Chapter VIII: Part 8

The economic changes which have accompanied the great development of transportation that has taken place during the last fifty years have revolutionised our industrial and social life. Among the effects of developed transportation upon the economic organisation may be noted: First, that relations of producers and consumers have been fundamentally changed by placing a larger market at the service of both. Many classes of commodities are now bought and sold in a world market that were formerly restricted to local trade. Second, improved transportation has made the prices of commodities more uniform for different producers and consumers. The variations due to situation have been lessened. In a like manner there has been a decrease in those time variations in prices that result from changes in the supply of commodities. Improved transportation also makes prices lower--not only because it reduces the costs of moving the raw materials of manufacture and the finished products of industry, but also because it enables the merchant to turn his stock oftener and thus do business with less expenses for capital.

As a third effect of improved transportation may be mentioned the acceleration which it has given to the growth of cities. Cheap and efficient transportation has led manufacturers to locate their plants where they can command a large supply of labour and where they have the greatest advantages for the distribution of their products. The great manufacturing establishments are now located in Chicago, New York, Philadelphia, Pittsburg, and the other large cities. Conditions of transportation have become a stronger factor than even the location of the sources of raw materials in determining where an industry shall be established. The effect of the railroad upon the location of agriculture has been no less potent. The railroad has brought new agricultural regions into cultivation and destroyed the profits of cereal agriculture in many parts of the Eastern States.

Another important consequence of improved transportation and communication has been that of bringing the nations of the world into closer economic and social relations. With the growing solidarity of the economic interests of the countries of the world, with the multiplication of the intellectual and other social ties that unite the nations, their political relations inevitably change, and for the better. Nothing is doing more to advance the attainments of the cherished ideal of international amity than is the development of transportation.

XI. FREIGHT TRANSPORTATION BY RAIL

THE ORIGIN OF RAILROAD TRAFFIC ASSOCIATIONS

The performance of the transportation services necessitates the co-operation of carriers. When the government owns and operates the railroads of a country they are managed by a single authority, and the different parts of the railway system are fully co-ordinated; but when the railroads are operated by a large number of independent corporations, co-operation can be secured only by means of traffic associations composed of representatives of the railway companies, and intrusted with the power of making arrangements affecting joint traffic, and settling questions involving the interests of two or more companies.

Two distinct causes brought about the establishment of railway traffic associations. The first cause was the necessity of co-operation to facilitate the joint business of connecting lines. Through tickets, joint fares and rates, through bills of lading, the interchange of cars between connecting roads, and the settlement of joint accounts led to the establishment of co-operative freight lines, car-service associations, claim associations, and various other general and local organisations for the promotion of the joint transportation business.

The other cause of co-operation among the railways was the necessity of regulating competition. This cause first became potent after the process of consolidation had brought about the formation of numerous large railway systems, and had inaugurated the violent competition which led to discriminations in transportation charges, rate wars, and the other evils which have combined to produce "the railway question." The competitive struggles of rival railway systems began to be violent shortly after 1867, and soon led to the formation of railway traffic associations, with enlarged powers. The classification of freight, the determination of rates on competitive traffic, and the apportionment of that traffic, or of the earnings from it, among the competitors became functions of the associations.

THE WORK OF ALBERT FINK

The man who did more than any other person to develop traffic associations and to promote the co-operation of competing railroads was the late Albert Fink. It was his master mind that organised and put into successful operation in 1876 the Southern Railway and Steamship Association. The following year Albert Fink succeeded in organising the great trunk lines connecting the North Atlantic seaboard and the States north of the Ohio River. Though smaller traffic associations similar to these two organisations had been previously established where but few obstacles had to be overcome, it was Fink who first organised traffic associations including all the competing railroads serving large sections of the country.

In discussing the work of traffic associations, which are to-day concerns of really enormous magnitude, railway pooling and the classification of freight especially demand consideration.

RAILROAD POOLING

Railroad pools are agreements entered into by competing carriers, by which the railroads provide for the division with each other of their competitive traffic, or of the earnings from that traffic in accordance with stipulated ratios. Thus there are traffic pools and money pools. During the decade preceding 1887, the year when the present interstate commerce law was enacted, most traffic associations had the pooling feature, and most of the competitive railway traffic was pooled, thus eliminating all competition in rates.

Pooling agreements have never been legal in this country. Being illegal by the common law, they could not be enforced in the courts. Section 4 of the interstate commerce law made it unlawful for the carriers subject to the act to pool their freights or the earnings from their freight traffic, and made it necessary for the traffic associations to reorganise without the pooling agreements. Until March 22, 1897, it was supposed that the associations, without pooling agreements, were legal; but, on that date, in the case of the United States _vs._ the Trans-Missouri Freight Association, the United States Supreme Court held that the law of July 2, 1890, popularly known as the Sherman anti-trust law, applied to railways, and made it illegal for railway companies to contract with each other to maintain rates. Thus at the present time traffic associations are permitted neither to contain a pooling feature nor to provide arrangements for the enforcement or maintenance of rates, although the charges may be reasonable and be sanctioned by all the carriers interested. The associations may now legally exercise those functions which are connected with the joint business of their members, and they may act as bureaus of information regarding the competitive traffic. They have no power to make or to maintain rates.

TRAFFIC ASSOCIATIONS INCLUDING POOLING SHOULD BE LEGALISED

The best performance of the service of transportation by rail requires the fullest possible co-ordination of the different parts of our transportation system and the largest attainable measure of co-operation among the agents who perform the service. Section 4 of the act of 1887 and the law of July, 1890, as far as the latter relates to railways, are based on an unsound theory. Provision having been made for that kind and measure of governmental regulation of railway rates that will insure reasonable charges, the railways should be permitted to co-operate in rate-making and be given power to pool their competitive business.

CLASSIFICATION OF RAILROAD FREIGHT

There are thousands of varieties of freight offered to the railroads for transportation. If each class of commodities were charged the same freight rate per ton per mile, the charges upon many articles of prime necessity, such as coal, lumber, and grain, would be so high as to prevent their being moved, while the rates on goods of high value per bulk would be much lower than they could readily pay. Classification must precede the fixing of rate schedules. The railroads are interested in adjusting their charges to services performed in such a manner as to insure the greatest possible amount of traffic at rates that are properly remunerative. The public is interested in having the necessary revenues of the railroads so levied as to make the burdens as light as possible. To accomplish this a careful grouping of commodities is necessary.

The goods are usually classified in five or six large divisions. The official classification referred to below has six classes. The first class consists of articles of high value, the sixth class of bulky commodities of low value, such as iron ore, lumber, grain in bulk, etc. In practice, however, the number of classes is at least doubled. Goods of especially high value are made to pay once and a half, double, treble or quadruple the regular first-class rate. A commodity is also frequently placed in more than one class, the rating of classification being lower for car-load lots than for less than car-load shipments. The classification is further extended by omitting certain articles from the list of those classified. Live stock and coal are illustrations of articles to which so-called "commodity," as distinct from "classification," rates are given. The individual shippers are constantly endeavouring to have their goods given commodity rates, and the effort of the railroad companies is to reduce the number of articles excepted from classification. Commodity tariffs have been a fruitful source of unjust discrimination.

From this description of freight classifications it will be perceived that the main basis upon which the grouping of commodities rests is the relative value of the goods. The gradations cannot, however, be made strictly according to value. The goods are frequently put into a lower class than their value would warrant in order to stimulate their production and shipment or to develop the industries depending upon those articles.

At first each railroad worked out a classification of its own, and there were practically as many classifications as there were railway systems. The disadvantages of this soon became apparent with the development of long-distance traffic. The multiplicity of classifications made it difficult for shippers or purchasers to ascertain in advance what the charges on consignments would be; there was a constant tendency to increase the number of commodity tariffs, and unjust personal and local discriminations were in consequence made more numerous. It became evident that there would be great advantages in having one uniform classification for the whole United States. This ideal has not been reached yet, but the number of classifications has been practically reduced to three--the official, applying to the traffic north of the Potomac and Ohio and west of the Mississippi; the southern, in force among the railroads in the Southern States, and the western, which obtains in the territory west of the Mississippi River. This amalgamation of the classifications has been brought about chiefly by the traffic associations and as the result of the enactment of the interstate commerce law. In order to avoid the discriminations prohibited by that law it was necessary to abandon the system of a separate classification for each railway. It is to be hoped that the attainment of the ideal of uniform classification will not be long delayed.

THE CONDUCT OF THE FREIGHT BUSINESS OF RAILROADS--TRANSPORTATION PAPERS

The manner in which the freight business is conducted affords a good illustration of the high degree of development to which modern business methods have attained. Freight is accepted by each railroad for shipment not only to all points on its own system, but also practically to every railway station in the country, and even to many foreign cities.

A waybill containing the initials of the number of the car used, the name of the consignor, the name and address of the consignee, the description and weight of the articles sent, the freight class and rate of the goods, and the total amount of freight charges, accompanies each shipment and is delivered to the agent at the place to which the goods are shipped.

For the goods thus accepted for transportation, manifests, or "bills of lading," are issued to the consignor, which, like other representatives of property, may be transferred by the owner or may be deposited in a bank subject to draft. Bills of lading are of two general kinds--"straight consignment bills" and "order bills." When a straight consignment bill of lading is issued the goods must be delivered to the consignee or to the person to whom he may order them delivered. An order bill of lading is one that may be transferred upon indorsement. The following concise description of an order bill of lading is taken from the "Book of General Instructions to Freight Agents," issued by the Pennsylvania Railroad Company:

When freight is consigned to "Order" it is, as a rule, for the
purpose of securing the payment at destination of a draft for
the value of the property. The draft is usually attached to the
bill of lading and sent through a bank for collection from the
party at destination, who is to be notified of the arrival of
the freight. The payment of the draft secures to the payer the
possession of the bill of lading, which must be indorsed by the
party to whose order the property is consigned.

XII. RAILROAD RATES

Transportation charges have such a general and vital relation to industrial and social welfare that the problem of the just and equitable distribution of their assessment is one of paramount economic and political consequence. A consideration of the main factors which influence the railway companies in fixing charges should precede a discussion of the regulation of transportation by the government.

GENERAL FACTORS WHICH DETERMINE RAILROAD RATES AND FARES

The factors which have most weight in fixing schedules of rates and fares are what it will cost to perform the several services, what the services are worth to those for whom they are to be rendered, and the extent to which there is competition among rival carriers to secure the traffic concerned. Though on the face of things it would seem that the railways should fix the charges for their various services in accordance with the costs of performing those services, it is neither practicable for them to do so nor is it desirable from the standpoint of public welfare that such a criterion should be adopted. It is impracticable for the railroads to base their charges upon cost of service, because it is impossible to determine accurately the elements which enter into the cost of performing the particular transportation service. The modern railroad is a very complex mechanism, employed in the performance of a multitude of different services. No railroad official is able to say just how much of the company's total expenses are to be charged against any one particular freight or passenger service.

The cost of service would be an undesirable basis of rates, because the railroads would derive such a small part of their total necessary revenues from the carriage of goods having a high value in proportion to bulk and weight, that they would be obliged to charge much higher rates than they now do upon the cruder products of the farm, forest, and mine. These products are the basic materials of industry, and the lowest possible rate for their transportation is essential to social and economic progress.

VALUE OF SERVICE AND VALUE OF COMMODITIES

Value of service is a more desirable basis for rates and fares than cost of service. By charging according to value of service is meant that the shippers of commodities and the passengers who travel shall contribute to the railroad's aggregate expenses in proportion to the value which they derive from the transportation service. The rates and fares may cover a part or all of the value of the service obtained. In either case they are fixed with reference to that value and not with regard to the cost involved in performing the work of transportation. The levy of rates and fares in accordance with this theory, which is usually called "charging what the traffic will bear," is considered by most people to distribute transportation charges properly, because it is claimed that the true measure of a shipper's or a passenger's ability to pay for a desired service is the value which he will thereby derive. That this theory, nevertheless, does not afford an altogether satisfactory basis of charges, particularly in the freight traffic, may be readily shown.

While it is true that the amount of value added by transportation to goods of low value is less for each unit of weight or bulk than the amount of value which is acquired by an equal weight or bulk of high-priced commodities, yet the _percentage_ increase in value is greater in the case of the goods of low cost. Expensive articles can be carried long distances without adding very much to their cost to the consumers. Measured in their percentages, then, the value of the service of transportation is relatively much lower in the case of the higher-priced commodities. The freight charges on wheat range from twenty to forty per cent. of its farm value, while the rate on shoes is possibly two per cent. of their factory price. That these charges are levied in accordance with the real ability of the articles to pay would be hard to establish.

A PARTIAL THEORY OF RAILROAD FREIGHT RATES

Without attempting in this connection to formulate a complete theory of freight rates, it may be said that there are three factors to which weight should be given in fixing charges: First, _the cost of service_. The total costs of transportation, including a fair return on invested capital, must be covered by total receipts. Furthermore, the minimum rate charged any particular class of commodities ought to be sufficient to pay the operating expenses incurred in transporting the goods. Second, _the value of the service_. This fixes the maximum rate that may be charged. Were the railroads to charge more than the service is worth to the shipper the service would not be desired. Third, _the value of the commodities_. Between the minimum rate fixed by the operating expenses and the maximum charge determined by the value of the service actual rates may vary through a wide possible range. In determining what rates within this range will be theoretically most just and least discriminatory, consideration should be given both to the value of the service and--more than is the case at present--to the value of the articles transported. By doing this rates will be paid by the various articles of freight more nearly in proportion to their ability to pay.

THE EFFECT OF COMPETITION ON RAILROAD RATES AND FARES

Whatever theory of rates may be accepted as ideally best, it cannot be strictly adhered to under the existing conditions of active competition obtaining in the United States. Actual charges have to be fixed and revised to meet the varying circumstances under which railway traffic is conducted. This competition takes several distinct forms. One is that between railways and waterways. A large part of the domestic traffic of the United States has the choice of transportation by rail or by water on the great lakes and the tributary canals, by the navigable rivers, or by one of the many ocean routes followed by our coastwise commerce. There is also the competition of rival railways connecting common termini or serving the same cities. These forms of competition are the ones most frequently noted; but they perhaps exercise a less potent influence over rates than what is known as competition through the markets or through the channels of trade. The competition between rival centres of commerce and industry--between the Atlantic cities and the gulf ports, for instance, or between the manufactures of New York and Philadelphia and those of Chicago or Cincinnati for the markets of the Southern States, to cite another example--is a force that must be considered in making rates and fares. Even towns served by only one railway and by no waterway enjoy the benefits of this industrial competition. Unless the railroad can give the industries in these local towns rates that will enable them to market their products, the industries will decline and the railway will lose its traffic.

An interesting result of the competition of roads connecting common termini or joining a common industrial region with seaboard points is that the road whose line is the longest and whose expenses of transportation are greatest is obliged to charge the lowest rate. The short lines can charge more because they compete for traffic under more favourable circumstances. The lower charge of the longer line is called a differential rate, and it is customary for the shorter or "standard" lines to agree to allow the "differential" line a stipulated differential rate. This is the concession which the standard lines are obliged to make to temper competition and to prevent rate wars. The Grand Trunk, running from Chicago to Boston by way of Montreal, is a good example of a differential line, and the New York Central is a good instance of a standard line.

GOVERNMENTAL REGULATION OF RAILROAD TRANSPORTATION

It is a maxim of common law that transportation charges must be reasonable, and the exaction of an unreasonable rate by a public carrier is a common-law misdemeanour punishable by the courts. But when, as the result of severe competition of railroads with waterways and with each other, unjust discriminations between persons, between places, and as regards classes of traffic--the abuses which constitute the railway question--became prevalent, the common-law provisions applying to railway charges were given statutory form and were supplemented and extended by such legislation as the circumstances peculiar to the situation seemed to demand. The comprehensive railway- and canal-traffic act passed by Great Britain in 1854 has been the model adopted for much of the railway legislation in the United States.

The Constitution of the United States gives Congress power to regulate commerce "among the several States," but the jurisdiction over intrastate traffic lies with the State governments. The States began to pass general laws for the regulation of railroads fully twenty years before Congress acted, and two thirds of the States have established commissions to administer those laws.

THE INTERSTATE COMMERCE LAW

After fifteen years of agitation and investigation the existing interstate commerce law was enacted in 1887. The law prohibits unreasonable rates and unjust discriminations between persons, places, and classes of traffic, prohibits pooling agreements, provides penalties for the violation of the law, and establishes a commission of five men to administer and enforce the statute. Fortunately for the commission and for the country the first chairman of that body was the eminent jurist, Thomas M. Cooley, whose master mind did much to give vitality to the law.

During the first five years after the law was passed it secured a fairly efficient regulation of interstate railway commerce, but recent decisions of the United States Supreme Court have so weakened the law that at present the commission has very little power. The commission can investigate complaints and make reports, it can collect statistical information, it can and does informally adjust many differences between shippers and carriers; but, to quote from the last report of the commission, "it has ceased to be a body for the regulation of interstate carriers." Legislation to amend and strengthen the interstate commerce law is urgently needed.

XIII. STOCK AND PRODUCE EXCHANGES

THE STOCK EXCHANGE

The stock exchanges of the world must not be considered simply as noisy congregations of brokers speculating in securities under the guise of legitimate business. They really play an important and necessary part in the financial mechanism of the country, and are instruments of enormous value in subdividing and distributing capital, and in directing its employment in great commercial and industrial enterprises.

The largest stock exchange of the world is that of London. It is not only the centre of the English market for stocks and securities but, like the Bank of England, it is linked internationally with nearly all the financial centres of the world. Almost every reputable security is marketable in London, either through the ordinary channels provided by arbitrage dealers, who buy in the cheaper and sell in the dearer markets, or through the agency of trusts and investment concerns. The magnitude and extent of the financial resources of the London Stock Exchange are enormous. Its advantages to the business public outweigh altogether the drawbacks imposed by the too-speculative spirit of mankind. It is a great business barometer, extremely sensitive to all conditions likely to disturb the world's finances. The London Stock Exchange has scarcely more than one hundred years of history. In the early part of the century the elder Rothschild was one of the giants "on 'change," and it was in this business that he amassed the great fortune which makes the name of his house a synonym for money power. The membership of the London exchange is not limited to a fixed number, as in Paris and New York. In the Paris Bourse all agents are strictly forbidden to trade on their own account.

The New York Stock Exchange was formed in 1792. There are 1100 members. Members are elected and must be nominated by two men who will say that they would accept the uncertified cheque of the nominee for $20,000. The initiation fee is $20,000. Memberships have sold as high as $32,500, and the market value of a seat on the Exchange varies only slightly from year to year.

There are stock exchanges in all large cities, and scattered throughout the country in convenient centres are grain and produce exchanges, cotton exchanges, petroleum exchanges, etc. These exchanges are really the central markets for the commodities they represent. Commodity exchanges deal in actual products, even though the dealers handle nothing but warehouse receipts or promises to deliver. Stock exchanges deal in credits and securities, which may or may not have a tangible value back of them.

There is no reason why bonds and shares should not be publicly dealt in--and in large quantities--as well as dry goods, corn or cotton; but, unfortunately, few stock exchanges confine their transactions wholly to legitimate business. You will look in vain in the quotations for the stock of dozens of corporations whose securities are among the choicest investments. It is upon fluctuations that stock speculations prosper, and it is often true that the largest profits are made on the poorest stocks.

Transactions are quickly collected and reported to the world. In hundreds of offices in New York, Chicago, and other American cities may be seen a little instrument called a _ticker_, which automatically prints abbreviated names of stocks, with their prices, on a narrow ribbon of paper. These _tickers_ are rented to these offices by the telegraph companies, and as fast as the sales are made the quotations are ticked off in thousands of offices in all parts of the United States.

TECHNICAL TERMS OF STOCK EXCHANGES

The term _bull_ is applied to those who are purchasers of stock for long account, with the purpose of advancing prices, as the tendency of a bull is to elevate everything within his reach. The term _bear_ is applied to those who sell short stock, with the purpose of depreciating values. The _bear_ operates for a decline in prices. The broker's charge for his services is called a _commission_, which in the New York Stock Exchange is one eighth of one per cent. each way on a par value of the security purchased or sold. A _point_ means one per cent. on the par value of a stock or bond. _Stock privileges_ or _puts_ and _calls_ are extensively dealt in abroad and to some extent here. A _put_ is an agreement in the form of a written or printed contract filled out to suit the case, whereby the signer of it agrees to accept upon one day's notice, except on the day of expiration, a certain number of shares of a given stock at a stipulated price. A _call_ is the reverse of a _put_, giving its owner the right to demand the stock under the same conditions. A _put_ may serve as an insurance to an investor against a radical decline in the value of stocks he owns; a _call_ may be purchased by a man whose property is not immediately available, but who may desire to be placed in a position to procure the shares at the _call_ price, if they are not below that in the open market when he secures the necessary funds. The speculator usually trades on _margins_. If he has $500 to invest he buys $5000 worth of stock, his $500 being ten per cent. of the total amount. He expects to sell again before the remaining amount falls due. The _margin_ is usually placed by the speculator in the hands of a broker as a guaranty against loss. Although these brokers are really agents for others, yet _on 'change_ they stand in the mutual relationship of principals. A _margin_ is merely a partial payment, but a broker buying stock for a client on _margin_ is compelled to wholly pay for it. If he has not the necessary capital his usual custom is to borrow from banks or money-lenders, pledging the stock as collateral security. In foreign exchanges the element of credit enters more largely into the conduct of business. Where the credit of the client in London is established his broker does not, ordinarily, call on him for any cash until the next "settlement day." A _wash sale_ is a fictitious transaction made by two members acting in collusion for the purpose of swelling the volume of apparent business in a security and thus giving a false impression of its value. Stocks sell _dividend-on_ between the time the dividend is declared and the day the books of the company close for transfer; after that they sell _ex-dividend_, in which case the dividend does not go to the buyer. When a company decides not to declare a dividend it is said to _pass its dividend_. To sell stock _buyer 3_ is to give the buyer the privilege of taking it on the day of purchase or on any of the three following days, without interest; and to sell stock _seller 3_ is to give the seller the privilege of delivering it on the day of purchase or on any one of the three following days without interest. _Buyer 3_ is a little lower and _seller 3_ a little higher than _regular way_ when the market is in a normal condition. _Bucket shops_ are establishments conducted nominally for the transaction of a stock-exchange business but really for the registration of bets or wagers, usually for small amounts, on the rise or fall of the prices of stocks, there being no transfer or delivery of the commodities nominally dealt in. There are thousands of these counterfeit concerns throughout the country conducted without any regard for legitimate commercial enterprises.

FUTURE DELIVERY

Grain is stored in warehouses until needed for milling or shipment. When we speak of _December wheat_ we mean wheat that is to be delivered to the buyer in December. The carrying charges include storage, interest, and insurance, so that wheat sold for _May delivery_ would necessarily bring a higher price than wheat sold for December delivery. Carrying charges are in favour of the _short_ seller. When sold for immediate delivery it is known as _cash grain_.

XIV. STORAGE AND WAREHOUSING

BONDED WAREHOUSES

There is a government regulation that an importer who does not wish to pay immediately the customs duties on his goods may have them stored in a warehouse, provided he furnish a bond with a surety that he will pay the duty within three years or export the goods to some other country. It is also a requisite that the goods be deposited in a bonded warehouse in the care and custody of its proprietor, who also must furnish the government with a bond of indemnity. The bond of the proprietor is a general bond and usually covers what might be considered a fair amount of total values due the government at any time. Officers of the United States are stationed at the bonded warehouse during business hours. These are there in evidence of the government's proprietary interest in the merchandise stored. When an importer makes entry at the custom house for bonding his goods, he at that time provides the security required.

By a recent decision of the Treasury Department at Washington goods in bond are in the joint custody of the United States government and the proprietor of the warehouse, and after the government has received its customs duties for the goods they are in the proprietor's sole possession. The government cannot interfere to enforce delivery of the goods to the importer. The claim of the warehouse proprietor for storage charges becomes a first lien after the government's claim is satisfied. When the importer has paid both customs and storage charges he is privileged to remove his goods.

WAREHOUSE REGULATIONS

It is the duty of United States storekeepers to check off the goods as they are received at the warehouse and to report the same to the custom house; and when goods are to be withdrawn to see that delivery is not made until a custom house permit is presented. Upon payment of the import duty on goods in bond at the custom house at any time after importation, the customs officials issue a warehouse permit to the importer ordering the United States storekeeper in charge of the bonded warehouse to deliver the goods to the importer, and upon presentation of the permit the goods are released unless the proprietor holds them subject to storage charges.

Goods may be held in bond for three years with the duty unpaid, but after that time either the duty must be paid or the goods exported. If shipped to another country and afterward re-imported the goods would again be entitled to the three-year privilege. If goods are not exported and the customs charges are due and unpaid, the government may dispose of the goods at public sale to obtain its claim.

Goods arriving by steamer and unclaimed lie at the wharf forty-eight hours. If the owner does not appear to make entry for them within that time, after the entry for the vessel has been made, the goods are sent to a bonded warehouse and remain there on what is known as a general order, and if they stand there unclaimed for a year they may, at the expiration of that time, be sold by the government.

The capital of a warehouse is its storage space. The rates vary from 1/4 to 3/4 of a cent per cubic foot. The charges may be based on the amount of space consumed and the weight of the merchandise. The latter often determines the floor elevation to which the goods may be assigned. The more convenient of access the storage location is, the greater the cost. Warehouse receipts are issued as evidence of storage. All merchandise is conveniently bulked for numbering and marking, and these distinguishing marks appear on the receipts. Negotiable and non-negotiable receipts are issued as the needs of the owner may require. The former permit advances to be made by bankers upon the merchandise as collateral security.

FREE WAREHOUSES

These differ from bonded warehouses only in the fact that the government has no control or interest in them. They are only for the storage of imported goods on which the customs duty has been paid or for goods imported free of duty or for merchandise of domestic production and manufacture. They are managed entirely by the proprietor, and the contracts for storage are, of course, between the proprietor of the warehouse and the owner of the goods. The storage rates in free warehouses are considerably lower than for goods stored in bonded warehouses--the latter being a much more expensive business to conduct. There is no time limit in free warehouses. Goods may remain indefinitely. When they remain from six months to a year the charges are collected usually at certain periods to avoid accumulation. Experience shows that goods in free warehouses do not stay so long as those in bond. The articles commonly found in these houses are domestic and imported wools, cotton, canned goods, peanuts, yarns, cotton piece goods, mattings, dry goods, etc. Perishable goods, of course, do not find their way into bonded or free warehouses. These are placed in cold storage.

BANKING FEATURES OF WAREHOUSING

Many of the warehouses find it advantageous to do a banking business in connection with the storage features. Very frequently, for the convenience of the importer, goods are consigned to the warehouse and sent subject to a sight draft for the amount of the invoice. The warehouse company will pay the draft with the exception of about twenty per cent., which the importer is expected to furnish. If the duty is paid then the value upon which a loan is estimated is based upon the market value of the goods in this country. After the draft has been satisfied the goods are placed in the stores of the warehouse company subject to the customs and storage charges. The amount advanced by the company bears interest at current money rates. In illustration let us suppose bonded goods to be shipped and invoiced at $10,000, customs duty $4000, and the goods consigned to a bonded warehouse. The draft ($10,000) is sent to the warehousing company, which advances $8000, and together with the $2000 received from the importer pays the draft. The $8000 loan made by the company is then charged to the importer at the usual interest rate, and when the borrower withdraws his merchandise from storage he will have to pay the government the $4000 customs duty and pay back his loan of $8000 to the warehouse company, together with interest and storage charges. If any portion of the goods stored is withdrawn for use in the business of the importer, the company will rebate a proportionate amount of the interest. If goods decline in value as collateral in storage the company will demand additional margin for its protection. If goods appreciate in value the loan may be increased. The market value of the goods is ascertained by the appraisement of some expert, who receives a commission for his services.

COLD STORAGE

The cold-storage warehouse is the natural result of the necessities of our great agricultural interests in the preservation of perishable products so sensitive to the deteriorating effects of temperature. The solution of the problem of the preservation of dairy products, meats, fish, poultry, fruits, and vegetables has developed a system that has eliminated the seasons and made possible the equalisation of prices of the finer class of edibles. The cornering of products and the creation of unreasonable prices are avoided. No article becomes a glut on the market as formerly. When there is a surplus of eggs and fruit, prices may be maintained by putting them in cold storage for a few days and offering them on the market when the conditions of trade warrant.

TEMPERATURE REQUIREMENTS FOR COLD STORAGE

Prior to the year 1890 cold storage was dependent upon the employment of ice, but in the evolution of the cold-storage warehouse ice is no longer a requisite. In fact, the temperature obtained by the employment of ice precluded a thermometric register much below the freezing point. The accepted temperature for butter and eggs was formerly 40° to 50°; but through the introduction of mechanical refrigeration, which has revolutionised the business economically as well as physically, eggs now are held in storage at a temperature of 31° and butter from 10° to 18°. Under the former method of ice storage, goods that were offered on the market as "held goods"--that is, as coming from a cold storage--always brought several cents under the prices of fresh merchandise. But the remarkable modern methods of cold storage permit the carrying of dairy products for a number of months and their successful sale afterward in competition with fresh goods. Eggs stored in March are taken out in the following November and have commanded as high and often higher prices than the fresh commodity. Eggs have been kept two years and found perfectly sweet when used. In freezing poultry and fish the temperature now frequently given is zero and under. Poultry does not carry so well as other merchandise. Although it is possible to keep it for two years, yet it loses its flavour. Five or six months' storage is its usual average limit.

Certain temperatures are maintained in the various compartments of a cold-storage warehouse according to the requirements of the products, and these temperatures are made possible by forcing through pipes arranged around each compartment a brine composed of about ninety-five per cent. of pure salt whose temperature has been reduced by the action of the chemicals. When a shipper stores his goods there is an implied contract with the storage company that the temperature required for the product will be furnished and maintained. Failure to do this renders the company liable for any damage to property. So vital is this feature of the business, which is really the only liability assumed by the company, that the custom prevails of taking the temperature of each room as often as five times in every twenty-four hours, and keeping the record in temperature books open to the inspection of the shippers. A room filled with merchandise may not vary in temperature one degree in six months.

COLD-STORAGE CENTRES

Chicago very naturally is the leading cold-storage centre. Its situation in the heart of the productive area and its advantages as a distributing centre have given it its prestige. But in the last two or three years the Eastern cities, New York, Philadelphia, and Boston, have developed enormous cold-storage facilities, and Chicago no longer is absolute in her dictation to the markets of the world. When it is remembered that the dairy interests of our country during the last three years averaged an annual value of $650,000,000, and that the greater portion of this found its way into cold-storage warehouses, the importance of this new and very necessary business is readily appreciated.

COLD-STORAGE CHARGES

The cold-storage charges for eggs in thirty-dozen cases would be about 15 cents per case for the first month and 9 cents for every additional month. Butter in sixty-pound tubs would be charged at the rate of 12 cents per tub for each month. Cheese would cost one tenth of a cent a pound per month. The rates of Eastern cities are usually higher than in the West. About ninety per cent. of the storage business of the East is in goods shipped from the West. The refrigerator car is a valuable adjunct to the business. The temperature of the cars is about 45°.

Although no ice is used in the modern cold-storage plant, yet the ice has become a very valuable by-product. Since all the facilities for its manufacture are at hand it has become a matter of commercial expediency to employ them to the company's profit in the production and sale of a commodity indispensable to modern life.

QUESTIONS FOR REVIEW

1. Give some particulars in which the Bank of England differs from our
larger national banks.

2. A bank cheque is a demand order for money drawn by one who has
funds in the bank. How does a cheque differ from an order on A----
B---- to pay bearer a certain sum of money?

3. You are sending a cheque through the mails to John Brown, Chicago.
How will you prevent the cheque from falling into the hands of the
wrong Brown?

4. You identify A---- B---- at your bank. The cheque A---- B----
presented turns out to be a forgery. Are you responsible?

5. What is meant by power of attorney? How should an attorney indorse
cheques for any person for whom he is acting?

6. What is a certified cheque? Brown gives A an ordinary cheque for
$1000, and B a certified cheque for $1000. He fails before either
cheque is presented. Why is B's security for his claim considered
better than A's?

7. Show how all the banks of the United States are connected through
the clearing-house system.

8. How do State and national banks differ as to their organisation?

9. A national bank has a capital of half a million. A customer asks
for a loan of $62,000 on indorsed paper. Can the bank legally grant
the loan?

10. Give some particulars of the liabilities of the officers and
directors of national banks.

11. What is meant by borrowing money on _collaterals_? How is this
done?

12. Tell how it is possible for a young man of good character, but
without friends who have financial standing, to secure bonds for his
faithful conduct in a responsible position.

13. When rates are high bankers prefer to deal in long-time paper.
Why?

14. Account for the fact that London is the financial centre of the
world.

15. Explain in detail the business of a note broker, giving some
particulars of his responsibility in connection with the paper
handled.

16. Enumerate the leading items of resource and liability in a
national-bank statement.

17. A bank receives from the comptroller of the treasury $100,000 in
new bank-notes of its own issue. What ledger entry? A bank retires
$10,000 of its own bank-notes. What entry?

18. Discuss fully the points which should enter into a proper estimate
of the value of paper offered for discount.

19. Give the successive and necessary steps in the formation of a
joint stock company.

20. Why are companies which properly exist and belong in one State
sometimes organised under the laws of another State?

21. Explain very fully the difference as to resource and liability
between a bondholder and a stockholder.

22. How may a stock company be dissolved?

23. What is the difference between a voluntary association, such as a
society or club, and a stock company?

24. Explain very fully the meaning of _Limited_ when it forms part of
the legal title of a company.

25. Is it legal to sell shares of stock and issue mortgage bonds upon
the same property? What relationship do they bear one to the other?

EXAMINATION PAPER

NOTE.--_The following questions are given as a means by which
the student may test for himself whether he has attentively
pursued the lessons of the course or not. It is recommended that
each student as he finishes the course write out the answers to
the questions in full. Only such answers need be attempted as
the student can frame from a careful study of the course._

1. (_a_) Give some particulars in which the Bank of England differs
from our larger national banks. (_b_) Enumerate some of the
advantages afforded to the community and to commerce in general
by banking institutions. (_c_) How do private banks and trust
companies differ from national banks?

2. (_a_) What is a stock certificate? How does it differ from a
mortgage bond? (_b_) At what rate must United States 4 per cents
be bought to net 3.2465 per cent.? (_c_) Give the successive and
necessary steps in the formation of a stock company. How can the
stock of a company or corporation be increased?

3. (_a_) What provision is usually made for the redemption of
municipal bonds which have a long period to run? (_b_) What is
meant when we say that a certain railway is in the hands of a
receiver? (_c_) Give some of the advantages which stock companies
have over partnerships.

4. (_a_) Tell how you would receipt for a payment on a note. Why is
not an ordinary separate receipt sufficient? (_b_) Discuss fully
the points which should enter into a proper estimate of the value
of paper offered for discount. (_c_) Explain in detail the
business of a note broker, giving some particulars of his
responsibility in connection with the paper handled.

5. (_a_) What are the advantages to the banks of a city of their
central clearing-house? (_b_) Show by a diagram how collections
are made between distant points. (_c_) What is a certified check?

6. (_a_) Enumerate some of the abuses of rate discrimination in the
United States and tell how they are met. (_b_) What are the
advantages to the public of freight organisations which arrange
for through service? (_c_) Explain in detail the methods adopted
by leading and competing railway lines to regulate and adjust
freight rates. (_d_) What are _differentials_? How are (1)
through and (2) local passenger rates regulated?

7. (_a_) Give the particulars in which a warehouse receipt resembles
and differs from (1) a promissory note, (2) a bill of lading.
(_b_) What are the advantages to the importer of bonded
warehouses? (_c_) What are the duties of our foreign consuls with
reference to the importation of goods?

COMMERCIAL LAW

I. THE DIFFERENT KINDS OF CONTRACTS

Commercial law relates to CONTRACTS. These are made by almost every one. A person cannot ride in a street-car without making a contract with the company for carrying him. If he goes into a store and buys a cigar, a stick of candy, or a tin whistle, he has made a contract with the man behind the counter, who owns the store or is his salesman. Tramps and thieves are about the only persons who live without making contracts. In that respect they are like the birds of the air, getting whatever they desire whenever the chance is seen.

A contract has been defined as an agreement to do or not to do some particular thing. These are the words used by one of the greatest of American judges. The reader may turn to his dictionary and find other definitions that contain more, if he pleases, but this will answer our purpose.

All contracts may be put into three classes, and each of these will be briefly explained. First, SEALED AND UNSEALED CONTRACTS. What do we mean by a contract that is sealed? It is one to which the person who signs it adds, after his name, a seal. But what is a seal? It may consist of sealing-wax, stamped in a peculiar manner, or a wafer made of sealing-wax, or a paper wafer. In the olden times when people could hunt and fight but were not able to write their names, they put a seal at the end of a contract made by them; in other words, the seal supplied the place of a name. Each person's seal differed from the seal of every other. It had its origin really in the ignorance of the people. As they were unable to write their names these distinct signs or marks, called seals, were put on instead of their signatures.

With the changes brought by time the form of this device or seal, required by law, is much simpler than it was centuries ago. Indeed, in every State persons use the letters "L. S.," with brackets around them, instead of a seal. They mean "the place of a seal," and are just as good in every way as any kind of seal that might be used. Here are two of the forms of seals in most common use:

Any contract that has a seal after the name of the signer is a sealed contract, and every other is called an UNSEALED, ORAL, or VERBAL contract. If a contract was written and a seal was added after the signer's name, and there was another exactly like it in form, but without a seal, this would be called an unsealed or verbal contract, and in law would differ in some important respects from the other. This is true in every State except California, where the difference between sealed and unsealed contracts is no longer known.

The second class of contracts are called EXPRESS AND IMPLIED CONTRACTS. By an EXPRESS CONTRACT is meant one that is made either in writing or in words. But the reader may ask, Are not all contracts of this kind? By no means. Many contracts exist between people which have not been put into words. Suppose A should ask B for employment and it should be given to him, but no word should pass between them about the price to be paid. The law would _imply_ that B must pay him whatever his work was reasonably worth. If A should come at the end of the week for his pay and B should say to him: "I never made any bargain with you concerning the price, and I am unwilling to pay you anything," A could, if he understood the law, say to B: "You told me to work, and the law _implies_ that you must pay me whatever my work is worth." How much would the law give him for his work? Just what the employer was paying other men for the same kind of work.

Another class of contracts are called EXECUTED and EXECUTORY. An EXECUTED CONTRACT is one that is finished, done, completed. If I should go into a store and ask the price of a book and say to the salesman, "I will take it," and give him the money, and take the book with me, this would be an executed contract. An EXECUTORY CONTRACT is one that is to be completed. Suppose the salesman did not have the book and I should say to him, "Please get it for me and I will come in next week and pay you for it," this would be an executory contract; and it would remain so until I came in and got the book, as I had promised to do, and paid the price.