why does Morgan accept them? Gates offers them because he values $300,000 in gold more highly than the notes. Morgan accepts the notes because in his judgment they are

Value and price of credit.

quite as valuable as $300,000 in gold. Morgan indorses the notes and sells them for $305,000. Why does the purchaser offer, and Morgan accept, that amount? Manifestly, because the purchaser thinks the notes of greater value to himself than $305,000, while Morgan esteems the $305,000 more highly. The purchaser of the notes is an investor in commercial paper; he gets his income from furnishing current funds to those who wish to sell credit on terms of advantage to him. Morgan is also about to devote his energies to investment, but his judgment is that he will profit something by exchanging the notes for $305,000 in gold. But again, the purchaser of the notes, instead of paying Morgan $305,000 in gold, hands to him his check for that amount, which is accepted. It is quite clear that this was done because the one making the purchase thought it to his advantage, while Morgan valued the check quite as highly for the purpose of exchange as he did the gold.

i.

credit

We now pass to the consideration of the basis of credite., the elements in it which cause credit funds to be valBasis of the ued more highly than money and consequently to supplant money exchange.. Morgan's judgjudgment. ment is that Gates's promises to pay $300,000 with interest at 5 per cent are more desirable than his own business as a broker. But why? Before an exchange can take place the conclusion must be reached; but by what process? The thing to be considered is a contract for future delivery of money. The promise is that Gates will pay $330,000 in gold at a definitely appointed time. In estimating the value of such promises, what element must be taken into account? In the first place, Morgan must estimate the ability of Gates to obtain that amount of gold at the time proposed.

1. Ability to obtain money for future delivery.

2. Business integrity.

He sells his business; he receives a claim against the future income of Gates; he must, in estimating Gates's ability, therefore, consider his facilities for obtaining money. But this is not all. There is a second consideration. Morgan must not only pass judgment on Gates's ability, but he must also take into account Gates's disposition to apply the money obtained to the fulfilment of his promise-to the payment of the claim when due. These two judgments lie at the basis of all credit; on these two elements does the value of credit rest. (1) A judgment that the one promising is able to fulfil his promise. (2) A judgment that he will be willing. Willingness is another name for “honesty " or "integrity." If these two judgments are favorable, or, as the business man would put The result of it, if Morgan has "confidence" in the future judgment delivery, he is in a position to make a business Confidence. estimate as to the present value of a future income of $330,000. Confidence is nothing more or less than the result of judgment that a person is both able and willing to do what he promises.

a favorable

That which we call security is a contract whereby a favorable judgment is secured when otherwise such judgment would be lacking. In the transaction in. Security. which Morgan sells Gates's notes, the purchaser of the notes was not well acquainted with Gates, and was not in a position to pass favorable judgment; he did not value Gates's ability and integrity as highly as did Morgan. The purchaser of the notes, perhaps, would not offer more than $250,000 for them, but he knew Morgan and had confidence that he would meet his credit obligations. He was willing to buy Morgan's contract for future delivery of $330,000, at the times specified in the notes from Gates to Morgan, for $305,000. He therefore proposes that he will pay $305,000 for the notes, on condition that they be indorsed by Morgan. What was the force of this indorsement? Why did the simple fact of Morgan's name written across the backs

of the notes raise the purchaser's valuation to such an extent that he was willing to add $55,000 to his offer? By operation of commercial usage (law) the addition of Morgan's name set up a new contract. If this contract had been written out in full it would have been as follows:

In case Gates does not pay this note when due, upon notice given to me, I hereby promise to pay it in full myself.

Relation of security to credit.

This contract is one of the obligations known as personal security. Now the purchaser has confidence that the several amounts promised by Gates will be paid at the time specified, and he offers Morgan $305,000 for them. The effect of security is to obtain a more favorable estimate as to the value of the contracts for the future delivery of money which Morgan offered for sale; it increased the price obtainable from the credit and decreased the cost of the money or other things. received by Morgan in exchange for credit.

CREDIT VIEWED AS A 66 SHORT SALE" OF MONEY

A short sale of flour.

No better illustration of a credit transaction may be found than what is known as a "short sale"-the sale of something that one does not possess. Pillsbury & Co. are millers. They enter into a contract for the delivery of 10,000 barrels of *A* flour to Kimball & Co., of Liverpool, at any time that Kimball & Co. may want it, after May 1, at $8 per barrel. Their business manager has made a sale of something that they do not possess something that they are "short" of. They have neither wheat nor flour. The company has only a mill and other equipment for making the kind of flour sold. The contract for future delivery, however, is important to the successful management of the mill. By this,. one factor in the manager's problem is solved-the price

which he will receive for his output. Another factor he is able to calculate with substantial accuracy from business experience, viz., the cost of manufacture. If, therefore, the manager can make a contract which will fix the cost of the wheat to be used in the manufacture of the flour, he can calculate the profits as well as if he had sold flour already produced.

A short sale of wheat.

Wheat was selling at 99 cents per bushel at the time that the "short sale" of flour was made. If, the company's manager calculates, "No. 2 Hard Spring" wheat may be had at $1 per bushel, his company will make a profit of $2 per barrel on the Liverpool contract. To assure his company of this, he enters into another contract with Brown & Schaffer, produce-brokers, for the future delivery of 50,000 bushels “No. 2 Hard Spring" wheat "on call" after thirty days, at $1 per bushel. But Brown & Schaffer have no wheat at the time the sale is made. They are "short" of the commodity contracted for, but, being a reliable business concern, Pillsbury & Co. make a part payment, or "put up a margin," and rely on Brown. & Schaffer for the delivery of the grain. The manager can now devote himself to the manufacture of flour without being troubled about fluctuations in the price of wheat; he has shifted the risk of market fluctuations in the price of wheat to Brown & Schaffer. Pillsbury & Co. have made a "short sale" of flour, and to cover the risk of fluctuating price they enter into a contract for the future delivery of wheat.

Brown & Schaffer sold "short" of "No. 2 Hard Spring" wheat at $1 per bushel for delivery on demand Settlement of after thirty days. They did this because in the short sale their judgment wheat was "going down"; they of wheat. wished to buy on a better market to fulfil their engagement with Pillsbury & Co. Instead of going down, however, a "corner" is formed in this grade of wheat and the price advances rapidly. Thirty days hence Pillsbury

& Co. "call" for the delivery of 25,000 bushels. Nothing will satisfy the contract under which the call is made but "No. 2 Hard Spring"; this is the grade needed for the milling process for the production of the kind of flour sold to Kimball & Co.; this is the only kind that will be received. Whatever the sacrifice to be made by Brown & Schaffer, there is for them no alternative other than to deliver the exact thing promised, or to "settle "-i. e., to turn over to Pillsbury & Co. $12,500, to pay the difference between the contract price and the market price, which on that day happens to be $1.50 per bushel. In other words, before Pillsbury & Co. will agree to "settle," Brown & Schaffer must place the mill company in a position to buy $1.50 wheat at a cost, to them, of only $1.

The Pillsbury company, however, have not the extra $25,000 with which to pay for the wheat needed. The manager therefore takes the $12,500 received from Brown & Schaffer and goes to Armour & Co., whose elevator bins are filled with "No. 2 Hard Spring," which they are holding at $1.50 per bushel; he arranges to purchase 25,000 bushels at $1.50, paying down $12,500 (the amount received from Brown & Schaffer), giving his firm's note for $25,000 (principal) and $500 (interest), due in ninety days in payment for the balance. The wheat A short sale is immediately delivered. Pillsbury & Co. have purchased 25,000 bushels of the kind of wheat desired. They have become the absolute owners of it; they may grind it and dispose of it as they please. But how has the wheat been paid for? In exchange, the company, in part consideration, has sold its contract for the delivery of $25,000 "on call" after ninety days; it has made a "short sale" of money-has again promised to deliver something that it was "short" of at the time the contract was made, hoping to obtain the money from Kimball & Co., of Liverpool, in return for the flour, before the maturity of the note. Thus, the calculation is, the return

of money.