Chapter VII: Part 7

There are two distinct classes of mortgage securities--one class based upon the actual value and the other upon the earning value of the property. When a man lends money upon a dwelling-house he bases his estimate of security upon (1) the cost of the property, (2) its location, (3) the average value of adjoining properties, and (4) the general character of the locality; that is to say, the value of the property is the basis of the security. On the other hand, the lender of money upon railway mortgages, for instance (that is, the buyer of securities known as railway mortgages), considers the general earnings of the road rather than the cost of building and equipping the road as the correct basis upon which to estimate the value of the security. These two classes of securities differ in other particulars. The value of the mortgage upon ordinary real estate is constant and the security itself is not so likely to change ownership, while the value of the railway mortgage may vary with the success or failure of the road, and the security itself is in the market constantly as a speculative property. The whole property of a railroad company, considered simply as real estate and equipment, is usually worth but a small fraction of the amount for which it is mortgaged. The creditors, as a rule, depend for the security of their money upon the business of the company.

We have already learned that collaterals are mortgages, stocks, bonds, etc., placed temporarily in the hands of lenders as additional security for money borrowed. The student will note, further, that the borrowing value of such securities depends very largely upon the character of the property represented.

MORTGAGES AS SECURITIES

A MORTGAGE is a conveyance of property for the purpose of securing debt, with the condition that if the debt is paid the conveyance is to become void. A mortgage in form is really a deed of the land, with a special clause stating that the grant is not absolute but only for the security of the debt. It is usual for the debtor at the time of executing the mortgage to execute also a bond or promissory note in favour of the creditor for the amount of the debt. This is called a MORTGAGE NOTE. Mortgages are frequently given in cases where there is a debt existing to secure or indemnify the mortgagee against some liability which he may possibly incur on behalf or for the benefit of the mortgagor. For instance, when a man has indorsed another's note for the latter's accommodation or gone on his bond as surety the latter may execute to the former a mortgage of indemnity. The power of a corporation to mortgage its property is usually regulated by its character or by the general law under which it is organised. All mortgages must be recorded in the office of the register of deeds for the county in which the property is located. The object of recording is to give notice of the existence of the mortgage to any one who might wish to purchase the land or to take a mortgage upon it. There may be several mortgages upon the same property. The first mortgagee is entitled to be paid in full first, then the second, and so on. The mortgagee may use his mortgage as security for loans or he may assign it as he pleases. When the requirements of a mortgage are not met the holder has under certain conditions the right to FORECLOSE--that is, to advertise the property for sale and, within a time fixed by law, to sell it to satisfy the mortgage. It is usual for the mortgagor to insure the property for the benefit of the mortgagee.

Although the terms of corporation mortgages are similar to those on real estate such as is represented by dwelling-houses, the commercial conditions make it inconvenient or impossible to foreclose and sell such properties. To stop all business of a railway or to shut down the work of a manufacturing concern would not only result in injury to the public but would reduce largely the earning value of the property. To overcome this difficulty where an active concern is financially embarrassed, the court appoints a receiver, who is responsible for the proper conduct of the business until a satisfactory reorganisation or sale is accomplished.

Mortgages upon improved property, if properly graduated in amount, should be safe and profitable investments. The buyer, however, must exercise great care and good judgment. Should there be collusion between the loaning agent and the land-owner, the money advanced may be largely in excess of the actual property value. Villages with less than a dozen houses are often the sites of investment companies doing business under pretentious names and offering mortgage investments at interest rates which by the local conditions are impossible. One of the devices of these enterprising companies is to offer their own guarantees as to both principal and interest of all mortgages negotiated by them. The investor should be sure of two things: (1) The safety of the principal, and (2) regularity in the payment of the interest. There is great danger of default from causes not anticipated by the mortgagor and over which he has no control.

STOCKS AS SECURITIES

To make a profitable investment in stocks the buyer must anticipate the future. A mill that may be working day and night this year may be obliged to shut down entirely next year. A business which is open to public competition must take its chances on its future success. The greater the earnings, the more certain the competition. Many corporations owning monopolies by virtue of patent rights have made large fortunes, but there is always the possibility of new discovery. Electricity has succeeded gas; the telephone is competing with the telegraph; the trolley is cutting into the profits of railways. A good thing in stocks to-day does not necessarily mean a good thing next year. Railroad stocks are of such varied character that it is impossible here to make more than general statements. Many of our railroad stocks bring prices far above par and pay liberal interest on investments. Some of them are so profitable that they are really not on the market and cannot easily be bought. Others represent roads loaded down with mortgages and other obligations so heavy as to make the stock really a liability rather than a resource to its owner. The stock quotations represent in a general way the comparative value of these securities. Of recent stock electric-railway stock is the most popular and in many instances the most profitable. The introduction of electric power has reduced the working expense one half and in most instances has doubled the traffic without any reduction in fares. The buyer should make sure that the road is in a busy community able to sustain it, that its franchise will protect it from dangerous competition, and that the securities have been legally issued.

SUBSTITUTION SECURITIES

There have recently been formed several large companies whose business it is to issue bonds on the security of other bonds. The idea is similar to that of real-estate title insurance. Such companies are supposed to have superior facilities for investigating securities. They purchase those which they consider good and at the best prices possible. These they deposit with some trust company or banking institution. With these bonds which they buy as their original property they issue new bonds of their own, which they sell to the public and which they guarantee. The differences in prices and in interest make up their profits.

LOANS AND INVESTMENTS

With the growth of wealth we find increasing numbers of persons who want to invest their means in good securities. To do this successfully and safely is a very difficult question. It is even more difficult to keep money profitably employed than to make it. Changes and innovations are of continual occurrence. Not only are new securities constantly coming upon the market, but new subjects as a basis of their production are industriously sought after. Every newly discovered force or process in mechanics means the appearance of another detachment of paper securities. The War of the Rebellion popularised the _coupon bond_, in consequence of its adoption by the government, and made it the favourite form of investment paper. Railroads and other corporations soon availed themselves of the confidence which that species of paper inspired, and States, cities, and counties were soon flooding the country with obligations carrying long coupon attachments. Many persons have purchased and paid good prices for mortgage coupon bonds, giving them no control over their security, who would have rejected share certificates standing for an equal interest in the property pledged and giving them the right to participate in its management, with the possibility of a greater return for their money. Many of the States through careless legislation have permitted corporations to decide for themselves the amounts of obligations they might put out, and the privilege has been very much abused. We now have stocks and bonds upon the market representing nearly all conceivable kinds of property--telegraph and telephone companies, mining companies, cattle ranches, grain farms, water-works, canals, bridges, oil- and gas-wells, electric lighting, trolley companies, factories and mills, patent rights, steamboat lines, apartment-houses, etc. Not only are properties of many kinds used to issue bonds upon, but many kinds of bonds are often issued upon the same properties. One issue of bonds is sometimes made the basis of other issues. Some one has said that there never was a time in the history of the world when it was so easy to invest money--and to lose it. Of the securities that are offered with first-class recommendations it is probable that about one third are actually good, one third have some value, and one third are practically worthless. In making investments the first and main thing to be studied is safety. Never buy a security of any kind without having read it. Do not buy what are commonly known as _cheap securities_. Do not rely solely upon the advice of a broker; he may have personal interest to serve. By far the greater number of losses to investors have been in securities purchased exclusively on the recommendation of interested commission men. It is a mistake to give preference to _listed_ securities--that is, those reported on the stock-exchange lists. Stocks are too often listed simply for speculative purposes, and the price represents not so much the value of the property as the pitch of the speculation at the time. Securities in the long run must stand upon their merits. As a rule the best time for an experienced investor to buy is when others are unloading.

VI. CHEQUES, DRAFTS, AND BILLS OF EXCHANGE[11]

BANK CHEQUES

A CHEQUE is an order for money, drawn by one who has funds in the bank, payable on demand. Banks provide blank cheques for their customers and it is a very simple matter to fill them out properly. In writing in the amount begin at the extreme left of the line. The illustrations given here show a poorly-written cheque and a copy of the same cheque after it has been "raised." The original cheque was for $7.50 and shows very careless arrangement. It was a very easy matter for the fraudulent receiver to change the "seven" to "seventy" and to add a cipher to the amount in figures. The running line was written in on the raised cheque to deceive the bank. In this case Mr. Carter and not the bank must suffer the loss. Mr. Carter cannot hold the bank responsible for his carelessness. Drawers of cheques should exercise the greatest care in writing in the amount to prevent changes or additions. Draw a running line, thus: ~~~_Nine_~~~ before and after the amount written in words. If the words are commenced close to the left margin the running line will be necessary only at the right. The signature should be in your usual style familiar to the paying teller. The plain, freely written signature is the most difficult to forge. Usually cheques are drawn "to order." The words "Pay to the order of John Brown" mean that the money is to be paid to John Brown or to any person he "orders" it paid to. By indorsing the cheque in blank (see indorsements) he makes it payable to bearer. If a cheque is drawn "Pay to bearer" any person--that is, the bearer--can collect it. The paying teller may ask the person cashing the cheque to write his name on the back, simply to have it for reference. Safety devices to prevent the fraudulent alteration of cheques are of almost endless variety, but there has not been a preventive against forgery and alterations yet invented, which has not been successfully overcome by swindlers. A machine for punching out the figures is in common use, but the swindler has successfully filled in the holes with paper-pulp and punched other figures to suit his purposes. The safest cheques are those carefully written upon what is known as safety paper.

FOOTNOTE:

[11] A part of the matter of this lesson has already appeared in Part I. of this book ("General Business Information"), but it is here repeated to preserve the connection.

IDENTIFICATION WHEN CHEQUES ARE PAID

The banks of this country make it a rule not to cash a cheque that is drawn payable to order unless the person presenting the cheque is known at the bank--or unless he satisfies the paying teller that he is really the person to whom the money is to be paid. It must be remembered, however, that a cheque drawn to order and then indorsed in blank by the payee is really payable to bearer, and if the paying teller is satisfied that the payee's signature is genuine he probably will not hesitate to cash the cheque. In England all cheques apparently properly indorsed are paid without identification. In drawing a cheque in favour of a person not likely to be well known in banking circles, write his address or his business after his name on the face of the cheque. For instance, if you should send a cheque to John Smith, Boston, it may possibly fall into the hands of the wrong John Smith; but if you write the cheque in favour of "John Smith, 849 Tremont Street, Boston," it is more than likely that the right person will collect it. If you wish to get a cheque cashed where you are unknown, and it is not convenient for a friend who has an account at the bank to go with you for the purpose of identification, ask him to place his signature on the back of your cheque and it is likely you will not have trouble in getting it cashed. By placing his signature on the back of the cheque he guarantees the bank against loss. A bank is responsible for the signatures of its depositors, but it cannot be supposed to know the signatures of indorsers. The reliable identifier is in reality the person who is responsible.

CHEQUES FOR SPECIAL PURPOSES

If you wish to draw money from your own account the most approved form of cheque is written "Pay to the order of _cash_." This differs from a cheque drawn to "_bearer_." The paying teller expects to see you yourself or some one well known to him as your representative when you write "_cash_." If you write "Pay to the order of (your own name)" you will be required to indorse your own cheque before you can get it cashed. If you wish to draw a cheque to pay a note write "Pay to the order of _bills payable_." If you wish to write a cheque to draw money for wages write "Pay to the order of _pay-roll_." If you wish to write a cheque to pay for a draft which you are buying write "Pay to the order of _N. Y. draft and exchange_," or whatever the circumstances may call for.

CHEQUE INDORSEMENTS

In indorsing a cheque remember that the left end of the face is the top when you turn it over. Write your name as you are accustomed to write it. If you are depositing the cheque, a blank indorsement--that is, an indorsement with simply your name--will answer; or you can write or stamp "Pay to the order of (the bank in which you deposit)" and follow with your signature. Either indorsement makes the cheque the absolute property of the bank. If you wish to transfer the cheque by indorsement to some particular person write "Pay to the order of (naming the person)" and follow with your own signature; or you may simply write your name on the back. The latter form would be considered unwise if you were sending the cheque through the mail, for the reason that a blank indorsement makes the cheque payable to bearer. An authorised stamped indorsement is as good as a written one. Whether such indorsements are accepted or not depends upon the regulations of the clearing-house in the particular city in which they are offered for deposit.

THE NUMBERING OF CHEQUES

Cheques should be numbered, so that each can be accounted for. The numbers are for your convenience and not for the convenience of the bank. It is important that your cheque-book be correctly kept, so that you can tell at any time how much money you have in the bank. At the end of each month your small bank-book should be left at the bank, so that the bookkeeper may balance it. It may happen that your bank-book will show a larger balance than your cheque-book. You will understand by this, if both have been correctly kept, that there are cheques outstanding which have not yet been presented at your bank for payment. You can find out which these are by checking over the paid cheques that have been returned to you with your bank-book. The unpaid cheques may be presented at any time, so that your actual balance is that shown by your cheque-book. Cheques should be presented for payment as soon after date as possible.

CERTIFIED CHEQUES

If you wish to use your cheque to pay a note due at some other bank than your own, or in buying real estate or stocks or bonds you may find it necessary to get your cheque certified. This is done by an officer of the bank, who writes or stamps across the face of the cheque the words "Certified" or "Good when properly indorsed" and signs his name. (See illustration, p. 244.) The amount will immediately be deducted from your account, and the bank by guaranteeing your cheque becomes responsible for its payment. If you should get a cheque certified and then not use it deposit it in your bank, otherwise your account will be short the amount for which it is drawn.

BANK DRAFTS

Nearly all banks keep money on deposit in other banks in large commercial centres--for instance, in New York or Chicago. They call these banks their New York or Chicago correspondents. A bank draft is simply the bank's cheque drawing upon its deposit with some other bank. (See illustration, p. 245.) Banks sell these cheques to their customers, and merchants make large use of them in making remittances from one part of the country to another. These drafts or cashiers' cheques, as they are sometimes called, pass as cash anywhere within a reasonable distance of the money centre upon which they are drawn.

BILLS OF EXCHANGE

A draft on a foreign bank is commonly called a bill of exchange. Bills of exchange are usually drawn in duplicate and sometimes in triplicate. (See illustration, p. 246.) Only one bill is collected, the others simply serving in the meantime as receipts. These bills are used to pay accounts in foreign countries, just as drafts on New York or Chicago are used to pay indebtedness at home.

VII. THE CLEARING-HOUSE SYSTEM[12]

THE CLEARING-HOUSE SYSTEM A MODERN INSTITUTION

The clearing-house is a comparatively modern institution, the Edinburgh bankers claiming the credit of establishing the first one. The earliest clearing-house of whose transactions we have any record is that of London, founded about 1775. For fully seventy-five years the London clearing-house and that of Edinburgh were the only organisations of the kind known to exist. The monetary systems of most European countries centring around one great national bank located at the capital of each, found in this a means of effecting mercantile settlements. The New York clearing-house was established in 1853, from which date the American clearing-house system has grown to enormous proportions. No country in the world has so large a need of clearing-houses, for in no country is the bank cheque so generally used in the payment of ordinary accounts.

TRANSFER OF CREDITS IN CLEARING-HOUSES

The purpose of the clearing-house is largely to facilitate the transfer of credits. This is explained by the following illustration: Suppose that Brown and Smith keep their money on deposit in Bank A and that Brown gives Smith his cheque for $100 and Smith deposits it in the bank to his (Smith's) credit. The officers of the bank will subtract $100 from Brown's account and add the same amount to Smith's account. No actual money need be touched. It is simply a matter of arithmetic and bookkeeping. Credit has been transferred from Brown to Smith. If all the people of a city kept their money in one central bank there would be no need of a clearing-house. The bookkeepers of the bank would be kept busy transferring credits from one customer to another on the books of the bank. But if Brown keeps his money in Bank A and Smith keeps his money in Bank B it is necessary that Bank A and Bank B come together somewhere to conveniently make the credit transfer, and this is practically what they do in the clearing-house. Then, again, if Bank A should be located in San Francisco and Bank B in Boston, the difficulty of transfer of credit is greatly increased.

Through the agency of clearing-houses located in money centres and of co-operation between banks at distant points, the transfer of credits between business men located anywhere in the United States, or for that matter in the world, has become a comparatively simple matter. If it were not for the agency of this system it would be utterly impossible for a great city to do the business of a single day. All the actual money in all the banks and stores and safes and pockets of New York City to-day would fall far short if used to pay to-day's transactions. It is estimated that the cash transactions of a single day are fifty times greater than the actual cash changing hands in one day. So that the great bulk of the business of the country, both cash and credit, is done on a system of credit transfers made possible wholly through the agency of our banking system.

FOOTNOTE:

[12] See also Lesson VIII. of Part I. of this book ("General Business
Information").

ORGANISATION OF CLEARING-HOUSES

Each large city has its clearing-house system. To establish a clearing-house a number of banks associate themselves together, under certain regulations, for the purpose of exchanging daily at one time and place the cheques and other commercial paper which they hold against each other. The usual officers are a president, a secretary, a treasurer, and manager, and a clearing-house committee. The cheques, etc., which the banks take to the clearing-house are called the clearing-house exchanges, and the total amount of paper exchanged is called the day's clearings. Those banks which bring a less amount than they take away are obliged to make the difference good in cash or its equivalent within a fixed time upon the same day. Suppose, for illustration, that a clearing-house association consists of five banks--A, B, C, D, and E--and that Bank A took to the clearing-house cheques against B, C, D, and E amounting to $20,000, and that B, C, D, and E took to the clearing-house cheques against A amounting to $21,000. Then A is on this particular day a debtor bank, and owes the clearing-house, or the other banks through the clearing-house, $1000. The payment of the balances by the debtor banks and the receipt of the balances by the creditor banks complete each day's transactions. As the total amount brought to the clearing-house is always the same as the amount taken away, so the balances due from the debtor banks must be exactly equal to the amounts due the creditor banks. The clearings in New York City in one day amount to from $100,000,000 to $200,000,000, and the actual cash handled, if any, need only be for the actual debit balances. Usually once a week (in some cities oftener) the banks of a city make to their clearing-house a report, based on daily balances, of their condition. The clearing-house establishes a fellowship among banks that has already proved in times of money panics of the greatest service to themselves and the community.

PAYMENT OF BALANCES IN CLEARING-HOUSES

Clearing-house certificates are made use of in many cities for the payment of balances by debtor banks. These are issued against gold deposited with one of the associated banks. They are numbered, registered, and countersigned by the proper officer, and are used only in settlements between the banks. Various methods of making settlements are in use. In some of the cities the balances are paid by drafts on New York or other money centres. The debtor bank sells some creditor bank New York exchange, and receives in return a cheque or order on the clearing-house, which when presented makes the debits and credits balance. It is estimated that the actual cash employed in New York clearings is less than one half of one per cent. of the balances.

HOW DISTANT BANKS ARE CONNECTED BY THE CLEARING-HOUSE SYSTEM

To illustrate the connection between banks at distant points let us suppose that B of Haverhill, Mass., who keeps his money on deposit in the First National Bank of that city, sends a cheque to S of Waconia, Wis., in payment of a bill. S deposits the cheque in the Farmers' Bank of Waconia and receives immediate credit for it in his bank-book, just the same as though the cheque were drawn upon the same or a near-by bank. The Farmers' Bank deposits the cheque, with other cheques, in, say, the First National Bank of Minneapolis, or it may send the cheque to its correspondent in New York--say the Ninth National--asking to be credited with the amount. For sake of illustration, suppose that the cheque is deposited with the First National of Minneapolis. Now, this bank has a correspondent in Chicago--the Commercial National--and a correspondent in New York--the National Bank of the Republic. If sent to the Commercial National, this bank has a correspondent in Boston--the Eliot Bank, where the cheque would be sent. Now, the First National of Haverhill has a correspondent in Boston--the National Revere Bank. The Eliot Bank would likely take this cheque to the Boston clearing-house as a charge against the Revere Bank. The Revere Bank would deduct the amount from the First National of Haverhill's deposit and send the paid cheque to the Haverhill Bank, where at the close of the month it would be handed to B, showing on the back the indorsement of S, and stamping representing all the banks through whose hands it passed. If the Farmers' Bank of Waconia had sent direct to its New York correspondent, the Ninth National, this bank would have sent to its Boston correspondent, the North National, and the cheque would have been charged up through the clearing-house against the Revere Bank. If the First National of Minneapolis had sent direct to its New York correspondent, the National Bank of the Republic, this bank would have sent to its Boston correspondent, the Shawmut National, etc. As a rule, banks collect by whatever route seems most convenient or advantageous. It is estimated that millions of dollars are lost to the banks each year on account of the time consumed by cheques en route.

VIII. COMMERCIAL CREDITS AND MERCANTILE AGENCIES

HOW THE WORLD'S TRADE IS LARGELY TRANSACTED UPON CREDIT

It is estimated that about ninety per cent. of the world's trade is transacted upon credit. And in no country of the world are commercial credits so freely granted as in the United States. This is a land of seemingly unlimited faith in humanity, and yet a land in which hazardous speculation, extravagance, and bankruptcy have often prevailed. Statistics show that about ninety-five per cent. of our merchants "fail to succeed," and yet no other country can boast of such wealth, industrial energy, and generous confidence in business integrity. While credit is not money, in that it cannot settle a debt, it must be considered a very powerful agent in the creation of capital. Credit is another name for trust. The business world bases its confidence or trust in men upon their character and resources. And the extent of this trust becomes the only limitation of the business man's purchasing power. He who can show conclusively the ability and disposition to fulfil obligations, has it within his power to command the capital or merchandise of others. Credit is one of the fruits of a higher civilisation and a settled condition of a country's business. It bespeaks a quality of government, too, that is not to be depreciated. The nations that are most successfully and equitably governed and show the most stable conditions of currency also show us the most extensive and efficient credit systems. It is abundantly true that these same nations have on many occasions passed through periods of great distress from failures widespread and panics severe, but it must also be borne in mind that these very bankruptcies are more often the abuse of prosperity than the product of adversity. Over-confidence in men and things has resulted in speculation and precipitated bankruptcy. And if it be urged that to the undue expansion of credit is traceable the greater number of our financial disasters, it may be said with still greater force that all our impetus to industrial achievement has been and still is dependent upon the generous exercise of credit. The construction of our railroads and canals, the operation of our mines, the improvement of our great farm areas, the building of our towns and cities, and the development of our extensive manufacturing interests are all the result of the trust reposed in men and the industrial interests they represent.

THE IMPORTANCE OF A HIGH STANDARD OF CREDIT TO BUSINESS MEN

Reticence on the part of business men respecting their financial position may seriously impair their credit. It is universally regarded by the intelligent business man to be good policy to make known his condition. A refusal to do so throws a suspicion and doubt upon his financial ability, and at some future time when confidence in his integrity may be essential to the very life of his business, he may find the necessary help unobtainable. An applicant for credit should be willing to prove himself worthy of it. But the keen competition among merchants eager for sales often enables the buyer to obtain credit without the necessity of giving very much evidence as to his commercial standing. Since some risks must be taken merchants frequently conclude to accept an account because of its possible acceptance by some competitor. If business is to be had risks must be taken, is the theory.

When former customers apply for credit the merchant is guided by the record made in previous dealings. A business man's ledger is a very valuable history of credits. It is his compass in a sea of doubt. If upon the inspection of an old account it be discovered that in former years the customer paid cash and discounted his bills, and that later his method of payment was by promissory notes, and that on several occasions he asked for special favours, such as dating bills ahead or the privilege of renewal of notes, one is able to read a certain unmistakable sign of degeneracy in the customer's credit. New orders from such a customer will bear scrutiny; and a closer attention to the present condition of the account may save the firm from some bad debts.

While it is possible to-day to determine the average losses from bad debts in the various lines of business, individual risks cannot be accepted on that basis. Each requires special study. If an applying customer paints his financial condition in roseate colours, let him be willing to reduce his statement to writing, and when his signature is affixed his statement is much more reliable, because he knows of the impending liability of fraud if he has misrepresented. Men averse to transforming an oral statement to writing have discredited themselves immediately. Men who mean to be honest may be optimistic in picturing prospects and be inclined to set an unreasonable value upon their property and extent of business. It may be easier to tell the absolute truth about one's liabilities, because they are such persistently real things; but assets have elastic qualities in many men's minds and seem capable of any extension in an emergency. Buyers who impress themselves most favourably upon the business house are frank in their statements. The explicit, candid man of few words will merit consideration. The cringing or pleading kind predisposes one unfavourably. Stephen Girard said of one who in tears asked for a loan: "The man who cries when he comes to borrow will cry when he comes to pay."

To determine the right of a buyer to credit and the safe limit of credit to be extended to him is the seller's serious problem. It is customary to request references in order to discover how other firms regard the applicant's credit. But these references may be cautious of reply. A selfish desire to retain the customer for themselves, or the higher motive of a desire to be true to the interests of both the inquirer and the customer may produce dubious or very incomplete reports. If a bank be among the references one does not place too much stress upon a very favourable reply from it, because a merchant usually learns the lesson of expediency in making a friend of his banker. And, moreover, one endeavours to reveal only the best side of his business affairs to the bank. Favourable replies from several firms showing a uniform line of credit go a great way toward reaching a safe conclusion. But in these days of vast and multifarious interests there has developed, as a result of this desire for adequate knowledge respecting men's credit, an agency for the exclusive purpose of arriving at definite and reliable evidence upon financial matters; and after years of experience men have learned to depend upon these mercantile agencies as the most valuable and trustworthy assistants.

MERCANTILE AGENCIES

Mercantile agencies had their origin in the system adopted by several prominent firms of keeping on record all the information obtainable relating to their customers. In 1841 "The Mercantile Agency of New York City" began its history, and was the forerunner of the present great agencies whose record books of credits and ratings include the names of all the business houses and corporations in this country and Canada. The pioneer institution of this character in the United States was the one bearing at present the name of "R. G. Dun & Co.," an outgrowth of "The Mercantile Agency of New York City." Since 1860 it has borne the name of Mr. Dun, who was formerly a partner with Mr. Douglass when the agency was known as "B. Douglass & Co." Another popular and influential concern is the one known as "The Bradstreet Company," familiarly spoken of as "Bradstreet's." Besides these two leaders there are many others, whose reports on credits are limited to particular lines of trade. The larger agencies soon found it necessary to establish branches in all the business sections of the country. A particular field of investigation is allotted to each branch, and an interchange of information is in constant progress.

To be a recipient of the valuable information afforded by these agencies business men, by paying an annual fee, are enrolled as subscribers and furnished with books of ratings, as they are called. Besides this book special type-written reports with elaborate details respecting a firm's credit are sent upon the request of the subscriber. The volume of information recorded in these agencies concerning any one's credit is obtained through the effort of officials of the agencies known as reporters. These men of experience, integrity, and discernment are seekers after truths. Usually each reporter has a distinct line of trade assigned him for research and investigation. This brings him into intimate acquaintanceship with every trader in his particular field. He is a constant solicitor of the banker and merchant for facts. His business is not merely to gather information respecting the resources of business men, but to investigate rumours that in themselves may be detrimental to one's credit, and to disprove them where possible and sustain and support the credit of a house. Too often it is supposed that the reporter is seeking evidences of weakness when in reality his business is most frequently that of discovering elements of strength. Information is freely given him as he interviews men whose businesses and experiences are the depositories for a wealth of credit information. He soon becomes a confidant of the merchant himself, who not only tells him all he knows about the customers and their accounts upon his books, but his own business affairs as well. Indeed, the relation becomes so very reciprocal that the reporter often furnishes information to the merchant in the interview on some matter of credit of pressing notice. In this way a corroboration of facts or the denial of a rumour may be effected. He inspects the books of the offices of public record to find the evidence of mortgages, judgments, and transfers of property, and have the same recorded on the agency's books. It is the reporter who finally has gathered the information that determines a firm's ability to have and to hold a line of credit.

It is essential to the life of the agency that its reports be honest and free from any element of doubt. The public confidence in the reliability of the reports will determine the prosperity of the company. Perhaps at first glance it would seem as if the system of reporting financial information was a serious discrimination against the men of smaller capital and in favour of the wealthy. But mere capital is not the only element entering into an estimate of one's ability to pay. Character and reputation are powerful forces in assisting a merchant in determining credit. An agency discloses facts and not opinions. And it is within the range of possibility of any one to create and maintain his credit. Capital may grow gradually but credit is sometimes established or destroyed by a single act.

The facts obtained by mercantile agencies are not public property. They are given in confidence and for the sole purpose of aiding the business with respect to the propriety of granting credit. The private reports are for the eyes of the interested inquirer and not the curious. Whenever some particular item of interest finds its way to an agency that would affect one's credit seriously, such as the giving of chattel mortgage or the confession of a judgment or the sale and transfer of property, it is customary to send unsolicited a special report of these facts to all subscribers on the agency's books who have ever at any time made inquiry concerning the firm. One might expect that these agencies expose themselves to risk of prosecution for libel, but since no malice is ever intended in any report circulated, and since it rarely occurs that damaging reports are sent out by these institutions unless abundantly confirmed, there is little opportunity for litigation of this sort.

Another field of usefulness of the mercantile agency is in the exposure of the absconding debtor and his whereabouts, and also the dishonest trader who in arranging a fraudulent failure may be striving to open many new accounts. The unusual demands for reports respecting such a one lead to careful investigation. Instead of a restrictive tendency a mercantile agency promotes the expansion of credit and yet permits of proper conservatism. It opens to the trader as a market for his merchandise every new and trustworthy account. It curbs speculation, stimulates diligence in business, habituates punctuality, and develops character. When we remember that the present annual internal commerce of our country is estimated at about 800,000,000 tons of merchandise carried an average distance of 120 miles, and that this volume of trade is worth over $10,000,000,000, we are forced to admit that the unique system of these credit agencies has done much to further and make possible this commercial prosperity.

IX. BONDS

UNITED STATES, STATE, AND MUNICIPAL BONDS

When a country borrows money it gives a guaranty that the money will be returned at a particular time and that interest will be paid at regular intervals at a fixed rate. This guaranty is called a bond. In actual practice, instead of borrowing the money required and then giving bonds for its return, countries usually issue the bonds first, and sell them to the highest bidder. For instance, if our government needed to borrow $1,000,000 it would issue bonds for this amount, stating definitely the rate of interest to be paid, and call for bids. If the rate of interest were four per cent. and a buyer paid more than $1000 for a $1000 bond he would, of course, make less than four per cent. upon his investment. Such bonds are absolutely safe and always marketable on account of our strong financial standing among the nations of the world. Similar bonds are issued by States, cities, towns, school districts, etc. They are not mortgages in the ordinary sense, and their worth consists entirely in the ability of the issuer through its taxing power to meet the obligations incurred. Municipal bonds are issued by cities and other municipalities to raise money for local improvements.

BONDS AND CERTIFICATES OF STOCK

A bond is evidence of debt, specifying the interest and stating when the principal shall be paid; a certificate of stock is evidence that the owner is a part owner in the company, not a creditor of the company, and having no right to regain his money except by the sale of the stock or the winding up of the company's business. Bonds issued by stock companies and corporations are really mortgages upon their resources. Such a bond is usually secured by a mortgage upon the company's plant, franchises, and assets, or some part thereof. Corporate bonds can only be issued by the consent and direction of the shareholders of the company or corporation.

At the present time a mortgage securing the payment of corporate
bonds is usually placed in the hands of a trustee--generally
some trust company--which is supposed to act in behalf of the
bondholders as a unit and which is empowered by the language of
the bond, in the event of the failure of the corporation to
perform the obligations it assumes in said bond, to foreclose
the mortgage and divide the proceeds of sale among the
bondholders.--CARROLL.

CLASSES OF CORPORATION BONDS

Corporation bonds are of many classes, differing widely in their value as securities. Only a few of the more important classes can be mentioned here. FIRST MORTGAGE BONDS constitute, as the name implies, a first lien upon the property of the company issuing them. It is important in estimating the value of such securities to know whether they include only the property of the corporation at the time the bonds were issued or whether they are so worded as to include all property owned or acquired by the corporation. Second and third mortgage bonds are second and third liens. The interest upon second and third mortgage bonds is paid only after the interest upon first mortgage bonds is satisfied.

When bonds are issued to take up and put into one fund all previously issued mortgage bonds, the new bonds are sometimes called CONSOLIDATED MORTGAGE BONDS. Holders of previously issued bonds are not obliged to exchange them for any new securities.

INCOME BONDS are usually secured by a mortgage on the earnings of the corporation issuing them. Interest on such bonds must be paid before dividends are declared to stockholders. It is customary when such bonds are issued to set aside a percentage of the earnings as a sinking fund to meet the bonds at maturity.

Bonds are issued against all conceivable kinds of securities. Not only are properties of many kinds used to issue bonds upon, but many kinds of bonds are often issued upon the same properties. This is especially true of railways, where mortgages of various kinds often lap and overlap in almost endless confusion.

SINKING FUNDS

Money set aside by a municipality or corporation to _sink_ a debt at a certain future time is called a SINKING FUND. For instance, if a city should issue twenty-year bonds for $100,000 to secure money for street improvements the entire debt would fall due in twenty years, but to avoid having such a large amount fall due in one year, a proportional sum is set aside each year as a sinking fund--that is, to _sink_, or reduce, or wipe out the indebtedness when the bonds mature. Bonds are not paid in advance of maturity.

INTEREST COUPONS

Most bonds have INTEREST COUPONS attached. These are cut off and presented for payment as they mature. For instance, a four per cent. bond for $1000 would draw $40 interest yearly. This sum would be paid in two instalments of $20 each. If the bond were for twenty years there would be at the date of issue forty interest coupons, each calling for $20 and collectable at intervals of six months.

X. TRANSPORTATION BY RAIL

THE GROWTH OF OUR RAILROAD SYSTEM

A railway map of the United States shows that most parts of our country have a thickly woven net of railroads. The mileage of our railroad lines is now 184,000 miles, the actual length of track on these roads being about 245,000 miles. The significance of these large figures becomes more manifest when a comparison is made between the length of our railroads and the length of those of Europe and those of the world. The railroads in the United States comprise over four ninths of the total railway mileage of the world, and are considerably longer than the railroads of all the countries of Europe combined. The facts are shown graphically by the following diagram:

Mileage in Europe 155,000
Mileage in U. S. 184,000
Total for the World 434,000

The history of the construction of American railroads covers a period of seventy years. The greater part of our mileage has been built since 1870. The following table and diagram illustrate the growth of our railway net during each decade:

Year | Miles
------|--------
1830 | 23
1840 | 2,800
1850 | 9,000
1860 | 30,600
1870 | 53,000
1880 | 90,300
1890 | 163,600
1898 | 184,000

It will be noted that the decades of most rapid railway development were the one from 1850 to 1860, following the discovery of gold in California, and the two between 1870 and 1890. We added 70,000 miles to our railway net between 1880 and 1890--a record that no other country has equalled. By 1892 we seem to have met the more urgent demands for new lines, and we are now annually building less than 2000 miles of new roads. The face value of the capital now invested in American railroads is $11,000,000,000. The number of persons employed in the railway service is 850,000.

THE RAILWAY CORPORATION

The agents that do the work of transportation by rail are the railway corporations. These "artificial persons" are created by the several States and intrusted with the performance of services of a public nature. In all the German states and to a large degree in many other European states, the governments themselves provide the means of transportation by rail; but in the United States the ownership and management of the railroads is rightly regarded to be a task of greater magnitude than the administrative department of our government is as yet able to cope with.

The growth of the railway corporations of the United States has been typical of the evolution of industrial organisation in this country. The early railway corporations were small. The Philadelphia, Wilmington and Baltimore Railroad, for instance, comprised the lines of four companies. In 1850 the road connecting Albany and Buffalo included the lines of seven companies. During the last fifty years most of the small companies have united to form the corporations which now operate our large railway systems. Though the last statistical report of the Interstate Commerce Commission--the one for the year ended June 30, 1896--contains financial reports from 1985 companies, there were only 782 "independent operating roads," the remainder of the companies being subsidiary organisations. This report shows that forty-four of these operating companies have an aggregate mileage that equals nearly six tenths of the total railway mileage of the United States. Indeed, the statistician to the Interstate Commerce Commission declared in 1894 that "over 83 per cent. of the business of the railways and 82 per cent. of their earnings fall under the control of less than forty associations of business men."

The Pennsylvania system affords a good concrete illustration of railway consolidation. That corporation, with its 9000 miles of road, was built up by the union of over 200 railroad companies, and it now comprises within its organisation 177 corporations--most, though not all, of which are subsidiary railroad companies. This one railway system does one seventh of the entire freight business performed by all the railroads of the United States and handles one eighth of all the passenger traffic.

THE FREIGHT SERVICE OF RAILROADS

The freight business of the railroads of the United States is much larger than their passenger service, the earnings from freight being nearly three times that from the passenger traffic. It is only in some of the New England States, the most densely populated parts of the United States, that the passenger receipts equal the freight earnings. The industrial conditions of the United States necessitate the movement of great quantities of bulky freight long distances. Our principal grain-fields are from 1000 to 1500 miles from the manufacturing districts and seaboard cities. Our richest iron deposits are in the States adjacent to Lake Superior hundreds of miles from the coal-beds of Illinois, Ohio, and Pennsylvania. Most of the cotton crop is moved long distances to reach the mills of New England and Great Britain. In fact, most of the products of our fields, forests, mines, and factories are marketed over wide areas. The average distance travelled by each ton of freight moved during the year ended June 30, 1896, was 124.47 miles; and, as the railroads carried 765,891,385 tons that year, the number of tons carried one mile was 95,328,360,278.

A comparison of the revenues received from the freight and passenger services by the American, German, French, and British railways is instructive. For each dollar received from the passenger traffic the American railroads earn $2.95 from their freight business, the German roads $2.40, the French $1.31 and the British railways $1.17. The United Kingdom has the greatest volume of passenger traffic per population of any country in the world.

AMERICAN PASSENGER TRAFFIC ON RAILROADS RELATIVELY UNDEVELOPED

The long distances of the United States necessitate a large freight traffic but act as a hindrance to travel. It is a generally accepted but erroneous supposition that Americans travel more than any other people. A comparison of the passenger traffic in the United States with that in the United Kingdom, Germany, and France reveals some surprising facts. The figures are for 1896. The number of passengers carried one mile per mile of road upon the railroads of the United States was 71,705, in France the number was 273,315, in Germany 315,399, and in the United Kingdom 440,000. The average distance which the Briton travels per year by rail is 244 miles; for the American the distance is 209 miles, for the Frenchman 176 miles, and for the German 165 miles. The Englishman takes 24.4 trips per year on an average, the German 11.3, the Frenchman 9.6, and the American 8.2. Americans travel extensively, but it is evident from the foregoing comparisons that the possibility of developing the passenger service in this country has by no means reached its limit.

RELATION OF TRANSPORTATION ON RAILROADS TO ECONOMIC ORGANISATION