Up To Date Business

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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

[Illustration: Showing cheque raised from $7.50 to $70.50.]

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.

FOOTNOTE:

[11] A part of the matter of this lesson has already appeared in Part
I. of this book ("General Business Information"), but it is here
repeated to preserve the connection.

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.

CHEQUE INDORSEMENTS

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

[Illustration: A certified cheque.]

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

[Illustration: A bank draft.]

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

[Illustration: A bill of exchange.]

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.

FOOTNOTE:

[12] See also Lesson VIII. of Part I. of this book ("General Business
Information").

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

[Illustration: Illustrating cheque collections.]

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.

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