. jjg finds, however, that the farmers are not acquainted with this sort of "paper," and do not cai-e to take it in exchange for wheat. He still does not find it convenient to carry tlie necessary amount of coin, and there- fore goes to a Canadian bank for the purpose of exchanging American "bills" for Canadian "paper money," a form of credit that the farmers have confidence in, and are will- ing to accept as a par value with gold. But the Canadian bank will not trade without profit. It offers to buy Amer- ican bills at 98 cents. In exchange for $5,000 of American money, therefore. Brown receives $4,900 in Canadian bills, which he takes out into the Manitoba fields and exchanges for wheat. He has paid $100 exchange on Canadian money, but has had a service rendered him by the Canadian bank that is worth much more than the price paid. On his way homeward he stops at Deadwood, where he finds a merchant who wishes to buy flour. The trader's 8. Ads as business is to furnish supplies to mining-camps. bullion He has little money, but j^ossesses a stock of '° ^''' bullion which he has received in the course of trade. Brown offers to sell flour F. O. B. at the market price at Falls City, and to receive in payment bullion at the market rate in ISTew York. The bullion is consigned to his l^ew York bank, and on its arrival Brown is given credit on his account at the market price of silver, less commis- sion. Eeturning to Falls City, he flnds awaiting him there notification of the credit given, and he thereupon places on board the cars, billed for Deadwood, the amount of flour contracted for. In this way the sale is made to the Dead- wood merchant as readily and conveniently as if he had possessed gold or paper money instead of bullion of uncer- tain quality. THE COMMERCIAL BANK 247 The bank has served Brown and his business by reHe\'- ing him of the expense and risk of keeping current funds 9. Binds to- in the form of money. It has furnished him gether and with a kind of Credit that will serve him more business rela- conveniently for cash. It keeps his credit ac- tions. counts and makes collections, through its agents, of all checks received by him in his business. It acts as his agent for the collection of notes and bills. It serves as trustee in matters where he may gain business advantage through such service. It has enabled him to procure money with which to deal in foreign lands. It has enabled him to dispose of bullion and to trade with those having it as con- veniently as if they had coin instead. All these services are of marked advantage not only to Brown, but likewise, by similar arrangement, to all other business in the com- munity. Throughout the country, in fact throughout the civilized world, these institutions have grown up, and by maintaining their own credit engagements with others, men are able to make exchanges of large value by use of credit instead of money. By maintaining its own credit the com- mercial bank likewise compels its patrons to fulfil their obli- gations ; by giving greater certainty to business judgment and greater facility to exchange, it has become a potent factor in widening the range of commercial industrial en- terprise and increasing the opportunities for profit to those who have the ability to avail themselves of industrial and commercial advantage. Such, in brief, are the principal services rendered by the commercial bank to the business community. But how does the bank profit ? Does it charge its cli- ents for making exchanges of " money " for " bank credit " ? 'So. Does it receive compensation for keeping fhehanll deposit accounts ? ISto. Does it charge for collecting checks on other banks that are re- ceived in the course of business and turned in "for de- posit " ? No. Does it charge for " collections " ? In most 248 FINANCIAL INSTITUTIONS cases it does not. More than this, it ofttimes pays its cus- tomers something for the privilege of performing these services. How, then, can the commercial bank afford to employ a staff of officers and clerks, build and maintain costly business houses and strong vaults, keep guards and watchmen, carry a large stock of coin and bullion of their own with which to meet outstanding credit when demand is made for money, pay mailing expenses and transporta- tion charges, and make other outlays incident to services rendered to the business community ? It meets all these charges out of the income of its business. Banks pay large salaries to officers and employees, and they also make a good profit in di\ddends to their stockholders. The bank obtains a small proportion of its income from sales of exchange, from transactions in coin and bullion and other incidental services, but the principal in- Profits arise ,i • i • i ,i i t t- ,. out of ex- come — the income on which the bank relies tor change of Jts success — arises from the fact that it deals in credit" for Credit — buys and sells credit. For the pur- "time cred- poses of the banker there are two kinds of credit : 1. Demand credit — that which is due at such time as it may be presented for payment, and which bears no interest. 2. Time credit — credit that bears interest (interest being proportionate to the amount of money prom- ised, the length of time that payment is delayed, and the rate agreed on). The function of the bank is that of fur- nishing to business men a kind of funds that will pass current, such credit as will be received in exchange in lieu of money — that is, as " cash." The business commu- nity needs current funds — currency. Under more anti- quated systems of business, money served the need for cur- rency in exchange. The bank offers a form of currency that will serve them better than money. It offers bank credit — its own promise to pay money on demand. To make its promises pass current, however, it is neces- sary to keep enough of money on hand to assure the public THE COMMERCIAL BANK 249 that it can meet all demands oiitstanding. If tliis is done, if the bank so conducts itself that the business community has coiijidenee in it, if, in the judgment of "de- ofbcuik"' positors" and other members of the commu- nity, it M'ill at all times be able and willing to meet its promises, then the superior advantages of using bank credit instead of money -will cause the community to do nearly all of its business with the demand promises of the bank. If the business public know that they can always get gold in exchange for " bank credit," then the obligation of the bank will be considered " as good as gold," the value of the credit promises will be equal to the value of the thing promised. The bank, therefore, must keej^ such a stock of coin (or legal-tender money) in its vaults as wdll enable it at all times to satisfy the public that it is ready to meet its promises. This stock of money necessary to maintain its " credit " is usually contributed by its stock- holders at the time of its organization. This money con- tribution is its capital. So long as there is no doubt of the integrity and the ability of the commercial bank to pay, it will require only a relatively small amount of money to meet demands. In case of Brown's business, his bank-account may range from $5,000 to $100,- 000. Here is a widely fluctuating credit, to be sure, and if the bank had to keep $95,000 in its vaults to insure its ability to meet his checks it could profit nothing from serv- ing him. But Brown is not its only customer. The bank has several hundred others. When Brown buys his grain he delivers checks to a hundred different farmers and grain- dealers that are also customers of the bank. Brown's ac- count is simply transferred to others on the books of the bank. A little gold, or silver, or paper money will be drawn out daily to meet the demands of trade — to make change, perhaps, or to do business out in the country, where the •_\'>0 PIXANi'IAL IN'STITI'TIOXS people do not know enoTigli abcnit the tinaueial standing- of ^nl^^ne^s men to be M'illing to aeeept elieeks — but in the ,) J.,, daily eourse of tratle about as nuieh luoiiev is dfinandsfor eolk'eted by merohaiits and bank eustoniers """"•"' from "ontsiders" as is drawn out. This is brought to tlie bank and exehauged again for bank ereilit. The amount of eoin aetually needed, M'hen pnbHe eonlidenee is undisturbed, amounts to but a fraction of 1 per eent of the eredit eurreney of the bank outstanding. In times of linaneial disturbanee, when public faith is shaken, it has been found by experience that if a bank continues to meet its obligations as fast as payment is asked, confidence in its ability to pay all demands will be restt>red before ;>(• per cent of its otitstaiuiing credit has been redeemed. Under all circumstances, therefore, it wot^ld not be necessar\' to carry in money more than l\"> or ;Ui per cent of its de- posits. "With $,">(>, oOO money capital invested by the stockhold- ers, the bank will be able to sell from 8lcO,000 to s^-JiHi,(H>0 Thf bfink-'ii '-^^ '^* '■^^^'^ crediit accounts, and will at all times salable be able to deliver cash on demand. This is a smaller ]iercentnge of "eredit" than is usually sold by the hanks as current fnnds " deposit." The Federal law rcipiircs a l.'> per cent rescrx e for country banks and iTi per cent for city (^reserve") banks ; but it allows i> per cent of the i:> per cent required of the country bauks to be deposited in the city reserve banks and to be counted as a part of the reserves of both. "With a !^,'i0.t»(U> capital held in its reser\e a bank could purchase by use of its own credit —make investments— to the same extent that it could if it had S-'il(>,Ot»0 or more of gold in its vaults. AA^luit will the bank do with this i^'JiHkOOO of disposable credit { The stockholders have invested $,"ii),(HHi of money in the bank. The bank has S-_'iH>,(HH> of disposable credit for investment in other things. It is in the disposition of its credit funds that it builds up its clientage, renders the TUK COMMERCIAL BANK '-'.M liigliost service to the eouimimity, tiiids its owu groatost protoetioii, and maizes the greater part of its iucome. Let us sav that Browu sells ou the average $r>0,tH)(i Proii.\< bafid 4.1 4." • 11 1 i ii ^ o J.- on iiivesi- vvortli ot mill products per mouth, bouie oi mint of this is sold at Chicago, the remaiuder iu jN'ew York and Liverpool. He deals -with tirst- class wholesale houses. But it takes time to deliver goods after a sale is made ; theu, too, his busiuess arrangemeut with his customers is that the bills shall be post-dated — that is, if a sale is uiade ou Jauuarv "JO, teu days, perhaps, may be allowed after delivery and the bill will be dated 3[ay 1. This is the date upon which it will be due and payable. It is also a riile of business with him to allow ."i 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 siich of his customers as do not avail themselves of the ."i per cent discount. In this case, the miller may be able to get ."1 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, Bro\VTi may tind it to his ad^'antage to buy a large stock ; otherwise it may be shipped out of the coiintry, and later he would have to pay ( 'hicago 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 au arrangement whereby he is to turn over to the bank " bills " against his customei-s 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 lie may need in his business (not to exceed On per cent of the amount of bills placed in their handsV The amount borrowed from the bank is represented by Brown's promissory note payable ou or before ninety days, ^vitll intei'est at 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 outstanding. Assuming that $4()0,- 000,000 of the deposits in other banks were drawing inter- est, the credit sold by those banks from which an income was derived would be 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 exchange for their own credit (for deposits and notes) were as follows : Commercial paper 12,496,751,251 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 come the gross income of the bank, from which is to be obtained its expenses and profit. CHAPTER XIII THE TRUST COMPANY A wELL-OEGANizED sjstem of Credit involves a great many fiduciary relations. It is to give greater certainty and facility to the administration of these that the trust riiinpiiny is organized. To make the more common trust relations concrete, as well as the more common demands for their administration, let us recall the experience of a retired banker. At an advanced age he "withdraws 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 i- " of the trust not been long, however, in retirement when an company. qj^j fj-Jend asks him to allow his name to be in- serted 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 poi-tion 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 the estate the attention which it demands. The judge urges A'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 257 is thrust upon him in a manner that he can not refuse it. A neighbor has died, leaving an infant daughter. By will he had appointed A the guardian of his child and the 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 make 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 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 A's own busi- ness — investment. But all in all, he 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- Tlie econo- o ' o r rr mies of the ment as receiver. They point out his special trust com- fitness ; his acquaintance with the men and 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 give attention to details, an 17 258 FINANCIAL INSTITUTIONS experienced and capable financier must pass judgment on 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 vpas in this country that it had its origin. Ours was a new society and one in vphich business activity was a most 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. In Europe a large proportion of Origin of the estates were so held, and men found among trust com- their fellows those who had the time, intelli- pani/. gence, and financial standing necessary for the safe and successful managing of trusts. In America the conservative, 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 in- vention 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 Eevised Statutes of New York, the term trust company signifies " any corporation formed for the purpose of taking, acceptina;, and executing Ilethodsof ,\ \ ,*'i ,K, *' ■^.. J . -r organization such trusts as may be lawfully committed to it, —Legal steps and acting as trustee in the cases provided by necessary. , „ ~ • i • , • law. io give a more comprehensive notion of the constitution of the trust company and of the care exercised in their 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 organization 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- ^ y^^g ital stock and the number of shares into which organization the same is to be divided — at least $100,000 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 will 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 2 ]\r f- f mustbepublishedatleast onceeach weekforfour intent-ion to consecutive weeks in a newspaper (to be designa- organize. ^^^ |jy ^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^Su- one of the duplicate copies of the certificate of perintendent organization must be filed in the ofiice of the 0/ 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 ^no FINANCIAL INSTITUTIONS of the State, together with evidence of publication and service of notice before described. " If such certificate is iu due form and duly executed according to law, and is accompanied by evidence satisfac- tory to the superintendent of the proper publi- tion " ""^" 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 ascertain _//'o»2/ the hest sources of informa- 5 Eramina- ^^'^^^ '^^ ^^^ command (1) whether the general tlon 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 Ai thori ^Kiine or cause an examination to be made in zation to lie- order to ascertain whether the requisite capital gin business. ^^ g^^^j-^ 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 offieial 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 atithorization 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, have 7 Trust *^® following powers : (1) To be appointed and poivers accept appointment of executor or of trustee granted. 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 property 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 record, 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 their agent in the manage- ment of such property, or to transact any business in rela- tion thereto. (6) To receive deposits of trust moneys. y«;a KlNAN(JIAI"i INH'rri'UTIONH BCCuritit^H, and otlicr J)C1'hoji;i1 ])ro|K!r(.y fr(jiii any ])0rHOii or corporation. TliuMO \V(; rriiiy (tall the f^cjMcral (.ruHt j)owcrH ctjiifcrrcil. In addition, there are wliat may be Htylcd the xpcfinl truHt powers, {rrowinfi; out of nio(Jern in(!lJio(lH ol' lown-K corporation iinance, an(.i truHt hci-v ice demanded in tlie orf^anization and management of larf^o buHinesH corporations. 'I'liese are as foll(jWH : I. "I'Ik; j)ower to act as the fiscal or transfer agent of any Static, nuinici- [tality, Ijody jjolitic, or corporation, and in sucii capa<',ity receive and disl)urHC money and transfer, reffist(;r, and c(jn- sign certificates of Htoci<, ])on(]s, or otlier indebtedneHS. '/J. The power to act as trustee under any mortgage or bond issued 1)y any rmmicipality, body pohlic, or corporalion ; and, '■'), accept and execute any other inunii',i|)al or corpo- rate trust not incoiiHistent witli tlie laws of the Stal,(!. To give effect to tiicsc; trust powers, :uu\ enable tlic com- pany to manage the fun\^i i\;S5^ ' Entrance to i;^^'/ Vam '^.^ TeioplumijPelivery T^i^i^if:^:^^^^ .^■?,™Jt-:^n-3r„.4p'»'- ■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 on the OrqanizcUion organization of the broker's office. Customers ofthebro- are not allowed on the floor of the board. ■ersopce. They are found in the office of the broker. In what is known as a board-room (see page 278), usually in the rear of the broker's office, 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 pour 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 T/ie specu- ^^^^ "^^ employ a broker to make purchases lative side of and sales. When he wishes to purchase, he ro miff. g^gg ^^ ^ 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. The investor is one who purchases a property or business interest outright and as a result of judgment based on " what tlie concern has earned." His profits may come from THE BROKER AND THE BROKERS' BOARD 277 a rise in value of the property, or from income in the form of interest or dividends, but in last analysis it is dependent on the income or prospective income of the 1)'} 9/3 '}) Pit fit! between in- property. The speculator, however, cares not vestment and what may be the income-producing power or speculation. . -j. j? -u ■ ah earnmg capacity of a business 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, as one may say, is his business, it is, usually, not to his advantage to purchase 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 trans- actions also that much of the flnancial uncertainty and mis- fortune 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- jy^g room, or going in and out keeping an eye on speculative the market, to which may be traced a very large constituency, portion of his orders. 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 279 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 sYop*""^^'' *^® market, a class of business has been organ- ized which has its center in the " bucket-shop." This is nothing more or less than a room in which quota- tions are given representing the fluctuations of the market and which allows one to take chances on price movements. In this it does not differ from the regular speculative busi- ness in the broker's oflace. Their methods differ, however, in that the ones conducting the oflice 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 New York Central is doing. The oifice has it entirely within its own power to say whether Now 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 on whether he will " try the market again." CHAPTEE XIY THE INSURANCE COMPANY In previous chapters the nature of contracts of security has been fully gone into. Contracts of security for the payment of credit obligations are specialized ofliiZmnie. ^'o^ms of insurance. No better illustration of concrete insurance may be found than the forms of personal security heretofore discussed as iudorse- iTient and (juarantee. 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 injuring Drexel against loss on account of default in the payment of the notes by Gates when due. An insurance poKcy 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 policies 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 $4:5;],420. Its losses paid were only $75,352—1. e., about one-half of one per cent of the risks taken. A wholesaler 283 THE INSURAXCE COMPANY 2S3 has an opportunity to sell a bill of goods on ninet}- 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 concern dealt with. To obtain such a policy the wholesale house will make a statement 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 accoi'ding 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 price. 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 liy 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 fi'^'e hundred taken. As shown before, the premiums received from the four hundred and 284 FINANCIAL INSTITUTIONS ninety-nine far exceeded tlie 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. lu this the policy is one of The Security reinsurance of secured credit. The contracts Insurance ' of Security to credits issued are entered into to Company. 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 cecurity runs — that is, his judgment may be msrirance. ^^^^^ ^^^ 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 mSURANCB 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 secui-ity. 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 olfer a low rate of insurance to the customer and at the same time protect itself against net loss by the receipts of premiums in excess of the amount paid out on policies. To illustrate : The German-American Heal Estate Title Company of New York sustained losses of only $25 for the year 1900, while during that time it received in premiums $17,6(1S. 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 cent 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 Biiferent around risks incident to honesty or business forms of fidelity ; to injuries sustained in travel ; acci- nscs. ^gjj^ ^^ 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 the Lloyds 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 popu- lar spectacles, the financial return on which depended on chances of weather, health of the sovereign, and many other fortuitous circumstances. Before undertaking business of this kind — before the building of temporary stands for spec- tators, placing decorations of flowers, and arranging displays of perishable goods that depended on the happening of the event at a certain hour and place — business conservatism suggested the shifting of the risk to concerns whose busi- ness it is to undertake hazards and to distribute loss of in- dividuals over and make them a charge against the profits of the many. Policies on this event alone, it is alleged, 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. Every individual insurance policy or contract is a spec- ulation. It is a speculation of the most fortuitous kind — a Individual form of risk that a conservative business man risk and^ does not wish singly to undertake. In consid- sveculation. j.- j} •' / n j_- _e ' eration tor 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 comprehend the facts and forces which affect the market to such an extent as will allow him to make a conservative judgment. Both of them are certain, however, that there will be fluctuations in market 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 market 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 individual 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 individucd risk is based on a highly speculative uncertainty. Eor this no data may be procured by which a conservative judgment may be made. Busi- insurance. ^^^® experience, however, has shown that among risks of a certain 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 every individual 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 3'ear — 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- T!\R principle "^S ■'i^® have been reduced to a problem of busi- 0/ life ness certainty in the organization of the life-in- surance company. In l(i54 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 naathematical conclusions as to probability of death among various classes of men based on experience. While the life of an individual man, therefore, is uncertain, yet it may be counted on 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 such lives, it is also a business certainty that 16 of these would have to be paid the second year, 17 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 death losses of those who die is the The"natural problem of life insurance. For this purpose premium" two methods are prominently employed. The " level pre- first is that known as the '' natural premium " mium"plans. qj. assessment method, which implies that on the death of each member of a society or group of insured, those who still remain in the society or group will contrib- ute ajiro rata in order to pay the death losses on those who have died. If each of one thousand take out a policy for $1,000, if these were young lives, and if during the first year only three out of the thousand were to die, then an assessment of $3.01 on the 997 remaining would be suf- ficient to pay the death claims. Leaving out of considera- tion expense of administration, 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 on keeping within the group or society employ- ing the plan an increasing number of members, in order that as the policy-holders attain greater maturity of years 10 290 FINANCIAL INSTITUTIONS and by death drop out, the assessment may not rise to i prohibitive rate ; for if the society did not increase, witl each death the number of survivors would proportionately decrease, and the rate of assessment vsrould necessarily ris( to meet future losses until the last survivor would be re quired to pay an assessment of $1,000 to the one next be fore him, and he himself would be left without protection. Many examples of the working of this principle art found within what are known as fraternal and assess ment insurance orders that provide no reserve) Assessment f^y. ^^g payment of death claims. The Loya insurance. ,,.£. „. . . .,• Mystic Legion of America is an associatior organized in 1892. The record of death-rates, togethe: 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 $5,419,000 5,903,000 6,350,000 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 organizec in 1879 which, in its insurance in force, rose to a higl rank (had outstanding something like $130,000,000 ir 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 th( following result : Ybab. Amount of insurance in force. Death-rate per 1,000 1897 $51,612,500 44,023,500 37,294,500 17,073,500 10,736,500 26.9 30 8 1898 1899 32.0 40.8 43.3 1900 1901 THE INSURANCE COMPANY ' 291 These two societies may serve to illustrate the extremes ia the working of a principle that is as certain as death itself. As stated before, the success of such an organiza- tion depends on 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 render them unac- ceptable by 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 The reserve q^ what is known as the "natural premium" — 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 uj) the defi- 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 inter- est 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. ISTo better expose of the working of this principle may be found than that given in an ad- dress by Mr. J. "W". Hamer before the Wharton School of Finance of tlie 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 I1T.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 ii|)on 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 . 37 Out of this net premium is provided the cost of the first year's insurance 7.05 The difference $6 . 33 is the sum laid by at interest as the year's contribution to the reserve, reducing the amount at I'isk from $1,000 to $993.78. When this insured member has reached the age of fifty, he is charged the same net premium of 13.37 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 policy to $303, 'which, deducted from $1,000, the face of the policy, has diminished the amount at risk to $697. " The insured memlier having attained the age of seventy-five, is still charged the same net premium of $13.27. His reserve has reached $680.0Y, 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 1680.07 Net premium, as before : . . . |13.'2T 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 tor the current year upon $319. 93 27.06 and you have a balance or reserve of 1694.01 reducing the sum yet at risk to |305.99. " 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 policy. 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 or ordinary life, tontine, and other plans, but of the two through them and in them all may be found lifeimur- ^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- 29i FINANCIAL INSTITUTIONS serves kept by the life insurance companies; the capital and surplus invested in fire, marine, and other forms of rpi -f; ■ I insurance 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 between fifteen and twenty billions of dollars. The re- sources in the hands of the life-insurance companies alone on January 1, 1901, amounted to $1,754,662, Y12. 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 years 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- l'^'i'0,972,061 to $1,742,414,173 ; in other words, ments of within ten years they have added one billion insurance ^o[\a,rs to their assets. companies. Tnese assets are very largely held in the form of investments. A classification of investments is as follows : THE INSURANCE COMPANY 296 Real estate $158,119,116 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 11,614,439,761 Besides these items there appears among the assets of companies what is termed " cash in oiiice and in bank." The cash "^^^^ ^^^^ ^^^ ^ pecuhar status. The laws of items of the several States require that the insurance companies. Companies make a statement of investments, assets, habilities, etc., in order that there may be a published record of their doings. Furthermore, the various States have appointed special officers for the in- vestigation of the condition of insurance companies for the protection of policy-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 conti'ol 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 atti- 296 FINANCIAL INSTITUTIONS tude of certain unintelligent inspectors to interfere in what may be considered a legitimate business arrangement, and one which does not necessarily jeopardize any of the inter- ests of policy-holders or of stochholders. "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 \^ ig tj^^t what are Called " gilt edge " stocks the security and 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 retiirn to his company an income which will produce a dividend to policy-holders and to stockholders. Moreover, a certain j)ro rata of the funds of insurance com- panies are loaned to speculators on what may be called " call " or " collateral " loans. These have as collateral se- curity listed stocks and bonds. The Equitable of ]^ew 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 becomes incumbent on an institution making such loans — and most of the old line companies do make advances of this kind — constantly to keep a watch of the market in order that the margin of safety may not be impaired. The usual thing 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 they are 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- THE INSURANCE COMPANY 297 spire to that end, every financial concern in the country might be brouglit to a condition of distress, possibly of bankruptcy. On the other hand, with the strong support of such companies the market, financial institutions, and the Government itself find in insurance companies tlie greatest financial security. The efliect 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 relieving financial distress in time of strain. IISTDEX Accommodation, signature to note, 120 ; accommodation mortgage, 156. Appropriation, funds oljtained by, 87, 88. Assignment of note, 121. Balance-slieet, 152. Banli draft, Bank of the United States, 67. Bank 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 ; Trust 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 Reading Company, 175 ; blanket mortgage bonds and consolidated mortgage bonds, 175 ; divisional bonds, 175 ; Collateral Trust bonds. 175 ; 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, 183 ; coupon bonds as distinguished from registered bonds, 185; 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 tlie 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 arc computed, 235, 206 ; how profits are shared, 237 : plans for the ■withdrawal of funds, 2;3S. Business. What is business? 3; viewed a^ a conte^t for yains, 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, Y ; rela- tion of tinancc to business, 7-8. Capitalist, definition, 12; functions of, no. 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 gidd certificates, 160, 161. Collateral gold receipt, 160. Collateral note, 123, 124; collateral judgment note, 126. Collateral trust certificate of Asphalt Co., 162. Commercial Banks. Tlic commercial bank as a financial institution, 240 ; obstacles to business without a bank, 241 ; servjees of the eonjmercial bank in a eoninnuiitv, 242-247; 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 nf investment it may uiiikc, 2'i2, 25:; ; magnitude of CL'mmercial banking business, 254. Commercial Paper. Sales of, as a means of obtaining funds, 109-148 ; promis- sory note, 111. (See Tromissory 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, 30 ; credit used as current funds, 31 ; essential characteristics of credit, 33 ; princi- ples of exchange as applied to credit, 34 ; value and pi'ice of credit, 35 ; basis of judgment as to value of credit, 36 ; 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 (see 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; ca})italist, 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; conmiun stock, 100; preferred stock, 104 ; promissory INDEX 301 note, 111 ; protest, 129 ; commercial draft, 137 ; mortgage, 153, i:)6 ; bond, lij2; insurance, lS-2 ; investment, ■277 ; speculation, 278. Dividend check, 61, Documented bill, 142-146. Dollar. AVhat 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 method of acquiring property, 2 ; importance of funds as a medium of exchange, 3 ; funds ob- tained by exchange, 89-191 ; ex- change of labor for funds, 90-92; exchange of tangil>le property and business interests for funds, 92-1U8 ; 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. Deiinition 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, 3 ; 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 agenta, 195-297. Gift. As a means of acquiring prop- erty, 1; the method of non - in- dustrial and dependent membei'S 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 indorsement, 122 ; guarantee by sep- ai"ite 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 S: Co., Philadelphia board-room of, 278 ; chart of private wires of, 280. Inheritance as a form of gift, 82 ; the assumption on which iidieritance rests, 82, 83; principle of trusteeship applied to inheritance by Mr. Car- negie, 83-N5 ; laws of, 86. Instruments of transfer of credit funds, 55-76 ; custouierV check, 55-62 ; form of, 56 ; manner of drawing, 56- 59 ; check of Andrevi'. Jackson, 67 ; cheek of Daniel Webster, 58 ; cheeks drawn for special purposes : for wages, 60 ; dividend check, 61 ; coal- shipper elieek, 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 cheek, 65 ; cashier's check, 66 ; bank draft, 66, 67 ; letter of credit, 67-70 ; money order, 68; traveler's check, 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 insurauee policy, 282. Insurance Company. Credit insur- :;(i3 INDEX ance, 282 ; risk involved on account of non-payment of contracts, tlie credit insurance company, 2S2, 283 ; the principle of community responsi- bility applied to credit insurance, 2^4 ; the security insurance com- pany, 28-t; the insurance company a guarantee of sufficient security for payment of credit contracts, 284 ; title insurance, 28i ; advantages of this form of guarantee, 285 ; equipment for title insurance, 285 ; other forms of risk made the iDasis 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 conmiu- nity of speculative individual risk, 28S ; 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 : (l) the "assessment method," (2) the " level premium " plan, 280 ; 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 I'lan, 291-298 ; financial side of insurance, 294; investments of insurance com- panies, 294-295 ; significance of what are known as " cash items," 295 ; in- surance companies as factors in the security market, 29ii, 297. Insurance policy attached to bill of lading, 144. Investment distinguished from specu- lation, 277. Invoice accompanying documented bill, 142. "Ironclad" note, 123. Jackson, .Vndrew, check on Bank of the United States, 57. Judgment note, 125. Labor. Exchange of lalior 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. Relation of the lease to funding methods, 189 ; the lease as security for credit, 190 ; uses of the lease by credit stores, ] 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, 153-161; (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 nirmey, 13, 14 ; conditions on which funda- bility and value of money depend, 14-16 ; 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 E.xpress (_'o., 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 eertificates, 27; silrcr certificates, 28 ; Treasury ;iotes 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 iUiistration of mortgage note, 154 mortgage contract, 155 ; mortgages without separate notes, 156 ; aceom- modation mortgages, 156 ; chattel mortgages, 1 57 ; farm mortgages, l.r.7 ; 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, 1'20 ; ac- commodation signatures and indorse- ment, 120, 121 ; guarantee of note, V22 ; 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 purehasu of Glen Echo Kailroad bonds, 166, Eeeeipt used as cheek, 'i2. Receiver's Certificates. Their nature and their uses, IsV ; distinguished from bonds, 187; security fnr, IHS ; advantages of use, ls9. lielease 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 rise to savings institutions, 216 ; first sav- ings-banks, 217 ; the safe-keeping of funds, 218 ; the investment of sav- iugs, 218, 219; how to deal with a savings-banlv, 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, 22G ; 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 & Wilkesban-e Turnpike Co., 47 ; sutler's scrip, 47 ; store scrip, 48; Camden & Wood- bury Railroad scrip, 48; Che.sapeake & 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, ?>oi INDEX 37 ; parts of promissory note contain- ing conti'acts of security, 1^0-1 2(}. Shares. (See Stock.) Sale of corporate shares, 95 ; ditference between cor- porate shares and partnei'ship inter- ests, 98. Rhinplasters. (See Scrip.) Silver-sheet money, illustration, 23. S]teculatLou, distinguished from in- vestn;ient, 277. Stuck. Illustration of share in Bank of the United States, 97 ; common stock of Dnited States Steel Co., 99; non- cumulati\e preferred stock, 101 ; common stock of Gramercy Finance Co., lO'J ; preferred stock, cumulative, of Gramercy Finance Co., 103 ; sig- nificance of common stock, 100 ; of preferred stock, 104; iirst and second preferred stock, 106 ; cumulative and non-cumulative preferred stock, 106; trust ccrtilicatcs, 108 ; other forms of stock, 108. Stock E.\change. Stock-l.roker.s, 269; brokers' boards, 270 ; history of stock- c.vchaiiges, Philadelphia board, 270; London Stock Exchange, 270 ; New- York Stock Exchange, 271 ; ('onsoli- dated Stock and Petroleum Exchange, 272; organization of a stock ex- change, 273, 274; floor-plan of, 274, 275. Tioga County Hanlc, note of, 44. Traveler's Check Of American Express Co., 70; of Jirown Bros., 71, 72; of Knauth Naehod & Ki:iline, 73. Treasury of the United States, 195- 208 ; relations of Treasury to mod- ern systems of linance, 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 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 Treasuiy, 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; inadeciuaey 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 ccrtillcate, 108 ; of Standard Oil Co., 105 ; Iirst preferred, of Heading Co., 107. Trust Company. As agents of sale and transfer of bond issue, lf'4 ; service of the trust company, 256 ; its econo- mies, 257 ; conditions out of which ijistitutiojis arose, 258 ; methods of organization, 258 ; legal steps re- quired in New York, 259, 260 ; general trust powers granted, 261 ; liscal powers of the trust companies, 262 ; investment powers, 202, 263 ; growth of business of, 263; double invest- ment relations of, 203, 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 Eail- road, fiO. Wcb.ster, Daniel, check on Boston Branch of Bank of the United States, 58. A VALUABLE FINANCL\L BOOK. Financial Crises. And Periods of Industrial and Commercial Depression. With Diagrams, Bibliography, and Index. By Theodore E. Burton. lamo. Cloth, fi.40 net ; postage, 12 cents additional. This valuable work combines theory, criticism, and statistical fact. In the theoretical part the author exposes some fallacies as to financial crises and panics, and offers a positive theory which is reasonable and tenable. His analysis of partial gluts and of misdirected production as a chief element in producing crises and depressions is an important feature. It is believed that there is no book in English which would make a satisfactory substitute for this work. One notable point is the close association of rapid industrial progress with panics. Where industrial development is greatest, there is the largest likelihood of crises, according to the author, but he notes the great advance in recent years in the adop- tion of preventives of crises. 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