their indorsers for payment of the credit contract ninety days after acceptance.

Secured

The indorsements and other collateral contracts of security attached to drafts make these instruments of high commercial value. In the negotiating of fordrafts used eign bills, such precautions are taken that one as funds. house doing several millions of this kind of business per annum has the phenomenal record of having lost only $600 during forty years of dealing. By sale of his draft on New York, the St. Louis merchant is enabled to obtain funds with which to pay for grain sold. On receipt of the grain by the New York merchant, he may at once trans-ship it to a Liverpool customer, and on his bills of lading draw for the amount. By sale of this he obtains funds with which to meet the St. Louis draft. The Liverpool merchant meets the draft on him by drawing on a Belfast brewer, who settles the draft on him by a bill on a New York importer of Irish stout. These international drafts or bills are settled by setting one off against another. Americans having accounts to meet in London, buy drafts against England, and Englishmen having American accounts to meet will buy drafts against New York. These secured bills, in their capacity as instruments for the collection of funds due "on account," come to serve in the capacity of funds for the payment of other accounts and avoid the necessity of shipping money from place to place in payment of credit obligations.

Non-payment and protest.

Drafts which are not paid at the time for which acceptance is made, or which are not accepted, may be protested. In fact, this is the usual custom when instructions are not given to the contrary. The protest of a bill puts on its face notice of its dishonor, and thereafter it ceases to serve as funds. No one will receive it in payment. It will be returned to the party drawing it, and he will be required to make good the amount, and pay all costs and expenses. When the drawer does not

wish to incur the expense of protest, he will have printed or attached to the end of the draft a detachable slip with the words, "No protest. Tear this off before presenting.” This is in the nature of private advice to one presenting. Except as between the most reputable houses, such drafts are not taken as readily in exchange for the reason that the very instruction itself may cast suspicion on the value of the paper.

CHAPTER VIII

FUNDS OBTAINED BY SALES OF LONG-TIME PAPER

THE credit instruments thus far described are those commonly used as a means of obtaining funds for current use-i. e., for commercial transactions; they are generally referred to as short-time or commercial paper. When funds are desired for more permanent use quite a different arrangement must be made. Instead of the credit being due on demand, or in thirty, sixty, or ninety days, it is made payable in five, ten, twenty, or perhaps fifty years. This precludes the use of accounts; it makes necessary a definite or formal, written contract—one which will place the terms and amount promised beyond all question. In form, all the instruments used for long-time credit transactions are in the nature of promissory notes. The credit contract itself does not differ from the commercial note except as to time of maturity; the essential difference between longtime and short-time paper is found in the contract of security given. One can make a conservative business.

Form of long-time credit.

judgment of the value of a promise to deliver

money thirty or sixty days hence; in this the personal ability of the one offering his credit for sale to obtain funds with which to redeem it, and questions of integrity, can be determined with practical certainty. The incidents and accidents of life, and the shifting fortunes of business, however, make uncertain all judgments of personal condition to deliver funds twenty years hence; judgment as to the value of a contract for the delivery of

money twenty years hence, one which rests on personal ability and integrity alone, must be unfavorable. The credit contract in itself would be little valued; the one to whom it was offered in exchange for funds would refuse to buy it. A contract of security is added. Uncertainty being thus obviated, the long-time credit may be sold.

Illustrations

of difference in forms and

uses of longand shorttime paper.

To illustrate the different characters and uses of longand short-time credit: Edward Strong and Leonard Williams decide to engage as partners in a general grocery business at West Point, on the Hudson. Each has $1,000 to put into the enterprise. This will give the firm $2,000 as cash capital. But they have no stock; they have no store building, no office fixtures, no counters or shelves, and no provision made for service. Besides, they estimate, a stock worth $2,000 would be too small a one to give profitable employment to themselves or to their capital. They need a stock of goods that will cost from $3,000 to $5,000, a building, and other business equipment. How shall they obtain the funds? By consultation with the West Point National Bank they find that funds may be obtained there to finance their stock purchases; an arrangement is made through the president and cashier of the bank whereby the grocers are to keep their account with them, and, on bills being presented for stock purchases, Strong & Williams will execute their promissory notes, the bank to give the firm a credit on its books in exchange for stock notes to an amount not to exceed $5,000, as occasion may require. As a part of the agreement, the grocery company is to "deposit" all cash received from customers-all money and checks received from sales as fast as they are made. This arrangement will enable Strong & Williams to buy for cash, and to take advantage of the trade discounts offered by the wholesale house. The notes are to be made payable on or before ninety days, for the reason that it is estimated that the stock will be turned over, or sold,

once every three months. In such a transaction the bank requires no security; it is willing to rely on the integrity of the partners and their ability to make payments out of sales-in other words, it is willing to rely on their unsecured credit. Strong & Williams now have established a line of credit good for $5,000 for stock purchases, and, besides, they have their original $2,000 for working capital. But how about a building and other equipment? A welllocated store-room is found which they may rent at $50 per month-$600 per year. Just across the street is a vacant lot, however, which may be purchased for $1,000. If they buy this vacant lot instead of renting the store-room, they can put up a suitable one-story building for $1,000 more. The whole property will cost only $2,000; the interest on this will be $100 per annum. By such an arrangement there will be a clear gain of $500 per year. They decide to buy the lot for $1,000, and to spend the other $1,000 of the original capital for a building. But having done this they have no funds left. To complete their equipment, some provision must be made for current funds. Current expenses must be paid; the partners themselves must live; they must pay clerks, delivery, obtain supplies of fuel, meet incidental expenses, etc. At least $1,000 more of permanent capital is required before they are ready to begin business. The West Point National Bank is willing to take their short-time notes for funds with which to make stock purchases, but it is not willing to contribute permanent capital-its own business is so organized that it must be able to collect funds whenever demands are made by depositors. The problem of getting more permanent funds is solved by arrangement with the Dime Savings-Bank. This institution is willing to give Strong & Williams $1,000 for their note, due five years hence, bearing interest at the rate of 41 per cent and secured by a mortgage on the building and lot. Current funds being provided for in this manner, they take the $1,000 received from the sale of the mortgage note, de