Note.—The following questions are set as an indication of the sort of knowledge a student should possess who has carefully read the several papers of this course. The paper covers only about the first half of the course. The student is recommended to write out the answers carefully. Only such answers need be attempted as can be made from a study of the lessons. - What in a general sense is meant when we speak of the currency of a country?
- Enumerate some of the advantages afforded to the community and to commerce in general by banking institutions.
- 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 John Smith to pay bearer a certain sum of money?
- Why is it important that cheques should be very carefully drawn?
- (a)A cheque has no date. Does this make it void? (b)How about a cheque dated months ago? (c)Is a cheque dated on Sunday good? (d)Why are cheques sometimes dated ahead? (e)Are you at liberty to print your own form of cheque? (f)Is it necessary that your cheque be written on the prescribed blank form? (g)How would you write a cheque for 75 cents?
- How would you word a cheque to give to a person who is unknown at your bank, but who wishes to draw the money over the counter?
- You are sending a cheque through the mails to John Brown, Philadelphia. How will you prevent the cheque from falling into the hands of the wrong John Brown?
- You identify A. B. at your bank. The cheque A. B. presented turns out to be a forgery. Are you responsible?
- A. B. transfers a cheque to you by a blank indorsement. It is then payable to bearer. How can you legally make it payable to your own order?
- What is meant by power-of-attorney? How should an attorney indorse cheques for any person for whom he is acting?
- If a note were about to be transferred to you by indorsement and delivery in payment of a debt, would it make any difference to you whether or not it was overdue? Explain in full.
- Tell how you would receipt for a payment of a note. Why is not an ordinary separate receipt sufficient?
- Why are notes protested? Why is a formal protest sometimes desired even though the paper bears no indorsements?
- If an indorser is compelled to pay a note, against whom has he a good claim?
NOTE TO THE FOREGOING EXAMINATION PAPER It is a mistake to answer questions for a student if he is able of himself to find the answers. A question which sets a student thinking, even though he cannot immediately find a satisfactory answer, affords educational training of considerable value. A few of the answers to the foregoing questions are as follows: 5. (a) Not necessarily so. (b) Such a cheque would under ordinary conditions be all right. Cheques should be presented as soon after date as convenient. (c) Cheques dated on Sunday are very commonly paid. Cheques or notes delivered on Sunday are void. The delivery makes the contract, not the dating. (d) That the maker may have a few days in which to deposit sufficient money to meet them. (e) You are at liberty to print your own form of cheque or to write it out in full if you wish. (g) Write the words "Seventy-five cents" plainly along the money line. 8. Yes.
es break through and steal.' No savings bank can keep money on hand or deposit it or loan it with absolute safety. All is comparative. It is a peculiarity of money that each dollar requires watching; general supervision is insufficient; hence it is that the safety of moneyed institutions depends upon the capacity and honesty of those in control, and not upon adherence to arbitrary rules. No set of rules can be adopted that will bind dishonest men nor that will compensate for want of experience and ability of honest ones. There is really no conflict between commercial and savings banks. In fact, a large number of the commercial banks of a country allow interest upon average balances and standing deposits in the same manner as savings banks. Primarily the savings bank creates wealth, while the commercial bank handles it; the savings banks are creative, while the commercial banks are administrative. The aim of the savings bank is to gather money and invest it safely and thus bring profit to the depositor; the aim of the commercial bank is to lend money at fixed charges and thus bring profit to the institution. The former opens its doors to savers, the latter to borrowers. One serves by receiving and keeping and the other by lending. The savings bank aims at making men savers as well as producers. It offers the aid of the strong, who can manage well, to the weak and inexperienced. If the 5,000,000 depositors of savings in the United States were to hide away their own savings nearly $2,000,000,000 would be withdrawn from circulation. The savings bank invests its money. Its managers are as a rule intelligent men, competent to make safe investments in solid securities. The best savings banks are conservative and do not encourage speculation. The rules and regulations of savings banks differ largely. In some institutions deposits of a dime at a time are accepted; in others a dollar is the limit. Deposits usually begin to draw interest on the first day of each quarter, but they are entitled to it only if they remain until the end of the half-year. Thus money deposited on the 1st of January is entitled to six months' interest on the 1st of July, though it is not entitled to any interest if withdrawn in June. Some few banks allow interest to begin on the 1st of each month. Most savings banks do not permit money to be withdrawn short of thirty days' notice. Students of this course who are interested in securing definite information upon this subject regarding any particular bank should apply to that bank for a set of its rules and regulations for the information of depositors. TRUST COMPANIES There has grown up in this country a class of financial institutions which take a sort of middle ground between the commercial bank and the savings bank, so far as their service to the public is concerned. These are what are known as trust companies. National banks are prohibited by law from making loans on real estate, and though State banks are not hedged in this way, as a matter of good banking they usually avoid loans of this character. The policy of commercial banks is to make a great many comparatively small loans on short-time paper, while that of the trust company is to make large loans on long-time securities. The deposits of trust companies consist largely of undisturbed sums such as might be set aside by administrators, executors, trustees, committees, societies, or from private estates. They are such as are not likely to fluctuate greatly in amount. From the very nature of their deposits trust companies find it convenient and profitable to make larger loans and at longer periods than do ordinary banks. Trust companies not only receive moneys upon deposit subject to cheque and for savings, and loan money on commercial paper and other securities, as do commercial banks; but they also act as agents, trustees, executors, administrators, assignees, receivers for individual properties, and corporations. They frequently assist as promoters or reorganisers of corporations and in the sale of stocks, bonds, and securities. They act also as agents for the payment of obligations maturing at future dates, such as the premiums on insurance, interest on mortgages and bonds, etc. Trust companies are organised under the laws of the State in which they exist and are usually subject to all the supervision required in the case of State banks. III. CORPORATIONS AND STOCK COMPANIES[9] CORPORATIONS Stock companies are usually referred to as corporations, though all corporations are not stock companies. A corporation is a body consisting usually of several persons empowered by law to act as one individual. There are two principal classes—(1) public corporations and (2) private corporations. Public corporations are not stock companies; private corporations usually are. Public corporations are created for the public interest, such as cities, towns, universities, hospitals, etc.; private corporations, such as railways, banks, manufacturing companies, etc., are created usually for the profit of the members. Corporate bodies whose members at discretion fill by appointment all vacancies occurring in their membership are sometimes called close corporations. POWER TO BE A CORPORATION IS A FRANCHISE In the United States the power to be a corporation is a franchise which can only exist through the legislature. There are two distinct methods in which corporations may be called into being: First, by a specific grant of the franchise to the members, and, second, by a general grant which becomes operative in favour of particular persons when they organise for the purpose of availing themselves of its provisions. When the specific grant is made it is called a charter. In the case of private corporations the charter must be accepted by the members, since corporate powers cannot be forced upon them against their will; but the charter is sufficiently accepted by their acting under it. When special charters are not granted individuals may voluntarily associate, and by complying with the provisions of certain State laws may take to themselves corporate powers. In some of the States private corporations are not suffered to be created otherwise than under general laws, and in others public corporations are created in the same way. A CORPORATION MUST HAVE A NAME A corporation must have a name by which it shall be known in law and in the transaction of its business. The name is given to it in its charter or articles of association and must be adhered to. The necessity for the use of the corporate name in the transaction of business follows from the fact that in corporate affairs the law knows the corporation as an individual and takes no notice of the constituent members. CORPORATE INTERESTS In municipal corporations in the United States the members are the citizens; the number is indefinite; one ceases to be a member when he moves from the town or city, while every new resident becomes a member when by law he becomes entitled to the privileges of local citizenship. In corporations created for the emolument of their members interests are represented by shares, which may be transferred by their owners, and the assignee becomes entitled to the rights of membership when the transfer is recorded; and if the owner dies his personal representative becomes a member for the time being. In such corporations also shares may be sold in satisfaction of debts against their owners. ADVANTAGES OF CORPORATIONS AND JOINT-STOCK COMPANIES OVER PARTNERSHIPS The following are given as a few of the advantages which are claimed for corporations and joint-stock companies over partnerships: - Union of capital without the active service of the investors.
- Better facilities for borrowing. It is a common thing for a partnership to be changed to a stock company for the express purpose of raising money by the issue of bonds or stock.
- Limited agency of directors. A partner may pledge and sell the partnership property, may buy goods on account of the partnership, may borrow money and contract debts in the name and on the account of the partnership. Directors of a joint-stock company must act in accordance with the provisions of the by-laws of the company.
- The continuous existence of a company.
- New shareholders are admitted more easily than new partners.
- A retiring partner is still liable for existing debts. A shareholder may retire absolutely by selling his stock and having it legally transferred.
IV. BORROWING AND LOANING MONEY[10] THE MONEY MARKET Money, like other articles of commerce, has for hundreds of years had its fields for the production of the raw products, its manufacturing establishments, its markets and exchange centres, its sellers and buyers, its wholesale and retail dealers, and its brokers and commission merchants. Out of this trade in actual coin has grown a trade in paper notes, which are really only promises to pay coin, and out of this latter trade has grown up during recent years a still further enormous trade in securities representing all kinds of property. Very often these securities are based solely upon the credit of the names attached to them, so that our modern system of borrowing and loaning money is really a system of borrowing and loaning credit. When our government borrows $100,000,000, as it did a few years ago, it gives "its bond" that the money will be paid. When States, or cities, or railroads, or other corporations borrow money they issue bonds guaranteeing payment at a particular time. When an individual borrows money he gives his "bond" in the form of a promissory note. These bonds pass from hand to hand and have a fairly constant value in the money market. They really represent the money trade to a much larger extent than does actual coin, so that the borrowing or loaning of money really means, to a very large extent, simply the borrowing or loaning of credit. If we borrow a $10 gold piece we borrow money; if we borrow a $10 bill or an indorser's name for the back of our note we simply borrow credit—in the one instance the credit of the United States and in the other the credit of the man who indorses our paper. BORROWING FROM BANKS It is the business of a bank to loan money to responsible persons within reasonable limits. The regular customer of the bank is entitled to and will receive the first consideration if the demand is larger than the bank can safely meet. A business man should not hesitate, when occasion requires, to offer his bank any paper he may want discounted, if in his opinion it is good, nor should he be offended if his banker refuses to take it even without giving reasons. A portion of the loans of many banks consists of investments in solid bonds, but the bulk of the loans of banks is made on commercial paper. Time and demand loans are made upon collaterals of many descriptions. The larger banks loan on an average from $50,000 to $100,000 a day. Banks discount paper for their depositors—and simply term the operation discounting; but when they go outside of their line of depositors in making investments in time paper they call it buying paper. They generally buy from private bankers and note brokers. National banks are prohibited from loaning over ten per cent. of their capital to any one individual or corporation except upon paper representing actually existing merchandise. WHAT ARE COLLATERALS? If a business man borrow $1000 from a bank on his note and give ten shares of stock to the bank, to be held by it simply as security, the stock thus given would be termed collateral. These collaterals are not the bank's property and the bank is responsible for their safe keeping. If coupons mature while bonds are being held as collateral, the owners are usually allowed to collect the amount for which they sell. Sometimes one note is given as collateral security for another which is discounted. ACCOMMODATION PAPER Notes and acceptances that are made in settlement of genuine business transactions come under the head of regular, legitimate business paper. An accommodation note or acceptance is one which is signed or indorsed or accepted simply as an accommodation and not in settlement of an account or in payment of an indebtedness. With banks accommodation paper has a deservedly hard reputation. However, there are all grades and shades of accommodation paper, though it represents no actual business transaction between the parties to it and rests upon no other foundation than that of mutual agreement. No contract is good without a consideration, but this is only true between the original parties to a note. The third party, or innocent receiver or holder of a note, has a good title and can recover its value even though it was originally given without a valuable consideration. An innocent holder of a note which had been originally lost or stolen has a good title to it if he received it for value, the law justly protecting such a holder against the fault or carelessness of others. NOTE BROKERS Merchants sell a great many of their notes in the open market—that is, to note brokers. The banks buy these notes from the note brokers. The assistance of the broker who handles commercial paper is a necessary and valuable aid to the purchasing bank. Fully three fourths of all the paper purchased by banks in large cities is purchased upon the simple recommendation of the note brokers. As a rule these brokers simply transfer the paper without guaranteeing by indorsement its payment. Notes bought by banks from note brokers without their indorsement are held to be guaranteed by them to be all right in all points except that which covers the question of whether they will be paid or not. The bank uses its best judgment in taking the risk. If the note dealer in selling notes to a bank makes what he believes to be fair and honest representations regarding any particular paper—statements of such a straightforward type that upon them no charge of false pretenses can be made to rest—he simply guarantees the note genuine as to names, date, amount, etc., and that in selling it he conveys a good title to the paper. As business men, however, they are very cautious and are exceedingly anxious that the paper they sell shall be paid, and as a rule they make good any losses which grow out of apparent misrepresentations on their part. BANKERS' RATES FOR LOANS In loaning money on demand, when it is strictly understood between bank and borrower that the money so advanced is positively minute money—money returnable at any minute when the bank calls for it—banks usually charge low rates of interest. When interest rates are high bankers prefer to deal in long-time paper. This general rule is reversed when the situation is reversed. Bankers aim also to scatter and locate their maturities so that as the seasons roll around they will not have very large amounts maturing at one time and very small amounts at another. They plan also to be "in funds" at those seasons when there is always a large and profitable demand for money. For instance, in the centres of the cotton-manufacturing interest the banks count on a large demand for money between October and January, when the bulk of the purchases to supply the mills are made. Again, among those who operate and deal in wool there is an active demand for money in the wool-clip in the spring months. The wheat and corn crops are autumn consumers of money. Midwinter and midsummer in the north are usually periods of comparative stagnation in the money market. All these things affect rates, and the successful banker is he who from observation and large experience shows the most skill in timing his money supply. V. COLLATERALS AND SECURITIES TWO DISTINCT CLASSES OF SECURITIES 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. 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. 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. 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: 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 1830, 23 miles; 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 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 ¼ to ¾ 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 - Give some particulars in which the Bank of England differs from our larger national banks.
- 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?
- 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?
- You identify A—— B—— at your bank. The cheque A—— B—— presented turns out to be a forgery. Are you responsible?
- What is meant by power of attorney? How should an attorney indorse cheques for any person for whom he is acting?
- 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?
- Show how all the banks of the United States are connected through the clearing-house system.
- How do State and national banks differ as to their organisation?
- 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?
- Give some particulars of the liabilities of the officers and directors of national banks.
- What is meant by borrowing money on collaterals? How is this done?
- 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.
- When rates are high bankers prefer to deal in long-time paper. Why?
- Account for the fact that London is the financial centre of the world.
- Explain in detail the business of a note broker, giving some particulars of his responsibility in connection with the paper handled.
- Enumerate the leading items of resource and liability in a national-bank statement.
- 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?
- Discuss fully the points which should enter into a proper estimate of the value of paper offered for discount.
- Give the successive and necessary steps in the formation of a joint stock company.
- Why are companies which properly exist and belong in one State sometimes organised under the laws of another State?
- Explain very fully the difference as to resource and liability between a bondholder and a stockholder.
- How may a stock company be dissolved?
- What is the difference between a voluntary association, such as a society or club, and a stock company?
- Explain very fully the meaning of Limited when it forms part of the legal title of a company.
- 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. - (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?
- (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?
- (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.
- (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.
- (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?
- (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?
- (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?
tr> | | 9. | Space to be inserted mark. | Space to be inserted. | | 10. | Matter wrongly altered to remain as it was originally mark. | Matter wrongly altered to remain as it was originally. Dots are placed under the matter. | | 11. | A bad or battered letter mark. | A bad or battered letter. | | 12. | Space to be reduced mark. | Space to be reduced. | | 13. | Close up mark. | Close up. | | 14. | Push down space or lead mark. | Push down space or lead. | | 15. | New paragraph mark. | New paragraph. | | 16. | Something foreign between the lines, or a wrong-font space mark. | Something foreign between the lines, or a wrong-font space making the type crooked. | | 17. | Line to be indented one em of its own body mark. | Line to be indented one em of its own body. |
When letters or words are set double or are required to be taken out a line is drawn through the superfluous word or letter and the mark No. 1, called dele, placed opposite on the margin. (Dele is Latin for take out.) A turned letter is noted by drawing a line through it and writing the mark No. 2 on the margin. If letters or words require to be altered to make them more conspicuous a parallel line or lines must be made underneath the word or letter—namely, for capitals, three lines; for small capitals, two lines; and for italic, one line; and on the margin opposite the line where the alteration occurs the sign caps., small caps., or ital. must be written. Where a letter of a different font is improperly introduced into the page it is noted by drawing a line through it and writing w. f. (wrong font) on the margin. Where a word has been left out or is to be added a caret must be made in the place where it should come in and the word written on the margin. A caret is made thus: ^ Where letters stand crooked they are noted by a line, but where a page hangs lines are drawn across the entire part affected. Where a faulty letter appears it is denoted by making a cross under it and placing a similar mark on the margin. Where several words are left out or where new matter is to be added the added matter is written wherever convenient, and a line is drawn from the place of omission to the written words. In making a correction in a proof always mark the wrong letter or word through and insert the alteration in the margin, not in the middle of the printed matter, because it is liable to be overlooked if there is no marginal reference to the correction. To keep the different corrections distinct finish each off with a stroke, thus /; and to make the alterations more clear or less crowded mark those relating to the left-hand portion on the left margin and those relating to the right-hand portion on the right margin.
The hints given here are intended for the general public and not for the printer, and to the student of these lessons let us say that the first essential of good proof-reading is clearness. Be very sure that the printer will understand the changes which you desire him to make. Quite often it is an advantage if you wish a particular style of type used to cut out a sample of that style and paste it on your copy or on your proof, indicating that you want it to be used. Instructions to the printer written either on the copy or on the proof should be surrounded by a line to separate them from the text, or to prevent any confusion with other written matter intended as copy or as corrections. When the corrections have been duly made and approved by the author or editor it is customary to write the word "press" on the top of the first page. If intermediate proofs are wanted, mark on the proofs returned to the printer "Send revise." The final or "press" proof is always retained by the printer in case of any dispute. It is his voucher, and he retains it for future reference. It is a good plan to make corrections in a different coloured ink from that used by the printer's proof-reader. If you are having a pamphlet or book printed the different proofs will reach you in the following order: - Galley proofs.
- Revised proofs (if any).
- Page proofs.
- Foundry proofs.
So far as possible, make all the necessary changes while the type is in galleys. Once made up into pages, a very slight change, particularly such a change as the crossing out or addition of a sentence, may make a great deal of trouble. When the pages are passed upon they are sent to the foundry for casting. The foundry proofs are the last proofs pulled. Corrections made on these make it necessary to alter the electrotype plates, which is rather an expensive process. To change a word, a piece of the metal plate has to be cut out and another with the new word soldered in. A page is said to overrun if it is too long. If the space to be occupied is limited it is a good plan to adapt your copy to it by counting the words and by comparing the count with that of some printed page in the same size of type. Return proofs to your printer or publisher as promptly as possible. As a rule printing houses cannot afford to keep type locked up and unused waiting for the return of proofs. There are many imperfections in typography, such as wrong-font and inverted letters, awkward and irregular spacing, uneven pages or columns, crooked words and lines, etc., which it is the business of the printing house to correct. No book or pamphlet, therefore, ought to go to press until it has been read and revised by an experienced reader. Strict uniformity should always be preserved in the use of capitals, in spelling, and in punctuation. Where authors have their manuscripts type-written and make two or three revises upon the type-written sheets before their copy is turned over to the publishing house, the labour of proof-reading and the expenses of corrections are reduced to a minimum. The errors shown in our illustration are more numerous than are likely to appear in any proof sent out from a publishing house. | Transcriber's Notes | | Page | | • favorable changed to favourable | 35 | | • favor changed to favour | 49 | | • (5) changed to 5. | 65 | | • contantly changed to constantly | 115 | | • Ierland changed to Ireland | 130 | | • battle-ships changed to battleships | 150 | | • BREAD-STUFFS changed to BREADSTAFFS | 152 | | • duplicated "from" deleted | 162 | | • bread-stuffs change to breadstuffs | 163 | | • June, 1898 changed to June 30, 1898 | 205 | | • proportiona t changed to proportion at | 208 | | • duplicated "in" deleted | 223 | | • typewritten changed to type-written | 259 | | • everyday changed to every-day | 350 | | • comma added after figures | 384 | | • colored changed to coloured | 389 | | • nessary changed to necessary | 390 | | Illustrations that appear on pages 117, 199, 216 and 241 in the original publication do not coincide with page numbers in this eBook due to the positioning of illustrations and footnotes at beginning and/or end of paragraphs. | 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. 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. 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: 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 1830, 23 miles; 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 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
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