Guaranty Trust Company of New York

NO industry shows better than the cotton industry the economic importance of banking service. No industry, perhaps, utilizes to such a complete extent the modern instruments of credit, nor is so dependent upon these instruments for its proper functioning. At no point in the progress from seed to cloth is the capital represented by the cotton necessarily or even customarily tied up. And not only may the cotton itself at any stage be the basis of credit accommodation, but also, the actual added value which the labor of any factor in the chain may give to the cotton may itself be realized upon in advance. The credit possibilities of the industry have grown with the admission of acceptances to rediscount in the Federal Reserve Banks, and this admissibility has likewise played a part in the present growth of the warehouse system, the lack of which was a handicap to the industry in past years.

Credit Necessary from Seed
to Finished Product

In considering the raw cotton and the cloth market it was necessary to include some account of the financial and banking processes involved in the various commercial transactions undertaken. It is perhaps advisable, however, even at the risk of some repetition, to give a quick survey of the financial and credit aspects of the industry as a whole from the time the cotton is placed in the ground up to the actual sale to the cutter-up or the jobber.

The utilization of credit begins, as we have seen, with the very planting of the crop. Many of the growers, even those who own their farms, are men of limited means, and are not able to pay for the necessaries of life and of labor during the long growing season. The country storekeeper, accordingly, in return for a lien on the crop, allows them credit at his store, usually charging interest based on the monthly statement of their ledger accounts. He in turn receives the necessary accommodation for his own purchases from the local bank, or from the local buyer or factor with whom he is affiliated. The high prices prevailing during the past few years have undoubtedly changed to some extent the small grower’s financial position.

Cash for the Grower
From the Local Bank

The larger growers, or the great corporations which let out cotton lands to renters, usually operate the stores in their villages upon the same basis, credit being advanced against the renter’s share of the growing crop. Even these large corporations are seldom able to meet the heavy demands of the growing season without recourse to the credit service of those to whom they sell their cotton, or to the local banks. The banks, or buyers, in turn discount at least a proportion of the commercial paper thus created with their correspondent banks in New York, Boston, or other financial centers. This credit arrangement, it will be seen, is almost entirely based on a moral risk, the lien being made upon the growing cotton which cannot be liquidated until it is grown, picked, and ginned.

When the crop is picked, it is weighed by the merchant before it is ginned, and 34 the farmer is credited on the merchant’s books with the amount due him, the balance in his favor being given him in cash. His concern with the cotton is thus ended. In the event that he is able to finance himself through the season he takes the cotton directly to the gin, and has it ginned and baled there, paying the ginnery for the operation, and selling the cotton directly to a local buyer and the seed to an oil mill. If the gin warehouse is available, and he desires to wait for a more favorable opportunity to sell, he may store the cotton, taking a gin receipt for it, against which the cotton will eventually be delivered. The gin receipt may be collateral for a loan from a cotton factor, or from a local bank.

Thus, it will be seen that the grower receives accommodation throughout his season, and is paid cash for his product when it is delivered. This arrangement puts a heavy strain upon the cotton buyers, particularly upon those who deal in large lots for the mills. The method by which the buyers pay the growers is thus described:

The buyers make arrangements with the local bankers where the gins are located for the payment of the cotton, the banks furnishing the actual cash against tickets issued by the buyer’s representatives, holding the tickets in question as their collateral in the meantime. When a sufficient amount of cotton has been accumulated the local banker, at the request of the buyer’s agent, delivers the tickets in question to the local agent of the railroad, who in turn issues a bill of lading covering the shipment to the compress point, which then is attached to the draft drawn by the buyer’s agent upon the buyer’s head office, which draft includes the price paid for the cotton plus interest and exchange charged by the local banker, who is reimbursed for the amount of the draft thus drawn. When this cotton is ready for export (or for shipment to the mill in the United States) local bills of lading, covering shipment from point of origin to compress point, are exchanged by the cotton buyer’s banker for local bills of lading to port or for through bills of lading.

"Picked 100 pounds today"

When cotton is bought at compress points, compress receipts instead of tickets are delivered to the local banker, who pays for the cotton as purchased by the buyer’s representative from time to time. When a sufficient amount of cotton is ready for shipment the compress receipts are exchanged by the banker for local bills of lading to port (or to mill), or through bills of lading, as the case may be. These bills of lading are attached to the draft drawn by the representative on the head office of the buyer, the local bank being reimbursed for the amount thus drawn. 35

Buyers must necessarily hold great quantities of cotton in storage, for they buy whatever cotton is offered, and must sell, as we have seen, certain grades and qualities to the mills in order that they may weave the cloth for which their orders call. Cotton must, therefore, be held in storage, either at the compress points, which is usual, or at warehouses operated by factors, or by independent corporations, or in their own warehouses.

While the buyers by cash payments are concentrating the cotton necessary to fill their domestic or foreign orders, their need for funds is a pressing one. Their arrangements with local banks we have seen. When the cotton is shipped, the local bank, by means of drafts on the buyer’s head office, is relieved of the burden it has been carrying, but the cotton still represents capital, and if that capital is to continue to earn its wages it must be the basis for credit. The factors and large banks in New York or Boston, which have been assisting the local bank, must now assist the buyer and the warehouseman. The methods by which this burden is shifted to the larger banks are varied, and we can consider only one or two of their aspects.

Same Mills Pay Cash, Relieving
Factors of Burden

Some of the larger New England mills pay cash for the cotton which is shipped to them, buying sufficient in the season to carry them through, or nearly through, the year. Their buyers, therefore, need support, if they need it at all, only during the period of concentration. They may have their private banking arrangements, and may be able to utilize their warehouse receipts or bills of lading, or their mere notes based upon mixed collateral, for an advance of sixty to seventy-five per cent. of the value of the cotton, the line having been arranged in advance. Credit may be obtained by the buyer directly from the warehouseman, who thus becomes a factor in his own right, being supported by arrangements previously made with his own bank. Credit may also be obtained from a bank, upon bills of lading which are exchanged for warehouse receipts when the cotton is delivered at the port or at any warehousing point; or the credit obtained from the bank may be settled and a new credit opened with the warehouseman when the cotton is shifted from cars to storage.

Warehousemen as Factors of
Growing Importance

The growing importance of the warehouseman has been mentioned. His services have developed with the need of mills for greater credit, and their unwillingness to tie up their working capital in cotton held in their own warehouses. Mills which formerly bought all their year’s supply during the buying season, so-called, now take their cotton from warehouses as they want it, buying it from their buyers, and making payment according to the individual standing arrangements. The advent of the warehouseman who is either a banker, or closely affiliated with a bank, has undoubtedly done much to make the financing of cotton a more elastic and feasible proposition, distributing the risk over a wider circle and making credit more readily available at any point in the succession.

The mill, we have seen, frequently pays cash for its raw stock, or else buys upon short term notes. The average mill does not have a working capital large enough to enable it to tie up the thousands of dollars necessary for such a proceeding, as well as the funds which must constantly be paid out for wages, for operation expenses of all kinds, for upkeep, and all other overhead. Mills, as a matter of fact, are frequent borrowers, either from general banks, or from textile banks or factors, or from their selling agents, who, as we have seen, combine their primary and original function of selling with that of supplying financial assistance.

Mills which purchase cotton from their buyers and pay cash, or approximately cash, for it, usually buy such cotton to fill orders which they have already received from their selling agents. They may, in certain instances, obtain an advance from their agents of a proportion of the whole selling price of the order, and out of that advance pay for the purchase of cotton, or they may hold the cotton in warehouses, using it only as needed, and putting up the warehouse receipts as collateral for loans.

The raw cotton itself, however, represents only a portion of the mill’s operating expenses and it cannot be the entire basis for financial operations of the magnitude often needed. These broader financial wants may be met out of the prospective selling price of the cloth by means of loans from the selling agent; or, they may be met by direct relations with a commercial bank, which may make loans on ordinary collateral, on acceptances, or, as frequently happens in the case of mills of undoubted integrity, on the mere note of the company operating the mill.

Selling Agent May Shift
Burden to Banks

When the burden is assumed by the selling agent, or factor, he in turn may shift it to the bank, either by indorsing the note of the mill, or by indorsing the note of the purchaser of the cloth or by borrowing directly from the bank on his own paper. 37

The converter, as a rule, is not a factor, but a merchant pure and simple, seeking accommodations from a factor or a bank as his needs may require it. Inasmuch as he usually buys for cash or on short-term notes, and sells to jobbers or retailers upon more extended terms, his needs are frequently heavy. His relation with his factor may be, and frequently is, upon the basis of accounts receivable, or he may borrow upon his own collateral, or, if he is counted an "A1" risk, upon his unsecured note.

These, in brief are the financial steps in the progress of cotton from the grower to the jobber. A cursory view is all that is possible, because in the words of a textile banker of standing "every textile banking transaction is a law unto itself." Yet enough has been said to show the all-important part which banking plays in the cotton industry, and to indicate how dependent are the turning of wheels and the distribution of cotton and of cloth upon the credit which banks and bankers are able to provide.

Factors and Their Wide
Financial Service

Frequent use has been made of the word factor, and no adequate definition of its meaning has yet been given. The factor is, briefly, the commercial banker of the industry, and his duty is to provide, at any stage of the cotton process, the financial assistance which may be necessary, either from his own resources or through his affiliations with some large bank. It is true, of course, that some factors work only with those dealing in raw stock, and some confine their services to mills. Some factors are cotton buyers, some are selling agents, some deal with buyers and some deal with selling agents. Some are employed only by the mills. Recently, however, the tendency has been to develop under one roof a unit institution capable of handling every textile banking transaction. It will be interesting to enumerate here, briefly, the various functions and facilities of one such institution: