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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.

[Illustration: A mercantile agency inquiry form.]

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

[Illustration: Specimens of 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:

Mileage in Europe 155,000
Mileage in U. S. 184,000
Total for the World 434,000

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 | Miles
------|--------
1830 | 23
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.

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