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 MERCANTILE CREDIT 
 
 BY 
 
 JAMES EDWARD HAGERTY, Ph. D. 
 
 OHIO STATE UNIVERSITY 
 
 NEW YORK 
 
 HENRY HOLT AND COMPANY 
 
 ms&s
 
 Copyright, 1913 
 
 BY 
 
 Henry Holt and Company
 
 HF 
 
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 PREFACE 
 
 This volume represents an attempt to discuss one 
 branch of the credit family, Mercantile Credit. The 
 theory of credit, and the different kinds of credit are 
 considered only in so far as the treatment of these sub- 
 jects makes more clear the nature, scope, and functions 
 of mercantile credit. Bankruptcy legislation has to do 
 largely with those who give and those who receive mer- 
 cantile loans, and for this reason it has been considered 
 of sufficient importance to warrant treatment. 
 
 While treating mercantile credit from a theoretical 
 standpoint, an attempt is made to view the problems of 
 mercantile credit as far as possible as a business man 
 would view them. For this reason the author has de- 
 scribed with much detail the work of the credit man, the 
 organization of his office, the sources of credit information, 
 the forms he uses to secure this information, and the 
 principles which govern him in the granting of credit. 
 He also discusses at considerable length the development 
 of legislation with reference to credit, and the attitude of 
 credit men toward this legislation. 
 
 Since economic phenomena should be viewed in the 
 same way as phenomena in any other science, it is the 
 first task of the economist to state clearly and to describe 
 accurately the facts which come within the scope of his 
 
 v
 
 vi PREFACE 
 
 investigation and then interpret them in the light of 
 economic knowledge. In this volume the author has at- 
 tempted to do this. 
 
 This book is intended primarily for students in the 
 colleges or schools of commerce, for those engaged in the 
 many phases of credit work, and also for those who are 
 interested in the general subject of credit. 
 
 Chapters IV, VI, VIII and XIV were published in 
 
 whole or in part in the American Journal of Accountancy, 
 
 and acknowledgement is made to the editors of this 
 
 magazine for their courtesy in permitting the use of the 
 
 material of these chapters in this volume. The writer 
 
 acknowledges his indebtedness to his colleagues in the 
 
 Department of Economics and Sociology of the Ohio 
 
 State University for helpful criticisms, and especially 
 
 to Mr. B. G. Watson, the secretary of the Columbus 
 
 Credit Men's Association, who read several chapters of 
 
 the manuscript and offered many helpful suggestions. 
 
 James Edward Hagerty. 
 Ohio State Univeesity, Columbus, Ohio. 
 June, 1913.
 
 CONTENTS 
 
 PART I 
 
 Origin, Development and Present Status of 
 Mercantile Credit 
 
 CHAPTER I 
 Theory and History of Credit 
 
 Page 
 Definition of Credit, Credit Transaction and Credit System — 
 Credit and the three periods of economic development 
 — Credit in Rome — The Code of the XII tables — Credit 
 in Babylon — Credit and the Great Fairs — Medium of Ex- 
 change — Function of credit — Credit of General Accepta- 
 bility and credit of Limited Acceptability — Credit instru- 
 ments — Essential characteristics of Credit — Confidence 
 as a basis of loans — Relation between credit, money and 
 goods — What limits the amount of credit — Credit not 
 Wealth or Capital 3 
 
 CHAPTER II 
 
 Credit Instruments 
 
 Two classes of credit instruments, (1) Promises to pay and 
 (2) orders to pay — Definition and uses of Promissory 
 Notes, Bank notes , book accounts, stock certificates, 
 bonds, checks — The travelers check, letters of credit, Post 
 office Money orders, bank drafts, Bills of Exchange, Drafts, 
 Bills of lading and warehouse receipts 19 
 
 CHAPTER III 
 Kinds of Credit 
 
 Different classifications of credit — Banking credit — Functions 
 of modern banks — Credit creation — Relation between 
 vii
 
 viii CONTENTS 
 
 Page 
 
 banking and mercantile credit and between banking and 
 personal credit — Setting of credit standards — Accommo- 
 dation paper — Loans on collateral — Credit departments. 
 
 Public credit: Floating loans — Paper money — Causes of Pub- 
 lic Debts. 
 
 Investment credit: Its extent — Stocks and Bonds — Invest- 
 ments and Public Credit — Investment and mercantile 
 credit — Kinds of investment credit 37 
 
 CHAPTER IV 
 
 Mercantile Credit 
 
 Dependence of mercantile on banking credit — Who receive 
 mercantile credit — Changes in granting mercantile credit 
 — Sources of credit information — Terms of credit — Rates 
 of discount — Mercantile rates of interest high — Credit in- 
 struments — Note brokers — Book accounts — Methods of 
 lending on book accounts — Dating ahead and its in- 
 fluence on credit 54 
 
 CHAPTER V 
 
 Personal Credit 
 
 Definition — Personal and mercantile credit compared — 
 Personal and banking credit compared — Changes in giv- 
 ing personal credit — Classes that receive personal credit — 
 Mercantile houses which give personal credit — Factors 
 determining the granting of credit by retailers — Granting 
 of credit and extravagance — Credit given by company 
 stores and installment houses — The consumer bears the 
 burden of unwise credit 75 
 
 CHAPTER VI 
 
 The Credit Man 
 
 The organization of mercantile industry — The work of the 
 credit man — Sources of information — Character of the 
 knowledge the credit man should possess — Book-keeping 
 and credit — Bank and mercantile credit — The signed 
 statement — Importance of work of credit man 90
 
 CONTENTS ix 
 
 Page 
 
 CHAPTER VII 
 
 Credit Office 
 
 Purposes of system — A typical system — Wherein office sys- 
 tems differ — Credit inquiry forms — Property statements 
 — Property forms — Traveling salesmen and local attor- 
 neys as sources of credit information — Comparative prop- 
 erty statement forms — Credit limitations — Credit depart- 
 ments of banks 108 
 
 CHAPTER VIII 
 
 Sources of Credit Information 
 
 mercantile agencies 
 
 ' What the agency does — Industrial conditions responsible for 
 the agency — Failure of early methods of granting credit — 
 Origin of agencies — Development of agencies — Organiza- 
 tion of agencies — Control of territory by district offices — 
 Organization of foreign offices — Methods of securing credit 
 information — Classifying, filing and distributing informa- 
 tion — Magazines of the agency — Value of the agencies. . 134 
 
 CHAPTER IX 
 
 Sources of Credit Information 
 
 general sources 
 
 Salesmen: Differences between salesman and credit man — 
 Salesman as collector — Inquiry blanks — Attorneys — 
 Method of securing information from attorneys — Banks, 
 kind of information obtained from them — Traveling 
 credit representatives — Methods by which they secure 
 credit information 158 
 
 CHAPTER X 
 
 Sources of Credit Information 
 
 credit exchange 
 
 Credit exchanges developed in last 15 years — Exchange of 
 ledger information — The New Orleans an<l Minneapolis
 
 x CONTENTS 
 
 Paob 
 
 systems — Two classes of bureaus to-day — The card index 
 system — The credit report system — Credit exchange 
 bureaus of retail merchants associations — Retail grocers 
 credit exchange bureaus 170 
 
 CHAPTER XI 
 
 Adjustment Bureaus 
 
 Origin of adjustment bureaus and their aims — Value of adjust- 
 ment bureaus — Ordinary methods of closing estates — 
 How estates are closed by adjustment bureaus — Plan of 
 organization — Three methods of organization — Relation 
 of National Association of Credit Men to bureaus — In- 
 come from adjustment bureaus — Costs of closing estates 
 by adjustment bureaus — Distribution of bureaus — Con- 
 clusions reached at conference of adjustment bureaus 
 managers 184 
 
 CHAPTER XII 
 
 Collections 
 
 Relation of collections to a credit department — Qualifications 
 of a collector — Office system in retail methods of collect- 
 ing accounts — Classes of accounts — Methods of collecting 
 accounts 200 
 
 CHAPTER XIII 
 
 Mercantile Credits and Depressions 
 
 Channels of distribution — Methods of giving mercantile credit 
 — Over-trading — Influence of rising and falling prices on 
 credit — A cause of the crisis of 1893 — Number and extent 
 of mercantile institutions — Changes in the character of 
 commodities produced 211 
 
 CHAPTER XIV 
 
 Credit Men's Association 
 
 History of National Association of Credit Men — Its origin — 
 Purposes — Membership — Difference in work of national
 
 CONTENTS xi 
 
 Paqb 
 and local associations — Work of committees — Co-opera- 
 tion of National and local associations in having State 
 laws passed — Local associations of credit men — Their 
 purposes and methods 225 
 
 PART II 
 
 Legislation 
 
 CHAPTER XV 
 
 Bankruptcy Legislation 
 
 Contracts of primitive peoples — Early legislation with refer- 
 ence to debts — Modern views with reference to the rela- 
 tions between debtors and creditors — Modern States regu- 
 late relations between debtors and creditors — Insolvency, 
 simple bankruptcy, and fraudulent bankruptcy — Bank- 
 ruptcy proceedings — Preventive compositions — Treat- 
 ment of bankrupts in different countries 247 
 
 CHAPTER XVI 
 
 The Bankrupt Law op 1800 
 
 National bankrupt laws — Right of National Government to 
 legislate on bankruptcy — Principles in bankruptcy legisla- 
 tion of progressive countries — Law of 1800 limited to 
 traders — Blackstone's views on bankruptcy — Who could 
 be declared bankrupts under law of 1800 — Bankruptcy 
 proceedings — Amount of property allowed a bankrupt — 
 Reasons for retaining the law — Why the law was repealed. 257 
 
 CHAPTER XVII 
 
 Bankruptcy Act of 1841 
 
 Proposed bankruptcy acts and what they aimed to accomplish 
 — Why traders made a special class — Foreign experience 
 — New York's insolent laws — Purposes of a bankrupt law 
 — Supreme Courts decisions on bankrupt and insolvent 
 laws — Crisis of 1837 — Provisions of Act of 1841 — Volun-
 
 xii CONTENTS 
 
 Paqb 
 tary bankruptcy — Involuntary bankruptcy — Preferences 
 and penalties for them — Assignees and their duties — 
 Courts having jurisdiction — Strength of law — Reasons 
 for its repeal 273 
 
 CHAPTER XVIII 
 
 Bankruptcy Act of 1867 
 
 Agitation for a third bankrupt law — Law of 1867 a compromise 
 measure — Administration of the law — Attempt to make 
 the courts accessible to the people — Registers appointed 
 by district judges when recommended by the Chief Justice 
 of the United States — Voluntary bankruptcy — Selection 
 of assignees and their duties — Discharge — Involuntary 
 bankruptcy — Control of debtor's estate by creditors — 
 Defects of the Act of 1867— The Amendments of 1870 and 
 1874 — Repeal of the law and why it was a failure. . . . 293 
 
 CHAPTER XIX 
 
 Bankruptcy Act op 1898 
 
 Conventions to formulate a bankruptcy law — Purposes of pro- 
 posed measure — Act which passed was a compromise 
 measure — The five acts which either make a debtor a bank- 
 rupt or which give grounds for bankruptcy proceedings — 
 What a bankrupt is required to do — His privileges — A 
 county the administrative unit — Trustees, their duties 
 and compensation — Debts which have priority — Interests 
 of debtors and creditors contrasted — Elements of strength 
 in the law — Its weak features — Advantages of a good 
 voluntary law — Amendments of 1903 and 1910 — Composi- 
 tions — Corporations may become voluntary as well as 
 involuntary bankrupts — Attempts to repeal law of 1898 — 
 Advantages of a National bankrupt act 316 
 
 CHAPTER XX 
 
 State Insolvency Legislation 
 
 Bankruptcy and the constitution — Why State insolvency laws 
 are inadequate — Voluntary and involuntary insolvency
 
 CONTENTS xiii 
 
 Pass 
 
 laws — Methods of procedure in each case — Voluntary 
 insolvency in Utah and Oklahoma — Conditions of dis- 
 charge in different states — Bankruptcy in New England — 
 Insolvent laws in Texas, Georgia, and Lousiana 345 
 
 CHAPTER XXI 
 Laws Regulating the Sale of Goods in Bulk 
 
 Bulk sales' laws passed as a result of systematic campaign — 
 Chief abuse which bulk sales' laws correct — Provisions of 
 model law — Louisiana bulk sales' law drastic in character 
 — What most bulk sales' laws require — Bulk sales' laws of 
 Oregon, Connecticut, and South Carolina — Acta passed 
 by Nebraska, North Carolina, and Nevada in 1907 intro- 
 duce new features — Some laws declared unconstitutional 
 — In most instances Supreme Court decisions sustain bulk 
 sales' laws as constitutional 357 
 
 Index 370
 
 PART I 
 
 ORIGIN, DEVELOPMENT AND PRESENT 
 STATUS OF MERCANTILE CREDIT
 
 CHAPTER I 
 THEORY AND HISTORY OF CREDIT 
 
 No economic term has been given a greater variety 
 of meanings, even by economic writers, than the term 
 credit. This fact makes it important at the beginning of 
 an economic study to state clearly the meaning which 
 the term is intended to convey. For purposes of the 
 present discussion, credit means "the power to 
 secure commodities or services at the present . 
 
 time in return for some equivalent promised 
 at a future time." 1 Closely allied to the meaning of 
 credit is a credit transaction which is "a transfer of 
 goods, services, or money, for a future equivalent." 2 
 The credit system may be defined as the great variety 
 of means by "which transactions in credit are conducted, 
 and the tremendous volume of debts and credits are 
 brought into being, passed from hand to hand in the 
 routine of business, and finally liquidated." 
 
 In the business world a man has good credit if he 
 always pays his debts when due. To the bookkeeper 
 credit means that something is owed on an account. 
 Credit is given people in general when they do some- 
 
 1 C. T. Bullock: Introduction to the Study of Economics. 
 
 2 Ely: Outlines of Economics. 
 
 3 Prendergast : Credit and Its Uses. 
 
 4 Johnson; Money and Currency. 
 
 3
 
 4 MERCANTILE CREDIT 
 
 thing upon which society places a favorable estimate. 
 Among the economists we also find a variety of defini- 
 tions: Mill defines credit as "the permission to use 
 another's capital." Macleod defines it as "the present 
 right to a future payment." Fawcett defines it as "the 
 power to borrow money." Laughlin defines it as 
 "machinery invented to aid in accomplishing the pur- 
 poses of capital." The differences of opinion among the 
 economists as suggested by these definitions are more 
 apparent than real, for their discussions of credit show 
 them to be at variance only on minor matters, and these 
 come into the foreground only when the author attempts 
 to establish certain theories with reference to the impli- 
 cations of credit. 
 
 Professor Hildebrand, one of the founders of the 
 German Historical School of Political Economy, in treat- 
 ing of economic evolution, says that credit 
 ^Tiere 
 credit an- comes relatively late in economic development. 
 
 pears in His three periods are those of natural econ- 
 economic omy, money economy and credit economy, 
 eve op- j n ^ e g rg ^ p e0 pi e consumed what they pro- 
 duced; or where exchange occurred, it took 
 the form of barter. In the second stage, money econ- 
 omy, exchange played an important role in economic 
 life and money as a medium of exchange facilitated 
 the selling and buying of goods. The third period 
 of credit economy was characterized by deferred 
 payments, loans, etc. 
 
 It cannot be maintained that each of these periods 
 existed exclusively of the others. From the point of
 
 THEORY AND HISTORY OF CREDIT 5 
 
 view of historical development there may be an ad- 
 vantage in considering these periods as emphasizing a 
 certain class of phenomena. Among primi- 
 tive peoples a simple form of credit existed as .. 
 soon as barter came into existence and this 
 was a phenomenon almost as important as barter itself. 
 From the records of all primitive peoples we have an 
 abundance of evidence to establish this. Lending food 
 was everywhere common. It was a common practice for 
 those who were successful in the chase to lend game or 
 food to those who were unsuccessful. This was treated 
 as a loan which the borrower was to return after the 
 next hunt. The credit was in the form of an under- 
 standing and this simple method of credit has persisted 
 to the present. In early historical times the loaning 
 of cattle and other domestic animals was common, and 
 even to-day in rural communities the loaning of corn 
 and household provisions to neighbors is a common 
 practice. 
 
 This simple form of credit, nowever, nas no import- 
 ance in the modern system of credit. The beginnings 
 of our present system of credit are difficult to trace. 
 H. D. Macleod 1 maintains that "the whole system of 
 credit, banking and bills of exchange, was originated by 
 the Romans, and a long series of illustrious lawyers had 
 brought the theory of credit to a state of absolute per- 
 fection: and their doctrines were embodied and declared 
 to be law in the great code, or digest of roman law, 
 called the Pandects, published by Justinian in the early 
 
 1 H. D. Macleod: Theory and Practice of Banking, p. 159.
 
 6 MERCANTILE CREDIT 
 
 part of the sixth century. They were adopted and 
 confirmed in the Basilica, the Reformed Code promul- 
 gated by the Basilian dynasty in the tenth century: and 
 they have been the mercantile law of Europe, except 
 England, for 1,300 years. They are fully set forth in all 
 the great continental jurists: but, from that unfortunate 
 aversion which the common lawyers of England so long 
 entertained against the Civil Law, they were compara- 
 tively unknown in this country : though adopted in equity : 
 and they have never yet found their way into any treatise 
 on Political Economy either, foreign or English." The 
 same author maintains that the Roman lawyers brought 
 the theory of credit to perfection as early as the sixth 
 century. He furnishes us with an abundance of evidence 
 concerning the forms and uses of credit during the first 
 part of the mediaeval period. He states that "when the 
 practice of writing became common at Rome, it was 
 established as a custom, or law, that every Dominus, or 
 head of a house, should keep a family ledger as strict 
 and exact as those of a modern banker. In this he was 
 obliged to enter all his receipts and disbursements: 
 all sums of money borrowed and lent: all trade profits 
 and losses; and these family ledgers were the only legal 
 evidence of debt among Roman citizens received in 
 courts of justice. And it was from these family ledgers 
 that the whole modern system of Book-keeping and 
 Credit has been developed." 1 
 
 In lending money, actual contracts were made by for- 
 mal ledger entries in which both creditors and debtors 
 
 1 H. D. Macleod: Theory and Practice of Banking, p. 163.
 
 THEORY AND HISTORY OF CREDIT 7 
 
 made entries in their respective ledgers by mutual con- 
 sent, "in the year 469 A D., the Emperor Leo abolished 
 the strict formalities of the Stipulation, and en- 
 acted that a consent given in any form what- ._ 
 ever, so long as the parties agreed about it, 
 should be valid. 1 There was no necessity for any writing 
 or any witnesses." Bills of exchange were used in 
 foreign credit in the time of Cicero, as his writings bear 
 ample testimony. At the time of the Roman Conquests, 
 these were invented by Roman bankers who established 
 correspondents abroad, and bills were given on these 
 correspondents when Romans traveled abroad or when 
 it was desired to meet obligations away from home. 
 The family ledgers gradually fell into disuse and by the 
 time of Justinian they were discontinued entirely. A 
 documentary acknowledgment of a debt known as a 
 cawtia and a formal contract or promise to pay, a 
 cheirographum, had taken its place. These were 
 transferable. 
 
 Under the Code of the XII Tables, debts could not be 
 sold, or rather the purchaser of an account could not bring 
 
 action in the name of another to collect it. 
 
 The sale 
 However, if the debtor agreed that the creditor , , . 
 
 might transfer his right of action, it could be 
 
 clone. Both in Roman and in English law, creditors 
 
 began to establish devices by which they could sell debts 
 
 without the consent of their debtors. The Emperor 
 
 Alexander Severus in 224 A. D. published a constitution 2 
 
 1 H. D. Macleod: Theory and Practice of Banking, p. 168. 
 
 2 Macleod: Theory and Principles of Banking, p. 208.
 
 8 MERCANTILE CREDIT 
 
 "by which the absolute freedom of the sale of debts 
 without the knowledge or consent of the debtor was 
 recognized and allowed." This practice has been recog- 
 nized since as a principle of the mercantile law of Europe 
 except in England. The earliest bills of exchange con- 
 tain no statement of negotiability, yet they have been 
 from the outset negotiable in all Europe except 
 England. 
 
 At the present time the laws of Scotland do not re- 
 quire a statement of negotiability on a bill of exchange or 
 promissory note to make it salable. This is because 
 the common law of Scotland has adopted the general 
 mercantile law of the continent. On the other hand, 
 the common law of England is the early Roman law and 
 a bill of exchange or promissory note to be salable must 
 be drawn payable to order or to bearer. As the United 
 States follows the common law of England, with reference 
 to negotiable instruments, bills of exchange and promis- 
 sory notes must be made out payable to order or to 
 bearer to make them salable. 
 
 The early banking system of Greece and Rome un- 
 doubtedly gave rise to the institutions of credit and of 
 banking in mediaeval and modern Europe. 
 
 Credit in However, good authors claim that everything 
 
 Babylon. ' ° j 
 
 of value in banking and in credit in Greece and 
 
 Rome was preceded by similar institutions in Babylon 
 
 several hundred years before Christ. The early bankers 
 
 of Babylon were more than changers, as they received 
 
 money on deposit, paid interest for it, and loaned it for 
 
 commercial enterprises.
 
 THEORY AND HISTORY OF CREDIT 9 
 
 In mediaeval times, throughout Europe merchants 
 
 brought their surplus products to great markets or fairs 
 
 and there exchanged them for the surplus prod- _ _ 
 
 o • 1 m, i Influence 
 
 ucts of other countries. 1 These products were of credit 
 
 bartered, the merchants bringing with them on the 
 metals which were used in settling balances. Great 
 To facilitate exchange, money changers estab- 
 lished places of business at these markets and thus made 
 possible a money economy in place of the system of 
 barter. By degrees the great merchants learned that it 
 was unnecessary to bring their goods to the fairs; that 
 instead of doing so they could send their products directly 
 to the purchasers and secure their pay by writing bills of 
 exchange. We have already seen that foreign bills of ex- 
 change were used to facilitate travel and to pay debts in 
 foreign countries in the early part of the Christian era. 
 Their use to facilitate foreign trade by introducing a 
 means of payment for exported goods came much later. 
 At first the bill of exchange was drawn by the money 
 brokers and bankers who had agents abroad. By the 
 end of the fourteenth century it had attained its present 
 use in England. 2 
 
 The essential feature of credit is the exchange of goods, 
 services, etc., for a promise to pay in the M e( jj um f 
 future. In the performance of this function exchange 
 
 it is an important medium of exchange. Its function 
 
 , , • , • • , of credit, 
 
 great use, however, consists in its service m 
 
 transferring capital. In economic treatises in recent 
 
 1 Encyclopaedia Britannica. 
 
 2 See Cannonists.
 
 10 MERCANTILE CREDIT 
 
 years the medium of exchange function of credit has 
 received most attention. This is due to the amount of 
 attention that has been given to the subject of money 
 because nations have assumed that it was necessary to 
 adopt a policy with reference to their coinage system 
 involving the use of two metals or one as the basis of 
 the monetary system. Supplementing the use of money, 
 the influence of credit in determining prices naturally 
 received a great amount of attention. 
 
 Into the subject the influence of credit as a means of 
 exchange, it is not our purpose to go in any detail. 
 However, its importance warrants brief consideration. 
 To the extent that money is an improvement over barter 
 in effecting exchanges, to the same extent is credit an 
 improvement on money. 
 
 Professor Johnson, 1 in treating of credit as a medium of 
 
 exchange, divides it into (1) credit of general acceptability 
 
 and (2) credit of limited acceptability. The 
 
 former, or credit money, includes those in- 
 classes 
 
 of credit, struments of exchange which all people of a 
 
 country are willing to accept, such as the green- 
 back, the bank note, the silver dollar and the silver cer- 
 tificate. They consist of those instruments of exchange 
 whose value depends upon faith in their convertibility; 
 that is, the belief that the government or agency which 
 issues them, or is responsible for them, will accept them 
 in exchange for real money. For all practical purposes 
 these instruments of exchange are money. 
 
 The instruments of credit of limited acceptability 
 
 1 Money and Its Uses, pp. 2 and 44.
 
 THEORY AND HISTORY OF CREDIT 11 
 
 have use as a medium of exchange in a restricted field. 
 "They include the promissory note, the bill of exchange, 
 various forms of bank credit and the book account." 
 These instruments, the real instruments of credit, are 
 limited in scope, but to a large extent they dispense with 
 the need for money. All large payments of money are 
 made by check or draft, and practically all payments due 
 in foreign countries are made by foreign bills or drafts. 
 The great bulk of the exchanges of a country is effected 
 by these means. The industrial prosperity of the 
 country would be greatly retarded if it were not for these 
 instruments for effecting exchanges. 
 
 The extent to which these instruments are in use in 
 the various countries as a medium of exchange depends 
 somewhat on the habits of the people, the de- 
 gree of confidence which business men have in What 
 
 governs 
 each other, and also the condition of pros- the exten t 
 
 perity. On the continent of Europe people to which 
 are much less inclined to pay bills by writ- credit in- 
 ing checks against deposits in banking institu- , 
 
 tions than English and American people 
 are. This is due to their conservative habits. In 
 prosperous times people use credit instruments to a 
 much greater extent than in periods of depression or 
 of inactivity. Relatively speaking, where free use is 
 made of credit instruments as a means of exchange, 
 but little use is made of money, and where but little use 
 is made of credit instruments, money must be freely 
 used. 
 
 The area over which credit instruments are used as a
 
 12 MERCANTILE CREDIT 
 
 means of exchange is limited by the area over which 
 business men have confidence in each other. Conse- 
 quently the larger the area of business confidence the 
 greater will be the resort to credit instruments for this 
 purpose. 
 
 As has been stated, the great function of credit is to 
 
 promote the production of wealth and to facilitate the 
 
 exchange of capital. It consists in the ex- 
 
 The chief c hange of commodities, money or services, 
 functions & . , J „ _ ' 
 
 of credit. * or a P r o mise to pay in the future. The 
 
 various producing industries — mining, manu- 
 facturing, agriculture, mercantile and transporting — 
 must secure raw materials, machinery and other instru- 
 ments of production as well as funds for building and 
 other purposes. This is advanced at the outset by 
 investors as capital credit, and later the various in stitu- 
 tions engaged in production find it necessary to secure 
 funds, usually from banking institutions, in exchange for 
 their promise to pay. Public credit is also to an in- 
 creasing extent used to secure funds for productive 
 purposes. 
 
 The use of credit funds for exchange and production 
 
 purposes may be seen from the following illustrations 
 
 from the manufacturing industry. The manu- 
 
 Use of facturer engaged in the production of ma- 
 
 credit il- , . , „. . . , • , 
 
 lustrated. chines has not sufficient capital, raw materials, 
 
 machinery and funds to employ laborers to 
 
 carry on the productive process until his products, 
 
 the machines, are sold. He goes to the producer of 
 
 raw materials and asks him to exchange the raw materials
 
 THEORY AND HISTORY OF CREDIT 13 
 
 for a promise to pay at a time usually when his products 
 are sold. If his credit is good, he secures the raw material 
 and gives in exchange his promise to pay a sum which is 
 somewhat more than the present value of the raw 
 materials. This amount, known as interest, which is 
 greater than the present value of the goods sold, is to 
 compensate the seller for waiting for his money, and is a 
 large or small amount as the risk of not being paid is 
 great or small. 
 
 To carry on the productive process it is necessary 
 to employ many workers who labor for wages which 
 are usually paid weekly or who labor for salaries which 
 are usually paid monthly. If the manufacturer has 
 good credit the wage earners will advance their services 
 throughout the week for a promise to pay at the close of 
 the week; and those who work for salaries will advance 
 their services during the month for the promise to pay 
 at the close of the month. The contracts for these 
 credit transactions may be written, but in the great 
 majority of cases they are oral but are none the less 
 binding on that account. 
 
 The same manufacturer must secure an advancement 
 of money or funds from banking institutions because he 
 must pay his labor before he can realize on the goods 
 they are producing and often because in selling his 
 goods he must wait several months before he can secure 
 his pay for them. The banker whose function is to 
 deal in credit, advances money or the right to draw 
 funds at any time in exchange for the promise of the 
 manufacturer to pay in the future.
 
 14 MERCANTILE CREDIT 
 
 Professor Laughlin 1 is right in insisting that if "an 
 essential function of capital is to discount the future, 
 the essential characteristic of credit is the element in 
 E .. , it of futurity." Any transaction which does 
 character- not involve the promise or the obligation to 
 istic of p a y i n the future is not a credit transaction, 
 credit. ^ barter or a cash sale in which the transac- 
 
 tion is closed, is just the opposite of a credit transaction 
 which calls for payment in the future. 
 
 There ought to be no reason for a quarrel between 
 Professor Laughlin in claiming that the essential thing 
 c fi in credit is futurity and those who insist on 
 
 dence as a the importance of confidence in credit. Each 
 basis of plays an important although a distinct role, 
 loans. Futurity is the distinctive factor in credit 
 
 itself, while confidence lies at the basis of the granting 
 of credit. Professor Laughlin himself makes this dis- 
 tinction, but unfortunately in the minds of his critics 
 he assigns to confidence a subordinate role. In mercan- 
 tile credit confidence is especially important. The 
 seller of goods accepts the promise of an individual with- 
 out means to pay only (1) when he has confidence in his 
 ability to pay and (2) when he has confidence in his 
 willingness to pay in the future. These two factors 
 are important in all mercantile loans. A commercial 
 loan is not based on goods as many suppose. The 
 goods advanced are offered for sale by the purchaser 
 and the original seller has no specific claim on them 
 or on the proceeds of their sale only in exceptional 
 
 1 Laughlin: The Principles of Money, p. 73.
 
 THEORY AND HISTORY OF CREDIT 15 
 
 cases. Confidence in willingness and in ability to pay 
 are the foundations of all mercantile credit. In bank 
 loans where collateral is demanded and in all mortgage 
 loans, the situation is different. In these cases, the one 
 who accepts a promise to pay receives with it securities 
 which insure payment when the debt is due. However, 
 bank loans based on collateral are decreasing in impor- 
 tance as contrasted with loans made to corporations and 
 business houses based on their credit standing and their 
 ability to pay their debts. 
 
 The dispute as to whether credit is based on money 
 or goods, whether it is a demand for money or for goods 
 
 is not important for our purposes here. A „ 
 
 Relation 
 description of the relation between credit and between 
 
 money and credit and goods will suffice. As credit, 
 
 has been stated a credit transaction is the mone yi 
 
 , - , - . and goods, 
 
 exchange of goods or services for a promise 
 
 to pay in the future. The promise to pay is usually 
 expressed in terms of money. This credit transaction is 
 also usually completed by the payment of money, credit 
 money or a title to money. When a bank borrows 
 money for thirty or sixty days time, it may cancel the 
 debt by paying gold, credit money, or by a book credit, 
 giving the lender the right to draw money. However 
 the debt may be paid, the contract in the United States 
 calls for its payment in dollars of 23.22 grains of pure gold, 
 and the lender may demand payment in gold if he chooses 
 to do so. So far as the credit transaction is concerned, 
 there can be no question that the contract calls for pay- 
 ment in money.
 
 16 MERCANTILE CREDIT 
 
 All convertible or credit money is a demand for money, 
 and it gives its possessor the title to this money — which is 
 a commodity and has real value. Of course the purpose 
 in securing money is not on account of any satisfaction 
 which money may give, but because of the goods it will 
 buy. When a merchant or manufacturer sells goods 
 and accepts a promise to pay money, what he desires 
 ultimately is not money, but production or consumption 
 goods. The same is true of the laborer who works for 
 wages and all others who contribute something to the 
 productive process. What they want is not money but 
 what money will buy, the necessaries and luxuries of 
 life and the means of production. 
 
 The contention that credit is based on goods and 
 is limited to the amount of goods in existence is not 
 Wh t wholly correct. In the case of a mercantile 
 
 limits the loan, the sale of goods on time, it will be seen 
 amount of later how funds may be advanced to several 
 credit. times the value of the goods. In mortgage 
 
 loans and loans based on the deposit of collateral, the 
 loan is definitely limited by the quantity of property 
 or wealth the borrower has. In most cases, however, 
 the loans are based not only upon the quantity of prop- 
 erty the borrower has, but upon the lender's confidence 
 in his integrity and in his ability to produce. As 
 Professor Johnson puts it, "Credit is limited, therefore, 
 not by a community's wealth, but by that plus lenders' 
 estimates of its power to produce wealth." 1 
 
 Although credit makes possible an increase in the 
 
 1 Johnson: Money and Currency, p. 38.
 
 THEORY AND HISTORY OF CREDIT 17 
 
 production of wealth and facilitates the utilization of 
 capital, it is neither wealth nor capital. Much 
 misunderstanding exists among competent Cre <"t not 
 authors on this point through a failure to ap- cap ital. 
 preciate the real significance of economic 
 terms, especially wealth and capital. 
 
 Wealth consists of economic goods. Capital goods 
 consist of the economic goods used in the production of 
 wealth. Credit which has been defined as "the power 
 to secure commodities or services at the present time in 
 exchange for some equivalent promised at a future time" 
 is no more wealth or capital than is labor power or 
 organizing ability. Labor power contributes greatly to 
 the wealth and capital of a country but it is not for 
 that reason capital. Organizing ability also increases 
 wealth and capital but it is not for that reason either 
 wealth or capital. The division of labor has been one 
 of the greatest factors in the increase of the wealth of 
 society, but the division of labor is never thought of 
 as wealth or capital. The credit transaction which 
 consists of an exchange of goods or services for a promise 
 to pay does not increase the sum total of economic 
 goods. It simply means an exchange of possessors. 
 Although many credit instruments may be exchanged, 
 the actual means of satisfying wants have not been 
 increased by the process. 
 
 We may admit the statement of Daniel Webster that 
 "credit has done more a thousand times, to enrich nations 
 than all the mines of all the world," without conceding 
 that it is either wealth or capital. What then is the
 
 18 MERCANTILE CREDIT 
 
 function of credit? As Levasseur puts it, "Admit in 
 summing up this analysis, that credit strictly speaking, 
 creates nothing, that it is simply a displacement of 
 capital; nevertheless in transporting capital to a place 
 where it can be employed most profitably, in furnishing 
 tools to labor, in rendering active that which was 
 inactive, and fertilizing that which was sterile, this 
 simple displacement introduces a profound modification 
 into the economy of society, it renders production more 
 active and increases wealth." 1 
 
 1 Elements of Political Economy, p. 208. Translated by T. 
 Marburg.
 
 CHAPTER II 
 CREDIT INSTRUMENTS 
 
 A credit transaction is one in which something of 
 value is exchanged for an obligation to pay in the future. 
 A credit instrument is the evidence of this ob- 
 ligation. It may be exchanged for economic . 
 goods in which case it constitutes a demand 
 on the part of its possessor for the payment of the obli- 
 gation at maturity or, like the book account, it may be 
 simply a record of the contractual relations between 
 debtors and creditors. One writer prefers the use of 
 "instrumentalities rather than instruments, to cover 
 cases of orders and promises by telegram and telephone." 1 
 
 Credit instruments may be divided into (1) promises 
 to pay and (2) orders to pay. The chief promises to 
 pay are promissory notes, bank notes, de- 
 posits, book accounts, stock certificates, bonds, c i asses f 
 etc., and the chief orders to pay are drafts, credit 
 bills of exchange, checks, circular letters of instru_ 
 credit, post-office orders, mobilizing certificates 
 of all kinds such as warehouse receipts, bills of lading, etc. 
 
 A promissory note is a written promise to pay a 
 
 certain sum of money at a future time under definite 
 
 conditions. Promissory notes are frequently exchanged 
 
 for goods or funds. They are among the most com- 
 
 1 Andrews: Institutes of Economics, p. 143. 
 
 19
 
 20 MERCANTILE CREDIT 
 
 mon of credit instruments. A man whose credit is good 
 
 may exchange his promise to pay in the form of a 
 
 promissory note for goods, or for money or 
 
 The pro- other funds. They are made either negotia- 
 
 missory 
 
 note. hie or non-negotiable. If the note is made 
 
 payable to a particular person without order 
 
 or bearer on the note, it is non-negotiable. If it is made 
 
 payable to order or to bearer, it is negotiable. The 
 
 negotiable promissory notes are the most common form 
 
 of note credit instruments. They are used freely in the 
 
 payment of debts, and consequently may be transferred 
 
 a great many times, and on this account perform all the 
 
 functions of money. When sold, they must be endorsed 
 
 by the person to whom the note is ordered to be paid. 
 
 The endorsement may be either in blank or special. 
 
 The former specifies no indorsee and an instrument 
 
 so indorsed is payable to bearer and may be sold on 
 
 delivery. A special indorsement indicates the person 
 
 to whom or to whose order the note is to be paid, and 
 
 must be endorsed by such person before it can be sold 
 
 again. 
 
 The promissory note was used early in the history 
 
 of credit transactions. It is now the most common 
 
 instrument used for the transfer of funds. In 
 
 Use of the the united States prior to the Civil War when 
 promis- . , .. 
 
 sory note, goods were sold on time, except by retailers, 
 
 the promissory note was almost invariably 
 
 used. Even since the Civil War it has been used for 
 
 this purpose more than any other instrument of credit. 
 
 On account of its ease of negotiability it serves this
 
 CREDIT INSTRUMENTS 21 
 
 purpose well as it often passes through many hands 
 before it is finally paid. 
 
 A bank note is a bank's promise to pay the bearer 
 the amount specified on its face. As it is intended to 
 pass freely from hand to hand, it is a credit 
 instrument of general acceptability. The free- e an 
 dom with which it circulates at its face value 
 depends upon the general credit standing of the banking 
 institution or upon special provisions made for the 
 redemption of the note circulation of banks. It is well 
 known that the note issues of private and state banks 
 in the United States before the Civil War fluctuated 
 greatly in value, while the national bank notes issued 
 in accordance with the National Banking Act of 1863 
 are absolutely safe owing to the use of United States 
 bonds pledged to their redemption. In other countries 
 as Canada where bank asset currency prevails, bank 
 assets may be used in such a way as to make bank notes 
 practically safe. 
 
 A bank deposit imposes on a banking institution the 
 same obligation as the bank note. Both are promises 
 of the bank to pay on demand. In the case 
 of bank deposits, the only record which deposi- e 00 
 tors have of the obligations of the bank, is in 
 the books of the bank and in the pass book in possession 
 of the depositor, which contains a copy of the bank-book 
 record. The depositor in this case exchanges funds for 
 the promise of the bank to pay on demand, in which 
 case the credit instrument is a book account which the 
 bank keeps. For purposes of collection this account
 
 22 MERCANTILE CREDIT 
 
 or credit instrument is as valuable as any that are 
 recorded. 
 
 In the use of the book account as an evidence of debt 
 one person may exchange money and other property for a 
 credit upon books. That is a right of action on the part 
 of one who exchanges something valuable is secured 
 against the individual who receives it. Common cases of 
 book accounts are those used by the retailer when he 
 sells goods to a consumer, or by a banking institution in 
 making a record of deposits. In the former case, the 
 retailer exchanges goods for a promise to pay, which 
 evidence is on the books of the retail institution. This 
 record of the debt gives the retailer a right of action 
 against the receiver of goods for the value of the goods as 
 indicated by the books. The book account is as valuable 
 a credit instrument as any that is used. It does not, 
 however, serve the purpose as a medium of exchange 
 or serve the purpose of paying many obligations the 
 same as checks or other credit instruments to be con- 
 sidered later. However, the book account may be 
 sold and the purchaser of the book account has the 
 same right of action against the debtor as the original 
 creditor had. When a retail business is sold, the book 
 accounts are usually a part of the sale. Book accounts 
 may also be sold outright to any one who wishes to 
 make the purchase and who will take the responsibility 
 of collecting debts. 
 
 The book account is perhaps the oldest of credit 
 instruments. Some primitive peoples kept records of 
 things loaned. We have already seen how the family
 
 CREDIT INSTRUMENTS 23 
 
 ledger was used in ancient Rome to record credit 
 relations and these credit transactions which were re- 
 corded in the register were legally binding. 
 Book accounts are kept as customary the only se ^ ° 
 evidence of debt by professional men as CO unts. 
 lawyers, doctors, etc., and by manufacturers, 
 builders, contractors, etc. These accounts have a legal 
 status and are salable. 
 
 A modern use 1 of the book account in banking trans- 
 actions in lending on open book accounts has developed 
 in recent years as a result of changes in trade 
 
 organization. When the commission mer- new , 
 
 type of 
 chant was a powerful factor in trade he loans. 
 
 performed the function of banker as well as 
 merchant in that he often advanced funds to the mill 
 owner, to the planter or to both of them. Since his 
 disappearance, there has arisen a banker who now con- 
 ducts the financial part of the commission merchant's 
 business in advancing funds to reliable traders or manu- 
 facturers on open book accounts. The trader who has 
 borrowed from his banker all that his means and credit 
 standing will permit sometimes finds himself handicapped 
 in trade when he cannot pay cash for the goods he buys. 
 This new type of banker requests such a person to furnish 
 him the names of the firms from whom he wishes to buy. 
 When their ratings are found to be satisfactory, an in- 
 demnity bond is secured covering the goods in question. 
 The invoice of the seller must contain a notice that pay- 
 ment for the goods should be made to the banker. When 
 1 The Journal of Accountancy, Feb., 1912, pp. 127-132.
 
 24 MERCANTILE CREDIT 
 
 a notice is received to the effect that an order for the 
 goods has been filled the shipper is sent an amount not 
 exceeding 80 per cent, of the value of the goods, and this is 
 charged to the account of the purchaser. When pay- 
 ment is received the banking concern deducts the inter- 
 est on the amount advanced, charges a fee for its services, 
 and pays the seller the amount still due him. A method 
 similar to this is sometimes used in advancing funds to 
 importers of foreign goods. 
 
 "A share of stock is a certificate of ownership in a 
 
 corporation." 1 The stockholders are the owners of the 
 
 property of the company. However, a credit 
 
 Stock relation exists between the stockholders and 
 
 certin- . . 
 
 cates. their corporation. In purchasing stock the 
 
 stockholders exchange funds for stock cer- 
 tificates, which are credit instruments that indicate the 
 number of shares of the company to which the holder is 
 entitled. While the stock certificates themselves are 
 not negotiable, for all practical purposes they are. The 
 registered holder of them may sell them and deliver 
 them to the buyer with his assignment in blank, and in 
 this way they may pass through a great many hands 
 without any registration on the books of the corpora- 
 tion. Stocks are used extensively as collateral for bank 
 loans, and the more fully negotiable they are the better 
 they are for this purpose; consequently the tendency is 
 to make them more easily transferable. 
 
 The two main classes of stocks are the preferred and 
 the common shares. The preferred stockholders are 
 
 1 Meade: Trust Finance, p. 150.
 
 CREDIT INSTRUMENTS 25 
 
 given a preferred claim to the profits of the company 
 and in event of dissolution of the corporation they are 
 usually given a preferred claim to the assets p re f erre d 
 of the company. The preferred stockholders and com- 
 are usually paid an assured dividend which mon 
 must be paid before the common stockholders 
 receive any dividends at all. The common stockholders, 
 upon the other hand, frequently have the exclusive man- 
 agement of the business of the corporation, and while 
 they receive what is left of the profits of the company 
 after the preferred stockholders and in some cases the 
 bondholders are paid, if the business is a very successful 
 one they receive comparatively large profits. 
 
 The leading stock investments are in public service 
 corporations and in industrial companies. As corporate 
 organization in these enterprises has increased vastly 
 the last fifty years property in the various classes of 
 stocks has also increased to vast proportions. 
 
 What is said of the increase of stocks as credit instru- 
 ments may also be said of bonds in industrial and public 
 
 service securities. However, bonds are more _ 
 
 Bonds. 
 extensive than stocks, as they include also 
 
 loans to governments, national, state, and local. Like 
 the stock certificate the bond is ordinarily negotiable 
 and as it too is used as collateral to secure loans there 
 is every reason to facilitate its negotiability. A bond 
 is a promissory note in which a government, a corpora- 
 tion, or in exceptional cases, an individual promises to 
 pay a certain sum of money. A bond differs from an 
 ordinary promissory note in that "it is issued as a part
 
 26 MERCANTILE CREDIT 
 
 of a series of like tenor and amount, and in most cases 
 
 under a common security." 1 The security for a bond, 
 
 like that of a note, may be found written upon the face 
 
 or back of the bond itself." 2 
 
 Corporate bonds are different from corporate stocks 
 
 as the bond holder is a lender to the corporation who is 
 
 promised a definite sum of money at a speci- 
 
 orpora e ^^ time at a certain rate of interest and ordi- 
 bonds. 
 
 narily he has nothing to do with the manage- 
 ment of the company. The bondholder usually has some 
 kind of property pledged to the payment of the note while 
 there is no pledge of property to pay the holder of stock. 
 The different kinds of bonds, classified with respect 
 to their security, are numerous, including such as real 
 
 estate bonds, general mortgage bonds, blanket 
 . n , s ° mortgage bonds, equipment bonds, debenture 
 
 bonds, etc. The name of the bond indicates 
 the character of the security offered, but it is not within 
 the province of this treatise to go farther into the sub- 
 ject of the security offered. 
 
 Of the credit instruments which are orders to pay, 
 the check has come to be the most important in the 
 
 United States. It is an instrument authoriz- 
 Checks. 
 
 ing the transfer of funds which are credited 
 
 to the maker of the instrument. It is a written order 
 
 by an individual who has a deposit in a bank upon the 
 
 banking institution to pay a certain sum of money. 
 
 Checks are sight bills on bankers. The check when pay- 
 
 1 Cleveland: Funds and Their Uses, p. 169. 
 
 2 Cleveland: Fwids and Their Uses, p. 169.
 
 CREDIT INSTRUMENTS 27 
 
 able to bearer or to order is a negotiable instrument and 
 the individual who receives it, upon endorsing it, may 
 transfer it to some one else in payment of an obligation. 
 The check may circulate very freely in the business com- 
 munity, and it may cancel many obligations the same 
 as money can. It is used in the payment of obligations 
 both locally and at a distance, and to the extent that 
 it is used, it dispenses with the need of money. 
 
 Records from Babylonian history 1 show the existence 
 of deposit banking in Babylonia. At first depositors 
 left their money with large money lenders for ^- se Q ^ 
 which they accepted receipts. Against these checks in 
 funds depositors wrote checks ordering the earl y 
 bankers to pay money to creditors of 
 depositors. We see that the beginning of the check 
 system thus dates back to early Babylonian history. 
 The deposit system was established in Sicily in the 
 fourteenth century and depositors were given the 
 privilege of ordering by check payment of sums of 
 money to others. 
 
 In the United States and Great Britain the greater 
 share of cash pa3 r ments are made by checks. In other 
 commercial countries the tendency to pay 
 large sums of money by checks rather than ^ e ° 
 by cash is rapidly increasing. Bills and notes present, 
 are used for time transactions while checks are 
 used for cash payments. The latter are superior to bills 
 as they may be used in making payments promptly and 
 consequently afford a faster method of doing business. 
 
 1 Aldrich: Money and Credit, p. 72.
 
 28 MERCANTILE CREDIT 
 
 Checks are usually presented, not where the deposit is, 
 but in the holder's bank, and a completely developed 
 clearing house system enables the banks in a commer- 
 cial community to settle their claims against each other 
 without delay. 
 
 Closely associated with the common check are the 
 
 certified check, the cashier's check, the cheque bank 
 
 check, the letter of credit, the traveler's check 
 
 checks an< ^ *^ e P os t-office money order. They are all 
 
 practically orders to pay funds which the 
 
 drawer has deposited, or to which he is entitled. 
 
 It sometimes happens that a depositor will desire to 
 make payments where he is not known and where the 
 payee does not care to take chances on a private check. 
 Two devices are open to him: (1) He may draw his check 
 for the amount desired, have the cashier of the bank 
 where his deposits are write above his signature across 
 the face of the check "certified" or "good when properly 
 endorsed." This certified check is acceptable to the 
 payee because its payment is guaranteed by the bank. 
 (2) The second method is to exchange his check for the 
 "cashier's check" made payable to the person designated 
 by the depositor. 
 
 An institution known as a "Cheque Bank" sells to 
 
 its customers a book of its checks made up of assorted 
 
 blanks, and across the face of each is written 
 The 
 cheque ^ e max i mum amount for which each may be 
 
 bank. drawn. The buyer pays the sum of the 
 
 amounts written on each check and when the 
 
 book is returned, the bank refunds the difference between
 
 CREDIT INSTRUMENTS 29 
 
 the amount paid for the cheque book and the amounts 
 
 paid out. The purpose of the cheque bank is to make its 
 
 checks more acceptable than the common check. 
 
 A similar method of transferring funds also for the 
 
 benefit primarily of travelers is the travelers' check 
 
 issued by express companies. The best 
 
 known of these are the American Express 
 
 travelers 
 Company s checks. The purchaser secures check. 
 
 from an office of the American Express 
 
 Company a number of checks of various denominations 
 
 to suit the convenience of the traveler. They are bound 
 
 together so that they may be carried conveniently and, 
 
 as the agents who are authorized to pay these checks 
 
 are widely distributed, the holder of these checks finds 
 
 them very convenient as he can have them redeemed 
 
 by banks, hotels, business houses, etc. 
 
 The letter of credit is intended primarily for the 
 
 convenience of those who travel in a foreign country to 
 
 enable them to collect funds where they are 
 
 unknown. The purchaser of the letter of ... 
 
 *, credit. 
 
 credit secures the right to draw sums of money 
 at different times not to exceed the face value of the letter, 
 while the letter of credit is a guaranteed account by the 
 bank issuing it. When funds are drawn where the letter 
 of credit is presented, the bank official writes down the 
 amount drawn on the letter and he requires the customer 
 to write his name and this signature is compared with the 
 signature of the holder at the time the letter of credit was 
 purchased. Letters of credit are of great convenience to 
 the traveling public as advancements may be secured
 
 30 MERCANTILE CREDIT 
 
 nearly everywhere and no identification is necessary aside 
 
 from the comparison of signatures. 
 
 The post-office money order is an instrument widely 
 
 used in America for transferring funds. It performs 
 
 practically the same function in transferring 
 
 Post office mone y as checks and banks drafts. One who 
 
 money 
 
 order. desires money sent to some one at a distance 
 
 may go to the nearest post-office station, pur- 
 chase a money order for the amount desired, which is 
 made payable to the person specified. It is then sent by 
 mail to the payee who presents it at his post office and 
 receives the amount designated. 
 
 A bank draft is a bank's check upon any banking in- 
 stitution in which it has a deposit or credit relations 
 
 to pay a certain sum of money. It is an 
 
 . .. instrument used by a bank to draw funds from 
 
 draft. ... 
 
 another bank in which it has deposits the same 
 
 as a check is an instrument by which a depositor draws 
 
 funds from a bank where he has deposited money. The 
 
 person receiving the draft, the payee, may upon endorsing 
 
 it sell it to some one else and it may serve as a medium 
 
 of exchange, passing through a great many hands. The 
 
 bank draft is used to pay debts at a distance, to transfer 
 
 money to remote sections of a country or to a foreign 
 
 country, and also to facilitate travel by transferring 
 
 money with but little risk to places where it is made 
 
 available. 
 
 The bank draft was the earliest Bill of Exchange. 
 
 Bank drafts were dealt in extensively in Greek and 
 
 Roman times. The money changers or bankers had
 
 CREDIT INSTRUMENTS 31 
 
 branches or agents in distant cities and foreign countries 
 upon whom they drew for the payment of money. By 
 selling drafts they enabled merchants to pay debts in- 
 curred in purchasing merchandise at a distance. In 
 selling drafts to travelers they enabled the latter to go to 
 distant countries, obtain the money of the country and 
 travel with ease. 
 
 A bill of exchange or commercial draft is an order or 
 request by one person upon another to pay a certain 
 sum of money. The payee may be the drawer 
 
 of the bill or some one that the drawer owes. . 
 
 exchange. 
 
 In either case the amount paid is charged to 
 the account of the drawer. The occasion which gives 
 rise to a commercial draft is usually a sale of goods. 
 The seller of merchandise makes out an order against the 
 purchaser to pay the purchase price of the goods either 
 to himself or to some one else who is to collect the bill. 
 The bill may be made out payable at sight or after sight. 
 The former is known as a sight draft. If the seller of 
 the merchandise desires to give credit to the purchaser 
 for a few months, the bill of exchange is made out pay- 
 able after the lapse of the credit period. The bill may 
 be accepted by the purchaser of the goods writing across 
 the face of the instrument "accepted" with the date of 
 acceptance and signing it. 
 
 The bill may then be sold to a banking institution 
 or any one else who will make the purchase and both 
 the drawer and drawee become responsible for its pay- 
 ment. As a salable instrument it is double-name paper. 
 Its acceptance makes it a written evidence of debt the
 
 32 MERCANTILE CREDIT 
 
 same as a promissory note. Without being accepted a 
 bill is not a credit instrument. It is simply a request 
 of one person upon another to pay a cum of money. 
 However, bills not accepted are frequently sold as re- 
 sponsibility for them rests with the drawer. 
 
 In England 1 a distinction is made between a bill of 
 exchange and a draft. Only bills that are "accepted" 
 are drafts. All others are bills of exchange. Bills of 
 exchange often mean foreign bills, while acceptances 
 are domestic or inland bills. However, bills of exchange 
 are ordinarily included to cover both "accepted" bills 
 and those not accepted and foreign bills and domestic 
 or inland bills. 
 
 The commercial draft grew out of the Great Mediaeval 
 Fairs of Europe which were centers for the distribution 
 of products. After the period of direct barter, money 
 changers attended the fairs to exchange money for the 
 traders. With the great multiplication of goods to be 
 exchanged and a better organization of the mercantile 
 system, merchants remained at home, shipped their 
 goods to each other, and by means of bills of exchange 
 they secured payment for their goods with the use of 
 but little money. 
 
 Bills of exchange have reached the greatest degree of 
 acceptability in England. Where in America 
 
 Use of ^le promissory note is generally used pledg- 
 
 bills of ... , , ,, 
 
 exchange. m § ™ e promise of the purchaser to the pay- 
 ment for a bill of goods sold on time, in 
 England the commercial draft is used. Often to these 
 1 Journal of Accountancy, Dec, 1911, p. 601.
 
 CREDIT INSTRUMENTS 33 
 
 drafts bills of lading are attached representing the prop- 
 erty shipped, which is a pledge to the payment of the 
 bill. As each succeeding endorser is pledged to pay the 
 face of the bill they may pass through many hands and 
 are considered relatively safe instruments of credit. 
 
 The bill of exchange is also used in what is termed 
 accommodation paper. A may order B to pay a certain 
 sum of money and when B accepts it, A may sell it to a 
 banking institution. B in turn orders A to pay a cer- 
 tain sum of money and as soon as A accepts it, B can 
 dispose of it to a banking institution. This is known 
 as accommodation paper. Other forms of bills of ex- 
 change are not subjects for discussion here. The two 
 sorts of transactions, however, represent the purposes 
 for which bills of exchange are made out. 
 
 Aside from the promises to pay and the orders to pay 
 other credit instruments are bills of lading and warehouse 
 receipts. 
 
 The bill of lading is an itemized statement of goods 
 shipped, and it gives the purchaser or the one to whom 
 the goods are shipped, a right to them. The 
 bill of lading is both a receipt and a contract. . d . 
 It is a receipt given by the transportation 
 company acknowledging the acceptance of goods and it 
 is also a contract between the transportation company 
 and the shipper stipulating the terms and manner of 
 shipment and the carrier's responsibility. As the bill 
 of lading is a right to certain specified goods, it is a sale- 
 able credit instrument and may be transferred frequently, 
 and as often as it is sold, the goods called for by the bill
 
 34 MERCANTILE CREDIT 
 
 of lading change hands. As it is a favorite collateral for 
 loans from banks, it is not only used to facilitate the sale 
 of goods but as a basis of credit pending their sale. 
 
 The bill of lading is often an instrument used in the 
 collection of accounts. In shipping a bill of goods the 
 seller often attaches a commercial draft to the bill of 
 lading with the understanding that the latter is to be 
 delivered, together with the right to the goods only 
 when the draft is paid. 
 
 The bill of lading is used as collateral to secure the 
 
 advancement of funds especially in cases of standardized 
 
 products such as wheat, cotton, coffee, etc. 
 
 Uses of Local buyers of grain are without much cap- 
 
 the bill of . 
 
 lading. ital and to do an extensive business they must 
 
 secure advancements of funds from commis- 
 sion men who buy from them, or from their local banks. 
 A favored way of securing advancements when grain is 
 shipped, is to attach to a bill of lading a draft written 
 against the commission man and deposit them with the 
 local banker who will advance funds which are used in 
 buying more grain. When grain is again shipped from 
 the interior market to the seaboard, the shipper secures 
 a bill of lading from the vessel or railway company, 
 draws a draft against the consignee and deposits the 
 draft and bill of lading with the bank and has funds 
 advanced. The cycle of transactions of this class is 
 completed when the exporter draws a draft against the 
 foreign purchaser and attaches to it the steamship bill 
 of lading and the insurance policy on the cargo and takes 
 them to his banker and sells the bill.
 
 CREDIT INSTRUMENTS 35 
 
 The warehouse receipt performs practically the same 
 
 function as an instrument of exchange and as a credit 
 
 instrument to secure the advancement of 
 
 funds, as the bill of lading. It is a receipt Ware- 
 house 
 for goods classified and placed in a ware- receipt. 
 
 house. The purchaser of many classes of 
 farm products exchanges funds for a warehouse receipt 
 which entitles him to the possession of the goods depos- 
 ited. Goods are sold through a disposition of the ware- 
 house receipt. When sold the warehouse receipt must 
 be endorsed the same as a promissory note, check, or 
 other instrument of credit. It is also used frequently 
 as collateral for the advancement of funds. With the 
 increased tendency to classify and to standardize ware- 
 house products, it becomes to a greater extent both a 
 negotiable instrument and collateral for the advance- 
 ment of funds. 
 
 Contracts for the delivery of grain are usually ful- 
 filled by a tender of warehouse receipts. 1 "The receipt 
 states the name of the elevator company issuing it, the 
 date of issue, the kind and amount of grain, and the name 
 of the owner." When sold the receipts are endorsed. 
 
 Terminal elevator companies buy large quantities of 
 
 grains and to carry on their buying operations 
 
 they are heavy borrowers of banks. To pro- 
 
 . warehouse 
 
 cure loans elevator receipts are deposited as reC eipts. 
 
 collateral. They are considered safe collat- 
 eral and where the market is stable bankers advance 
 
 1 "American Produce Markets," Annals of American Academy 
 of Political and Social Science, p. 39.
 
 36 MERCANTILE CREDIT 
 
 funds to 90 per cent, of the value of the receipts. When 
 the grain is sold the loans are paid and the receipts are 
 surrendered. All others engaged in purchasing grain 
 secure the advancement of funds from banks by de- 
 positing warehouse receipts with them.
 
 CHAPTER III 
 
 KINDS OF CREDIT 
 
 Depending upon the basis of classification credit 
 
 may be classified in a variety of ways, and each class 
 
 may be divided into many sub-heads. We may group 
 
 all classes of credit under two main heads, 
 
 public and private credit. From the point Basis of 
 
 classifica- 
 of view of the use of funds credit may be tion> 
 
 divided into productive and consumptive 
 credit and to these may be added a third, public credit, 
 which is in part productive and in part consumptive 
 credit. Upon the basis of the personality of the bor- 
 rower credit may be divided into individual credit and 
 corporate credit. In the above suggested classification 
 each of the main divisions of credit may be divided into 
 many subheads. 
 
 Upon the basis of the conditions affecting credit, 
 credit may be divided into five kinds: 1 mercantile, per- 
 sonal, banking, public and investment credit. This 
 classification will be used in the present treatise. While 
 no hard and fast lines can be established between different 
 kinds of credit, it is believed that this classification 
 
 1 Prendergast divides credit into the same five classes [Pren- 
 dergast: Crtdit and Its Uses.] Galloway divides credit into four 
 classes, Personal, Mercantile, Business and Banking Credit. [See 
 Adcertising, Selling and Credits in the "Modern Business Series."] 
 
 37
 
 38 MERCANTILE CREDIT 
 
 serves a useful end in describing the uses and purposes of 
 credit. This chapter represents an attempt to describe 
 the last three classes and to explain their relation to 
 mercantile credit, while a discussion of personal and 
 mercantile credit is reserved for subsequent chapters. 
 
 Mercantile credit is the power to secure goods for 
 purposes of sale in return for an equivalent promised in 
 the future, and a mercantile credit transac- 
 ~ tion consists of an exchange of goods for a 
 promised equivalent. A sale of goods on 
 time is a mercantile loan. Wholesalers, jobbers, com- 
 mission men and retailers deal in mercantile credit, as 
 sellers are frequently compelled by business practice to 
 give time for the payment of goods from the proceeds 
 of their sale. 
 
 Personal or individual credit is the power to secure 
 something valuable in the present in exchange for some- 
 thing promised in the future. It is some- 
 .. times known as consumptive credit, as 
 
 personal credit is obtained at present chiefly 
 for purposes of consumption, but in this discussion 
 personal credit not only includes consumptive credit 
 but also the credit which enables individuals and partner- 
 ships to secure capital for purposes of production. 
 
 BANKING CREDIT 
 
 Banking credit is the power of a banking institution 
 to obtain something of value in the present in exchange 
 for its promise to pay. In the case of a simple de-
 
 KINDS OF CREDIT 39 
 
 posit the bank exchanges its promise to pay in the form 
 
 of a certificate of deposit or a book credit for funds or 
 
 a title to funds. Because the bank is required 
 
 to pay money in the future, this transaction Banking 
 
 credit 
 is often termed a "short sale" of money. In defined. 
 
 other instances which arise in the ordinary 
 
 work of Commercial Banks, the bank exchanges its 
 
 credit for the credit of persons or associations. 
 
 The three primary functions of a bank are those of 
 deposit, discount or loan, and note issue. The early 
 bankers were money changers, who exchan- B ank m g 
 ged one form of money for another either do- functions 
 mestic or foreign. Perhaps the next function *" earl y 
 assumed by banks after money changing, was 
 to pay a given amount to some one else in another 
 place. 1 To do this work, it was necessary to have 
 correspondents in other places on whom orders to pay 
 were drawn. This function was assumed by bankers in 
 Babylonia, Greece and Rome. The next step toward 
 the modern banking system consisted in receiving de- 
 posits for which receipts were given, the depositor being 
 permitted to withdraw his funds upon presentation of 
 his receipt. He was also permitted to order his banker 
 to pay to a third person all or a part of the amount de- 
 posited. This method of banking was prevalent in 
 Babylonia as well as in the mediaeval states of Europe. 
 A transfer of funds from the credit of one person to an- 
 other on the books of the bank was permitted by the 
 leading banking institutions of mediaeval Europe. At 
 
 1 Seligman: Principles of Economics, p. 525.
 
 40 MERCANTILE CREDIT 
 
 first the transfer could be made only by word of mouth 
 in the presence of both parties but later the transfers 
 were made by written order or draft by the depositor 
 upon the banking institution. 
 
 The loaning of funds deposited with banks for pur- 
 poses of safe keeping was at first considered incompatible 
 
 with the proper custodial care of people's 
 Functions f un( j s> However, the functions of money 
 banks. lending and deposit banking became common 
 
 in Greece and Rome as well as in Mediaeval 
 Europe. The bank of Amsterdam was perhaps the 
 first to advance money upon deposits of coin or bullion, 
 the latter to be given to the owner upon the return of 
 the money advanced. By degrees advancements were 
 made upon the deposit of other things, the funds or 
 wealth deposited guaranteeing the return of money ad- 
 vanced by the bank. As an outgrowth of this develop- 
 ment we have to-day such specialized institutions as the 
 agricultural and mortgage banks of Europe, and the 
 bond and mortgage companies and other closely related 
 institutions of the United States. The acceptance of 
 collateral by commercial banks to guarantee the payment 
 of loans is a modern safeguard corresponding to the 
 advancement of money based upon deposits of bullion 
 of the mediaeval bank. 
 
 The conditions under which banks lend do not come 
 Founda- directly under the head of banking credit, or 
 tions of the power of banks to secure advances of 
 banking funds in exchange for their promises to pay. 
 
 But as the power of banks to command the
 
 KINDS OF CREDIT 41 
 
 confidence of the business community, and also the 
 
 funds of the community, depends almost entirely upon 
 
 the caution and judgment of banks in lending their 
 
 funds, it seems appropriate to consider the conditions 
 
 under which banks lend their credit. 
 
 As contrasted with the earlier banking institutions, 
 
 credit creation is the distinctive feature of the modern 
 
 banks. The bank loans not alone its money 
 
 but its credit. In the regular routine of bank- 
 s' creation. 
 
 ing in the great majority of cases when a loan 
 is made, cash is not paid out to the borrower, but he is 
 given a credit account on the books of the bank. Like- 
 wise, when the loan is paid, the banker simply charges 
 the amount against the borrower's account. In our 
 modern methods of business but little cash is used, the 
 great bulk of payments being made in checks or drafts 
 against an account in a bank. Because of this, when 
 business men borrow from a bank they do not want cash 
 but a deposit account which they can draw on by checks 
 when they make their payments. Business men thus 
 leave nearly all their funds with banks because it is to 
 their interest to do so. Since banks enjoy the con- 
 fidence of the business community to such an extent as 
 to retain as deposits in large measure the funds loaned 
 as well as other deposits left with the bank, it can loan 
 to a far greater extent than its capital and deposits com- 
 bined. It is by this method of credit creation that the 
 bank earns its chief income and performs its greatest 
 social service. Experience shows that not all who have 
 claims against a bank will present them at once, and that
 
 42 MERCANTILE CREDIT 
 
 in ordinary times, a bank needs to keep but one-fourth 
 or one-fifth of its obligations in its vaults for redemption 
 purposes. This means that by use of its credit with a 
 given amount of funds a bank can lend several times as 
 much as any individual. 
 
 Mercantile credit and banking credit are mutually 
 dependent. Mercantile credit transactions give rise to 
 the great bulk of banking credit and banking 
 between credit supports and makes possible mercan- 
 mercantile tile credit. When goods are sold by manu- 
 and bank- f ac turers, jobbers or other middlemen on 
 ing ere thirty, sixty, or ninety days time, the seller 
 usually accepts a promissory note from the buyer as a 
 pledge of payment, or, as is the usual case in the British 
 Isles, he writes a bill or draft ordering payment which the 
 buyer accepts. These notes or drafts are taken to the 
 commercial bank and discounted. In other words, 
 these promises to pay, the evidences of the mercantile 
 loan, are sold to the commercial bank, the latter advanc- 
 ing the funds, or in other words, making a loan to middle 
 men to cover the value of the goods sold. The loan 
 function of the bank is ordinarily called the "discount 
 function" as the great majority of its loans are made by 
 discounting notes, drafts, or other paper which come into 
 being in the ordinary course of business of which the 
 above is typical. It is obvious that the mercantile loan 
 gives rise to a large volume of banking loans. However, 
 if it were not for bank loans, mercantile loans would be 
 greatly restricted. Time is given frequently by the 
 manufacturer, jobber, etc., because they know that
 
 KINDS OF CREDIT 43 
 
 they can take the notes of the buyer to the commercial 
 bank and have them discounted. The great majority 
 of mercantile houses have not an adequate supply of 
 capital to carry on an extensive loan business wthout 
 the aid of banking institutions, and it was for the pur- 
 pose of rendering this and similar functions that the 
 modern commercial bank was developed. Mercantile 
 credit is thus fostered and supported by banking credit. 
 
 When the merchant sells to a bank the promissory note 
 of the purchaser of his goods endorsed by himself, the 
 banker subtracts from the face of the note the interest 
 for the time the note is to run, and either gives the 
 merchant the present value of the note in money, or 
 gives him credit for the amount on the books of the 
 bank. Where money is paid, the bank exchanges a 
 present value for the promise to pay in the future. This 
 transaction involves banking credit only in the sense 
 that the bank is a giver of credit. In the other case, 
 where the merchant is given credit on the books of the 
 bank for the amount due him, banking credit is ex- 
 changed for mercantile credit. The bank exchanges its 
 promise to pay for the credit instrument which the pur- 
 chaser of goods gave to the seller. 
 
 Individual or personal credit is related to banking 
 credit in a similar way. Individuals who en- 
 joy a good credit reputation may borrow f banking 
 money from a bank. If the bank pays the credit to 
 
 money directly to the borrower in exchange P ers o nal 
 
 credit* 
 for his promissory note, banking credit is in- 
 volved in the transaction only in the sense that the bank is
 
 44 MERCANTILE CREDIT 
 
 a giver of credit. Upon the other hand, if the borrower 
 of the money leaves it on deposit in the bank, which is 
 the usual case, then the bank exchanges its promise to 
 pay for the promise to pay of the borrower, in which 
 case banking credit is exchanged for personal credit. 
 
 In some respects banking credit is the highest form 
 
 of credit, for the standards set by banking institutions 
 
 are, and should be, above those of any other 
 
 Banking individual or institution giving credit. In 
 credit sets 
 
 standards. the ver y na ^ ure °f things, a bank should 
 enjoy the fullest confidence of the public. 
 If it does not, its service is at an end. As it has custodial 
 care of the funds of the community, the people desire to 
 be certain of getting their money when they want it, or 
 when the obligation of the bank to pay them, matures. 
 When a merchant buys a bill of goods on sixty days' time, 
 if he is unable to pay the note when due he may ask for 
 an extension of time, which the seller may be willing to 
 grant or be compelled to grant for practical reasons. 
 In personal credit too, borrowers may be unable to pay 
 notes when due and their requests for an extension of 
 time are frequently granted. But a banking institution 
 cannot ask for extensions of credit; it must meet its 
 obligations as they mature or close its doors and admit 
 its failure as an institution of credit. 
 
 Since a bank makes its chief income by loaning its 
 credit, and as its loans are usually several times in excess 
 of the funds in the bank to redeem them, and further- 
 more, as it must close its doors the moment it confesses 
 its inability to meet its obligations, it is imperative that
 
 KINDS OF CREDIT 45 
 
 it should exercise the greatest caution in lending. It 
 
 is limited to short-time loans, that is, call loans, and 
 
 loans for thirty, sixty, and ninety days. Where loans are 
 
 made to persons, most banks limit their purchases to 
 
 "double name" and "triple name" paper. When 
 
 "single name" paper is purchased, the borrower must be a 
 
 man of ready means who is certain to have funds ready as 
 
 his note matures. Where a loan is based on a sale of 
 
 goods, the paper purchased is almost invariably "double 
 
 name" paper, as the purchaser gives his note to the 
 
 seller and the latter, before selling it to a bank, must 
 
 endorse it. 
 
 Accommodation paper is also "double name" paper. 
 
 In this case would-be borrowers exchange their notes 
 
 or bills, take them to their respective banks, 
 
 affix their own signatures, and banks buy Accom - 
 
 u modation 
 
 them as double name" paper. Much has paper. 
 
 been said of the inferiority of such loans as 
 
 contrasted with those based upon a sale of goods. While 
 
 the latter class of loans is superior to the former, its 
 
 superiority has been greatly exaggerated. Since the 
 
 sale of goods gave rise to the loan, and although the 
 
 maker of the note is supposed to pay it from the sale 
 
 of the goods, and often does so, no property is pledged 
 
 for the payment of the note and, as will hereafter be 
 
 shown, several notes are often written based upon the 
 
 sale of one lot of goods. Loans made for consumption 
 
 purposes, as is often the case, clothe the borrower with 
 
 no power whatever to pay them when due. In either 
 
 case, however, much depends upon the ability of the bor-
 
 46 MERCANTILE CREDIT 
 
 rowers to pay their debts and upon the habits of the 
 borrowers in debt payment. 
 
 Often the deposit of collateral consisting of shares of 
 
 stock or bonds is required as a pledge of payment of 
 
 notes. The safest collateral accepted is 
 
 .. . that which is quoted on the Exchange as it 
 
 may be sold at once and the loans paid. 
 Commercial banks often have regular credit depart- 
 ments to pass judgment on the value of titles to prop- 
 erty submitted as pledges to loans, and also 
 
 ^ xt to pass judgment on the worthiness of bor- 
 
 depart- 
 
 ments. rowers. Business houses are often granted 
 
 lines of credit which permit them to borrow 
 from the bank up to a certain limit. These lines of 
 credit are granted after a thorough investigation of the 
 credit standing of houses seeking credit. 
 
 The interest charged by banks is relatively low, as the 
 terms are for short periods and as great caution is 
 
 exercised to avoid risks. This means also 
 
 that banks give very low rates for the money 
 
 they borrow. 
 
 Interest 
 rates. 
 
 PUBLIC CREDIT 
 
 Public credit has no immediate relation to mercantile 
 
 credit, and only a brief consideration will be 
 
 ,. 1C , given to it. It is the power of government — 
 credit de- . . . 
 
 scribed. national, state, or lesser political division — 
 
 to secure funds in exchange for its promise 
 
 to pay in the future. Its chief instrument of credit is a
 
 KINDS OF CREDIT 47 
 
 government bond, which is a promissory note of the gov- 
 ernment sold to purchasers; or, in other words, it is ex- 
 changed by the government for funds advanced by indi- 
 viduals. In some instances a special class of property, or 
 the income from specified property, is pledged to pay the 
 loan, while in other cases the lender depends exclusively 
 on the faith of the government to pay the obligation. 
 These loans are the typical long-time loans, and the 
 interest rates are low where the governments are 
 stable. Where governments are insecure, the interest 
 rates are higher, varying with the insecurity of the 
 government. 
 
 Another type of the public debt is the floating loan, 
 which is frequently a forced loan. In time of war, when 
 armies are in the field, it is often necessary to 
 secure loans of provisions and equipment from . oa ing 
 the section of the country over which the army 
 passes. Certificates of indebtedness are issued by army 
 officials which are exchanged for these things, and are 
 usually redeemed at the close of the war. 
 
 At times governments resort to their promissory notes, 
 or government paper money, which are given general cir- 
 culation when governments pay their obliga- 
 tions. These are convertible or inconvertible, 
 
 » money. 
 
 depending on whether the government pledges 
 anything to redeem them or not. Lesser political divi- 
 sions are usually denied the privilege of paying their 
 debts by issuing paper money. The propriety of resort- 
 ing to this method of borrowing by governments is not a 
 subject for consideration here.
 
 48 MERCANTILE CREDIT 
 
 The chief causes of public debts are war expenditures, 
 
 and public improvements. Until recently governments 
 
 borrowed chiefly to defray the expenses of war. 
 
 Causes of n ow these are declining in importance in 
 
 public . - 
 
 debts. comparison with expenditures for industrial 
 
 improvements and other public improvements 
 
 of a constructive character. 
 
 INVESTMENT CREDIT 
 
 The fourth division, investment credit, or capital 
 credit, as it is sometimes called, is represented by real 
 What in- es tate investments consisting of bonds and 
 vestment mortgages, bonds and shares in public service 
 credit in- utilities, bonds and shares in general industrial 
 securities, and shares in banking and in trust 
 companies. Investment or capital credit is a long-time 
 loan. In investment credit, the corporation or business 
 receives funds from individual investors in exchange for a 
 title to property. The term investment credit expresses 
 the point of view of the lender, as loans are made purely 
 for purposes of investment. An investigation of invest- 
 ment credit would take us into the entire field of the 
 money market and of speculation, but our purpose is 
 simply to state what it is, explain its nature and its 
 relation to mercantile credit. 
 
 Until a few decades ago, capital was invested in 
 business enterprises by those who assumed directly the 
 management of business with the hope of making good 
 profits on their successful management. Since then,
 
 KINDS OF CREDIT 49 
 
 with the development of corporations, and especially 
 
 those on a large scale, a great deal of the capital invested 
 
 in business is contributed by those who are _ . 
 
 Business 
 
 not active participants in business, but who rganiza- 
 
 advance the capital with the hope of making tion and 
 
 only fair profits. This so-called general in- ir i vestment 
 
 . . ... ,1 credit, 
 
 vestor is increasing in importance now, and by 
 
 all odds the largest portion of capital is invested by men 
 of this class. In the single entrepreneur system large- 
 scale production with its advantages was impossible. 
 With the partnership organization, the business unit could 
 command a larger amount of capital, but disadvantages 
 of the partnership organization prevented it from becom- 
 ing the prevailing form of organization for large undertak- 
 ings. The corporation became the most advantageous 
 institution for large units of production. l It could attract 
 capital from a great variety of investors because (1) they 
 are not responsible for the obligations of the corporation 
 beyond the amount of their subscribed stock, (2) they can 
 buy shares in small amounts, and (3) they can withdraw 
 from the corporation at any time by selling their stock at 
 its market value. Moreover, the corporation has an 
 advantage from the point of view of organization, as 
 it is relatively stable and permanent and it can concen- 
 trate its executive management in a few very competent 
 men. 
 
 The railroad business in the United States which rep- 
 resented the first great demand for large scale production 
 and consequently for the corporation form of organiza- 
 
 1 See Ely: Outlines of Economics, p. 148.
 
 50 MERCANTILE CREDIT 
 
 tion, finds the corporation in almost exclusive control 
 to-day. Corporations produce nearly three-fourths the 
 Extent of total product in manufacturing industry and 
 invest- an increasing number of mercantile establish- 
 ment ments are corporations. Nearly all banks, 
 credit. . -, , 
 
 insurance and trust companies are corpora- 
 tions. Nearly all municipal utilities under private con- 
 trol, are also corporations. 
 
 The property of corporations is in the form of stocks 
 and bonds. Bonds give their holders a preferred claim 
 
 to the assets of the company and the interest 
 
 Stocks 
 
 ... on them must be paid regularly. There are 
 
 several kinds of bonds depending upon the 
 character of the guarantee of the funds loaned. The 
 stock is divided into common and preferred shares, 
 although many corporations do not issue the latter. 
 The preferred stock when issued has usually a prior claim 
 over the common both to assets of the business and to 
 earnings, and in such cases dividends cannot be declared 
 until the holders of preferred stock are paid their interest 
 in full. A further discussion of the investments in cor- 
 porations is not warranted by the limits of the present 
 chapter. 
 
 From the point of view of the investor, investment 
 credit and public credit are identical. Both are long 
 Invest- time loans and upon each is realized usually 
 ment and a low rate of interest. Both appeal to practi- 
 public cally the same class of investors. But from 
 
 the standpoint of the agency enjoying the 
 credit the two kinds are different. In public credit the
 
 KINDS OF CREDIT 51 
 
 lender buys bonds when he believes that the government 
 is willing to pay, and has resources sufficient to enable 
 it to pay its obligations. In capital credit the investor 
 buys bonds or stocks when he believes that the business 
 is sufficiently profitable to enable it to pay its debts. 
 Because the securities of many kinds of capital credit 
 fluctuate in value, many investors are attracted to this 
 class of property by the hope of its appreciation in 
 value. 
 
 Mercantile credit is radically different from invest- 
 ment credit. As the former is a short-time loan, the rate 
 
 of interest is usually high, the loan is made _ 
 
 J ° Invest- 
 
 not as an investment but because the sale of me nt and 
 
 goods upon which the profits of the merchant mercan- 
 
 are made, requires the loan. Upon the other fale 
 
 credit, 
 hand, the power to command credit by insti- 
 tutions in investment credit and in mercantile credit 
 arises from a very different set of forces. 
 
 Ordinarily investments in real estate mortgages are 
 the safest long-time loans of investment credit. The 
 investments of building and loan associations 
 are in this class of property, and as the loans i nves t_ 
 are for considerably less than the value of the ment 
 
 property, they are considered safe. The secu- credlt 
 
 . . . , i ■ -i • compared, 
 
 rities in banks, trust companies, and insurance 
 
 companies are considered a safe investment, but of 
 course here much depends upon the character of the in- 
 stitution. Of the investments in public service utilities, 
 those in railway stocks and bonds are perhaps now the 
 safest. However, in the early history of railway develop-
 
 52 MERCANTILE CREDIT 
 
 mentin this country these were considered an unsafe in* 
 vestment. The investments in municipal utilities such as 
 the securities of street railways, telephone, waterworks, 
 gas and electric lighting companies are more or less pre- 
 carious, as it is difficult to find out the values of the prop- 
 erty of the companies, the capacity of the companies to 
 carry on a successful business, and ultimately the ability 
 of the companies to pay at maturity. Stocks and bonds 
 in these companies fluctuate frequently, and individuals 
 who make such loans take chances. More uncertain 
 than loans to public service companies are loans to 
 general industrial enterprises. The status of the com- 
 panies engaged in industrial enterprises is difficult to 
 discover, and on that account this sort of investment or 
 loan is more precarious. The so-called industrial secu- 
 rities as investments have arisen to importance in recent 
 years, as may be seen from the fact that nearly one-half 
 the property listed on the New York Stock Exchange 
 is of this character. 
 
 The funds to carry on the above-named enterprises 
 come from a variety of sources, and each sort of an in- 
 vestment has its respective interests. Those who are 
 required to make safe investments at low rates will seek 
 of course the safer investments. There is an opportun- 
 ity, however, in investment credit for people of varying 
 grades of speculating instincts. The chief support of 
 these investments is coming now from business men who 
 have funds to invest and do not care to manage business 
 directly themselves. Such investors canvass the money 
 market carefully, and distribute their investments in
 
 MERCANTILE CREDIT 53 
 
 such a way as to yield a fair profit without taking too 
 great a risk. These investors expect a lower rate of 
 interest than when they manage a business themselves 
 in which they have invested all of their wealth and lose 
 all they have in event of failure.
 
 CHAPTER IV 
 
 MERCANTILE CREDIT 
 
 Mercantile credit is the power to secure goods for 
 purposes of exchange in return for a valuable considera- 
 tion promised in the future. A sale of goods 
 Definition on ^ me j g & mercan til e loan. Mercantile 
 ofmercan- ,..,,, ,. .,■ 
 
 tile credit. creo -it includes the credit given to facilitate 
 
 the distribution of products from the time 
 they are in a raw state until they pass into the possession 
 of the retailer. In this discussion the selling of goods 
 on time by the retailer is not considered a mercantile 
 loan as the goods in this instance are usually purchased 
 for purposes of consumption, and the credit given is not 
 for the purpose of facilitating the transfer of goods. 
 However, this personal or consumption credit is closely 
 related to mercantile credit as the soundness of the latter 
 depends in large measure upon care exercised in giving 
 personal or consumption credit. 
 
 From production to consumption goods pass through 
 the following hands: the grower or original producer, 
 
 the selling agent or broker, the manufacturer, 
 
 Classes of the wholesaler, the jobber, and the retailer. 
 
 middle 
 
 men. When goods are imported the importer is a 
 
 distributer between the manufacturer and 
 
 wholesaler. Of course the great bulk of merchandise is 
 
 not now handled by all these middle men. However, 
 
 54
 
 MERCANTILE CREDIT 55 
 
 some products even now are handled by all of them and 
 of those that are not handled by all these middle men, 
 some are handled by some of them and others by other 
 middle men. The tendency now in reducing the cost of 
 marketing goods is to eliminate classes of middle men 
 with the result that the amount of credit given to 
 market goods is lessened. 
 
 The grower or producer of raw materials is frequently 
 compelled to resort to a loan to cover the period inter- 
 vening between the production of goods and Who re _ 
 the time they are sold or when pay is received ceive mer- 
 for them. In the sale of such products as cantile 
 grain, cotton, etc., credit is given as a rule and 
 both the farmer and the commission man receive ad- 
 vances before funds are received from the sale of goods. 
 The manufacturer may buy his raw material on time 
 in which case he receives a mercantile loan. Again after 
 his goods are manufactured it may be necessary for him 
 to wait a limited period after they are sold before he re- 
 ceives pay for them. The importers, the wholesalers, 
 the jobbers, the commission merchants, each in turn 
 often buy goods on time thus receiving mercantile loans. 
 
 Merchandise in the hands of the manufacturer or the 
 mercantile factors is capital, and when it is 
 parted with for a promise to pay funds in ence f 
 the future, capital has been loaned in as true mercan- 
 a sense as when funds pass over the counters tile u P° n 
 of a bank in exchange for the promise to an , ns 
 pay in the future. The commercial world 
 is so organized that the majority of the distribut-
 
 56 MERCANTILE CREDIT 
 
 ing factors require the advancement of funds to help 
 bear the expenses of handling and marketing goods, and 
 to cover the time until payment is received for goods 
 sold. The manufacturer sells goods to the wholesaler 
 on thirty, sixty, or ninety days time, and accepts the 
 note of the latter for the amount of the sale or writes 
 a bill against him. This instrument is then frequently 
 taken to the manufacturer's banker and is discounted. 
 The wholesaler may sell to the retailer under the above- 
 named conditions, and may also have his banker dis- 
 count the instrument of credit. In each of the above 
 instances banking institutions are called upon to advance 
 funds to support mercantile loans, and at these points 
 banking credit supplements and supports mercantile 
 credit. 
 
 The most important change introduced by the 
 modern methods of buying and selling is the system 
 Mercan- adopted by which credit is given. In the 
 tile credit first half of the nineteenth century, in the 
 sixty United States, when the jobbers and manu- 
 
 years ago. f ac ^ urers were visited by retailers twice a 
 year to purchase goods, they could understand through a 
 personal acquaintance of the buyer the nature of the loan 
 given. Then the jobbers and manufacturers were not 
 doing business on so large a scale as now, the buyers were 
 fewer in number and the sales were much less frequent. 
 The buyers were compelled to travel long distances over 
 inferior highways or by slow boats on rivers and canals, 
 and as they purchased but twice a year they were com- 
 pelled to buy large stocks of goods much of which was
 
 MERCANTILE CREDIT 57 
 
 unsalable as it was difficult to anticipate a season's 
 demands especially when the community was a change" 
 able one. Goods were purchased on time, the buyer 
 giving his note for the purchase which was paid in six or 
 eight months when he returned for his next season's pur- 
 chase. Long time credits were the custom then owing 
 to the industrial conditions that could not be avoided 
 which confronted the buyers. Then as now, manufact- 
 urers and jobbers sold their customers' notes to their 
 bankers. In foreign trade long terms of credit also pre- 
 vailed in periods of slow vessels and of slow methods 
 of communication between trading centers. 
 
 The introduction and wide extension of the railway 
 and the introduction of better means of communication 
 by mail service, the telegraph, and telephone 
 have revolutionized the methods of market- changes in 
 ing goods and also the mercantile credit granting 
 system. Whereas before the retailer had to r ^ eTcan - 
 make long trips to the market and have his 
 goods shipped at great hazard over rough roads, the bet- 
 ter means of communication and transportation have 
 reversed the situation as it is considered more advanta- 
 geous to have the manufacturer and the jobber sell the 
 buyer and bear the risks of conveying the goods to him. 
 At present the instances are exceptional where the buyer 
 and seller come together. Goods are sold by traveling 
 salesmen who visit the various buying localities, using 
 samples to make their sales, or else they are purchased 
 by the buyers through correspondence and not by visit- 
 ing the houses of manufacturers and jobbers as formerly.
 
 58 MERCANTILE CREDIT 
 
 The long term of credit of from six to twelve months 
 has given way to the short time loan of from thirty to 
 ninety days. Mercantile agencies have developed to 
 make known the credit standing of the buyer to the seller 
 and the latter no longer depends upon a personal inter- 
 view with the former to judge of his credit standing. In 
 the large jobbing and manufacturing institutions a de- 
 partment has been developed whose special function is 
 to investigate the standing and character of those seek- 
 ing credit and to collect time accounts. In the smaller 
 institutions not of sufficient size to warrant the estab- 
 lishment of a separate department, this function is, 
 nevertheless, carefully performed. 
 
 Our present credit system grew out of distinctly 
 modern conditions. Prior to the 19th century inability 
 
 to pay a debt was frequently a criminal 
 - offense and the offender was thrown in prison, 
 
 which The state of Georgia was organized by a col- 
 
 credit was o n y of delinquent debtors who were given 
 2 iven their liberty if they would leave England. 
 
 Virginia and other states were largely 
 settled by indentured servants — those who became, in a 
 sense, slaves to their creditors until the obligations of 
 indebtedness were removed. The farther we go back in 
 history the more rigid we find the laws against debtors. 
 Inability to meet an obligation as it matured was con- 
 sidered one of the gravest of offenses. The laws and 
 practices of the early maritime cities of Italy, Venice 
 and Genoa, bear evidence of the power of the creditor 
 class. The Shylocks were not merciful. So long as
 
 MERCANTILE CREDIT 59 
 
 these harsh measures prevailed the giving of credit re- 
 quired but little judgment, and the development of a 
 credit system was unnecessary. The risk was wholly 
 the debtor's of assuming the responsibility of meeting 
 an obligation at a certain time. 
 
 In our present industrial era the harsh treatment 
 accorded to the debtors of two or three centuries ago 
 
 would be absolutely impossible. Present 
 
 The 
 conditions make the debtor and creditor in a granting 
 
 sense partners in enterprise. Credit is given of credit 
 
 not as a favor to the debtor but with a view at 
 
 ore sent 
 to profit. The old idea that the debtor owed 
 
 the creditor in law and in fact is passing away. The 
 creditor investigates the character, ability, and financial 
 standing of the debtor, the nature of the enterprise in 
 which the capital is to be invested, and calculates on the 
 likelihood of the debtor's being able to meet his obliga- 
 tions at maturity. He thus becomes, in a sense, his 
 partner in the business and in event of failure willingly 
 accepts a cancellation of a portion of the debt, providing 
 that there has been no fraudulent conversion of the 
 assets. 
 
 The complicated organization of modern industry 
 requires credit giving. Business could scarcely be carried 
 on for a day without it. The element of chance seems 
 to play a much more conspicuous role than when busi- 
 ness organization was simple. The spirit of venture 
 finds no more enticing field than in some departments 
 of business. The success, too, of many of our great 
 captains of industry may be traced to the taking of great
 
 60 MERCANTILE CREDIT 
 
 risks. This element of risk is responsible to a large ex- 
 tent for our industrial advancement. It is thus easy to 
 see why credit giving should, in the nature of things, be 
 considered a necessary part of business transactions and 
 why the debtor who failed honestly should be considered 
 simply an unfortunate investor. 
 
 The rise of corporations which take the place of 
 partnerships introduces another change which has its 
 reflex influence on credits. As long as the 
 tions in- partnership remains family honor and family 
 fluence pride count for much in avoiding the bank- 
 the giving rU pt C y court. In corporations the identity 
 and importance of the individual are not con- 
 spicuous. "Stockholders and managers of corporations 
 frequently screen their credit and honor behind joint 
 stock companies, and in event of failure often pose as 
 unfortunate investors in disastrous enterprises." Hence, 
 with this change is introduced another reason for scruti- 
 nizing carefully the standing of concerns seeking credit. 
 
 It is extremely important, since credit plays such a 
 conspicuous role in industrial life, that it should be on a 
 high plane. To this end the reporting agencies have 
 been developed, credit and business men's associations 
 have been organized, and the government has thrown 
 about the creditor certain safeguards — all to make it as 
 difficult as possible for the debtor to be dishonest, and to 
 minimize losses due to mistakes in lending. 
 
 As soon as business was organized, so that it was no 
 longer possible for the seller to meet the buyer face to 
 face and to learn the nature of his business standing
 
 MERCANTILE CREDIT 61 
 
 directly from him, agencies were organized to investi- 
 gate the standing of those seeking credit. Now they are 
 absolutely essential to credit giving. No 
 
 merchant would think of granting credit with- bources ° 
 
 , credit in- 
 
 out investigating the standing of the buyer formation. 
 
 as reported by the agencies. All dealers are 
 consulted once or twice a year by the representatives 
 of the commercial agencies for desired information for 
 the purpose of establishing their rating, and if the 
 information is unsatisfactory, others are consulted. 
 When goods are sold by a traveling salesman to 
 some new firm, the house, before shipment, investigates 
 the standing of the firm as reported by Bradstreet or 
 Dun or other agency. If the report is not altogether 
 satisfactory the attorney of the company in the locality 
 investigates his standing. The advice of the banking 
 institutions with whom the debtor deals is always con- 
 sidered important. Other methods which will be dis- 
 cussed later are used. 
 
 Some time ago 500 letters were sent to a nearly even 
 number of manufacturers, jobbers and retailers for the 
 purpose of learning the practices relative to discounting, 
 credit giving, and related subjects in different parts of the 
 country. Over 30 per cent, of these people replied and 
 upon their communications the following facts are based. 
 The relations between the manufacturer and jobber 
 are simple. Jobbers who handle the lines of any 
 manufacturer are comparatively few, and it is easy 
 to learn their standing. When the manufacturer 
 sells to the retailer his interests in giving credit are
 
 62 MERCANTILE CREDIT 
 
 identical with those of the jobber whose dealings are 
 with the retailer. 
 
 Payment within ten days is usually considered cash. 
 
 Beyond this, payments range from twenty days' time to 
 
 over a year. One and two months' time is 
 
 ,. usually given on groceries. On tea, and 
 
 coffee in bulk, three and four months are often 
 allowed. On dry goods and textiles generally the average 
 term of credit is longer. The longest term of credit is 
 given on agricultural machinery, and the payments are 
 often arranged to be made in installments. 
 
 The comparative terms of credit on the different lines 
 of goods have an economic basis. No reason exists for 
 What de- lending credit beyond the time when the 
 termines buyer sells his goods. Mercantile credit is given 
 the term primarily to enable the buyer to pay for goods 
 
 ere 1 . f Tom foe proceeds of their sale. As groceries 
 may be turned in one or two months, the ordinary term 
 of credit on them is from thirty to sixty days. It gen- 
 erally requires a longer period for the sale of textiles and 
 a longer term of credit is consequently given. Farm im- 
 plements are sold by retailers to buyers who usually need 
 several months in which to pay for them, and these pay- 
 ments are usually arranged to come at times when crops 
 are sold. In the case of some other commodities the 
 urgency is not so great for granting credit to the con- 
 sumer, wherefore, the retailer is inclined to permit his 
 credit relations with the consumer to be determined 
 not by the consumer but by the manufacturer and 
 jobber.
 
 MERCANTILE CREDIT 63 
 
 Various methods are employed by manufacturers and 
 
 jobbers to learn the standing of the retailer. All of 
 
 them use the information furnished by the 
 
 leading commercial agencies. Aside from this p° urces of 
 
 lnforma- 
 their methods vary. In giving credit to new tion> 
 
 customers some require a definite statement 
 
 from them of their financial standing. Others learn what 
 
 they can from their traveling salesmen. Still others find 
 
 out what they can from the local bankers and from other 
 
 houses with whom the debtor has dealings. Then, too, 
 
 manufacturers and jobbers are often organized in credit 
 
 men's associations which are more or less clearing-houses 
 
 of information with reference to the credit standing of 
 
 their customers. So in a variety of ways the financial 
 
 ability and character of the retailer are learned. 
 
 The rate of discount for cash payments varies as 
 widely as the term of credit. It varies from 6 per cent, 
 to 72 per cent, a year, while the average an- 
 nual rate is between 12 and 18 per cent. In The rate 
 fixing discounts for cash, manufacturers and coun t. 
 jobbers may wield a ready weapon to force cash 
 payments. As a rule the longer the term of credit, the 
 higher is the rate of discount, because the more uncertain 
 the payment of the obligation. Discounts on groceries 
 average about 12 per cent, a year, on textiles about 18 
 per cent., while on certain kinds of jewelry the rate is as 
 high as 72 per cent, a year. 
 
 High rates are levied to cover losses by failures. 
 When conditions are normal, manufacturers and jobbers 
 know approximately what losses they wi,ll sustain through
 
 64 MERCANTILE CREDIT 
 
 failures, and therefore, adjust interest charges to cover 
 
 these losses. Those who do not fail are compelled to pay 
 
 the debts of those who fail. If we consider 
 
 Interest ra tes natural in which the excess above the 
 
 rates cover 
 
 losses. general rates prevailing on money loans pay 
 
 the losses of bankrupts, it often happens that 
 the natural rate deviates from the customary rates. 
 There is frequently a tendency to cling to cash discount 
 rates when the excess of these rates above the prevailing 
 ones more than pays the losses through bankruptcies. 
 The manufacturer and jobber are often interested on this 
 account in having the debtor take the full term of credit 
 rather than pay cash. 
 
 Another reason for the divergence between the so- 
 called customary and natural rates lies in the character 
 
 of the merchant's business. From the very 
 Why rates 
 on mer- nature of his business he has usually but a 
 
 cantile limited amount of property upon which he can 
 
 loans are secure advances of capital. The value of his 
 
 goods, relatively speaking, is a high percentage 
 
 of the value of the plant. So the scope of his business 
 
 as a merchant is limited directly by the extent to which 
 
 he goes into business loans. On this account discount 
 
 rates may be excessively high to compel purchasers to 
 
 resort to the regular institutions of loan. 
 
 It seems apparent that it is to the interest of the 
 
 retailer to cash all his bills with money borrowed from 
 
 banks. Many do this, and consequently save from 6 to 
 
 12 per cent, a year on purchases. The lack of capital 
 
 of many retailers and the difficulties in the way of
 
 MERCANTILE CREDIT 65 
 
 borrowing at banks, exclude them from this opportunity. 
 To put the matter in another way, the ease with which 
 commercial loans can be secured as against the difficulty 
 of securing bank loans is responsible for the high rates 
 of the former and the low rates of the latter. Banks 
 loan only on good collateral, on personal security, and to 
 those who have excellent credit standing. The retailer's 
 purchases are comparatively frequent, so that the diffi- 
 culties in the way of obtaining good security closes this 
 route of escape from high interest charges on capital 
 borrowed. There are, however, other merchants whose 
 credit at bank is good and who habitually allow the 
 term of credit to expire before payments are made. In 
 doing so considerable is lost by not appreciating the 
 difference between the bank rates of interest and the rates 
 charged by lenders of merchandise. 
 
 The credit instruments most commonly used in mer- 
 cantile credit are bills of exchange, promissory notes, and 
 book accounts. In the first instance the 
 
 seller of goods may write a draft ordering the . 
 
 » •> _ struments. 
 
 buyer to pay the amount of the bill a given 
 number of days after sight. If the latter accepts it, 
 the seller of the merchandise after endorsing the bill 
 may sell it at once to his banker as double-name paper, 
 or to some one else in the settling of his bills. The 
 promissory note may be used in practically the same 
 way except that the purchaser of the goods signs a 
 promissory nolo to pay the amount of the bill in a given 
 time. In this case as in the former one, after the seller 
 of the goods endorses the note it may be sold to his
 
 66 MERCANTILE CREDIT 
 
 banker or to some one else, usually one tc whom he 
 owes an account, as double-name paper. The use of 
 such credit instruments as bills of exchange and promis- 
 sory notes makes it possible for the seller of goods to 
 secure funds at once upon credit instruments which are 
 an evidence of a loan of thirty, sixty, or ninety days. 
 Moreover they are often used as mediums of exchange 
 cancelling many obligations and thus dispensing with 
 the need for money. 
 
 Notes or bills based upon mercantile loans have always 
 been considered good bankable paper, and in many com- 
 munities the bulk of bank loans are based 
 
 . , upon these credit instruments. As mercan- 
 
 brokers. ^ 
 
 tile loans are always connected with a sale of 
 goods it is not possible for merchants to maintain as high 
 standards of credit while selling goods as may be main- 
 tained by banking institutions whose business is de- 
 voted almost exclusively to the making of loans. The 
 diverse conditions under which mercantile credit was 
 given and the lack of system on the part of merchants in 
 giving credit, made it impossible for banks to handle 
 all classes of commercial paper offered to them for sale. 
 Consequently there has developed a specialized class 
 known as note brokers to facilitate the sale of commer- 
 cial paper. The note brokers made a study of the value 
 of commercial paper a specialty, and consequently be- 
 came experts in this department of credit. Acting as 
 middle men, they purchased commercial paper from 
 business houses and sold it to banking institutions. 
 Where banks were unwilling to accept single-name paper,
 
 MERCANTILE CREDIT 67 
 
 note brokers often either act as endorsers or else secure 
 endorsers for these notes. It frequently happens at 
 present that no bank will make a single loan in such 
 amounts as large mercantile houses desire in order to 
 make a cash purchase. In such instances the mercantile 
 house will call on a note broker who executes several 
 notes and sells them to a number of financial concerns. 
 While the note broker came into existence when mercan- 
 tile credit was given for from six to twelve months he has 
 come to be an important factor in mercantile life with 
 the changed organization of business. 
 
 The third form of mercantile credit is the book ac- 
 count which is frequently used in the case of sales be- 
 tween merchants. When a debt is due the 
 account is usually settled by a check upon the 
 purchaser's bank. Book accounts are taking 
 the place of promissory notes and commercial drafts but 
 they are not as serviceable to sellers of merchandise in 
 enabling them to realize at once upon accounts where 
 time is given for the payment of bills. The promissory 
 note and the bill of exchange can be sold at once. The 
 seller of goods may sell his book account or borrow upon 
 it, but it is more difficult to sell it or borrow upon it 
 than it is to sell either the bill of exchange or a promis- 
 sory note. When either of the latter is sold its genuine- 
 ness is attested by the signature of the maker of the 
 paper and when both the note and bill are endorsed, as 
 is usually the case, two parties are pledged to the pay- 
 ment of the instrument. Upon the other hand the pur- 
 chaser or assignee of the book account must depend for
 
 68 MERCANTILE CREDIT 
 
 its validity on the representation of the man who sells it 
 or who borrows upon it, and on this account the latter 
 must be well known to the former. 
 
 A regular system has developed of lending on book 
 accounts, and in some instances commercial banks main- 
 tain separate departments to pass judgment upon the 
 value of this class of accounts, while in other instances 
 brokerage houses, or commission houses, have developed 
 to negotiate loans upon book accounts. Prendergast 
 claims that "it is probable that this method found its 
 inception in a practice, introduced some years ago, where- 
 by a house having no other form of collateral to offer its 
 bank, and being much in need of money, induced its 
 bank to accept an assignment of certain accounts. Ad- 
 vances were made by the bank to an agreed percentage 
 of the gross amount of the accounts assigned." 1 
 
 There are three methods by which the man who sells 
 merchandise on time may realize at once on his book 
 Methods accounts: 1. He may sell his book account 
 of lending outright, in which case the purchaser assumes 
 on book a ii risks and charges high interest rates and 
 also a bonus proportioned to the degree of the 
 risk. 2. The seller of merchandise may assign his book 
 account and borrow upon it up to a certain per cent, of 
 the value of the account. The assignor in this case per- 
 mits the borrower to collect from the funds assigned, and, 
 in place of these, others may be assigned to the bank to 
 keep up the ratio agreed upon. Of course in this case, 
 if the assignor should fail or if for any reason the credit 
 
 1 Credit and Its Uses, p. 115.
 
 MERCANTILE CREDIT 69 
 
 relations between the borrower and lender should be 
 broken, the assignee would proceed at once to collect 
 the assigned accounts. 3. In another case the assignee 
 may advance funds to a certain percentage of the value 
 of the account and charge a heavy interest rate and a 
 bonus for the service rendered. The funds obtained 
 by the borrower in this instance are secured under more 
 unfavorable conditions than in the former one. In most 
 of the latter cases a higher interest rate is exacted than in 
 the former case, and, as the lending institution collects the 
 accounts, the selling house suffers somewhat in its repu- 
 tation, as its customers are made aware of the fact that 
 its accounts are assigned and that it does not enjoy a 
 high grade of credit; whereas in the method described in 
 (2), the borrower collects his own accounts and his 
 customers have no knowledge of the assignment of 
 accounts. 
 
 In still another case where book accounts are as- 
 signed, the assignee may proceed at once to collect the 
 accounts. 
 
 Commission houses have developed in recent years to 
 
 deal exclusively in book accounts; and, as they advance 
 
 funds and discount accounts, they are in this 
 
 respect bankers. Their numbers in large sion 
 
 commercial centers attest the profitableness houses 
 
 of the business in which they are engaged. deal in 
 
 Many of them have back of them wealthy 
 
 J accounts. 
 
 banks and trust companies which find in the 
 advancement of funds to these institutions, a lucrative 
 field of investment.
 
 70 MERCANTILE CREDIT 
 
 The rates charged are a further evidence of the differ- 
 ence in rates between regular banking loans and mercan- 
 tile loans. 
 
 An important change has been introduced in the sys- 
 tem of credit giving by the practice of dating ahead. 
 An impression prevails that dating ahead 
 
 * m ? and credit giving are the same. On the con- 
 trary, they are distinct, although directly 
 related. When we depended upon foreign countries for 
 the bulk of our manufactured goods, it was necessary 
 for the importer and jobber to carry all lines in stock 
 which were sold to the retailer. When the American 
 manufacturers began to supply the consumers it was 
 learned that there would be a clear advantage in selling 
 all commodities, not staples, before they were produced. 
 Such commodities as sugar, flour, and the cruder kind of 
 textiles can be kept in stock, as the demand for them is 
 comparatively regular. But changes in fashion and differ- 
 ence in kind of commodity with the consequent uncer- 
 tainty of demand, makes the production in advance of 
 all products* not of the staple type a hazardous enter- 
 prise, and producers are unwilling to take the risk. 
 
 The method of procedure in dating ahead is as follows: 
 
 The manufacturer or wholesaler goes to the retailer in 
 
 the fall and takes orders for spring and summer 
 
 e od of g 00C i s# After the orders are taken the goods 
 
 ahead. are produced. The goods are dated, we will 
 
 say, February 1, but the manufacturer ships 
 
 the goods to the retailer as soon as they are manufactured. 
 
 If the goods are paid for within ten days of the first of
 
 MERCANTILE CREDIT 71 
 
 February, then payment is usually considered cash, and 
 all payments are dated from February 1. But the re- 
 tailer may have the goods in his possession before the first 
 of the month and some of them often as long as six weeks 
 or two months prior to the time the goods are dated. 
 In a sense, dating ahead prolongs the term of credit by 
 the interval between the shipment and dating of the 
 goods. The keeping of goods in stock compels retailers 
 to increase their insurance account. In all cases where 
 goods are sold before the time of dating, an advantage 
 is gained. However, in such cases competition between 
 dealers often results in extending credit to consumers. 
 So the system of dating ahead is not only an extension of 
 credit itself but it indirectly results in the prolongation 
 of the term of credit. 
 
 Mr. Prendergast, in Credit and Its Uses, gives a 
 somewhat different interpretation of dating. The dis- 
 continuance of 'long time' such as four, six, and eight 
 months, has had the effect of introducing the feature of 
 'dating' into commercial transactions and credit. A 
 'dating' of thirty days or sixty days indicates that the 
 term of credit, whatever it may be, does not begin to date 
 until the expiration of the term of dating. For instance, 
 a bill sold and charged on January 1, 1906, with a dating 
 of sixty days — terms, 2 per cent, ten days and net thirty 
 days — is not due until April 1, as the dating does not 
 expire until March 1, and the terms being thirty days 
 carry it to April 1. The purchaser has the option of pay- 
 ing it whenever he chooses, but payment cannot be in- 
 sisted upon until April 1. A merchant purchasing a bill
 
 72 MERCANTILE CREDIT 
 
 under the foregoing terms would, if he were in a position to 
 do so, pay the bill at the end of ten days (January 10), 
 deduct his 2 per cent, discount, and also deduct interest 
 at the rate of 6 per cent, per annum for the unexpired 
 term of sixty days (the dating), of which time he has not 
 availed himself." 
 
 This author then assigns other reasons for dating. 
 Whether "dating" grew out of an endeavor to shorten 
 the term of credit, as it undoubtedly did, in many cases, 
 or has other reasons for its existence its effect is always the 
 same, it really extends the term of credit. 
 
 Aside from prolonging the term of credit, dating ahead 
 
 increases credit giving. When the goods are dated 
 
 _ . ahead they cannot be sold C. O. D. Under 
 
 Dating J . . , , . 
 
 ahead in- * ms s y s * em it is not always within the power 
 
 creases of the seller to dictate the terms of payment, 
 credit When the goods are not shipped C. O. D., if 
 
 the buyer should refuse to pay within ten days, 
 the term of grace usually allowed for cash payments, the 
 only recourse of the creditor is either to refuse to have 
 further dealings with the buyer or to institute proceedings 
 to collect the account. Injury to the buyer's standing by 
 recourse to either of these methods may often be ade- 
 quate to force him to abide strictly by his contract. 
 The point of interest in this connection is that the 
 system itself practically provides for credit giving. 
 
 The system has also another bearing on credit. The 
 manufacturer is relieved of the necessity of taking 
 chances on production. As goods are shipped as soon as 
 produced, he is also relieved of the necessity of carrying
 
 MERCANTILE CREDIT 73 
 
 insurance on the stock. However, these advantages may 
 be counteracted to a certain extent by interest accounts 
 on long period datings. As soon as dating Advan- 
 ahead came to be generally practised, competi- tages of 
 tion extended the period of the dating. This datin S 
 meant for the producer a prolongation of the t0 manu _ 
 interval between production and sale, if we facturers 
 consider the sale for practical purposes to and 
 take place when the goods are dated. The J0 
 traveling salesman is out taking orders, and the goods 
 are produced long before they are paid for. It matters 
 not for our purpose whether we consider this an increase 
 of interest account of capital expended, or an extension 
 of credit. The result is the same. In dating ahead the 
 producer has the advantage of regularity, certainty and 
 avoidance of risk in an extension of credit. 
 
 In dating ahead the risk is transferred from the manu- 
 facturer and wholesaler to the retailer. In the effect 
 of the system on the mind of the retailer we i n fl uen ce 
 find another influence tending to increase both of dating 
 credit transactions and the number of failures, ahead on 
 
 rptflilpr 
 
 The longer you postpone the time of payment 
 the more reckless and indifferent people are in giving 
 orders. Purchasing unnecessary and unsalable goods 
 results in an enforced extension of the term of credit. 
 Failures to a very large extent result from having in 
 stock unsalable goods. 
 
 Since the ending of the crisis in the United States 
 fifteen years ago there has been some agitation favoring 
 a shortening of the term of credit and the abandonment
 
 74 MERCANTILE CREDIT 
 
 of commercial credit wherever possible. The organiza- 
 tion of the business community practically forbids mak- 
 ing much headway in the latter movement. However, 
 much advancement has been made in the last ten years 
 in systematizing the methods of giving credit and in 
 minimizing losses resulting from credit giving.
 
 CHAPTER V 
 PERSONAL CREDIT 
 
 Personal or individual credit is the power of an 
 individual to secure something of value in the present 
 for a promise to pay in the future. It in- Definition 
 eludes credit used to secure production as well of 
 as consumption goods, and the credit of personal 
 partnerships as well as of individuals. Its 
 most common kind to-day is the credit secured at the 
 retail store; that is, the power to secure goods in exchange 
 for a promise to pay in the future. It is also used to 
 secure medical, legal and other expert service, and 
 to borrow money which may be used for a variety of 
 purposes, chiefly of an individual or personal character. 
 Because the things procured by personal credit are used 
 largely for individual ends, or for purposes of consump- 
 tion, it is sometimes known as consumptive credit. In 
 this discussion personal credit is given a broader meaning. 
 
 It is sometimes difficult to state at what point mercan- 
 tile credit ends and personal credit begins. 
 The purchasing of goods on time for purposes and mer _ 
 of final consumption, from the point of view cantile 
 of the buyer is clearly a case of individual credit 
 credit. Should the sale of goods on time by " 
 
 the retailer be placed in a different category 
 than the sale of goods on time by either the manufacturer 
 
 75
 
 76 MERCANTILE CREDIT 
 
 or the wholesaler? When the manufacturer sells to the 
 wholesaler on time, the latter often desires time in order 
 that he may pay for the goods from the proceeds of their 
 sale. Credit is granted by the manufacturer and re- 
 quested by the wholesaler to facilitate the sale of goods. 
 In this sense the function rendered by credit is quasi- 
 public if we assume that a social service is furnished in 
 the distribution of industrial products. A similar con- 
 dition prevails when credit is given the retailer, as in 
 theory he is granted time to enable him to pay for 
 goods from the proceeds of their sale. 
 
 The retailer does not give credit to enable the pur- 
 chaser to pay for them from the proceeds of their sale, 
 because in the case of consumption goods they are bought 
 not for sale but for consumption purposes. The sale of 
 goods on time by the retailer is not considered mercan- 
 tile credit, as time for payment is not given to facilitate 
 their future sale. In the case of production goods sold 
 by the retailer, a variety of reasons determine the giving 
 of credit and the terms of credit. In some instances 
 credit is granted in order that the goods may in part pay 
 for themselves. In the case of producer's goods sold for 
 farming purposes, the time of payment usually coincides 
 with the period of marketing farm products. In general, 
 credit is given by the retailer because the buyer is unable 
 to pay cash, whether the goods he buys are for production 
 or consumption purposes. 
 
 The success of all the distributors from the manu- 
 facturer to the retailer depends upon the payments by the 
 final purchasers to the retailers. Although the goods
 
 PERSONAL CREDIT 77 
 
 purchased from the retailers on time are usually put to a 
 different use by their buyers than the goods purchased 
 by the preceding groups in the chain of dis- 
 tribution, the sale in each case is a loan of ™ eTCAn ~ 
 
 tile 
 goods, and the final payments to the retailers cre dit de- 
 serve to cancel the preceding obligations in- pendent 
 curred upon the same goods by the preceding on 
 groups of distributors. I do not mean to say cre( j it 
 that the manufacturer and jobber must wait 
 until goods are paid for by consumers, but that the whole 
 superstructure of mercantile credit breaks down if the 
 final purchaser is unable to meet his obligations. 
 Mercantile credit and personal credit are so closely 
 related that a complete consideration of the former 
 warrants a treatment of the latter. 
 
 Personal credit is given to a large multitude of people 
 under a great variety of conditions, and the laws 
 governing the dispensers of personal credit are likewise 
 various. The system of selling on time by retailers, the 
 methods of investigating the standing of those seeking 
 credit, and the influence of the extension of credit upon 
 methods of selling and upon the prices of goods, will be 
 considered. 
 
 When personal credit is used to secure money, the 
 
 lender may be an individual, a partnership, Banking 
 
 a corporation, or a banking institution. and 
 
 When the lender is a bank, a confusion t.. 
 
 credit 
 
 may arise between banking credit and per- con . 
 sonal credit. It is in possessing credit, or in trasted. 
 manufacturing credit, that a bank's chief function as a
 
 78 MERCANTILE CREDIT 
 
 credit institution consists. However, its capacity to 
 create credit depends chiefly on its skill in granting 
 credit; while individuals, partnerships, and corporations, 
 are the grantees of credit by banking institutions. The 
 borrowing of funds by an individual from a bank is a 
 personal credit and not a banking credit transaction. 
 
 Personal or individual credit was the oldest form of 
 credit. As has been pointed out, people in prehistoric 
 Personal times enjoyed credit although they did not 
 credit of possess what might be called a credit system. 
 earl 7 In the hunting stage of society those success- 
 
 ful in the chase loaned to their unfortunate 
 neighbors. At this time charitable impulses inspired 
 lending. The borrower returned either in kind or in 
 money the amount of the loan without paying interest. 
 The public sentiment of the primitive community required 
 that the wealthy should help temporarily those who had 
 suffered misfortune and that no interest charges should 
 be made for the advancement of funds. This public 
 sentiment had at first the binding force of law. Later 
 when interest charges were made by the few who took 
 advantage of the poverty of those who sought credit, 
 nearly all the early nations passed laws forbidding usury 
 and imposed severe penalties for usurious charges. The 
 literature of the times teems with discussions on the 
 iniquity of the lender whose wealth grows at the expense 
 of his less fortunate neighbor. 
 
 So long as loans were made chiefly to borrowers who 
 were in desperate circumstances who were compelled to 
 meet obligations at an appointed time and were unable
 
 PERSONAL CREDIT 79 
 
 to do so without borrowing, the sentiment and the laws 
 
 against usury prevailed. When industrial development 
 
 had assumed a new form, when people bor- 
 
 rowed money to invest in industrial under- c jj anges 
 
 takings, the former views with reference to brought 
 
 usury passed away. When the borrower ob- about 
 
 tained funds to invest in profitable undertak- , 
 
 1 charges. 
 
 ings it became obvious that those who had 
 saved and hoarded their funds were entitled to a share 
 in the profits of the business in which their money in the 
 hands of the borrower was invested. This new develop- 
 ment gave rise to our present views of loans and of inter- 
 est. Personal or individual credit has thus preceded all 
 the other forms of credit and gradually merged into 
 mercantile, capital and banking credit. 
 
 To-day it represents the most varied and unsystematic 
 kind of credit. The people who receive personal credit 
 represent all stages and conditions of life. 
 As nearly all people receive credit at one time tliat 
 or another, a classification of those who re- receive 
 
 ceive personal credit would include practically personal 
 
 credit* 
 the whole of the human race. The wage- 
 earner is granted credit from his grocery store until 
 Saturday night when he receives his pay. Those who 
 work for salaries which are paid monthly often receive 
 credit either from necessity or convenience, and if the 
 time of payment coincides with the period when income 
 is received, the term of credit in this case should be longer 
 then when income is received weekly. Professional 
 people and men of means are granted credit because it
 
 80 MERCANTILE CREDIT 
 
 is more convenient to pay in large amounts than to carry- 
 funds and pay on each occasion of purchase. Each of 
 these classes lends itself to a great variety of sub-divisions, 
 consequently the number of classes seeking personal credit 
 place insurmountable obstacles in the way of classifying 
 them. 
 
 Personal credit is likewise granted by a great variety 
 of institutions and classes of people. The retail institu- 
 Wh tion giving the greatest amount of credit is 
 
 grants the grocery store. Purchases at the grocery 
 
 personal store are made very frequently, sometimes 
 several times a day in cities and towns, and 
 it is consequently inconvenient to pay cash on each 
 occasion of purchase. The grocery store is a community 
 institution and it is assumed that the management has 
 a better knowledge of buyers than in stores where pur- 
 chases are not made so frequently and where the retail 
 institution is not to such an extent a community institu- 
 tion. Credit is obtained at dry goods stores, drug stores, 
 hardware stores, etc., but not so often as in the grocery 
 store for the above-named reasons. As groceries are 
 life necessities we find another reason why it is difficult 
 to refuse credit to those who have been by misfortune 
 suddenly rendered unable to pay their debts. The uses 
 of things which are purchased of retailers have much to 
 do with the granting of personal credit and the terms of 
 personal credit. The use of dry goods, drugs, hardware, 
 books, etc., are not often absolutely essential to life and 
 consequently the need to give credit on these things is 
 not so imperative as on groceries. Hardware and imple-
 
 PERSONAL CREDIT 81 
 
 ment products are chiefly producers' goods and the use 
 to which these things are put determines largely the con- 
 ditions of credit. Personal credit is often given for the 
 professional services of lawyers, physicians, etc. In the 
 very nature of things some credit must be given for these 
 services as the service is rendered on the installment 
 plan and payment cannot be expected until the service 
 is completed. Personal credit is often given in the form 
 of a loan of funds in which the purposes to which the 
 funds are to be devoted may or may not be stated as a 
 condition of making the loan. As no rules of classifica- 
 tion can be very easily applied to either the receiver of 
 personal credit, the giver of personal credit, or to the 
 purposes to which the borrowed funds are devoted, it is 
 difficult to lay down any definite rules which govern the 
 granters of personal credit. 
 
 The conditions under which goods are sold make 
 cash payments in many instances inconvenient if not 
 impossible. First, let us take the case 
 of the retail grocery store, the institution necessary 
 which gives the greatest amount of personal for 
 credit. As a rule, groceries are delivered to grocers 
 
 customers. Competition between stores has ° ^ e 
 m r credit. 
 
 led the great majority of them in our cities to 
 send delivery boys to homes to take orders or to use the 
 phone to secure orders for daily deliveries. The house- 
 wife, too, uses the phone to order goods. This is done 
 frequently several times a day. In all these cases it 
 is impossible for the retailer to receive cash payments 
 on the delivery of his goods, and the cases are exceptional
 
 82 MERCANTILE CREDIT 
 
 where he does receive cash. In a great minority of in- 
 stances are goods purchased by those who visit the grocery 
 stores. Even in these instances groceries are purchased 
 so frequently that it is inconvenient to carry funds to 
 make cash payments. Those who visit grocery stores 
 to make purchases in most instances give orders also by 
 phone or to the delivery boy who visits the home of the 
 customer. The circumstances surrounding purchases in 
 the regular grocery store make cash payments almost an 
 impossibility. When cash payment is not made for 
 goods, the salesman furnishes to the purchaser of grocer- 
 ies a bill or account itemizing the things purchased with 
 the price of each. In some instances those who have 
 a credit account at a store carry an account book in which 
 the salesman makes a list of the things purchased with the 
 price of each on the occasion of each purchase. 
 
 As an exception to the rule that grocery stores give 
 credit, a number of stores, especially chain stores, do a 
 
 strictly cash business. However, to sell only 
 Some 
 
 grocery ^ or casn man Y of them do not deliver goods 
 stores do thus requiring the purchaser to come to the 
 not give store to take his purchases home with him. 
 
 To conduct a cash business and to decline to 
 furnish a delivery service requires such stores to sell their 
 goods much cheaper than goods are sold at the regular 
 grocery stores. 
 
 In other retail institutions as dry goods, hardware, 
 shoe, drug, clothing, gents' furnishing, and department 
 stores, the giving of credit is not so common. However, 
 in practically all of these stores except the hardware
 
 PERSONAL CREDIT 83 
 
 and gents' furnishing stores, the great bulk of goods is 
 
 purchased by women or other members of the family 
 
 than the breadwinner who ordinarily has _ 
 
 Personal 
 charge of the finances of the household. It is cre <iit 
 
 much more convenient for those who pur- given by 
 
 chase to buy on credit than to pay for goods. otner 
 
 stores* 
 Moreover, the custom of paying by check 
 
 rather than by cash is greatly on the increase. Those 
 
 who can get credit allow their bills to run till the close of 
 
 the month, and it has become the accepted practice of the 
 
 great majority of retail institutions to render an account 
 
 at the close of each month to their customers who have 
 
 been given credit. They then receive checks from their 
 
 customers shortly afterward which are returned to them 
 
 receipted. This has become almost the regular way 
 
 of making payments for public utility service such as 
 
 for heating and lighting and for other kinds of service 
 
 such as laundry, cleaning, etc. 
 
 Where the custom exists of rendering an account at 
 
 the close of each month a ready weapon is at hand for 
 
 the creditor to enforce prompt collections. 
 
 The debtor is presumed to pay his bills at the . 
 
 responsi- 
 close of each month when the accounts are b j e for 
 
 rendered. If he refuses to do so the retailer habits of 
 
 can either insist on prompt payment or with- P avment 
 
 hold credit from him in the future. The c b aser 
 
 postponement of the payment of accounts, 
 
 and the running up of bills beyond the capacity of the 
 
 debtor to pay, may often be traced to the carelessness and 
 
 the indifference of the retailer who gives credit.
 
 84 MERCANTILE CREDIT 
 
 The position of the retailer is wholly different from 
 
 that of the manufacturer and jobber in giving credit. 
 
 The manufacturer and the jobber must rely 
 
 ac or e- Qn mercan ti] e agencies and other sources of in- 
 termirung 
 t k e formation to learn the standing of their cus- 
 
 granting tomers, while the investigations of the retailer 
 
 of credit are more direct. The methods of the retailer 
 
 by 
 
 retailers depend upon his location, and the character 
 
 of his trade. The retailer often knows person- 
 ally all his customers, of their ability to pay, of their 
 promptness and of their credit worth. In large cities where 
 dealers have a great variety of customers, and in small 
 places where there is a transient trade, their credit prob- 
 lems are more difficult. The usual method of procedure 
 when an applicant for credit appears is to ask for refer- 
 ences to other dealers with whom the customer had 
 credit relations. Others investigate if the customer has 
 property. Some give credit on the evidence of honesty 
 judged from a few moments' conversation. Still others 
 will grant credit after learning where the man works and of 
 his ways of spending his money. In some cities retailers 
 are organized in local credit men's associations, and 
 through these organizations they avoid making loans to 
 irresponsible persons. The range of losses varies with the 
 class of creditors, the kind of business, and the section of 
 country. Some say that only 1/2 per cent, of their total 
 sales are uncollectable, while others place this percent- 
 age of loss as high as 5 per cent. It will be seen that the 
 information which determines the granting of credit by 
 retailers is derived from a great variety of sources.
 
 PERSONAL CREDIT 85 
 
 The following are some of the reasons why credit is 
 given unwisely by retailers: 
 
 1. Many retailers are anxious to do a large business 
 and to give external evidences of doing a very prosperous 
 business. To attract many customers it is necessary 
 to give them credit on easy terms and to deal leniently 
 with them in making collections. Such retailers com- 
 pete with each other to carry on an extensive trade, 
 establish easy standards of credit, and demoralize the 
 personal credit market. 
 
 2. Other retailers do not keep adequate books, do 
 not know the costs of conducting their business, and do 
 not know their credit losses. Bradstreet's estimates 
 of the causes of business failures show that approxi- 
 mately one-fourth of them are due to incompetence, and 
 failure to keep books is mentioned as the first evidence 
 of incompetence. It is safe to say that if retailers knew 
 the costs of giving credit they would be more conserva- 
 tive in this department of their business activities. 
 
 3. Fear of driving away customers deters many re- 
 tailers from making adequate inquiries regarding the 
 credit standing of those who wish to buy on time. As 
 there is no recognized system or method of inquiry, 
 retailers are timid about making necessary investigations 
 of the credit worth of their customers, and the latter are 
 inclined to resent such investigations. If there were a 
 customary method of procedure by retailers, seekers for 
 credit would accept as a matter of course all legitimate 
 inquiries concerning their ability and willingness to pay 
 their debts.
 
 86 MERCANTILE CREDIT 
 
 4. As personal credit has been given in a haphazard 
 way no definite knowledge exists with reference to 
 the right basis for personal credit. The conditions of 
 wealth, of character, of ability to pay, of family status, 
 etc., which should determine whether credit is to be 
 given at all or how much should be given, are factors 
 which have never been adequately investigated. Again 
 the poverty of the consumer or in other words his in- 
 ability to pay, is often a reason for giving credit by some 
 retailers. It is difficult for a grocer, for instance, to re- 
 fuse credit to a wage-earner who has always paid his 
 debts promptly, but who, through the loss of his position 
 has been suddenly rendered unable to pay his debts. 
 
 5. There is also a great lack of knowledge of the need 
 for credit. This does not apply to buyers who pay their 
 bills monthly as a matter of convenience instead of 
 paying cash for each individual purchase, but to those 
 who do not pay promptly because they have no funds 
 with which to pay. Retailers seem hopelessly ignorant 
 as to whether their customers are able to pay cash or 
 when they are able to pay. As consumers pay no more 
 for goods they buy on time than those for which they 
 pay cash there is no inducement for them to pay cash as 
 long as credit is given them. 
 
 6. Retailers have ordinarily no facilities to find out 
 the credit standing of their customers. When manu- 
 facturers and jobbers give credit to retailers they may 
 proceed with greater accuracy as mercantile agencies 
 furnish information on the credit standing of all busi- 
 nesses. Moreover, they have other sources of information
 
 PERSONAL CREDIT 87 
 
 which are described elsewhere, on which they can safely 
 rely. Those who receive personal credit as stated above 
 consist of the rank and file of humanity, and no facilities 
 have as yet developed to learn their credit standing. 
 It is safe to say that if retailers had the opportunity they 
 would learn if their customers were worthy of credit or 
 not. 
 
 What is said here does not apply to department stores 
 and other large retail institutions that employ agents 
 to investigate the standing of applicants for credit, and 
 who employ some system in granting credit. Moreover, 
 retailers along several lines in some of our cities have 
 formed organizations to exchange credit information and 
 these give credit with a great deal of care. The work 
 of these associations will be discussed later under the 
 subject, Credit Exchanges. 
 
 It has been stated that there are no definite principles 
 
 to guide the retailer in determining upon credit risks. 
 
 As far as can be learned retailers are governed __ 
 
 & What de- 
 
 by three sets of conditions: 1. character; 2. termines 
 
 wealth and earning power; 3. character, hab- the 
 
 its of payment, habits of life, and habits of e rantin g 
 .... of credit, 
 
 spending or buying. 
 
 In no division of credit does so much depend on the 
 
 character of the applicant as in personal credit. In 
 
 other cases, wealth and ability to pay are 
 
 primary requisites. In personal credit a 
 
 man without wealth or apparent ability to pay may 
 
 receive credit if it is known that he is honest, that he 
 
 treats his financial obligations very seriously, that he
 
 88 MERCANTILE CREDIT 
 
 would De willing to do almost anything than to fail to 
 pay his debts. Such a person may enjoy excellent credit 
 whereas one of considerable wealth but who is slow in 
 making payments, may not have good credit. 
 
 The latter class usually enjoys good credit because in 
 cases of emergency, debts can be collected, and frequently 
 Wealth a declaration of intention to take legal action 
 and is sufficient to secure payment. Individuals 
 
 ability to with ability to pay, but without wealth, are 
 
 pay * usually those of good incomes obtained by 
 salaries or as fees by rendering personal service. Those 
 whose income is secured through fees are professional 
 men as lawyers, physicians, dentists, etc. These men 
 ordinarily enjoy good credit because as a rule they 
 receive good incomes and their professional honor and 
 standing in the community demand that they meet their 
 obligations promptly. Those who work for salaries 
 are chiefly ministers, teachers and those engaged in a 
 high grade of work in industrial pursuits. As they have 
 regular salaries it is not difficult for them to adapt their 
 expenditures to their income. As long as their salaries 
 continue, a convenient means is always at hand to a 
 retailer to collect payment by attaching the salary. 
 
 The previous record of the customer is perhaps the safest 
 guide to the retailer in giving or in withholding credit. 
 If the seeker for credit is delinquent in mak- 
 ing payments, and if it is difficult to collect 
 from him, credit is either given him unwillingly or it is 
 withheld. Where credit cooperation methods prevail, this 
 factor is considered very important and the customer's
 
 PERSONAL CREDIT 89 
 
 record with other retailers in this respect is taken into 
 account when he solicits credit. Upon the other hand, 
 if the consumer pays his debts promptly, a limited amount 
 of credit is given without any reference to his wealth or 
 his ability to pay. 
 
 The habits of life of the buyer and of his family are 
 also important factors determining what credit should be 
 given. Habits of life include personal habits, habits of 
 industry of the bread winner, and habits of economy or 
 of extravagance of his family. It is sufficient to say that 
 if the bread winner has good habits and is industrious, 
 and his family does not live beyond his means that 
 ordinarily good credit will be enjoyed. Upon the other 
 hand, if just the opposite conditions prevail, or any one of 
 them, such a family should be given either no credit at 
 all, or very limited credit. 
 
 Closely associated with the extravagance of a family 
 as a guide to credit giving are habits of purchasing. If 
 a family purchases unwisely, that is, purchases what it 
 does not need or purchases in excess of its needs, it is an 
 argument in favor of either denying or limiting the 
 amount of credit given. 
 
 The extensive granting of credit has an important 
 
 influence on extravagance. Compelling customers to 
 
 pay cash imposes on them the obligation to _ 
 
 . ,. ... Granting 
 
 adapt their expenditures to their income. of cre dit 
 
 Where they can postpone the time of payment, and 
 
 this postponement begets a spirit of extrava- extrava_ 
 
 gance, goods are purchased beyond the power 
 
 of payment, and an artificial demand is created for goods
 
 90 MERCANTILE CREDIT 
 
 not warranted by the ability of consumers to pay for 
 them. 
 
 In mining districts, lumber camps, and in some manu- 
 facturing towns a kind of personal credit has developed 
 Credit which has become peculiarly reprehensible 
 
 given by on account of its influence on the working men. 
 company j n these centers the companies owning the 
 plants own also some or all of the stores and 
 often the homes where the wage-earners live. Credit 
 is freely given at the company store and when the wage- 
 earner's income is received, practically all of it goes to 
 pay for groceries, drygoods, rent, etc. On account of 
 low wages and the free granting of credit, the wage-earner 
 is frequently behind in his payments for these things and 
 when credit has become imperative for him, he buys exclu- 
 sively at the company stores, and because he is not free to 
 purchase anywhere else he pays excessive prices for his 
 goods. To prevent this kind of exploitation, many states 
 have passed laws either prohibiting company stores al- 
 together or else requiring that the prices charged by com- 
 pany stores shall not be in excess of the prices charged for 
 similar things at competing stores. 
 
 Installment sales is another form of credit which is 
 
 used persistently at the present time. Household goods, 
 
 furniture, clothing, books, pictures, jewelry, 
 
 Install- insurance, etc., may be purchased in install- 
 ment \ , -i 
 sales. ments, and some houses are organized specific- 
 ally to sell their products in this way. The 
 usual plan is to require a cash payment and then a cer- 
 tain amount each month until goods are paid for. An
 
 PERSONAL CREDIT 91 
 
 agent usually makes periodical calls to obtain these 
 installment payments. For larger purchases the buyer 
 usually gives a chattel mortgage, and in the event of 
 failure to pay the debt, the company may take not only 
 the goods sold, but also the pledged chattels. In 
 case of small purchases no mortgage is given, and the 
 seller recovers the goods sold when the buyer fails to 
 make his regular payments. 
 
 The evils of installment sales are twofold: 1. It is 
 notorious that of all goods that are sold those pur- 
 chased on the installment plan are obtained The evils 
 with least reference to the needs of pur- of install- 
 chasers. Only a dollar a month, is a ment 
 bait which has induced many an extrava- 
 gant purchase. In the mill and mining towns, organs, 
 pianos and victrolas are purchased by wage-earners on 
 the installment plan, and prices are paid for these things 
 out of all proportion to the income of working men's 
 families. In all cities a great variety of things are sold 
 to poor people for which they have very little need, be- 
 cause the burdens of payment seem to be light because 
 they are distributed over long periods of time. 2. The 
 expenses of selling on the installment plan are heavy, 
 and the consumer pays the extra costs of selling. If a 
 chattel mortgage is given some expense is incurred in 
 writing the mortgage. If the goods are sold by agents, 
 the traveling expenses of these agents must be paid. As 
 the installments are usually paid to agents the cost of 
 collection by these agents must be borne by the pur- 
 chasers. As the losses from installment sales are greater
 
 92 MERCANTILE CREDIT 
 
 than from other sales, these excessive costs too, must be 
 borne by the installment purchasers who pay their 
 obligations. 
 
 The chief advertisement of many retail houses is 
 "We will give you credit" or "Your credit is good." 
 How When this inducement is offered to buyers, 
 
 credit is the sellers cannot exercise reasonable care in 
 given distinguishing between those entitled to credit 
 
 y. an( j those not so entitled. Moreover, other 
 stores send out notices to prospective customers made up 
 from lists without any reference to credit standing, telling 
 them that their credit is good at the stores. Such loose 
 methods in giving credit stand in the way of positive re- 
 forms in systematizing personal credit. 
 
 The burdens of unwise credit, in the end, rest with the 
 
 consumer. High prices to consumers, which mean a high 
 
 cost of living, are traceable in part to the costs 
 
 ™„c.„~,~, of giving consumers credit. Personal credit 
 consumer ° ° 
 
 bears the is responsible for high prices in the following 
 burden of ways: 1. Consumers who pay their bills pay 
 .. in terms of higher prices for the goods of those 
 
 who do not pay their bills. Retailers who 
 give credit must secure a fair income for what they sell, 
 and on this account prices are placed high enough to 
 cover all losses and to make a reasonable profit; so that 
 those who pay will eventually pay the bills of those who 
 cannot pay for what they buy. It is on this account 
 that many consumers who pay cash refuse to patron- 
 ize stores that give credit, realizing that they are paying 
 other people's bills. 2. Where goods are sold on time
 
 PERSONAL CREDIT 93 
 
 an interest rate is charged, and the prices paid cover not 
 only the value of the goods but also the interest charged 
 on the loan pending payment for them. 3. The cost of 
 maintaining a credit system, including the cost of keeping 
 books and of collecting bills, is added to the price of the 
 goods. 
 
 It is difficult to estimate the extent to which goods 
 are increased in price by the costs of the credit system. 
 Mr. Daniel B. Murphy 1 of Rochester, New credit 
 York, quoting from reports of Mercantile and high 
 agencies showed that the annual losses from costs of 
 financial failures in the United States from mn £- 
 1890-1899 averaged $178,871,026.70. He further states 
 that "These stupendous figures — appalling though they 
 be — do not include the untold millions that are absolutely 
 lost each year by merchants engaged in retail trade, in 
 every line of industry, in every town and cross-road, from 
 ocean to ocean, from the lakes to the gulf, comprising 
 every retail enterprise from the gigantic department stores 
 in our great cities to the humble rural dealers. These 
 figures do not include the very considerable loss sus- 
 tained by those engaged in the learned professions — 
 notably by the physicians of the country — nor do they 
 include the enormous losses of a personal and confidential 
 nature, that are not submitted to the gaze and scrutiny 
 of the public." 
 
 1 The objects and possibilities of Credit Men's Associations, 1900.
 
 CHAPTER VI 
 
 THE CREDIT MAN 
 
 The credit man, like many of the leading factors of 
 
 to-day, came into prominence as one of the inevitable con- 
 
 _ . sequences of expansion of trade and concentra- 
 
 Organiza- 
 
 tion of tion of industry. Before the traveling sales- 
 
 mercan- man evolved, the area of trade occupied by the 
 * ile jobber and manufacturer was comparatively 
 
 narrow. The merchant visited the house, 
 made his purchases, and, after a face to face meeting of 
 buyer and seller, the terms of payment were arranged. 
 When the merchant ceased to visit the jobber and manu- 
 facturer, the simple way of arranging payments was aban- 
 doned. The traveling salesman now stands between the 
 jobber or manufacturer and the retail merchant, while the 
 mercantile agency is one of the chief sources of informa- 
 tion on the credit standing of the retailer. The territory 
 over which the manufacturer and jobber transact busi- 
 ness has been greatly extended, and much has been 
 gained in the rapidity of business methods. The rapid 
 means of transportation, the lowering of the charges of 
 shipping, and the improvements in communication, have 
 all been responsible for this enlargement of markets. 
 
 These changes have introduced the credit department 
 into all large jobbing and manufacturing houses. The 
 
 94
 
 THE CREDIT MAN 95 
 
 head of this department, after he has made a careful 
 
 investigation of the concern seeking credit, is intrusted 
 
 with the task of approving or rejecting its 
 
 orders for goods. To him is intrusted also , or °". 
 P , . - the credit 
 
 the duty of watching all accounts, of collect- man% 
 
 ing them when due, or of extending the time 
 as the conditions seem to warrant. In all houses not 
 of sufficient importance to have a regular credit depart- 
 ment the work belonging to such a department is care- 
 fully managed by other departments. 
 
 The purpose of the credit man is to keep the percentage 
 of losses at a low point. To do this not only must he 
 exercise excellent judgment in granting credit, but he 
 must be a good collector. A low percentage of losses is 
 not necessarily the criterion of a good credit man. He 
 who refuses all orders except from those houses whose 
 standing is known to be absolutely reliable drives away 
 much profitable trade. So he is compelled to give credit 
 to a class of merchants whose credit standing is not of the 
 best, but upon whose trade the profits exceed the losses. 
 It is upon orders from such a class that he must re- 
 peatedly exercise his judgment as to whether the prob- 
 abilities of profit exceed those of loss. The other part of 
 his task lies in the application of skill in collecting 
 accounts. Vigor and persistence in following up delin- 
 quent debtors and tact in handling them are requisites 
 for every successful credit man. 
 
 In order to accomplish these things the credit man 
 must be in possession of a very broad range of facts. He 
 relies upon several, sometimes all, of the following sources
 
 96 MERCANTILE CREDIT 
 
 of information: reports of mercantile agencies, the travel- 
 ing salesman of the house employing him, the attorney 
 of the house, an attorney in the community 
 
 Sources of of the dealer, the debtor's banker, firms with 
 informa- 
 tion, whom the debtor has dealings, and the state- 
 ment of the debtor. All these means of pro- 
 curing information are open to the credit man, and he 
 uses them as conditions warrant. 
 
 The credit man must be familiar with the laws re- 
 garding indebtedness in the states in which his firm deals, 
 and must know exactly the methods of pro- 
 Laws or cedure under the national bankruptcy law. 
 different _ . . .. : , , 
 
 states. * n deciding upon terms of contract, the laws 
 
 of the state must not be violated. Houses 
 often fall into endless difficulties because, not having 
 adequate knowledge of the state laws concerning in- 
 debtedness, they fail to collect many of their debts. A 
 knowledge of the laws of the states is of value, not only 
 in making terms of payment, but also in assisting the 
 collector to determine upon proper methods of pro- 
 cedure. If the business methods and customs of states 
 and localities differ, the credit man must be cognizant 
 of these facts, and must understand thoroughly the busi- 
 ness peculiarities, if any exist, in each locality in which 
 his firm has business dealings. 
 
 He must be familiar with the industrial, and com- 
 petitive conditions upon which the success of the mer- 
 chant depends. He must know what need there is 
 for such an institution in the city or the part of the city 
 where the merchant is located. He must know if the
 
 THE CREDIT MAN 97 
 
 competition in the debtor's line is very severe, or if he is 
 
 located in a splendid field for his business. It is very 
 
 generally believed that department store and 
 
 branch store competition, and the competi- con( jitions 
 
 tion of merchants who purchase collectively where 
 
 in some cities, make the existence of certain credit 
 
 classes of dealers precarious. In certain cities ,. lcan 
 1 lives. 
 
 these competitive forces act more strongly in 
 certain lines than in others. These are factors which 
 must be taken into account by the credit man in giving 
 credit. 
 
 Furthermore, the industrial character of a community 
 has much to do with the probability of success of the 
 dealer. If the community is conservative, the likelihood 
 of the dealer's being able to pay his debts is much greater 
 than if it is not. However, there is much less proba- 
 bility of great success in such a community than in 
 one of a different type. If the merchant lives in a 
 manufacturing city and his customers are to a large ex- 
 tent wage-earners, his ability to pay will often depend 
 upon the continuous employment of wage-earners. The 
 character of the industries of a city with respect to 
 furnishing continuous or intermittent employment exer- 
 cises much influence upon the dealer's ability to pay, 
 and over this influence he has little control. If the 
 wage-earner is not furnished continuous employment, he 
 cannot pay his store bills regularly. 
 
 If the dealer lives in an agricultural community or 
 if he depends directly on agricultural trade, crops and 
 prices are important items to be considered. In such
 
 98 MERCANTILE CREDIT 
 
 places there is always a close association between crops, 
 prices, and trade. If crops are poor or prices are low, 
 A icul- the farming trade falls off heavily. This is 
 tural con- strikingly true where the dealer does not 
 
 ditions handle the necessaries of life. But whether 
 
 and credit. • i • r ir i_ ji j 
 
 necessaries or luxuries ot lite are handled, 
 
 more credit is sought under these conditions than when 
 prices are high and crops are good. The general welfare 
 of the community has much to do with the character of 
 the goods consumed, but this is a problem with which 
 the credit man is concerned only in so far as it permits 
 him to judge of the purchasing ability of the merchant 
 seeking credit. 
 
 The certainty of the ability of the merchant to pay 
 is measured, everything else being equal, by the char- 
 acter of the customers — whether regular or 
 
 Character transient, whether made up of the wealthy, 
 
 of cus- 
 
 tomers. middle or lower classes. Transient customers 
 
 are more likely to pay cash. However, if 
 credit is given, the percentage of loss is greater with 
 transient than with regular customers. Losses are 
 greater upon the less well-to-do than upon the middle 
 and upper classes. All these are factors which the credit 
 man takes into consideration in estimating the ability 
 of the debtor to meet his obligations. 
 
 The credit man acquires also a knowledge of the char- 
 acter of the particular industries seeking credit. He 
 must know the capital required for a given business, its 
 running expenses, and the line of credit that ought to be 
 carried under the given industrial conditions. From
 
 THE CREDIT MAN 99 
 
 his knowledge of these things he judges of the safety of 
 the business which the merchant is conducting. 
 
 One drawback to success is the absence of bookkeep- 
 ing and the inadequacy of accounts that merchants keep, 
 to show the exact status of their business. 
 
 Many failures can be traced to these causes . " 
 
 keeping 
 alone. Merchants frequently do not know an d credit. 
 
 from their books whether their business is 
 profitable or unprofitable until it is too late. Good book- 
 keeping is, and ought to be, an excellent aid in revealing 
 wherein success or failure lies in business methods. 
 Failure to keep books hides from the credit man the real 
 status of the firms with which he deals. He knows that 
 in giving credit the probability of loss to him is greater 
 when a merchant does not keep books than when he does. 
 On this account the credit man must often discriminate 
 against such a merchant. 
 
 As the ideals and moral standards of communities 
 differ, credit men must consider the character of com- 
 munities. If a great many business men in 
 
 i # .1 i , - i Moral 
 
 a community have failed, and most of them standards 
 
 dishonestly, it is fair to assume that the moral of the 
 
 tone of such a community from a business commu_ 
 
 point of view is not high. Social control 
 
 plays a prominent role. Many dishonest failures are an 
 
 evidence of easy standards of honor. They show that 
 
 the public opinion of the community has been on a plane 
 
 too low to pursue relentlessly those whose business 
 
 morals are low. The record of the merchant and his 
 
 family is a matter of importance. The man who has not
 
 100 MERCANTILE CREDIT 
 
 failed and whose family record is clear, views with com- 
 punctions of conscience the taking of steps which may 
 lead to the bankruptcy court. 
 
 It is not difficult to determine the honesty of a mer- 
 chant. The character of his dealings with the house of 
 the credit man or with other houses and that 
 
 on y, of his dealings in the community in which 
 as a mark . 
 
 of credit. ^ e ^ ves > reveal his business character. If a 
 
 man has been in business some time, his busi- 
 ness morality is well known. If he is a beginner in busi- 
 ness it is more difficult to determine what he would do 
 under given conditions; but judgment upon his business 
 morality is based on his previous record. 
 
 The way in which a man secures his money is also a de- 
 termining point in j udging of his ability. If he has earned 
 
 his money it is fair to assume he will conduct 
 
 Business & sufficiently conservative business to guard 
 
 ability and 
 
 credit. against losing his capital. The fact that he has 
 
 earned it is itself sufficient to stamp him as a 
 
 man of ability to produce and of some business sagacity. 
 
 It is recognized not only in business, but in everything 
 
 else that the only way to learn to do, is by doing. When 
 
 essentially new problems arise, the chances of doing 
 
 wrong equal, if they do not exceed, those of doing right. 
 
 Nothing insures success in any business better than past 
 
 experience in dealing with all the problems that are likely 
 
 to arise. 
 
 There are those who seem to think that, for a man 
 
 who has capital to start with, business experience and 
 
 business sagacity are unnecessary for success. To the
 
 THE CREDIT MAN 101 
 
 prevalence of this theory may be traced a comparatively 
 large percentage of failures. Many act upon the as- 
 sumption that the business of merchants is simple. 
 Although they have failed as traveling salesmen or in 
 other fields, they think that if they can get the capital to 
 begin with, they can certainly succeed as merchants. 
 Credit is given sparingly to such men. Another class 
 has made a thorough study of business methods and 
 has learned the details of business through experience 
 as employees. When men of this class begin business, 
 even with borrowed capital, the presumption is favorable 
 to success. 
 
 There are thus four classes of men who begin business : 
 (1) Those who have earned their capital as employees, 
 in which capacity they may learn all the details of the 
 business. (2) Those who have learned the business as 
 employees, but who begin on borrowed or inherited 
 capital. (3) Those who have earned their capital in other 
 pursuits, but who bring to the business no experience in 
 it, and no knowledge of the business methods which pre- 
 vail there. (4) Those who have not earned the capital, 
 have no experience in the business, and who know little 
 or nothing of business methods. Only experience and 
 ability to produce entitle a man to credit. The second 
 class is probably more likely to receive credit than the 
 third. Experience in a business, a knowledge of its 
 details, is of more importance to a merchant than hav- 
 ing earned capital in other lines. 
 
 After a merchant has been in business for some time 
 the conditions under which he started are always con-
 
 102 MERCANTILE CREDIT 
 
 sidered. However, the credit man has facts more tan- 
 gible to act upon. He can judge of the merchant's 
 ability as a producer from his sagacity in handling the 
 business. The amount of capital in the business, the 
 running expenses, the character of the books he keeps, 
 and his methods in general, furnish the credit man a 
 criterion upon which to act. 
 
 A knowledge of a man's credit standing in his own 
 community is very important to the credit man. If a 
 Credit debtor can borrow at his bank and can carry 
 
 standing a good line of credit, his credit standing is 
 in com- certainly good. If he is able to pay his debts, 
 mum y * but is habitually in debt, and always allows 
 his terms of discount to expire before payment is made, 
 there is not only a strong evidence of carelessness in busi- 
 ness, but also of a lack of business sagacity. When a 
 merchant allows terms of discount to expire before pay- 
 ment, he is conducting business with capital upon which 
 excessive rates of interest are paid, and the business is 
 consequently less profitable than it should be. If he 
 sells on credit without a careful investigation of the 
 standing of his customers and is careless in making col- 
 lections, the losses in his business are unnecessarily high. 
 His treatment of his customers, his methods of adver- 
 tising, the organization of his clerical force, the general 
 appearance of his place of business, are all things pointing 
 in the direction either of success or of failure. 
 
 The merchant's sagacity as a buyer is something upon 
 which credit men are well informed. If he is an easy 
 buyer, he will over-buy and have on hand goods which he
 
 THE CREDIT MAN 103 
 
 cannot sell except at a loss. If he lacks judgment in 
 
 adapting his purchases to the demands of his customers, 
 
 he will always have on hand unsalable stock. 
 
 As said before, merchants are agreed that in / 
 
 ' ° a buyer. 
 
 a large number of cases failures are due to 
 having a large supply of unsalable goods. Although job- 
 bers will always sell to merchants unsalable goods, the 
 weakness of the latter in purchasing is considered a 
 reason for discriminations against them in giving credit. 
 The conditions under which bank and mercantile 
 credit are given are practically identical. In some ways 
 the jobber has the advantage of the banker 
 
 in knowing the producing ability of the mer- n an f 
 
 • • i i • mercantile 
 
 chant, an advantage which he gams by his cre( jjt. 
 
 opportunity to base his judgments upon the 
 character of the merchant's purchases and in his skill in 
 bargaining; in other ways he is at a disadvantage. As 
 a banker lives in the same community as the merchant, 
 he is in a better position than the jobber to know a wider 
 range of facts concerning him. Then too, money has 
 acquired the right of dictating conditions in bargaining 
 not yet attained by merchandise. It is clear why this is 
 true. The banker's reputation for conservatism must 
 be maintained or the purposes of the institution are de- 
 feated. The bank holds in its keeping much of the capi- 
 tal of the community, and consequently borrowers are 
 willing to concede the bankers all precautions necessary 
 to safeguard not only themselves but also their customers. 
 Bank failures entail a more serious disorganization of 
 business than a failure of a jobber or manufacturer.
 
 104 MERCANTILE CREDIT 
 
 Another difference in the relative power of dictation of 
 the banker and jobber is to be found in their competitive 
 conditions as bargainers. As a rule the jobber goes to 
 the merchant to sell, while the borrower of a bank visits 
 the banker. Loans of merchandise are always connected 
 with sale. Money loans, upon the contrary, are inde- 
 pendent of other transactions. 
 
 Since the right to be inquisitive on standing, character, 
 etc., is more clearly conceded to the banking than to the 
 commercial houses, it is given to the banks to fix the 
 degree of perfection which our credit system attains. 
 If they are loose and careless in granting credit, it is 
 impossible for the commercial houses to be strict and 
 careful. To the banking institutions, then, are given 
 the responsibility to a large degree for better customs, a 
 better credit system, and better relations between cred- 
 itors and debtors. 
 
 Upon receiving orders from a merchant who has had no 
 dealing with the house and whose credit standing is un- 
 known, the house usually requires a signed 
 
 Value of statement from the merchant. Merchants 
 
 the signed -...--- ... 
 
 statement, frequently refuse to give signed statements, 
 
 believing that requests for them challenge their 
 honor. This feeling, however, is passing away. Mer- 
 chants whose credit standing is good are coming to see 
 that a refusal to make a statement injures their standing. 
 If they can pay cash, a signed statement is unnecessary. 
 If they cannot, it is to their interest to have the best 
 terms of credit a condition which can be secured only by 
 making clear that they will pay their debts. Merchants
 
 THE CREDIT MAN 105 
 
 are coming to see that their best interests demand a fair 
 statement of the conditions of their business, and credit 
 men have discovered that the signed statement is the 
 most effective means of guarding against losses. 
 
 When the merchant goes into bankruptcy, a signed 
 statement in possession of the creditor gives him a de- 
 cided advantage. A false statement gives a creditor a 
 legal right to bring action to protect his claim either by 
 attaching the property of the bankrupt or of rescinding 
 the sale. In the latter case the title to the goods does 
 not pass to the debtor, and the creditor has the right to 
 recover their value, provided that enough remains in 
 stock. To do this it must be proved that the debtor 
 knowingly made a false statement without any grounds for 
 believing he could pay for the goods. Fraudulent intent 
 is the basis of civil action under the national bankruptcy 
 law. If the debtor was insolvent at the time the goods 
 were purchased and the statement was made, an evidence 
 of fraud appears, and the burden of proof is placed upon 
 him. As false statements are damaging to debtors, 
 statements in the hands of creditors improve their chances 
 in collecting bad debts. 
 
 The work of the credit man in investigating the stand- 
 ing of merchants is frequently defeated by the failure to 
 keep books. If a merchant does not know 
 his own financial standing it is impossible f^* 1 ™™ t0 
 for him to give the credit man an accurate books, 
 report. However, the demands of the credit 
 man for accurate statements are a strong incentive on 
 merchants to keep books and to know their financial status.
 
 106 MERCANTILE CREDIT 
 
 Those who took the census of small manufacturers and 
 traders for the United States Census Bureau, learned 
 that a great majority of them did not keep books. On 
 this account these manufacturers and merchants were 
 unable to state the few facts concerning their occupation 
 which the United States Government wanted to know 
 for its statistical report of 1900. A great many of these 
 people did not know the extent of their liabilities or their 
 assets, and did not know whether they were conducting 
 profitable or unprofitable businesses. 
 
 Some claim that we ought to have a system for verify- 
 ing accounts controlled by a public accountant; that 
 
 all dealers should be required to keep books 
 Books , ... . 
 
 examined to De opened to inspection at least once a 
 
 by public year by accountants appointed by the state or 
 account- national governments. Since credit rests on 
 the confidence one man has in another's ability 
 to pay, a good credit system cannot exist without a knowl- 
 edge of the debtor's resources and liabilities. If a simple 
 and thorough system of accounting could be devised, it 
 would be an excellent trade barometer to a business 
 house. If such a system were practicable it would relieve 
 the credit man from solving many perplexing problems. 
 
 Credit men occupy a unique position in industrial 
 society. In the methods employed, they either induce 
 Imoor- a nea lthy moral tone or else are responsible 
 tanceofthe for practices which result in heavy losses, 
 work of Merchants who buy on time, and who need 
 men. no ^. ^ p ar ^j cll i ar m paying when accounts 
 are due, are likely to overstock and to buy unsalable
 
 THE CREDIT MAN 107 
 
 goods. Credit is also granted indiscriminately by them, 
 and they are careless in collecting. Here is seen the 
 utility of prompt collections. When merchants re- 
 ceive credit sparingly and must pay promptly, they 
 are careful in granting credit to consumers and are care- 
 ful in collecting. The reactions inhibited by promptness 
 on the part of credit men are thus wholesome. Looseness 
 in giving credit over-gluts markets, while looseness in 
 collecting produces habits of indifference and carelessness 
 in business which degenerate eventually into business 
 immorality.
 
 CHAPTER VII 
 
 CREDIT OFFICE 
 
 The purpose of the credit office is to procure, organize, 
 and classify the right kind of information so as to make 
 it immediately available to the credit man. 
 Purpose rp^-g chapter will deal with the mechanics of 
 office. * ne cre dit office, the sort of filing cases to be 
 
 used and the records to be kept, and also 
 with the class of information to be secured, its classifica- 
 tion, and its uses. 
 
 The organization of the credit office depends very much 
 
 upon the nature and size of the business, the number 
 
 of credit customers, and somewhat upon the 
 
 Object of k a kjts and inclinations of the credit man. 
 a system. 
 
 The mechanism should not be so extensive 
 
 as to be cumbrous, nor should it be inadequate for the 
 purposes of the office. It should provide for such a 
 system as will supply the credit man with the informa- 
 tion he needs with the least amount of effort. 
 
 For the large offices there have been worked out very 
 
 definite systems which differ somewhat in detail but which 
 
 agree on the general method of recording and 
 
 A typical fii} n g information. A typical system is the 
 system. , . , 
 
 following: A large cabinet is provided for 
 
 filing information in which are placed large envelopes 
 
 vertically, each envelope containing all the information 
 
 108
 
 CREDIT OFFICE 109 
 
 on each credit case. Each envelope has a number cor- 
 responding to the number of the case. A cabinet con- 
 taining the regular sized filing cards is also used. The 
 cards are arranged alphabetically, each containing the 
 name of a credit case, and each bearing a number corres- 
 ponding to the number on the envelope in the large 
 cabinet. 
 
 The simplicity of the system commends it. When 
 some one applies for credit, the alphabetical arrangement 
 of the small cards enables the office clerk to turn at 
 once to the card bearing the man's name, and the number 
 on the card enables him to turn at once to the applicant's 
 envelope in the large case which contains all the infor- 
 mation possessed by the office on the applicant. This 
 method corresponds to those used by charity organiza- 
 tion societies, and many business houses, for filing in- 
 formation. When a new customer applies for credit his 
 name and other data are written on a small card, which 
 is placed in the cabinet in its appropriate place. The 
 number of the case is written on a large envelope, which 
 is intended to contain all the information concerning 
 the applicant as soon as it is collected. 
 
 The large envelope usually contains the property 
 statement made out by the applicant for credit, the 
 information obtained by the traveling salesman, the 
 information given by the mercantile agencies, and in- 
 formation furnished by references given by the applicant 
 and by all others from whom the credit man solicits 
 information. A record of the credit given the applicant 
 together with all other information concerning the history
 
 110 MERCANTILE CREDIT 
 
 of the business which may be gotten from trade papers 
 and a variety of sources is also placed in this envelope. 
 
 The character of the information which should be placed 
 on the small card is a mooted question. Much depends 
 on the use the credit man desires to make of it. It may be 
 used primarily as a reference to more complete information 
 in the large filing case; or it may be a complete record 
 of information for certain purposes. In the latter case 
 it may contain the name, the address, the business, the 
 rating, the terms of credit formerly given, and a few of 
 the most important facts usually furnished in a property 
 statement which should indicate the credit standing of 
 the customer. 
 
 Not all credit men keep record cards. If the volume 
 of business is large and the number of customers is 
 small, no elaborate office machinery is neces- 
 sary to follow each case. Again, there may be 
 systems 
 
 differ. a ^ ar g e number of accounts and a small num- 
 
 ber of individuals to whom sales are made; 
 in this case it is necessary to keep but few records. 
 But even where there are a large number of sales 
 and many customers of a house, the practices of credit 
 men differ widely. Perhaps the majority of credit 
 men do not use card catalogues at all. Most of them 
 have some sort of filing cases or use letter folders where 
 they file away the information they have on each 
 credit applicant. Again, many credit men look over 
 their ledger accounts of the candidate before passing 
 judgment upon a request for credit. However, in an 
 office where a great amount of business is transacted,
 
 CREDIT OFFICE 111 
 
 everything favors the use of card catalogues and filing 
 cases as a means of saving the time and energy of the 
 credit man, and of permitting him to give accurate judg- 
 ments without delay on applications for credit. If the 
 credit office is to have its greatest utility, the records 
 must be kept up-to-date, and this will require consider- 
 able activity from some member of the credit office 
 staff. 
 
 The committee on Credit Department methods of the 
 National Association of Credit Men has been laboring 
 for a number of years to get out suitable 
 
 property blank forms. Blank forms to be Credit 
 
 • • • inquiry 
 
 used by salesmen in obtaining information forms. 
 
 from customers, attorney's report blanks, and 
 blank forms to be sent to persons given as reference by 
 applicants for credit have been devised. A great variety 
 of blank forms is used for all these purposes. It was the 
 intention, however, of the above-named committee, after 
 receiving suggestions from many sources, to devise such 
 an inquiry form for each purpose as would enable the 
 credit man to obtain all the information desired with as 
 little annoyance and inconvenience as possible to the one 
 called on to make a report. These forms have been re- 
 vised frequently and have been submitted from year to 
 year to the National Association. As they represent the 
 best judgment of credit men for the purposes for which 
 they were intended, they will receive consideration in 
 this discussion. 
 
 A property statement is one usually made by an appli- 
 cant for credit over his own signature showing the nature
 
 112 MERCANTILE CREDIT 
 
 and kind of property he possesses, his assets, liabilities, 
 
 etc. The property statement is considered valuable as 
 
 a basis for credit for two reasons: 1. no one 
 
 proper y . g ag £ am jjj ar -^jth ^h e financial status of the 
 statement. 
 
 applicant for credit, his assets and liabilities, 
 
 as he himself is, and no one has the same right as he has 
 to give such a statement; 2. a signed statement which 
 misrepresents the facts pertaining to the possessions of the 
 applicant and his financial status, makes him criminally 
 liable for obtaining goods under false pretenses if he fails 
 to pay his debts. A great deal of effort has been made in 
 recent years to make it customary for the seller of goods 
 to demand as a right a signed statement from the appli- 
 cant for credit. The latter often has some one else in the 
 office sign the property statement, but in some states 
 the man who fails to pay his debts cannot be held crim- 
 inally liable for a false statement of his property which 
 he did not sign personally. 
 
 The blank form for a property statement is very desira- 
 ble in order that the right kind of information may be se- 
 cured. Otherwise, the applicant for credit makes such a 
 statement as suits his purpose. With a blank form before 
 him, a refusal to sign all questions makes it embarrassing 
 for the buyer, as any omission gives the credit man a 
 right to inquire why the desired information was 
 withheld. 
 
 Form I gives the property statement form recom- 
 mended by the Committee on Credit Office Methods of 
 the National Association of Credit Men. All property 
 statements contain the same essential elements. This
 
 CREDIT OFFICE 113 
 
 form calls for a more detailed report of the finances of 
 
 the applicant for credit than most property forms. 
 
 The two chief divisions of the report are the active 
 
 business assets and the business liabilities. Under the 
 
 former head are included the value of the 
 
 merchandise, the notes and accounts due the , 
 
 7 forms. 
 
 business concern, its cash in hand and in 
 bank, and the value of its fixtures, machinery, etc. 
 Under the head of business liabilities are included what 
 is owed for merchandise, what is owed in hand, what 
 is owed others for borrowed money, and what is owed for 
 taxes, rent, and on mortgages, for fixtures, etc. Other 
 assets included in the report are the real estate free from 
 encumbrances, personal property, etc. An opportunity 
 is then given the applicant for credit to state the grand 
 total net worth of his business. 
 
 It remains then for the credit man to make proper 
 deductions from the notes and accounts receivable and 
 also from the inventory of the merchandise and other cap- 
 ital. In considering the inventory the items should be 
 valued at cost, because the prospective selling value is 
 always an unfair estimate for an inventory. If the 
 fixed property, including buildings, furniture, fixtures, 
 etc., has depreciated in value, the inventory should show 
 the true selling value of such property. It will be 
 shown hereafter how other phases of the property state- 
 ment guide the credit man in judging the value of the 
 inventory. 
 
 Much depends on the character of the assets of the 
 company seeking credit, because the character of its
 
 To RICH, MANN & CO.. New York 
 
 For the purpose of obtaining credit for goods to be sold roe or us by you. or for «ny 
 extension granted me or us on my or our account with you, the following is given you as a 
 true statement of my or our assets and liabilities and general financial condition. I or wo 
 agree to and will notify you immediately in writing ofany materially unfavorable change 
 in my or our financial condition, and in the absence of such notice, or of a new and full 
 written statement, this may be considered as a continuing statement and substantially 
 correct 
 
 Firm name. 
 Town 
 
 -Date. 
 
 .County- 
 
 ACTIVE BUSINESS ASSETS 
 Value of merchandise on hand at cost 
 Notes and accounts, cash value 
 Cash in hand 
 Cash in bank 
 
 Fixtures, machinery, horses and wagons- 
 Total Active Business Assets — 
 
 Dollars 
 
 Cents 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ! 
 
 
 
 
 
 
 
 
 BUSINESS LIABILITIES. 
 
 Owe for mdse., open aoct 
 of which S fa past dne 
 
 Owe on notes for mdse. 
 
 Owe bank 
 
 Owe others for bor'd money 
 Owe taxes and rent 
 
 Mtges.on fixtures, machin'y, 
 horses and wagons 
 
 Total Business Liabilities. 
 
 Net Worth in Business, 
 
 OUTSIDE ASSETS. 
 Total real estate, assessed valuation, $. 
 Total encumbrances f> 
 
 Personal property. 
 Other assets - 
 
 Equity 
 
 Grand Total net worth in and out of Business. 
 
 Please state location and description of each parcel of real estate, and cash valuation 
 of, and encumbrances on each, and in whose name each parcel is held ■ 
 
 FORM I. 
 
 Property statement for use by partnerships. 
 
 114
 
 What portion of real estate described is homestead. 
 
 Have yon any other debts than herein mentioned?. 
 
 Full given and surname of each partner 
 
 Age! 
 
 Possible liaothiY ol caco 
 ried ? member ot firm as 
 
 indorser, bondsman, etc 
 
 What kind of business do you conduct?. 
 Insurance on stock. ,, 
 
 On fixtures, machinery, horses and .wagons 
 
 On real estate- 
 
 Amount of sales last year- 
 
 Amount of expenses 
 
 last year 
 
 Date of last inventory. 
 
 What proportion of your salas is on credit?. 
 
 ____^^_^^___ Have you any judgments, judgment 
 notes, chattel mortgages, or other liens against you, recorded or unrecorded ? If so, describe 
 
 If you have pledged or transferred outstanding accounts or property 
 
 remaining under your control, state amount thereof and amount received, or to be received 
 
 on account of such pledge or transfer 
 
 What books of account do you keep? - , — 
 
 Buy principally from following firms : 
 
 Nam* 
 
 Address 
 
 What line of 
 business 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 __^^^^^______^_^__^^_^-___ 
 
 The above statement, both printed and written, has been carefully 
 read by the undersigned, and is a full and correct statement of my or our 
 financial condition as of — 1°1 — 
 
 Finn signature- 
 By whom signed . 
 
 . a member of the firm. 
 
 All questions must be answered, insert ciphers in absence of any amount. When the 
 words "Yes," "No" or "None" will correctly answer the questions, write them in their 
 properploces. 
 
 FORM I.— (Continued.) 
 
 115
 
 116 MERCANTILE CREDIT 
 
 assets determines in large measure its paying ability. 
 
 If the seeker for credit is overstocked, as a rule he will 
 
 be slow in making his payments. If a con- 
 
 arac er gjdgrabie portion of the capital of the trader 
 of assets 
 important, which should be invested in the business is 
 
 invested in outside interests, as real estate, 
 stocks, etc., these investments should be very care- 
 fully examined by the credit man, as they may be of 
 vital concern in determining whether the applicant for 
 credit is worthy of it or not. It is generally conceded 
 that credit men do not give sufficient attention to the 
 assets of concerns seeking credit. 
 
 For convenience in determining the credit worth of can- 
 didates assets should be divided into two classes: live or 
 
 quick assets, and slow or fixed assets. " The 
 
 ive and g rg ^. c j ass cons i s t s of that character of property 
 slow 
 assets. * or which there is a steady demand, or for 
 
 which under all ordinary circumstances there 
 is a ready market; or property which can be converted 
 into money or utilized for credit purposes on short notice. 
 Such assets are represented by cash, marketable mer- 
 chandise, good book accounts, securities, and any other 
 character of personal property subject to expeditious sale. 
 Slow or fixed assets are those for which there is not a 
 ready sale, especially such property as is not of constant 
 utilization in the course of business. They consist of 
 furniture and store fixtures, buildings, real estate and 
 machinery, and investments which are of a developmen- 
 tal or speculative nature." 1 
 
 1 Prendergast : Funds and Their Uses, p. 228.
 
 CREDIT OFFICE 117 
 
 While credit men are agreed on the distinction between 
 the two classes of assets, much difference of opinion 
 exists among them with reference to the value of slow 
 or fixed assets in estimating a credit risk. Some are 
 inclined to consider them of no value whatever, while 
 others would discount them heavily in estimating their 
 value as a basis for credit. Still others consider that 
 they have merit chiefly in case of a failing concern, 
 as they materially assist, under such circumstances, in 
 liquidating. Much, too, depends upon the character 
 of the business conducted, and the general condition of 
 industrial prosperity. If the business often needs capital 
 on short notice, large investments in fixed capital are 
 a disadvantage. In periods of depression it is difficult 
 to dispose of fixed capital, while in periods of prosperity 
 certain classes of fixed capital may be sold on short 
 notice at good values. Everything, however, depends 
 upon the proportion of slow to fixed assets, the nature 
 of the business, the condition of prosperity, etc. 
 
 In property statement form (I) are many questions 
 which when they can be correctly answered result 
 in throwing much light on the nature of the assets of the 
 credit applicant and his worth as a credit customer. 
 It is important to know what portion of the real estate 
 described is the homestead on account of the importance 
 of the homestead laws of the various states. 
 
 One question calls for a knowledge of the insurance 
 
 on stock, buildings, machinery, fixtures, _ 
 
 mi • ill- Insurance, 
 
 etc. The amount of insurance held is very 
 
 important in determining a credit risk. A business man
 
 118 MERCANTILE CREDIT 
 
 may be perfectly solvent and doing a very profitable 
 business and from every other point of view a good 
 credit risk, but if he does not carry insurance on his build- 
 ings and his merchandise, he may be rendered unable to 
 pay his debts in a very brief space of time by a fire. It is 
 on this account that the property statement calls for a re- 
 port on the insurance on goods, on buildings, etc. This 
 feature is so important that no good credit man to-day 
 would think of granting credit without a full knowledge 
 of the insurance carried by the credit applicant. 
 
 The credit man should know in what company the 
 property is insured and whether the insurance company is 
 solvent or insolvent. He should also know the value of 
 the goods carried by the merchant and whether this prop- 
 erty as well as his buildings and other property are ade- 
 quately covered by insurance. Some concerns require 
 that their traveling salesmen obtain this information from 
 customers when credit is requested, and practically all 
 the property statement forms at present request this 
 class of information. 
 
 The subject is deemed of sufficient importance by the 
 National Association of Credit Men to have a standing 
 committee on Fire Insurance. This committee has done 
 efficient service in urging credit men to require merchants 
 who desire credit to be adequately insured, and in 
 securing where possible, better rates from fire insurance 
 companies and in bringing pressure to bear to have 
 merchants and communities take such precautionary 
 measures as will secure to them better rates from insur- 
 ance companies.
 
 CREDIT OFFICE 119 
 
 The property statement also calls for the date of the 
 
 last inventory and some of them for the frequency of 
 
 taking inventories. This is important to the _ 
 
 . Inventory, 
 
 credit man as he should know how often the 
 
 applicant for credit estimates the value of his property. 
 Moreover, as his report must be based on the last inven- 
 tory taken, it is important to know when the values 
 were placed on his property. It is further required that 
 the applicant for credit state if there are any judgments, 
 judgment notes, chattel mortgages, or other loans against 
 him; also if he has "pledged or transferred outstanding 
 accounts or property remaining under his control." 
 
 The property statement blanks made out by the 
 National Association of Credit Men require the applicant 
 for credit to state what books of account he 
 keeps. This is important for various reasons. . ? 
 Failure to keep proper books of account is re- 
 sponsible for a great many failures, and when the credit 
 man is asked to give credit he should know if the appli- 
 cant for credit keeps books and what kind of books he 
 keeps. This question is now of great importance on 
 account of its relation to the National Bankruptcy Act, 
 as under the Act a failure to keep proper books is an 
 assigned reason for refusing a discharge to a debtor. 
 Legislation in New York makes it an evidence of fraud 
 if the debtor who has received credit upon the representa- 
 tion that he keeps books fails to submit his books within 
 ten days after a requisition has been made upon him by 
 a creditor whom he has failed to pay. 
 
 The property blanks of the credit department methods
 
 TO RICH, MANN ft CO., New York 
 
 / For the purpose of obtaining credit no* and hereafter for goods purchased, we here* 
 
 with submit to you the following statement of our resources and liabilities, and will im- 
 mediately notify you of any material change in our financial condition. 
 
 In consideration of your granting credit to the undersigned, we agree that in case of 
 Our failure or insolvency, or in case we shall make any assignment for the benefit of credit- 
 ors, bill of 6ale, mortgage, <ir other transfer of our property, or shall have our stock or 
 plant attached, receiver appointed, or should any judgment be entered against us, then all 
 and every of the claims which you have against us shall at your option become immediately 
 due and payable, even though the term of credit has not expired. All goods hereafter 
 purchased from you shall be taken to be purchased subject to the foregoing conditions as 
 a part of the terms of sale. 
 
 Corporation style . 
 
 City. 
 
 . County . 
 
 -State - 
 
 ' BUSINESS ASSETS 
 
 Value of Merchandise on hand at cost 
 
 If manufacturing, raw material, $ . finished, ( 
 
 on finished, f 
 
 Notes and accounts, cash value- 
 Cash in *"""* 
 Cash in bank 
 
 Bills or accounts receivable, due from officers. 
 
 Patents and patterns. 
 
 Fixtures and machinery 
 
 Total real estate, cash value ___$_ 
 Total encumbrances on real estate, $. 
 
 Total Active Business Assets. 
 
 Equity- 
 
 Dollars 
 
 Cents 
 
 — 
 
 — 
 
 — 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 tUSINESS LIABILITIES. 
 
 Owe for mdse. , open acct , 
 
 of which $ is past due 
 
 Owe for notes for mdse — 
 Owe banks _____ 
 Owe for bills for paper sold 
 Owe others for bor'd money 
 
 Owe taxes and rent 
 
 Mtgs. on fixt's and mach'y 
 
 
 
 Dollars 
 
 
 
 Cents 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 — 
 
 
 Total Business Liabilities. 
 Total net worth . 
 
 Please state location and description of each parcel of real estate, and cash valuation 
 of, and encumbrances on, each 
 
 FORM II. 
 
 Property statement for use by corporations. 
 
 120
 
 Contingent Liabil 
 
 nay i 
 
 Accommodation indorsements 
 
 Indorsed bills receivable and outstanding. 
 
 President 
 
 Vice-Prest _— 
 Secretary -*. 
 , Treasurer _ 
 
 OFFICERS. 
 
 DIRECTORS. 
 
 Authorized capital 
 
 How paid in : Cash, $ 
 
 other property, and how valued- 
 
 — Subscribed — 
 Other property- 
 
 Paid in. 
 
 Description of 
 
 laws or special act ?. 
 Date of charter ? 
 
 In whose name is title to real estate held ? 
 
 -Incorporated in what State and under what general 
 . Nature of business? 
 
 -Suits pending, and of what nature?. 
 
 way 
 
 Amount of annual business. 
 
 Are any merchandise creditors secured in any 
 
 Annual expenses. 
 
 Annual dividends. 
 
 When was last dividend declared ?_ 
 
 Insurance carried on merchandise . 
 
 Real estate ________ Regular time of taking inventory 
 
 bank accounts ^m'th 
 
 Rate. 
 Fixtures and machinery 
 
 Keep 
 
 Keep following books of account. 
 
 If you have pledged or transferred outstanding accounts or property remaining under 
 your control, state amount thereof and amount received, or to be received, on account of 
 such pledge or transfer 
 
 Buy principally from following firms : 
 
 Name 
 
 Address 
 
 What line of 
 business? 
 
 
 
 
 
 
 
 
 
 
 
 
 
 The above statement, both printed and written, has been carefully read by the 
 undersigned, and is a full and correct statement of our financial condition as of 
 
 -191- 
 
 Corporation Signature- 
 By 
 
 All questions must be answered, insert ciphers in absence of any amount When the 
 words "Yes," "No" or "None" will correctly answer the questions, write them in their 
 proper places. 
 
 FORM II.— (Continued.) 
 
 121
 
 122 MERCANTILE CREDIT 
 
 committee of the National Association of Credit Men 
 require the signature of a member of the firm seeking 
 credit in the name of the firm under the following affir- 
 mation: " The above statement both printed and written, 
 has been carefully read by the undersigned, and is a full 
 and correct statement of my or our financial condition." 
 Property statement Form II is devised for use by corpora- 
 tions and is intended to procure practically the same 
 class of information as is to be secured by Form I. 
 
 The credit man of any well-regulated office will not 
 
 content himself with obtaining information from a single 
 
 source but will collect information on credit 
 
 rave ng a ppii can t s wherever it is available. The 
 salesman. x * 
 
 traveling salesman as a source of credit in- 
 formation will be discussed later. In order to secure the 
 credit information desirable or possible for him to obtain, 
 blank inquiry forms have been made out of which Form 
 III is a sample. These blanks especially are relatively 
 brief. They require the salesman to ask the buyer a 
 number of questions and other portions of the blank can 
 be filled out by the salesman himself. These blanks can 
 be filled out quickly by the salesman, and it will at once 
 occur to the reader which questions the salesman can 
 answer upon observation and which he must ask the 
 purchaser. 
 
 Attorneys residing in the locality of the credit applicant 
 have always been a source of credit information. The 
 
 work of the attorney enables him to possess 
 
 a great deal of information of interest to the 
 attorneys. ° 
 
 credit man. Special credit inquiry forms are
 
 CREDIT OFFICE 
 
 123 
 
 The CarppbfcTT frert Co. 
 
 New Customer Report- 
 To be 6lled oat and sent a» with each oew customers order, or change of firm. Do this to help us tntke 
 
 prompt shipments. 
 
 Address _ 
 R. P. D.. 
 
 (Give N;unes in full.) 
 
 Individual t( Firm, or Officers if Corporation. 
 AGE (about) MaRRIED_ 
 
 I. Owns shop worth about 8. — -■■■ 
 
 % Owns home worth about . ■ % . 
 
 *. Encumbrances on shown , ■ . t. — — — 
 
 4. Stock worth about * 1 
 
 ».' Kind of Business_„ , 
 
 «. Does owner devote all his time to this business ?. 
 
 7. WhatisUxal standing? . , — 
 
 %. Has he good ability ? 
 
 9. Doeshednnkor gamble 
 10. Has been dealing with _ 
 
 13. Is location good? 
 
 14. Does he get good profits?. 
 16. Banks with 
 
 10. Local crop prospects. 
 17. is customer colored ?_ 
 
 19. Wow long in business? 7**" 
 
 19. What is your opinion of customer? (Answer on Teverse side.) 
 
 — ■ — . — - Salesman. 
 
 FORM III. 
 
 Property statement form for use by salesmen.
 
 124 
 
 MERCANTILE CREDIT 
 
 St*. No. 100.522 DETACH AND SEND REPORT BELOW TO 
 
 ART BRASS COMPANY, 
 
 Expires Sept 1, 1913 
 
 299 t. 134thStr«t. 
 
 Name of party reported _ 
 
 19- 
 
 ATTORNEY WILL PLEASE DETACH. READ AND I ILE TF.S STUD. AND NOT D1WLCE NAME OF INQUIRER 
 
 Confidential "Form A" 
 
 Watson, Stouffor ft Dot la , 
 
 New York. 
 
 Uarch 4,1913. 
 
 .!=*_ 
 
 Expires ScpL 1. 1913 
 
 At Ne>» First National Bank Bldg. , Colmnbufl, Ohio. 
 
 Dear Sir: — Kindly Uvor ui with as full » report u pruabV of (he party, of 6rm, named below, which we pledge yoy wo 
 will treat in the strictest confidence. Mid to us in enclosed tUmped euvelope. Wc will gladly reciprocate your fattM— whetv 
 
 eve, opportuDUy occur*. A p.nmpt reply w,U be duly appreciated Subscriber's No. \QQ 522 
 
 Name 
 
 Address . , , 
 
 I. r till individual name* ? 
 
 3 How long in business ' 
 
 A Habits and business ability ' 
 
 b. Estimated value ol stock > 
 
 6 Repute as lo promptness > 
 
 7. Any home debts owing > 
 
 6- Ever sued ' -,,-,— . - 
 
 9. Ever tailed' 
 
 10 Netunencumbered value of real estat 
 I I. Any resources outside ot business ?- 
 I Z. What u your idea ot net worth > — 
 13. Getting ahead ? 
 Other iruonnaiioo 
 
 Ir.ilmed to speculate t- 
 
 Any claims in attorney i hands f 
 
 It so. give particular! ? 
 
 ll so. give particulars? 
 
 
 * itattoMrr. typ w wri W s tf poufcU, but c 
 
 FORM IV. 
 Business statement form for use by attorneys.
 
 CREDIT OFFICE 125 
 
 manufactured for use by attorneys, of which form (IV) 
 is a sample. It is the custom in some places to mail with 
 the credit inquiry form a check for one dollar, which is 
 considered a fair compensation to an attorney for the 
 service he renders. 1 
 
 It is a common practice for new applicants for credit 
 to give references to business men with whom they have 
 had dealings. In the absence of special forms 
 for this purpose the information solicited by the 
 credit man varies greatly, is usually brief, and 
 is likely to contain little of value. To suit this need 
 Form V was adopted and recommended by the National 
 Association of Credit Men. It is brief and self- 
 explanatory. 
 
 The following is a typical method of procedure of the 
 best credit offices in the opening up of new accounts. 
 With his order for goods from a new customer, the sales- 
 man is required to send in his credit report of the cus- 
 tomer. If the order is for immediate shipment and the 
 salesman's credit report is complete and satisfactory, the 
 goods will be shipped at once, and then a fuller report on 
 the credit risk is obtained for future use. If the order is 
 for shipment in the future or if the credit report of the 
 salesman is unsatisfactory, a further investigation of 
 the credit standing of the buyer is made at once. The 
 standing of the credit applicant is investigated first in 
 the reports of Dun and Bradstreet. If these are inade- 
 quate or unsatisfactory, special reports are requested 
 
 1 This subject will be more fully discussed under the head of 
 Sources of Credit Information.
 
 126 
 
 MERCANTILE CREDIT 
 
 RETURN THIS TO US 
 
 St Louis, 
 
 -19T 
 
 Messrs- 
 
 Kindly give us below YOUR EXPERIENCE with 
 Name . 
 
 P. O _ B. a_ 
 
 ALL INFORMATION WILL »B CONSIDERED STRICTLY CONFIDENTIAL 
 
 Yours truly, 
 
 National aosocn 
 
 ' Credit Mbn 
 
 GOOD FORM & CO. 
 
 National Association or Credit Mm 
 
 Sold Since. 
 Terms 
 
 Highest Recent Credit $ 
 
 ( On Open A 
 Owing Now< 
 
 ( On Notes, 
 
 Past Due . 
 
 P 
 
 (O 
 
 On Open Ace 
 
 n Notes, 
 
 First Order, $. 
 
 Other Information- 
 
 This form can he obtained only from 
 National Association of Credit Men, 
 41 ParkRoTiyJfewJfor k , 
 
 at the following prices : 
 50(F-$3.Z5 
 
 TOOfF^BTiRT 
 
 MANNER OF PAYMENT 
 
 Discounts 
 
 Prompt and satisfactory 
 
 Slow bat considered good 
 
 Slow end unsatisfactory 
 
 Pays C. O. D. 
 
 Sell for eeab only 
 
 Account secured 
 
 Notes secured 
 
 Account closed for cause 
 
 Makes unjust claims 
 
 Collected by attorney 
 
 FORM V. 
 Business statement form to be used by those given as references 
 and others who have had business relations with credit applicant.
 
 CREDIT OFFICE 127 
 
 from either or both of these agencies. The credit report 
 of the salesman should always contain a list of references 
 given by the buyer. These are written to at once. Using 
 blank forms similar to Form IV the office writes to an 
 attorney in the town where the credit applicant con- 
 ducts his business and also to an attorney in a town 
 where he formerly conducted a business. A banker of 
 the community of the buyer's place of business may also 
 be written to with reference to the prospective customer. 
 From these various statements and from the property 
 statement obtained from the credit applicant prior to the 
 shipment of goods or after they are shipped, the credit 
 man determines whether credit shall be given and if so 
 what the amount of the credit shall be. These reports 
 are then all filed away in the large envelope used by 
 the credit man for information concerning his credit 
 customers. 
 
 Another document of value to the credit man in grant- 
 ing credit is the comparative property statement form. 
 
 The larger mercantile houses and banking 
 
 Compara- 
 mstitutions appreciate the value of the com- tive 
 
 parative statement form. Well -organized property 
 credit offices require a property statement statement 
 once a year from those who receive credit 
 from them, and when occasion warrants it, more fre- 
 quently. The comparative statement form is a large 
 sheet in which is placed in a single column the essen- 
 tial facts from a property statement giving the finan- 
 cial standing of the applicant for credit. As the num- 
 ber of columns corresponds to the number of years
 
 128 MERCANTILE CREDIT 
 
 for which a comparison of standing is desirable, it is 
 possible for the credit man to prepare a comparative 
 statement form covering any number of years. 
 
 Where comparative statement forms are kept it is 
 necessary for the credit office to have one comparative 
 statement for each customer. The information from the 
 property statement is usually copied by some one in the 
 office. 
 
 Banks were the first to use the comparative statement 
 forms, and they are used to-day by them to a much greater 
 extent than by mercantile houses. This is perhaps due 
 to the fact that credit customers of banks are more will- 
 ing to submit property statements than are customers 
 of mercantile houses, and the property statement fur- 
 nished the bank conforms more to a standard type 
 than those submitted to mercantile houses. The latter 
 have only recently acquired the privilege of receiving 
 property statements from their credit customers, and 
 consequently the dates for comparative statements have 
 been received only recently by merchants. 
 
 In the absence of a comparative statement the credit 
 man usually compares the recent property statement 
 with those of previous years. The comparative state- 
 ment is valuable to him because at a glance he can com- 
 pare the various elements over a series of years upon 
 which a credit risk depends. 
 
 Credt Banks and mercantile houses have for a 
 
 lines or number of years been granting to their credit 
 
 limita- customers, credit lines or limitations. These 
 
 credit lines or limitations are the maximum
 
 CREDIT OFFICE 129 
 
 amounts which a banking or mercantile house will loan 
 to a customer at any time. These lines are determined 
 upon by credit men after a thorough canvass of the 
 value of a customer as a credit risk. 
 
 When a credit line is determined upon, the policy of 
 mercantile houses differs widely with reference to it. 
 Some treat it as a danger signal and act accordingly. 
 In some cases where the credit line is determined upon 
 the bookkeeper alone passes on accounts only to see 
 that loans are within the prescribed limits. In the 
 great majority of cases, however, all loans within the 
 credit limits receive the attention of the credit man, 
 and to many it is deemed highly expedient that they 
 should receive his consideration. The credit line should 
 be considered a fixed or a permanent matter. It is sub- 
 ject to change, however, with changing conditions and 
 circumstances, and if the credit man would fix these lines 
 wisely, he must know about the purchases of each credit 
 customer, the time allowed him for his payments, and 
 his promptness in paying his bills. 
 
 Credit lines have not been standardized. What is 
 allowed a customer depends somewhat on the whim of 
 the credit man. So many factors enter into a credit 
 risk that no definite rules have ever been evolved that 
 will enable credit men to act with system in determining 
 what credit should be granted. The conditions differ 
 so widely in the sale of different classes of goods that 
 rules which would guide credit men in granting credit to 
 grocers might be very unsafe to hardware men. As a 
 rule, lines of credit can be granted for larger amounts
 
 130 MERCANTILE CREDIT 
 
 where the terms of credit are for brief periods and where 
 the goods are turned many times a year, than where the 
 credit terms are long and where the stock of goods is 
 turned infrequently. 
 
 When credit limits are fixed they are changed fre- 
 quently or are not respected. The circumstances change 
 so often that credit may be given to one customer far in 
 excess of the credit limit, while another customer may 
 be denied a loan up to the credit limit. The factors con- 
 sidered have to do with the extent to which the credit 
 applicant is a customer of the house granting credit, with 
 the terms of credit he desires, his promptness in paying, 
 crop conditions, labor conditions, condition of prosperity, 
 condition of competition where he conducts his business, 
 opportunities for the business where he is located, and 
 with the degree of prosperity of his business. An in- 
 crease or a decrease of the credit risk, and a regard for 
 the credit limit granted to a specific customer depend 
 upon the above-named factors. Although subject to 
 change, credit limits serve a useful purpose in controlling 
 the policy of the credit man within certain limits. 
 
 Banking institutions are now establishing credit de- 
 partments with credit men in charge. Some banks in 
 our large cities have had such departments for 
 
 Credit de- man y years: but it has only been within the 
 
 partments 
 
 of banks. ^ as ^ fifteen years that the credit department 
 
 has been considered an essential feature in 
 
 large commercial banks. Where such departments do 
 
 not exist, the work of a credit department is handled by 
 
 officers of a bank in connection with their other duties.
 
 CREDIT OFFICE 131 
 
 This is especially the case with the smaller banks of the 
 
 country, and it is not at all likely that the smaller banks 
 
 will ever find it profitable to organize an independent 
 
 credit department. 
 
 In the interests of good banking there are many reasons 
 
 for the organization of good credit departments: 1. 
 
 Where loans are made by one or two officers of 
 
 Why 
 a bank, who use no system but retain valuable banks 
 
 information in mind, this knowledge may be should 
 
 lost to the bank if the officer who has charge of ^ ave 
 
 credits dies or resigns. With a credit depart- 
 
 ° ^ partments. 
 
 ment and a credit system this information is 
 preserved. 2. The profits of a bank are determined by 
 the wisdom of its investments, and these are made at 
 greatest advantage where those in charge of the invest- 
 ments have full knowledge of credit risks. 3. Large 
 banks have also the responsibility of advising country 
 banks which deal with them with reference to the value 
 of commercial paper which they buy and other invest- 
 ments which they make. They are also called on 
 frequently by their customers, their depositors, to 
 give advice on investments. Ability to guide others 
 safely requires not only a thorough knowledge of in- 
 vestment conditions, but a suitable system to preserve 
 this knowledge. 
 
 The credit department of banks is not so well es- 
 tablished as the credit department of mercantile and 
 manufacturing houses, but where such a department 
 is established in large commercial banks, the work is as 
 thoroughly differentiated and organized as in the credit
 
 132 MERCANTILE CREDIT 
 
 departments of either mercantile or manufacturing 
 establishments. 
 
 Most banks with credit departments demand a prop- 
 erty statement from prospective borrowers. The en- 
 dorsement by the American Banker's Association and 
 Association of State Bankers of the policy of requiring a 
 property statement gave a sanction to this policy which 
 many of the banks both within and without these asso- 
 ciations had the wisdom to accept. The method of 
 obtaining a property statement ordinarily differs from 
 the method employed by the credit department in a 
 mercantile establishment. When a new candidate seeks 
 credit in a bank, he is usually turned over to the credit 
 man who, using a blank form, obtains answers from the 
 applicant regarding his financial condition and his reasons 
 for credit, etc., and then obtains his signature to his re- 
 port. He usually is requested to call later for an answer. 
 In the meantime the credit man learns what he can of the 
 applicant personally, his business history, his business 
 ability, his reputation in his community for honesty, 
 etc., his habits and his moral character, and then gives or 
 withholds credit depending upon what he learns. 
 
 The credit departments also obtain information on 
 specially prepared blanks from other banks with whom 
 the customer has dealings, from references given by the 
 applicant for credit, from other business houses which 
 have a knowledge of the credit standing of the candidate, 
 and from mercantile agencies like those of Bradstreet and 
 Dun. These credit departments often obtain property 
 statements once a year showing the financial condition of
 
 CREDIT OFFICE 133 
 
 their borrowers. These are tabulated and comparative 
 statements are made out covering several years. One 
 question found in some of the property statements ask- 
 ing how often the accounts of the concern are audited 
 and when they were audited the last time, is especially 
 significant.
 
 CHAPTER VIII 
 
 SOURCES OF CREDIT INFORMATION 
 
 MERCANTILE AGENCIES 
 
 The mercantile agency is an institution organized to 
 investigate the financial standing, the business char- 
 acter, and habits of business men. To put 
 
 what the ^ e ma ^ er briefly, it is a credit information 
 
 agency 
 
 d oes , bureau. There are two classes of agencies, 
 
 the general agency and the special agency. 
 
 Of the first class, the two conspicuous examples are 
 
 the Bradstreet and Dun agencies. The special agency 
 
 obtains credit information in a special line of business, 
 
 as furniture, shoes, coal, etc. Because it specializes, it is 
 
 more efficient than the general agency in procuring and 
 
 distributing information of a detailed character. 
 
 The agency will be discussed here from three points 
 
 of view: 
 
 1. The economic conditions which gave rise to it, 
 and its development to meet the needs peculiar to the 
 United States. 
 
 2. The methods of the agency — its organization to 
 procure and distribute credit information. 
 
 3. The utility of the agency to the business world. 
 The mercantile agency did not exist before the crisis 
 
 of 1837. The industrial area of the United States at 
 
 134
 
 SOURCES OF CREDIT INFORMATION 135 
 
 that time did not extend far into the West. Cincinnati 
 was then the great western city of trade with a popula- 
 tion in 1840 of 46,000. Chicago and St. 
 Louis were small trading ports, the former con diti ns 
 having a population of 4,470, and the latter responsi- 
 of 16,469. Prior to the crisis of 1837, the bleforthe 
 western and southern traders visited the job- 
 bers and manufacturers of the East twice a year to make 
 their purchases. After the seller had a few minutes' 
 talk with a merchant, terms of credit were agreed upon 
 which usually required payment for the goods upon the 
 return of the merchant when he purchased again. The 
 relations between the jobber and the western retailer, 
 between seller and buyer, were personal ones. Credit was 
 granted because the jobber had confidence in the honesty 
 of the trader and in his ability to conduct a successful 
 business. When a merchant started in business, if 
 credit was desired, he took letters of recommendation from 
 his fellow merchants to their jobbers in the eastern 
 trading centers. If retailers lived remote from jobbing 
 centers, their purchases were restricted to the few job- 
 bers with whom they had established personal relations. 
 While the traders of the South and West continued to 
 visit the jobbers of the East, the relations between the 
 buyer and seller were very different from 
 
 p6rson3.1 
 
 those we understand today to be purely re i a ti ns 
 business ones. The trips of the retailers to between 
 the houses in the cities were not only for ^ u y er an d 
 business but for pleasure. When trade rela- 
 tions were established between the jobber and the re-
 
 136 MERCANTILE CREDIT 
 
 tailer, the personal relations between them became of 
 such a character that the retailer usually purchased ex- 
 clusively of the jobber. The standards of business and 
 personal honor then demanded fairness in prices and in 
 quality of goods on the part of the jobber, and prompt- 
 ness in paying his debts as contracted on the part of 
 the retailer. An element of shrewdness and a power 
 of personal control were acquired by the city merchant 
 in those days which the changed methods of buying and 
 selling have made unnecessary now. 
 
 Nearly all the states and territories had insolvency 
 
 and collection laws, but they were rarely enforced, as 
 
 eastern merchants seldom attempted to pros- 
 
 Insol- ecute bankrupts in the West and South. 
 
 vency and jy[ any merchants, even as late as the '40's, 
 
 collection . . .. 
 
 laws of claimed that it would be better it all the 
 
 states. collection laws of the states and territories 
 
 were abolished, as higher standards of honesty 
 
 and honor would be developed without them. 
 
 These earlier notions gradually changed. The jobber 
 
 had but little definite information as to the standing of 
 
 _ those to whom he granted credit, and he 
 
 Failure of . 
 
 early frequently discovered that his confidence had 
 
 methods been misplaced. Especially during times of 
 
 of granting p an j cs an( j depressions, he lost heavily by 
 
 injudiciously granting credit. Some of the 
 
 larger jobbing houses that could afford to do so sent out 
 
 agents among their customers to make collections and 
 
 to investigate their standing and the character of their 
 
 buiness. The means of travel were slow and difficult,
 
 SOURCES OF CREDIT INFORMATION 137 
 
 and this method of learning the status of those seeking 
 credit proved to be very expensive. At least all the small 
 jobbing houses were denied this means of investigation. 
 Such credit relations prevailed exclusively among busi- 
 ness men to the close of the crisis of 1837. After the 
 crisis had spent its force, and thousands of merchants had 
 been retired from business, the granting of credit with 
 little or no knowledge of the standing of those seeking 
 it became a very serious problem to both the jobber and 
 manufacturer. Then, too, as business relations began 
 to extend over a larger area, a greater need was felt for 
 information concerning the business standing of men 
 continually seeking credit, which could be procured 
 nowhere but in the home of the merchant. It was at 
 this time and under such conditions that the mercantile 
 agency arose. 
 
 The rise of the mercantile credit agency may be traced 
 to the eagerness with which information kept by the credit 
 man of a large jobbing house of New York 
 was sought for by sellers. The credit man y r s amza - 
 recorded in a book all the information he age ncies. 
 could collect over a series of years concerning 
 the traders with the house. The house failed, but the 
 information was preserved. Other houses knowing 
 this sought out the credit man to get his informa- 
 tion. He began to sell it, and in this act of his we 
 have the origin of the first mercantile agency. Tap- 
 pan & Co. was organized in 1841. In 1846 Benjamin 
 Douglas was admitted to the company as a partner of 
 Tappan. In 1854 Graham Dun became a partner of
 
 138 MERCANTILE CREDIT 
 
 Douglas and the firm name was Douglas & Company. 
 In 18G0 Douglas withdrew, and since then the business 
 has been conducted under the name of R. G. Dun & Co. 
 The Bradstreet Company, the other leading agency, was 
 organized in 1849. Mr. John M. Bradstreet, a lawyer 
 of Cincinnati, had charge of a large insolvent estate and 
 learned by this means a great deal of credit information 
 concerning people in and near Cincinnati. He made 
 arrangements with several New York houses which en- 
 abled him to sell his credit information to them. This 
 led him to organize an institution which dealt exclusively 
 in credit information. He was soon joined in the busi- 
 ness by his son, and the name was changed. The more 
 recent change of title was in 1876, when the firm was in- 
 corporated as the " Bradstreet Company." Other general 
 agencies for a time attempted to compete with the Brad- 
 street and Dun companies, but they failed, and now these 
 two companies have practically a monopoly of the gen- 
 eral agency business. 
 
 The agency was organized at first primarily in the 
 
 interest of the jobber. Customers from different states 
 
 and territories came to him seeking credit. 
 
 Develop- There was great need for information on the 
 ment of . 
 
 agencies, changing conditions of the dealers. As job- 
 bing houses were established in western centers, 
 branch offices were opened to collect and disseminate 
 information. By 1850, besides the offices at New York, 
 Boston, and Baltimore, western offices had been estab- 
 lished at Cincinnati, Louisville, and St. Louis. By 1857, 
 seventeen offices, besides the central one in New York, had
 
 SOURCES OF CREDIT INFORMATION 139 
 
 opened in trading centers. Each office was supported 
 by the trading community of which it was the center. 
 The office in Boston had charge of the trading community 
 of New England, the one in Charleston the community 
 of South Carolina and Georgia, while the Ohio Valley 
 was divided between the offices at Pittsburg, Cincinnati, 
 and Louisville. All the branch offices were under the 
 control of the central office in New York, and they were 
 all governed by uniform rules. 
 
 It could not be expected that an institution which 
 encroached upon the personal rights of the individual 
 and pried into the business affairs of merchants would de- 
 velop without opposition. It met with bitter opposi- 
 tion by retailers, and at first it was not generally en- 
 dorsed by jobbers. While many of the jobbers accepted 
 it at once as valuable to them and supported it, others 
 looked upon it as an unnecessary institution, and some 
 agreed with retailers that it was contrary to the spirit 
 of free institutions. At first reports had to be based 
 upon hearsay evidence in communities and upon records 
 of deeds and mortgages. Only in exceptional cases 
 could the merchant be induced to give his standing. 
 This prejudice against the agency has been bitter to 
 within the last generation. Only within the last twenty 
 years has the agency been conceded the right to require 
 a signed statement. Even now the signed statement 
 is repeatedly refused; but merchants generally feel that 
 it is to their interests to comply with the requests of the 
 agencies in giving statements over their own signature. 
 A right has been established here by private companies
 
 140 MERCANTILE CREDIT 
 
 to inquire into the business affairs of individuals, a con- 
 dition which has been impossible in foreign countries. 
 In no country other than the United States do the 
 mercantile agencies go so far in investigations of private 
 business. Elsewhere the rights of an inquisitorial char- 
 acter have been monopolized chiefly by the state. 
 
 An investigation of certain business conditions in the 
 United States and abroad will reveal the causes of the 
 difference. In older countries business relations are 
 more fixed; they move in more definite channels, and are 
 better understood. Private agencies exist in other coun- 
 tries, but their information on the credit worth of appli- 
 cants for credit is not as complete as in the United 
 States. 
 
 In Germany a credit reform association was organized 
 in 1882 by manufacturers, merchants, bankers, and other 
 business men, for the purpose of distributing confidential 
 information regarding the standing of firms seeking 
 credit, and of collecting delinquent debts. The informa- 
 tion procured and disseminated, however, was based on 
 the records of business men in their dealings with one 
 another, and on what could be learned in a general way as 
 to their financial standing. This association, though still 
 in existence, is not highly efficient, because the oppor- 
 tunity of procuring statements from merchants over their 
 own signature is denied it. Even the right to investi- 
 gate their standing from government records is re- 
 stricted. In the United States, on the other hand, 
 records have always been open to the inspection of the 
 public within reasonable limits.
 
 SOURCES OF CREDIT INFORMATION 141 
 
 The mercantile agency here grew out of our credit 
 system under the peculiar conditions of the rapid exten- 
 sion of commerce in a new country. Com- 
 mercial centers were springing up in the Why con " 
 newly settled parts of the south and west, America 
 and new customers were continually appearing were 
 in eastern houses and asking for credit. Busi- favorable 
 ness firms in the early days had but a transient ° r grow 
 existence. Attachments to a community agencies, 
 had but little force, and migration to loca- 
 tions where more enticing opportunities were presented, 
 was frequent. Business, too, was much more specula- 
 tive in its nature then than now. While great successes 
 are not infrequent in new countries, the business death 
 rate, too, is high. In older countries business connections 
 are more fixed, and business methods assume a more 
 conservative tone. The same firm name often prevails 
 in a community for generations, and the character 
 of the business is analogous to that of Tennyson's 
 "Brook." While great successes are very infrequent 
 and almost impossible, the business death-rate compared 
 with new countries is low. With the constantly shift- 
 ing changes in mercantile life in America in early days 
 credit was freely extended. Under these conditions 
 debtors are more inclined to permit inquiries regarding 
 their business standing. The two periods which com- 
 pletely unsettled business relations were most responsible 
 for the origin and growth of mercantile agencies. The 
 origin of the institution is traced to the endeavor to re- 
 store commercial order from the bankrupt institutions
 
 142 MERCANTILE CREDIT 
 
 left in the wake of the crisis of 1837, and the period 
 of its greatest prosperity followed the unsettled busi- 
 ness relations created by the Civil War. It is at such 
 times that the business houses appreciate most the 
 need of such information as can be given by organized 
 agencies. 
 
 Retailers finally saw many of the advantages which the 
 agency conferred. While the close personal relations 
 between themselves and the city merchants 
 .. gradually disappeared, this loss was compen- 
 
 sated for in other ways. As soon as the 
 agencies published the standing of business men, it was 
 unnecessary for them to confine their city trade to one 
 or a few merchants. They took advantage of the com- 
 petitive principle and purchased where the best bar- 
 gains were to be had. When they became subscribers 
 to the agency, they learned what merchants in the 
 city had the best rating, and this influenced them in 
 buying. 
 
 In local communities the merchant grants credit to 
 those only in whose intention and ability to pay he has 
 confidence. Before credit is given, a personal knowl- 
 edge of the man is necessary. Bankers likewise acquire 
 a personal knowlcedge of men before credit is given. 
 With the jobber and manufacturer the case is different. 
 Their customers are distributed over a wide area, they 
 come in contact with them only occasionally, and con- 
 sequently their facilities for knowing customers are 
 more meager than those at the command of the banker 
 and retailer.
 
 SOURCES OF CREDIT INFORMATION 143 
 
 To the jobber and manufacturer the service of the 
 agency was seen to be invaluable so long as the reports 
 were accurate. The larger houses which sent value to 
 agents to investigate the standing of their manufac- 
 customers, found that the system provided * urer and 
 by the mercantile agency permitted them to 3 ° 
 secure their information more cheaply. They were 
 notified as to who the reliable merchants were, and 
 were warned against men without business standing and 
 of bad financial habits. A merchant who found himself 
 unable to pay his debts frequently moved to a com- 
 munity where he was unknown, secured credit, if pos- 
 sible, and began again. In keeping careful records the 
 agency traced these men from state to state, creditors 
 were notified, and either settlements were effected or 
 credit was refused. 
 
 The honest merchant derives an advantage when the 
 agency makes it impossible for the unworthy to receive 
 credit, as he is freed from competition with undesir- 
 able competitors. The competition of the business 
 pirate and of the incapable is dreaded by honest mer- 
 chants. Those who purchase without paying for what 
 they buy are most indifferent as to selling prices, and the 
 competition of such men makes deep inroads into the 
 trade of other merchants. The same can be said with 
 equal certainty of the merchants without business ca- 
 pacity, whose chief aim is to have a large trade regardless 
 of selling prices, and who sooner or later must go down 
 in the competitive commercial battle. Through the 
 continued inspection and observation of the work of
 
 144 MERCANTILE CREDIT 
 
 business men, a force is exerted which lifts the methods 
 and ideals of business to a higher plane. Favorable 
 reports are responsible for credit, and to credit is fre- 
 quently due business success. The agency contributes 
 one of its chief services in working out a selective proc- 
 ess by which the weaker members of the mercantile 
 community are eliminated, and the most capable are 
 permitted to survive. 
 
 One of the rights acquired by the mercantile agency 
 
 is to demand a signed statement of the merchant. This 
 
 demand is by no means universally complied 
 
 with, but is gradually growing so that mer- 
 statement. ' . . 
 
 chants are beginning to feel that a difference 
 
 is made in their standing when they refuse to give it. 
 It possesses a legal status, since false statements make 
 the individual criminally liable for obtaining goods under 
 false pretenses. On this account it is considered valu- 
 able to the granter of credit, and is given with care by 
 the merchant. Individual reports have been given all 
 along when requested, and one of the chief services of 
 the agency consists in doing this. 
 
 Organization. 
 
 The agencies are organized under the control of cen- 
 tral offices in New York. The country is divided into 
 districts, and in each district is an office to be 
 
 Orgamza- SU pp or ted by the district and to have charge 
 
 tion of the 
 
 agencies. °^ the collection and the dissemination of 
 
 information within the district. The R. G. 
 
 Dun Co. has 223 such districts. In each district there
 
 SOURCES OF CREDIT INFORMATION 145 
 
 are usually many counties. The company has three 
 
 classes of investigators: (1) the traveling reporters, who 
 
 visit every locality at least twice a year, and (2) the 
 
 local reporter, who usually resides in the county seat, and 
 
 (3) an attorney, who also resides in the county seat. 
 
 Both the traveling reporter and the local reporter serve 
 
 an apprenticeship in the district office before they are 
 
 employed as reporters. The attorney who is employed 
 
 as reporter as a rule gives only a portion of his time to 
 
 the work and makes emergency reports or reports of 
 
 developments which the district office needs to know at 
 
 once. He is also the advisory agent of both the traveling 
 
 reporter and the local reporter. 
 
 In some cases the work is divided into the difficult and 
 
 the less difficult tasks and the more experienced men are 
 
 put on the hardest problems. In the larger 
 
 cities the work is classified with respect to s P ecia "~ 
 
 zation in 
 kinds of business, and reporters specialize wor k. 
 
 on classes of work. There is a great advan- 
 tage in this because where there are many lines of busi- 
 ness a reporter is put on each line; as a result he be- 
 comes an expert in reporting on his particular class of 
 business and his services are continued in that field for 
 years. 
 
 Each district office often has a number of sub-offices 
 in its territory. The number of sub-offices depends upon 
 the size of the district and other conditions. Sub- 
 From these sub-offices reporters are sent out offices, 
 over the territory of the sub-office to make investigations 
 and reports.
 
 146 MERCANTILE CREDIT 
 
 Each of the two leading agencies has foreign offices in 
 every civilized country. The number of these offices 
 . depends on the size of the country and the 
 tion of importance of its trade to the United States- 
 foreign The R. G. Dun Company has four offices in 
 
 ft ifl f QC 
 
 Mexico and one in all the leading cities of 
 Europe. From these offices traveling reporters are sent 
 out to collect trade information. While the office is 
 managed by an American the traveling reporters are 
 almost invariably natives of the countries where the offices 
 are situated. The reports obtained abroad are not as 
 complete as the reports secured from business men in the 
 United States, nor is there any great degree of uniformity 
 of reports of the different countries. The managements of 
 foreign offices in each country study the habits, methods, 
 and policies of business men especially with reference to 
 credit and there obtain such information as will make 
 their reports conform as nearly as possible to the Ameri- 
 can reports. The information collected at the foreign 
 offices is primarily for the benefit of American exporters 
 who are subscribers to the agency. Foreign business 
 men, however, make some use of the special reports ob- 
 tained by the foreign offices. 
 
 In the New York office are assembled all the reports 
 
 made out both at home and abroad for both the Dun and 
 
 Bradstreet agencies. The Chicago office is to 
 
 Clearing a j egg ex ^ en -t a clearing house for reports. 
 
 house 
 
 offices. ^ n * ne Chicago office are collected all reports 
 
 made out in the western part of the United 
 
 States, Alaska and Mexico. There is an advantage in
 
 SOURCES OF CREDIT INFORMATION 147 
 
 having territorial clearing houses as any one in a given 
 district desiring reports from other sections of the district 
 can obtain them sooner than if he had to send to New 
 York for them. For instance with the present plan a 
 merchant in Minnesota desiring reports from New Mexico 
 can send to Chicago for copies of them. Copies of reports 
 are always made out, and any office can obtain reports 
 from any district where its subscribers are interested. 
 The Columbus office obtains reports from every county 
 in Ohiq outside of the counties where Cleveland and Cin- 
 cinnati are situated, because its patrons are interested in 
 reports from every county in the state outside of these 
 two cities. 
 
 Information is secured directly from merchants and 
 manufacturers, and they are asked to make a signed 
 statement giving the status of their business, 
 containing assets, liabilities, capital stock, in- - 
 cumbrances on property, etc. Form VI is securing 
 the property statement form for corporations; credit 
 Form VII is the property statement form for * 
 individuals and partnerships, used by the R. G. 
 Dun Co. The differences in the questionaires of the two 
 forms are due to the differences in organization and in 
 responsibility of the two types of concerns. If the 
 person should refuse to make a signed statement the 
 information is reported orally. If he refuses to give 
 any information at all, the investigator finds out what he 
 can from public records and from people in the com- 
 munity. Whether a signed property statement is made or 
 not the public records are always investigated to learn if
 
 148 MERCANTILE CREDIT 
 
 Statement as a Basis for Credit 
 
 MAL>B TO 
 
 R. G. DUN & CO. 
 
 Location County of Stmte of 
 
 From Inventory ot- 
 
 Daie of tnrfirp^ratinn . ... Under Laws of_ 
 Authorized Capital Stock. $ No of Shares P 
 
 Amount of Stock subscribed, $ Paid in, IN CASH. 
 
 Amount paid in otherwise than in cash and how. $ 
 
 Limit of indebtedness allowed. $. 
 
 Bonded Debt, $ Drawing interest at. 
 
 Whom does the Corporation succeed ? 
 
 President. 
 
 Vice- President, 
 
 Secretary, 
 
 Treasurer, 
 
 Superintendent or General Manager 
 
 DIRBCTORS. 
 
 FORM VI.
 
 SOURCES OF CREDIT INFORMATION 149 
 
 a. » emt. 
 
 Real Etutt and bnttdingv •$- 
 
 Machinery and plinx . 
 
 Stock oo hand rav and finished. • . . 
 
 Bill* receivable, at realizable value. . • 
 
 Accounts receivable, considered good. »•»•••••* 
 
 Cash on hand and in bank ..,•... 
 
 Ail other assets, exclusive of patent rights. 
 
 Total Assets, &- 
 
 LIABILITIES. 
 
 For merchandise, open account . • • ... S , 
 
 Bills payable, 
 
 For machinery. •...•••»• — ■ 
 
 Mortgages on real estate, •»••..« . 
 
 Debts secured by mortgage (or lien) on personality. . . __ ______ 
 
 For borrowed money, unsecured, ...••• , 
 
 All other liabilities, contingent and otherwise, . . . . 
 
 Total. Liabilities . , $_ 
 
 Amount of Assets over Liabilities, .....••• $_ 
 INSURANCE ON MERCHANDISE, $ 
 
 ON BUILDINGS. MACHINERY AND PLANT $_ 
 Yearly extent of business, 8 
 
 Bank and other References:. 
 
 ADDITIONAL REMAR1 
 
 FORM VI.— (Continued.)
 
 150 MERCANTILE CREDIT 
 
 Statement as a Basis for Credit 
 
 NADC TO 
 
 R. G- DUN & CO. 
 
 Of the Financial Condition of 
 
 Location County of State of. 
 
 Front Inventory of 190 Business 
 
 Dated 190 
 
 ASSBTS. 
 
 Merchandise on hand and in transit $. 
 
 Outstandings, including bills receivable, open accounts, etc at realizable value, . _ 
 
 Cash on hand arjd in bank, 
 
 Other TERSONAL assets, consisting '•< 
 
 Total available assets ..-.., $. 
 
 LIADII.ITIE8. 
 
 For merchandise not due, • 4 • * . . » $ . 
 
 For merchandise past due,' « » # • » t • — 
 
 Loans from bank, ,,,<••,,, . 
 
 Loans other than from bank. ,...,.. . 
 
 Other obligations, ,,,,..,... . 
 
 Total liabilities. , f-. 
 
 Surplus In business, , . . , 
 
 RF.AL ESTATE: Describe, locate, and value separately, and in whost ntimt held 
 
 Total value of real estate, ' & 
 
 Mortgages or amount unpaid thereon, • a i , • ________ 
 
 Equity in real estate, . . , . , $_ 
 
 Total worth, in and out of business, ...,',,. 
 Insurance -on stock, % On rtal estate, $ 
 
 Annual business amounts to $ Amooot of legal exemptions. $ , 
 
 Amount of chattel mortgages or judgments, % 
 Individual obligations of each partner. 
 
 Ever burned nut ? If so, state circum-rtances of fire, 
 Give full name of all the partners, ________ 
 
 ftlfltlKr* IgUMO* wt 6*V 
 
 FORM VII.
 
 SOURCES OF CREDIT INFORMATION 151 
 
 there are mortgages or other encumbrances on the 
 property. The agency also learns what it can of the 
 habits and managing ability of the manager of the busi- 
 ness. It finds out whether he attends to business, what 
 his reputation for integrity and promptness is, and 
 whether or not he speculates outside of his business. 
 Whenever any suits are brought against him or when 
 a mortgage on his property is given, or when losses are 
 sustained by fire, these facts are immediately reported 
 by the local agent to the branch office, and the creditors 
 of the merchant are notified. Regular reports are made 
 twice a year. 
 
 All the information gathered is classified and filed 
 in card cabinets with reference to counties and cities, 
 the names of the firms represented being ciassifv- 
 arranged alphabetically with reference to ing and 
 
 cities. Whenever an inquiry is made re- filin g in- 
 
 ,. n ,1 i_ j. ,i . • formation, 
 
 gardmg a firm the number of the inquirer is 
 
 placed on the firm card. If changes take place in th' 
 
 status of the firm, the inquirer can be informed at onct 
 
 The information is distributed to the trade through 
 
 the quarterly reference books and special reports. 
 
 Suscribers pay $100 a year for the quarterlies, 
 
 and for a certain number of special reports. ^ istn °y" 
 
 . tion of m- 
 
 When all the regular reports are received and formation. 
 
 many of the special reports, the rates are 
 much greater. Some of the subscribers to the two lead- 
 ing companies pay as high as $30,000 annually for the 
 services rendered. Each subscriber is invited to submit 
 a list of his customers in which he is interested. Some
 
 152 MERCANTILE CREDIT 
 
 submit names of all their customers, while others give 
 no report at all. However, the names submitted in- 
 clude nearly all concerning whom subscribers desire 
 specific reports. When a special report is desired, the 
 information is usually wanted immediately by the sub- 
 scriber. The information at hand is collected, and, as 
 a rule, it is reported within a day. If there has been 
 an important change in the work of the concern, so that 
 an investigator must visit the manufacturer or merchant, 
 sometimes several days are required to make the report. 
 In the quarterly reference books furnished the sub- 
 scribers by the two agencies, business concerns are classi- 
 fied with reference to their capital rating 
 
 Quarterly an( j crec ^ rating. Signs are used to indicate 
 
 reference 
 
 books. * ne ratings. Nearly 20 signs are used to 
 
 indicate financial ability and about 10 to 
 indicate credit standing. Many factors enter into the 
 rating assigned a business man besides his financial re- 
 sponsibility. His promptness in paying, his business 
 ability, his personal habits including his inclination to 
 speculate outside of his business, his refusal to furnish a 
 report to the investigators, etc., are all factors which must 
 be taken into account in assigning him a rating. In these 
 signs which designate credit ratings is condensed a great 
 deal of information. They are used for purposes of con- 
 venience to subscribers to enable them to read at a glance 
 the credit rating of those in whom they are interested. 
 Then, too, without such a condensation of information the 
 quarterly reference books would be too bulky to be usable. 
 Until about five years ago the agencies issued daily
 
 SOURCES OF CREDIT INFORMATION 153 
 
 sheets or reports to supplement the quarterly reference 
 books. To take their place greater use is made of the 
 special reports. The daily trade reports be- Discon- 
 came bulky and inconvenient to use. When tinuance 
 first issued they were intended to convey of dail y 
 confidential information to subscribers, but re P or s - 
 instead of being so treated they fell into the hands of 
 collectors and collecting agencies and were used by them 
 with great regularity in furthering the interests of their 
 business in preying on those whose credit standing was 
 not strong. To protect the trader from the irresponsible 
 collector and to guarantee that the information furnished 
 should be used only by those for whom it was intended, 
 the agencies abandoned issuing the daily reports and gave 
 more attention to the preparation of special reports 
 which were sent to subscribers. Credit men who at 
 first objected to the discontinuance of the daily reports 
 now find the special reports more satisfactory to them. 
 An exceedingly valuable service is rendered by the 
 two agencies, through their magazines, in reporting 
 business conditions. These weekly reports Maea- 
 furnish far more valuable and reliable infor- zines of 
 mation on the status of business conditions, the 
 of trade and market conditions in every a g encies « 
 section of the country, than any publication dealing 
 with similar subjects. With agents in every section of 
 the United States, and even in foreign countries, the 
 agencies occupy a strategic position for collecting and 
 making public reliable information which enables busi- 
 ness men to adjust their plans in conformity to changes
 
 154 MERCANTILE CREDIT 
 
 continually taking place in the business world. The 
 fact that this is only an incidental feature of their busi- 
 ness in no way lessens their value. 
 
 Utility of the Agencies 
 
 Recently there has been a great deal of criticism of the 
 mercantile agencies by credit men and organizations of 
 credit men. The formation of credit men's associations 
 and exchange information bureaus, and the efforts of in- 
 dividual credit men to gather a class of information 
 concerning solicitors of credit which is not furnished by 
 the agencies, are evidences of the shortcomings of the 
 mercantile agencies from the point of view of the credit 
 man. Mr. Prendergast in his work "Credit and Its 
 Uses" claims that "there is a distinct feeling that while 
 the mercantile agency service is valuable, it is not in- 
 dispensable. Many of them have come to the opinion 
 now that this class of information is only secondary." 
 However, after several years of experience with credit 
 exchange bureaus the complaint is made that some of 
 the members of the bureaus rely exclusively on the bureau 
 for credit information instead of subscribing to mer- 
 cantile agencies and having the two sources of infor- 
 mation supplement each other. 
 
 The criticism of the agencies by credit men has led to 
 a great improvement of their service in the last twelve 
 Improve- or fifteen years. The National Association 
 ment of of Credit Men has a standing committee on 
 service of mercantile agencies, and many of the local 
 agencies, associations of credit men have such a com-
 
 SOURCES OF CREDIT INFORMATION 155 
 
 mittee. These committees have cooperated with the mer- 
 cantile agencies, the service of the latter has been im- 
 proved, and a better understanding prevails between the 
 mercantile agencies and credit men as a result of their 
 cooperation. 
 
 The chief criticisms of the mercantile agencies are 
 the following: 
 
 1. Reports of agencies are sometimes misleading since 
 the failures of those who have a good standing with Dun 
 and Bradstreet sometimes occur. 
 
 2. Special reports furnished are unsatisfactory on 
 account of the delay in securing them. 
 
 3. They fail to furnish ledger information. 
 
 4. The reports are lacking in system and definiteness. 
 
 5. The reports lack in comprehensiveness, in detail, 
 and in attention to essential elements. 
 
 Credit men and the agencies themselves are better 
 
 informed as to the validity of these criticisms than the 
 
 writer. A few observations, however, may 
 
 be made with safety. Where several hun- y . 
 
 mistakes 
 dred thousand reports are made annually, are ma( j e# 
 
 covering all business conditions and every 
 section of the country, it is to be expected that some 
 errors will be made, and that some Houses will be de- 
 clared to be in good standing which go into the bank- 
 ruptcy court. When judged by this standard alone the 
 percentage of such errors determines the efficiency of 
 the agency. 
 
 That the agency is slow with its reports is only partly 
 true. Much depends on the nature of the informa-
 
 156 MERCANTILE CREDIT 
 
 tion desired and the difficulty of obtaining it. No rules 
 
 can be given specifying the time required for such a 
 
 report. If the agency has all the informa- 
 Aire 
 o^o^rSoe ti° n desired at hand the report can be fur- 
 
 slow in nished the same day that it is requested. If 
 
 making t ne information must be procured after the 
 
 . ., request for it is received it will take one or 
 reports? ^ 
 
 several days to make out the report — the time 
 depending upon the difficulty of securing the desired 
 information. 
 
 The agencies have failed to furnish ledger information 
 and they claim that it is impossible for them to devise 
 a system to exchange ledger information, 
 cannot ^ ^ as ^ een suggested that the agencies fur- 
 
 furnish nish reports free to all who furnish the agency 
 ledger ledger information. Both agencies refuse to 
 
 in orma- ^ Q ^ a j S} claiming that as they are private 
 money making concerns it would be impos- 
 sible for them to adopt this policy without eliminating 
 in a measure the source of their profits. 
 
 The criticism that the reports of the agencies are 
 lacking in uniformity of form and development has un- 
 doubtedly improved the character of the 
 reports. However, the argument of credit 
 men that a universal form of report should 
 be adopted to facilitate the reading of reports by credit 
 men, does not seem to be valid. Both agencies require 
 their reporters to follow a topical order of development 
 in making their reports. However, both agencies abso- 
 lutely refuse to adopt a uniform form of report, a thing
 
 SOURCES OF CREDIT INFORMATION 157 
 
 which would dispense with the need of having the credit 
 men read all of each report. They claim that their re- 
 ports are made out in such a way as to require the en- 
 tire reading of a report and that it is only by reading 
 everything that is reported that the credit man can have 
 an adequate idea of the credit situation of the applicant 
 for credit. Reporters are given the greatest latitude to 
 write their reports in such a way as will give a correct 
 view of the standing of the business reported. 
 
 With reference to comprehensiveness, to detail, and 
 to emphasis on essential elements improvements are being 
 made by the agencies. Shortcomings of reports in these 
 respects are due chiefly to the inefficiency of reporters. 
 Agencies claim that they are demanding higher stand- 
 ards of efficiency of their reporters and that they are 
 increasing the costs of their service in making their 
 reports more complete. 
 
 The active competition between the two agencies and 
 the organized interest in them and their criticism of them 
 by credit men will greatly improve the service 
 of the agencies. The business community X. 
 has depended on these agencies so long that agencies, 
 it is not likely that it can soon dispense with 
 their services. It has become so well adapted to them 
 that it is more inclined to look harshly upon their short- 
 comings than justly on their merits. Their real merits 
 could never be appreciated unless it were possible to 
 forego their services for a while. For only in this way 
 could business be made to realize how much it depended 
 upon them.
 
 CHAPTER IX 
 
 SOURCES OF CREDIT INFORMATION 
 
 GENERAL SOURCES 
 
 Salesmen 
 
 Aside from the information obtained from the mercan- 
 tile agency by the credit department it obtains a great 
 deal of information from a variety of sources, 
 salesmen ^ n man y respects the traveling salesman 
 can give occupies, by virtue of his work, a better posi- 
 important tion than any one else to obtain the kind of 
 
 , .. information which a credit department needs. 
 formation. ^ 
 
 He visits every community where credit is 
 granted to business men. He ought to be able to learn 
 through his relations not only with the business man seek- 
 ing credit, but from others in the community with whom 
 he has relations of either a casual or a business character, 
 something of the credit standing of those in the com- 
 munity in whom the credit department of the house is 
 interested. In selling to the buyer he knows from his 
 experience with him whether he is a successful purchaser 
 or not. From frequent visits to his store he knows some- 
 thing about his stock of goods, the character of his trade, 
 and the adaptation of his business to his trade. Aside 
 from this, there are many incidental facts that determine 
 success or failure with which the salesman is familiar. 
 
 158
 
 SOURCES OF CREDIT INFORMATION 159 
 
 In the United States the traveling salesman first ap- 
 peared as a part of our mercantile system primarily as 
 a credit man. Near the middle of the nine- cb aracte , 
 teenth century when jobbers and manufac- of early 
 turers of the East abandoned the policy of work of 
 selling almost exclusively to traders who vis- sa esman * 
 ited their houses, and went into the West after trade, they 
 sent men into the new communities primarily because they 
 were interested in knowing the credit worth of those to 
 whom they wished to sell. These salesmen became at the 
 very outset credit men and collectors as well as salesmen, 
 and it was to render the service chiefly as credit men and 
 as collectors that they were employed as salesmen. With 
 the newer developments of our mercantile system the work 
 of the salesmen and of that of the credit and collection 
 departments have been separated. Through specializa- 
 tion the credit men and collectors have limited themselves 
 exclusively to their lines of work, while the salesmen have 
 become almost exclusively salesmen. In recent years the 
 tendency is to bring the salesman back into the credit 
 work again because it is believed that by virtue of his 
 position he can be of material assistance to credit men. 
 
 The cooperation of the credit man and salesman is 
 not as effective as successful business methods should 
 require. The credit man should be an adviser of the 
 traveling salesman, while the latter is in a position to 
 provide the former with invaluable information. The 
 nature of their work makes them radically different, 
 and an altogether different type of man is developed in 
 each position. The salesman's work compels him to
 
 1G0 MERCANTILE CREDIT 
 
 adapt himself to all classes of people. He is sympathetic 
 and responsive, and his feelings are easily aroused by 
 the woes of the merchant. His success in 
 Differ- selling goods depends upon his personal rela- 
 between tions with the merchant. He becomes ac- 
 the customed to their points of view, and con- 
 
 salesman sequently often becomes more interested in 
 ,. his customers than in his employer. The 
 
 man. credit man, on the other hand, is cold, re- 
 
 served, and unsympathetic. He is not easily 
 moved by the misfortunes of people. His judgment is 
 influenced by no motives other than the financial suc- 
 cess of his firm. The work of the credit man is to 
 make adjustments. His is the last court of appeal. His 
 function is to guide business into safe channels. 
 
 In the business world the work of these two men has 
 been differentiated, because two very different types are 
 demanded and consequently many believe that it is a 
 great mistake to use a salesman as a credit man and 
 to withdraw him to a certain extent from the line of work 
 in which he is efficient into a line to which he is little 
 adapted. For this reason many are inclined to believe 
 not only that the salesman should not do credit work, 
 but that his credit reports are practically worthless. 
 
 The interests of the two are in some ways diametrically 
 opposed. The one is anxious to secure as large an amount 
 of sales as is possible, because his salary is to a certain 
 extent determined by sales. The other is anxious to 
 secure a maximum of sales to reliable firms, or to put the 
 matter in another way, a minimum of sales to question-
 
 SOURCES OF CREDIT INFORMATION 161 
 
 able firms. In most cases the credit man is a stockholder 
 in the concern, and on this account has an additional in- 
 terest in having as few unprofitable sales as possible. 
 
 If the services of the salesman were so rewarded that 
 his total sales would not influence his salary, he would be 
 more serviceable to the credit man. In reporting the 
 character of the business, the type of the business man, 
 the character of the community, the industrial conditions 
 upon which the success of the merchant depends, etc., 
 he can give the credit man facts that are invaluable. 
 From his broader survey of facts, and from his experience 
 in watching credits, the credit man can estimate with a 
 high degree of accuracy the probability of the success of 
 the merchant. In going over routes with salesmen, the 
 credit man can guard the salesmen against certain 
 customers and can direct them into profitable fields. 
 Through the supplementary nature of the work of the 
 credit man and the salesman, and on account of the 
 complementary qualities in the men, they should be 
 mutually helpful, and their cooperation should make 
 busines safe. 
 
 The salesman is sometimes employed in collecting 
 debts, but in this he is usually a failure. The type of 
 man required for selling goods is different 
 from the type required for collecting accounts. esman 
 Besides, there is a direct economic loss in di- collector, 
 verting, even for a part of the time, the atten- 
 tion of a man from a field in which he is skilled into a 
 field for which he is not fitted. The salesman's relations 
 with merchants unfit him for collecting debts from them.
 
 162 MERCANTILE CREDIT 
 
 SALESMAN'S CREDIT REPORT 
 
 FAIRBANKS, MORSE & CO. 
 
 ST. LOUIS, MO. 
 
 (Member ol The National Association ol Credit Men) 
 
 One of these report* must be filled out by the salesman when taking older from customer or customers 
 with whom we have had no previous dealings. Where it is possible to do so each and every question should 
 be answered fully and intelligent!;'. These reports are for the guidance of the Credit Department and when 
 properly filled out are of material assistance in determining the propriety of extending credit. The salesman is 
 requeued to give all information on these forms and not em ody it in letter regarding the order as these reports 
 are to be filed in oar "Credit Folders." 
 
 Nime- 
 
 Address 
 Age 
 
 Business 
 
 How long engaged In - 
 Banks with 
 
 Oans real estate . 
 Incumbrance! 
 
 Stock valued at $- 
 
 Supposed net worth. S- 
 Buys from ________ 
 
 REMARKS: 
 
 FORM VIII. 
 
 Report to be filled out by salesmen when taking orders from new 
 
 customers.
 
 SOURCES OF CREDIT INFORMATION 163 
 L. ADLER, BR05. & Co., Inc. 
 
 Dear Sirs: In response to your request I submit the following information concerning 
 of 
 
 The firm has been in business 
 since ... I 
 
 Formerly were at- 
 
 or clerked for 
 
 of . 
 
 or (here state other antecedents). 
 
 Lines of Merchandise carried? 
 
 Your estimate of present value of stock ? $ 
 
 Do tbey do a cash or credit business ? . 
 
 City or Country trade principally? 
 
 . Condition of stock ? 
 
 .Amount of annual sales ? |_ 
 
 Location relative to business centre ? 
 
 Local opinion as to habits ? Ability ?_ 
 
 Is stock well insured? _ For how much? $ 
 
 .Expenses?- 
 
 .Is firm thought making money ?_ 
 
 Is the firm, or any member of it, engaged or interested in other ventures? _ 
 
 If so give particulars 
 
 Real Estate in own name, if any, consists of houses, . vacant lots, 
 
 stores and valued at $ „ and mortgaged for $ 
 
 of this real estate the following is used as homestead 
 
 and valued at t . and mortgaged for $ . . 
 
 If they are just starting in business, what capital has the concern and in what shape? Cash, $_ 
 other Assets, $.. 
 Describe the other Assets. 
 
 Buy principally from the following houses (give address): 
 Clothing 
 
 Hats and Caps 
 
 Mens' Furnishings. 
 
 Other lines ... 
 
 Yours respectfully. 
 
 SaUmam. 
 
 FORM IX. 
 To be used by salesmen when taking orders from new customers.
 
 164 MERCANTILE CREDIT 
 
 Inquiry blanks have been devised to simplify and 
 make definite the work of the traveling salesman in fur- 
 nishing credit information. These blanks rep- 
 
 Inquiry resent extreme types. Blank VIII is a simple 
 blanks. ^ ... 
 
 type which calls for information giving the 
 
 name of the firm, the kind of business, the length of 
 time the business has run, the value of stock, the en- 
 cumbrances on thep roperty and the firm's bank — which 
 information is to be obtained directly from the seeker 
 for credit. Aside from this there is a blank space for 
 information of a more general character, which the sales- 
 man may learn incidentally from the purchaser and from 
 others in the community. This form has a fatal weak- 
 ness in that a report of the insurance on the property 
 and stock is not required; the amount and kind of this 
 insurance are in many respects the most important 
 factors to be taken into account by the credit man. 
 Otherwise this form can be used to a great advantage, 
 and it is difficult to see how its use would stand in the 
 way of the success of the traveling man as a salesman. 
 Form IX, to be used by the salesman, calls for this in- 
 formation and other information of a more detailed 
 character. The nature of some of the information 
 sought in this form is such that many purchasers would 
 be unwilling to furnish the information to a salesman 
 who is seeking to sell goods, and the salesman would 
 be very much disinclined to use it on account of the 
 danger of preventing a sale. Consequently it is be- 
 lieved that a more simple type of blank is best for the 
 salesman to use, and the credit men can then depend
 
 SOURCES OF CREDIT INFORMATION 165 
 
 upon the wisdom of the salesman in securing other 
 information of a detailed character from others than 
 the purchaser himself. 
 
 Attorneys 
 
 From the attorney in the community where the busi- 
 ness house makes sales, the credit man obtains impor- 
 tant information. Mr. Prendergast in Credit Attorneys 
 and Its Uses gives five reasons why an give 
 attorney is an excellent medium for the credit in- 
 procurement of credit information: "First, orma on " 
 the organization of his office makes it convenient for 
 him to act as a collector and distributor of such in- 
 formation; second, a lawyer invariably has a large circle 
 of acquaintances, both of a business and social charac- 
 ter, and this acquaintance enables him to secure infor- 
 mation in regard to the circumstances of people to better 
 advantage than others whose connections are not so 
 extended; third, a lawyer's duties afford him much private 
 information in respect to people's affairs, a large per- 
 centage of which information he is at perfect liberty to 
 utilize as credit material without in any sense disclosing 
 professional secrets; fourth, his daily association with 
 matters in litigation opens to him an ample field of 
 information, a good part of which is hearsay, but a 
 large portion of which may also have considerable 
 foundation in fact, and this information of either class 
 can be judiciously diffused for credit purposes; fifth, he 
 is frequently called upon to act as a collector of claims 
 against people or in behalf of clients in cases where
 
 166 MERCANTILE CREDIT 
 
 accounts are of a disputed character. The information 
 he acquires through association with this work is of 
 vital interest to credit givers and no better class of 
 information could be obtained." 1 
 
 Attorneys themselves have frequently volunteered 
 to furnish credit information to business houses because 
 of the advantages that may accrue to them in 
 securing ^ e way of employment in case of litgiation. 
 credit in- For this reason they have made out attorneys 
 formation lists, which manufacturing and jobbing houses 
 may use in calling upon attorneys to furnish 
 credit information in the community where 
 they live. This volunteer service on the part of at- 
 torneys has, on the whole, proved unsatisfactory not 
 only to the attorneys themselves but to the houses 
 that use them for credit information. The attorneys 
 learned that upon the whole they received relatively 
 little benefit for the services which they rendered, and 
 in many cases a great deal of service is rendered in 
 furnishing the credit information for which no returns 
 are received. Upon the other hand, business houses 
 complain of the character of the service rendered by 
 attorneys. They claim that the attorneys prepare 
 reports which are superficial in character and not based 
 upon facts which could be easily procured upon in- 
 vestigation. When the attorney receives no returns 
 for his services, it is apparent that his services will 
 be of an inferior character. To correct this, many busi- 
 ness houses make a practice of sending a small fee, 
 1 Page 163.
 
 SOURCES OF CREDIT INFORMATION 167 
 
 usually one dollar, to the attorney along with the credit 
 blank which he is to fill. The fee furnished is intended 
 to pay the expense of the service in making the report. 
 In cases where a more thorough investigation is desired 
 the business house sometimes pledges itself to make 
 further compensation commensurate with the services 
 rendered by the attorney. 
 
 Since commercial work has brought into existence a 
 class of attorneys who specialize in this field almost ex- 
 clusively, many attorneys have developed offices which 
 should be, in the very nature of things, of great help 
 to credit men. They have large cabinets where detailed 
 information is filed concerning the daily routine of their 
 business. Their contact with the business affairs of the 
 community is such as enables them to know more defi- 
 nitely than any one else in the community the credit 
 standing of the people. If he can make this informa- 
 tion which he has in his possession useful to the credit 
 man in an honorable way, this type of attorney can 
 render a great deal of valuable service to credit men. 
 
 Bank References 
 
 Banks are used in many countries by mercantile insti- 
 tutions as an important source of credit information. In 
 their dealings with their customers and from the prop- 
 erty statements which they receive, it is possible for them 
 to furnish a great deal of valuable information to credit 
 departments. Upon the whole they have refused to fur- 
 nish to credit men important information which they
 
 1C8 MERCANTILE CREDIT 
 
 have. They have insisted that in the United States it 
 is impossible for them to furnish the information which 
 credit men desire without being false to their own clients 
 and without injury to their own business. The credit 
 information which credit departments receive from bank- 
 ing institutions is practically a negligible quantity. 
 
 Traveling Credit Representatives 
 
 Some of the most valuable credit information is ob- 
 tained by oral investigation. By visiting the business 
 house which is seeking credit the credit representative 
 can learn either directly or indirectly very valuable in- 
 formation to serve as a basis of credit. For this reason 
 large houses doing an exclusive credit business have em- 
 ployed traveling credit representatives who obtain much 
 valuable credit information which guides them in grant- 
 ing credit. They cover the same territory as is covered 
 by the traveling salesmen and they obtain their informa- 
 tion by the use of a questionaire which is filled out after 
 a personal interview with the seeker for credit. This 
 credit representative learns incidentally from his con- 
 versation with the buyer many subsidiary facts which 
 are important in granting credit. He learns all he can 
 from court records and from conversations with other 
 men in the community. When he leaves the office to 
 visit these men, he goes prepared with all the facts that 
 the credit office can furnish as a preliminary to the mak- 
 ing of an investigation. In some cases these traveling 
 credit representatives examine the books of debtors and
 
 SOURCES OF CREDIT INFORMATION 169 
 
 confer with them in detail on the management of their 
 business. This is done only when the debtor's status 
 is precarious, and when somewhat drastic methods must 
 be pursued. In ordinary cases of credit investigation 
 nothing of this sort could be done without the loss of 
 customers.
 
 CHAPTER X 
 
 SOURCES OF CREDIT INFORMATION 
 
 CREDIT EXCHANGE 
 
 A system of credit exchange has developed in the last 
 fifteen years as the most accurate and in many respects 
 the most important source of credit informa- 
 tion. This system was the outgrowth of the 
 velopment ..... . . 
 
 of credit organization of local associations of credit 
 
 exchange men. Local as yet in character, it is the most 
 
 in last important factor in many communities in the 
 
 fifteen ,. „ .., . . * . 
 
 years. granting of credit, and it promises to occupy 
 
 a more important place in the future in the 
 system of credit giving. Business men are the only 
 source of credit information. A knowledge of a man's 
 credit or of what credit he ought to have must be sought 
 in his experience, that is from those with whom he deals. 
 Other factors of a subsidiary character, such as his 
 environment, capital, habits, etc., must be noted. The 
 Credit Exchange Bureau represents an attempt by busi- 
 ness men to learn from each other about the credit stand- 
 ing of their customers. It is the outgrowth of an en- 
 deavor to obtain the most accurate information of this 
 character from each other with the least effort and 
 expense. 
 
 170
 
 SOURCES OF CREDIT INFORMATION 171 
 
 The information furnished by the Credit Exchange 
 Bureau is chiefly from ledger experience, and this has 
 been proved to be the most valuable informa- Exchange 
 tion to the credit man. It is supplementary f ledger 
 to and a corrective of data collected by mer- informa- 
 cantile and other agencies and does not sup- 
 plant them. While the mercantile agency procures 
 information on the past experience of a business man, 
 his character, his habits, his ability, his environment 
 to do business, the Credit Exchange Bureau limits 
 itself chiefly to one source of information, ledger 
 and trade experience. While no one would discount 
 the value of the general character of the information 
 procured by other sources as a basis of credit, the 
 function performed by the Exchange Bureau is a 
 different one. 
 
 The inadequacy of other classes of information was 
 responsible for the development of the Credit Exchange 
 Bureau. The age of the mercantile agency value of 
 report and the method of procuring it are ledger in- 
 often arguments against it. Allowance must formation - 
 be made for the reports of salesmen since the buyer is 
 often his friend. The local attorney or agent is a 
 fellow townsman of the buyer and often his neighbor. 
 Besides, the buyer who intends to defraud sellers, em- 
 ploys methods which usually delude all other agencies. A 
 favored practice of such is to keep good accounts with a 
 few houses, which are given as references, while goods 
 are purchased from a large number with no intention 
 of paying for them.
 
 172 MERCANTILE CREDIT 
 
 When the first attempts were made to exchange ledger 
 information after the local credit men's associations 
 were formed, credit men were skeptical about 
 Business furnishing the desired facts. It was feared 
 !? e ° that they would give up valuable business 
 
 skeptical information, that they would give their 
 about ex- competitors an advantage, and that they 
 
 changing wou ^ furnish information concerning their 
 ledger in- , 
 
 formation, customers which they had no right to sur- 
 render. This general attitude of suspicion, 
 which existed among business men years ago, prevented 
 the organization of business men's associations of all 
 sorts, and their cooperation for common ends. Where 
 ledger information was exchanged it became an important 
 factor in developing a friendly feeling between business 
 men and in developing a cooperative spirit among them, 
 which was utilized for other purposes. 
 
 Soon after some of the local credit men's associations 
 were formed cooperative plans were adopted for ex- 
 changing information with reference to debtors. 
 
 Exchange ^y^jj some f the associations the credit clear- 
 bureaus of . . 
 local m S house work of furnishing credit information 
 
 credit became the prominent feature. In 1900 there 
 
 men * were credit exchange systems in six cities : 
 
 tioas Detroit, New Orleans, Baltimore, Cincinnati, 
 
 Sioux City, and Minneapolis. The methods 
 
 of these may be grouped into what may be termed the 
 
 New Orleans and the Minneapolis systems. 
 
 In the former the reports of merchants cover three 
 
 important items: (1) Orders that have been declined
 
 SOURCES OF CREDIT INFORMATION 173 
 
 for any reason; (2) merchants who are delinquent in 
 their payments or are otherwise unsatisfactory cus- 
 tomers; (3) " attorneys who disregard instruc- 
 tions, are slow in reporting or remitting 
 
 ,i • i . , - .. Orleans 
 
 collections, charge excessive fees, fail to sys tem. 
 
 answer letters of inquiry, or are otherwise 
 derelict in their duty." Each member was given a 
 blank upon which to fill out a report. Each was 
 furnished with a number, so that it was unnecessary to 
 sign a name to a report. So long as members complied 
 with instructions the system was successful, but it broke 
 down on account of their lack of interest. 
 
 In the Minneapolis system members were required to 
 bring to each meeting lists of those whose orders had 
 been rejected and of those whose accounts had The 
 been placed for collection. The reports Minne- 
 covered simply these two items. The reports apolis 
 were read in open meetings and comments ys e 
 were made. Each member had a number which he used 
 in making his report. Individuals outside of the asso- 
 ciation who reported were assigned numbers, and lists 
 were kept of them. With a key to reports each member 
 could determine what house had made a particular 
 report and then make an individual inquiry. 
 
 The commendable feature of the system consisted 
 in its simplicity. The varying success of the different 
 methods used by the local associations seems to demon- 
 strate that no method can succeed which requires much 
 labor to make it effective. 
 
 The simple exchange bureaus organized at first, either
 
 174 MERCANTILE CREDIT 
 
 developed into more comprehensive systems or else failed 
 
 and gave way to thoroughly organized Credit Exchange 
 
 - Bureaus. These may be divided at present 
 
 classes of into two classes: 1. "A method by which 
 
 bureaus ledger facts and other information are ob- 
 
 ay * tained through the representatives of credit 
 
 departments. 2. A method of entering information 
 
 upon forms provided for that purpose, these forms being 
 
 afterward assembled and a compilation made of all the 
 
 information acquired." 1 
 
 An office is established with suitable filing cases 
 
 and a secretary placed in charge of it. In the first 
 
 method a list is made out of all members of 
 
 The card ^ e bureau, and a number is assigned each 
 
 index 
 
 system. one ' This list is furnished all members of 
 
 the association so that when a reference is 
 given by number it will be possible for those interested 
 to use the list as a key and know at once the other mem- 
 bers interested in a given case. Each member is re- 
 quired to furnish a list of his customers. A card is made 
 out for each of these, and on the card is written the num- 
 bers of all those who sell to the purchaser. 
 
 When an inquiry is made concerning the standing of 
 a customer of any of the members, the secretary looks 
 through the filing case for the customer's card. As this 
 contains the numbers of all those who have dealings 
 with the purchasers, the numbers are sent to the inquirer. 
 By examining his list or key, the inquirer knows who the 
 others are who have dealings with his prospective pur- 
 
 1 Prendergast: Funds and Their Uses, p. 207.
 
 SOURCES OF CREDIT INFORMATION 175 
 
 chaser. These he calls by telephone or he sends a 
 messenger to make inquiries of them. The information 
 furnished is oral but is taken from the books. Other 
 information of a general character may also be obtained. 
 
 One of the commendable features of this method is its 
 simplicity. An office that will do the work satisfactorily 
 may be maintained at small expense. The one seeking 
 information can secure it at once, and in a few hours he 
 can have what he desires to know of his purchaser. 
 
 By the second method of credit interchange, written 
 reports are furnished those wishing them. A list is made 
 of all members of the bureau and a number is ^ 
 assigned each, the same as in the first method, credit re- 
 Inquiry blanks are furnished those seeking P ort 
 information, and inquiries are made from sys em * 
 them. If each member seeks information about a large 
 number of his customers in course of time the Bureau 
 will have nearly all the information its members desire. 
 
 Each morning the secretary of the Bureau assembles 
 all the inquiry blanks received. Requests are then made 
 for information from all members with whom the cus- 
 tomer has had dealings. The blanks call for information 
 on the credit standing, the amount owing, the amounts 
 due, the methods of payment, etc. This information is 
 compiled into a report and furnished the member desiring 
 the information. In some bureaus a copy of each report 
 is sent to all members. The organization of the office and 
 its equipment are in no important respects different 
 from that in the first method described. 
 
 The Committee on Mercantile Agencies and Credit
 
 176 MERCANTILE CREDIT 
 
 Cooperation of the National Association of Credit Men in 
 
 1910 sent questionnaires to all the local credit men's 
 
 associations to learn to what extent the local 
 Extent to 
 which associations had established credit exchange 
 
 each bureaus, to learn the methods used, and the 
 
 system is extent to which dealings were carried on with 
 those outside the associations. Replies from 
 thirty having credit exchange bureaus were received. 1 
 Of these thirteen used the first method, the card index 
 system, while seventeen used the second system, that of 
 compiling information. Eleven of thirteen associations 
 using the card index system were willing to exchange 
 credit information with outsiders, while only four of 
 the seventeen that compile credit information were 
 willing to furnish information to outsiders. The card 
 index system permits dealing with outsiders to a much 
 greater extent than the other system, as in the latter sys- 
 tem detailed information would have to be furnished 
 non-members who contribute nothing to the support 
 of the bureau. An exchange of information with 
 those outside the bureau is frequently desirable, as 
 is the case especially with such mercantile agencies as 
 those of the Bradstreet Company and R. G. Dun and 
 Company. 
 
 The system of compiling credit information has its 
 limitations for another reason. Business houses are 
 The s ^^ very skeptical about furnishing accurate 
 
 compiling information, to be made relatively general with 
 system. reference to classes of customers they are 
 
 1 Bulletin National Association of Credit Men, July, 1910.
 
 SOURCES OF CREDIT INFORMATION 177 
 
 carrying who are heavily burdened with debt. 1 
 These customers are often seeking credit with other 
 houses and if all the facts were known they might be 
 denied credit. The failure to receive credit by such 
 houses would often result in their insolvency, a condi- 
 tion detrimental to the house which is carrying them 
 and which has furnished the damaging information. 
 
 Another obstacle in the way of the interchange of 
 credit information consists in the unwillingness of large 
 firms with thousands of customers to exchange informa- 
 tion with business establishments having only a few custo- 
 mers. The larger house would rarely learn anything from 
 the ledger experience of the smaller house, while it would 
 be a perfect mine of information to the smaller business 
 establishments and would be frequently used by them. 
 
 The Committee on Credit Cooperation of the National 
 
 Association of Credit Men was created by an amendment 
 
 to the constitution of that association pro- Exclian „ e 
 
 viding for such a committee, passed at its f ledger 
 
 annual meeting at New Orleans in 1910. informa- 
 
 Prior to this the work of credit cooperation | on y 
 
 . those not 
 
 came within the province of the Committee on members 
 
 Mercantile Agency Service and Credit Coop- of credit 
 eration. It has been shown in the chapter exchan g e 
 on Mercantile Agency Service that this com- 
 mittee was one of the most active committees of the 
 National Association of Credit Men, and that its chief 
 interest consisted in promoting the exchange of credit in- 
 formation. Both it and its successor, the Committee on 
 1 Prendergast : Credit and Its Uses, p. 211.
 
 178 MERCANTILE CREDIT 
 
 Credit Cooperation, have urged upon members of the 
 National Association to exchange ledger information 
 freely. As a result of this persistent campaign the 
 number of inquiries received by some members of the as- 
 sociation has increased to such an extent that they have 
 been compelled to employ a clerk whose time is devoted 
 exclusively to answering these inquiries. The unfairness 
 of receiving ledger information without giving data in 
 return and the danger of breaking down the system of 
 exchanging ledger information by those not members of 
 bureaus which are organized for this purpose, have 
 induced the Credit Cooperation Committee to devise 
 uniform blanks to be used by members of the National 
 Association of Credit Men when seeking ledger informa- 
 tion. When one member of the association wishes 
 credit information with reference to one of his cus- 
 tomers, it is but fair that he give the man who is to 
 favor him with a reply the benefit of his own experience. 
 It is, moreover, only by this method of mutual ex- 
 change that any results of far reaching importance can 
 be secured. 
 
 At the meeting of the National Association of Credit 
 Men held in Boston in June, 1912, the Committee on 
 Credit Cooperation submitted as a part of its report 
 seven rules which were to govern members of the Na- 
 tional Association of Credit Men. These rules which 
 were adopted are as follows: 
 
 1. The blank adopted and recommended by the 
 National Association of Credit Men for the making of 
 inquiries always to be used.
 
 SOURCES OF CREDIT INFORMATION 179 
 
 "2. Each inquiry shall state the amount of the order 
 and always indicate if first order. 
 
 "3. If the inquirer has had previous experience with 
 the one inquired on, then the inquiry shall be accompanied 
 by a statement of such experience. This encourages 
 reciprocal interchanges of experience and views. 
 
 "4. Inquiries are not to be made except on orders 
 actually in hand or on open account. If investiga- 
 tion is being made with a view to soliciting business or 
 collecting an account, a letter explicitly stating this fact 
 should accompany the inquiry. 
 
 "5. It is fundamental that all inquires are to be treated 
 confidentially, and under no circumstances divulged to 
 the subject of the inquiry. 
 
 "6. All inquiries to be answered on the day received 
 and by the credit man or manager if possible, so that the 
 ledger experience and any additional information in his 
 possession may be furnished. 
 
 "7. A compliance with these rules in this interchange 
 of credit experience and information leads to accuracy, 
 reciprocation, promptness and confidence. Their obser- 
 vance will mean a closer contact between the members 
 of this Association, and be of great assistance in their 
 credit investigations." 
 
 Other institutions than credit associations are en- 
 gaged in credit cooperation. The following organiza- 
 tions 1 are doing in this line satisfactory work: The 
 Jewelers' National Board of Trade, The National Asso- 
 ciation of Clothiers, The Electric Trade Association of 
 
 1 Bulletin National Association of Credit Men, July, 1905.
 
 180 MERCANTILE CREDIT 
 
 the Pacific Coast, The Merchants' Credit Association 
 of California, The Stationers' Board of Trade of New- 
 York, The Crockery Board of Trade of New York, The 
 Lumbermen's Trade Association, The Glass Dealers' 
 Protective Association, The Manufacturers' and Dealers' 
 Protective Association and The New York Paint and 
 Allied Traders' Association, etc. The work of these credit 
 exchange bureaus is very satisfactory, and in many 
 respects the best work of this sort is done by agencies in 
 a certain trade. 
 
 Personal credit or credit to consumers is usually given 
 
 with less system and wisdom than credit to other classes. 
 
 Many attempts are being made to systema- 
 
 Credit ^ ze cre dit to consumers by merchants, who 
 
 exchange 
 
 bureaus of excnan g e credit information with each other 
 
 retail on the credit standing of their customers. 
 
 mer- The best-developed plans of this class have 
 
 been established by the retail merchants' 
 asso- ( J 
 
 ciations. associations of Columbus, Ohio, and Indian- 
 apolis, Indiana. The credit system of the 
 former was established September, 1911, and of the lat- 
 ter about five years ago. The members of the Colum- 
 bus Association are sixty-five of the leading merchants 
 of the city. A central office is maintained with suit- 
 able filing cases, and the secretary of the retail merchants' 
 association has charge of the office. The card system 
 is used for filing purposes and the information is private. 
 Numbers are used to designate persons and a code is 
 used in giving the standing of credit applicants. Each 
 merchant reports all his credit cases, and a messenger
 
 SOURCES OF CREDIT INFORMATION 181 
 
 goes out from the central office each day to collect all 
 new information. Two girls are employed in a private 
 office where the cabinets are placed, using telephones to 
 furnish information, when it is requested, to the members 
 of the association. Some of the merchants have private 
 wires with the office. Whenever a buyer goes to a store 
 of a member to make a purchase and asks for credit, if 
 his credit standing is unknown, the merchant calls up 
 the office, and the desired information is furnished at 
 once by telephone. If more detailed credit information is 
 desired than is possessed by the office, a credit investi- 
 gator is sent out to procure all the information which is 
 accessible. For the purpose of obtaining this kind of 
 information, the office of the association has established 
 relations with many of the banks, manufacturing insti- 
 tutions, and other employing agencies where the people 
 of the city work. Information is obtained with reference 
 to salaries, business prospects, habits of life, etc., of 
 those who seek credit. 
 
 The initiation fee of the members of the Columbus 
 Association is $50, while the annual dues vary from $100 
 to $300 a year, the amount depending on the service 
 rendered. The cost of maintaining the Credit Exchange 
 Bureau is approximately $5,000. 
 
 The success of this plan depends almost entirely upon 
 the organizing ability, the initiative, and the persist- 
 ence of the manager of the office, who is in each of the 
 above cases the secretary of the retail merchants' asso- 
 ciation. In both cities the merchants feel that the main- 
 tenance of such an office is an excellent investment on
 
 182 MERCANTILE CREDIT 
 
 account of the amounts which may be saved by avoiding 
 bad debts due to giving credit unwisely. Neither 
 association, however, is prepared to prove approximately 
 how much is saved in this manner, owing to many con- 
 fusing factors in estimating losses. The plans pursued 
 in both of these cities are workable in all large cities, 
 provided the right kind of ability can be secured in 
 managing the general office. 
 
 Retail grocers and retailers in other lines have credit 
 exchange bureaus, of which the Retail Grocers' Exchange 
 
 Bureau of Columbus, Ohio, is typical. About 
 Retail 
 Grocers' ^25 grocers of Columbus maintain a central 
 
 Credit office where records are kept of the credit 
 
 Exchange standing of the customers of the members. 
 
 Each grocer sends a report to the office on the 
 
 credit standing of his customers who are given credit. 
 
 Whenever a new applicant for credit comes to a store, the 
 
 clerk calls up the central office, obtains his credit record, 
 
 and then withholds or gives credit, basing his decision upon 
 
 the information he receives from the central office. The 
 
 great obstacle in the way of an efficient credit exchange 
 
 bureau is the difficulty of getting grocers to furnish to 
 
 the office promptly complete and accurate reports of 
 
 their credit customers. The grocers have been urged to 
 
 withhold credit from all customers who owe debts 
 
 until the debts have been paid, but it has been found 
 
 impossible to enforce this provision. 
 
 The credit exchange bureau may be made most 
 
 serviceable to all business establishments when it is 
 
 made national in its scope. At present there is some
 
 SOURCES OF CREDIT INFORMATION 183 
 
 interchange of information between bureaus in the same 
 territory, such as the Cincinnati, Columbus, and Youngs- 
 town bureaus in Ohio: but there is no definitely organized 
 system for the exchange of credit information between 
 bureaus not in the same territory. 
 
 Unfortunately mercantile credit is at present local 
 and not national. Banking institutions are local units, 
 each community depending on its own re- r re ^j t 
 sources for funds. The local associations exchange 
 exchanging information should extend their national in 
 scope and provide an exchange bureau, which scope * 
 would be a clearing house of information for all the 
 United States. Then the Bureau would have valuable 
 information for all classes of business men. Before this 
 end can be consummated it will be necessary to have 
 well organized bureaus of exchange in all sections of the 
 United States. At present only a beginning has been 
 made. Hundreds of communities have no credit men's 
 associations at all and no exchange bureaus. All the 
 trades, too, should be organized on a national basis. 
 There is a business consciousness of kind among members 
 of a trade, and a national organization can be perfected 
 more easily than the organization of a National Ex- 
 change Bureau from the various local organizations repre- 
 senting diverse interests. The cooperation of both 
 groups is necessary to a great Credit Exchange Bureau 
 national in scope. When this is accomplished mercan- 
 tile credit will no longer be local but national, and the 
 funds of the whole country may be made available for 
 carrying on the mercantile business in any community.
 
 CHAPTER XI 
 ADJUSTMENT BUREAUS 
 
 The adjustment bureaus have developed within the 
 last decade as credit institutions. When the National 
 
 Association of Credit Men first took formal 
 adjust- notice of them at its Memphis meeting in 
 ment 1905 by the appointment of a special Corn- 
 
 bureaus mittee on Adjustment Bureaus, several local 
 and their . ,. r ■,., , ,. 
 
 associations 01 credit men were conducting 
 aims. ° 
 
 adjustment bureaus. After making a thor- 
 ough canvass of the work of the various adjustment 
 bureaus then in existence, this committee in its report 
 to the Baltimore meeting of the National Association of 
 Credit Men held in 1906 set forth the fundamental aims 
 and objects of these bureaus as follows: 
 
 1. To investigate, upon request, the affairs of a debtor 
 reported to be insolvent and adjust the estate, when 
 possible without court proceedings. 
 
 2. To secure capable and efficient receivers, ap- 
 praisers or trustees when court proceedings are found to 
 be necessary. 
 
 "3. To secure quick adjustment of all honest failures at 
 the minimum cost and with the maximum dividend to 
 creditors. 
 
 "4. To facilitate and economically secure extensions 
 
 184
 
 ADJUSTMENT BUREAUS 185 
 
 or liquidations when upon investigation it is found to 
 be to the best interests of all. 
 
 "5. To influence concerted action by the creditors for 
 the benefit of all. 
 
 "6. To assist creditors to acquire for their own use the 
 estate of failing or insolvent debtors, when mutually 
 agreed upon. 
 
 "7. To prosecute or assist in the prosecution of the 
 guilty party or parties where investigation discloses 
 fraud or the intent to defraud." 1 
 
 The functions of the adjustment bureaus as above 
 
 stated show quite clearly the conditions which gave rise 
 
 to them. When a debtor was in failing 
 
 circumstances there was usually an absence of ~ ondl ~ 
 
 tions 
 concerted action on the part of creditors in- gi v j ng 
 
 terested. The debtor's estate was frequently rise to 
 dissipated so that there was little or nothing ad J ust ~ 
 to be divided when action was taken against bureaus 
 him. When receivers, appraisers, and trus- 
 tees were appointed, they were frequently incompetent 
 and were often friends of the debtor and acted in his 
 interests. When attorneys were appointed they often 
 had an inadequate knowledge of commercial law, and 
 as a rule made excessive charges for their services. In 
 general there was an absence of concerted action by 
 creditors to protect their own interests, to preserve the 
 estates of worthy debtors, and to punish the fraudulent. 
 
 The value of an adjustment bureau may be seen by con- 
 trasting its methods with the usual clumsy and expensive 
 
 1 Bulletin National Association of Credit Men, July, 1906.
 
 186 MERCANTILE CREDIT 
 
 methods of procedure in closing an estate. The in- 
 vestigation of a failure ordinarily proceeds slowly. Where 
 Value of credit exchange bureaus do not exist, the 
 adjust- business of a bankrupt may be in very bad 
 ment condition before bankruptcy proceedings are 
 
 begun. A fraudulent debtor may escape, or his 
 assets may be wasted, or his books and other data may 
 be missing. Absence of concerted action is frequently 
 responsible for delay. Where the failure is not a fraud- 
 ulent one, lack of harmony among creditors, and the 
 haphazard methods of handling estates, lead to a com- 
 promise at a small percentage of the claims. 
 
 The ordinary method of closing estates is harmful 
 to the debtor also. The debtor whose liabilities are rela- 
 Ordinarv lively heavy is always in danger of having 
 method of action taken against him by an over-zealous 
 closing an creditor. As long as creditors act independ- 
 
 ently there is always a temptation to hasty 
 action and the dissipation of the estate through a mul- 
 tiplicity of suits and executions. As soon as action is 
 taken by one, others follow in proceeding against the 
 debtor's property, and an inventory is taken of it. 
 Although the debtor's assets may exceed his liabilities, 
 yet for want of sufficient funds to promptly pay his 
 debts he may be forced into insolvency or bankruptcy. 
 When bankruptcy has been thus precipitated the trustee 
 is practically compelled to sell the stock at a discount as 
 he sells it under the conditions of a forced sale and this 
 together with the costs of closing estates leaves credi- 
 tors less than their original claims.
 
 ADJUSTMENT BUREAUS 187 
 
 Where the adjustment bureau exists if a member comes 
 in possession of knowledge that one of his debtors is in 
 failing circumstances, he must notify the sec- 
 retary of his adjustment bureau at once. tates are 
 The latter calls a meeting of the creditors, closed by 
 who carefully canvas the situation. If there adjust- 
 
 are many creditors, a committee of creditors is , 
 
 *' bureaus. 
 
 appointed with power to act, and the foreign 
 creditors are notified. An adjuster is usually sent to 
 secure a financial statement from the books of the debtor, 
 and if necessary he takes an inventory of his property. 
 The committee of creditors then acts with full knowledge 
 of the debtor's condition, and grants the debtor an ex- 
 tension of time if the circumstances seem to warrant it. 
 If it is desirable that a trustee be placed in charge, the 
 debtor is asked to make an assignment to him, and if he 
 refuses to do so, he is made an involuntary bankrupt. 
 Appraisers will be selected who have a special knowledge 
 of the business and know how to estimate the value of 
 the bankrupt's property. If an assignment is made, 
 experts or men trained in closing estates are employed. 
 Men skilled in collecting accounts and in disposing of mer- 
 chandise are appointed, with the result that the bank- 
 rupt's property is disposed of at the least possible loss. 
 As will be shown later, the costs of closing bankrupt 
 estates by adjustment bureaus are much less than by the 
 ordinary methods. Only when it is absolutely necessary 
 are debtors required to make assignments. Those with 
 small as well as large accounts and the foreign as well as 
 the local creditors, are all treated alike.
 
 188 MERCANTILE CREDIT 
 
 The plan of organization of adjustment bureaus varies, 
 
 but all of them pursue practically the same methods. 
 
 The active work of the bureau is in the hands 
 
 an . of either the secretary, manager, or both, 
 
 organiza- 
 tiQ^ A firm of attorneys is usually retained, and 
 
 their fees are definitely limited by the bureau. 
 When the bureau serves a creditor upon his request, he 
 alone pays the expenses. When it serves all the creditors 
 of a debtor, the expenses are divided among them. A 
 creditor in a remote section of the country can get a 
 bureau to take up the case of a debtor residing in its 
 district, and then give no further attention to it. The 
 bureau's attorneys on account of wide experience are 
 usually experts in handling claims, and the creditor, 
 wherever he resides, is assured superior ability in looking 
 after his interests. 
 
 The question has been raised frequently in the annual 
 conferences of the National Association of Credit Men as 
 
 to whether the adjustment bureaus should 
 adiust- become in any sense collection agencies, 
 ment Previous to 1912 some of the bureaus had made 
 
 bureaus a practice of collecting claims, and much op- 
 
 collect 
 
 position had arisen against this policy. Those 
 in favor of the bureau's undertaking this work 
 claimed that in certain sections of the country it could 
 perform the best service to its members by collecting ac- 
 counts. Those opposed to this policy contended that 
 the function of the bureau was to investigate a debtor's 
 financial condition, and, where he was solvent but in 
 failing circumstances, to preserve his business, if possible
 
 ADJUSTMENT BUREAUS 189 
 
 from failure ; to act as trustee of his estate, where his 
 success was hopeless, to manage it economically, and to 
 preserve as much of it as possible for distribution. It 
 was further insisted that an association of credit men 
 should keep itself free from commercialism and it should 
 make it obvious to the critics of the Association that a 
 credit men's association is not organized for the purpose 
 of enforcing the payments of claims due to its members; 
 and that if it is to carry out the ideals of the National 
 Association of Credit Men, that of being an institution to 
 serve the general purposes of credit men, it should keep 
 itself free from the taint of commercialism, which would 
 inevitably follow the collection of specific debts. It was 
 finally decided at a conference of adjustment bureau 
 managers held in Chicago in 1912, and at the National 
 Conference of Credit Men of the same year, that the ad- 
 justment bureau should "not handle delinquent ac- 
 counts for collection as bureaus, nor should the managers 
 or commissioners of such bureaus handle such delinquent 
 accounts in their official capacity." 
 
 The policy to be pursued with reference to the noti- 
 fication of creditors when a debtor's affairs are under 
 consideration has often been a mooted ques- 
 tion. Some favored the notification of those ,0 . 1 .. y 
 
 creditors. 
 
 only who were members of adjustment bu- 
 reaus, while others favored the notification of all credi- 
 tors. Those in favor of the former policy insisted that 
 creditors not members of any bureau might not be in 
 sympathy with the work of the bureaus and consequently 
 might give their claims into the hands of attorneys or
 
 190 MERCANTILE CREDIT 
 
 collection agencies, a procedure which would thus in a 
 measure defeat the ends of the bureau that had the 
 matter in charge. It was definitely decided by the 
 National Association of Credit Men at its annual confer- 
 ence in 1909 that if any creditor should be notified, all 
 should be notified regardless of their membership in 
 bureaus. 
 
 There are three methods of organization of adjust- 
 ment bureaus: 1. "the corporate form, in which stock- 
 
 -,. holders are limited to members of a local asso- 
 
 Tnree 
 
 methods ciation, and the management is in the hands 
 of organ- f a salaried employee; 2. the general corpo- 
 iza ion. ra ^ e f orm ^ - n some cases without the stock- 
 holding feature, with the management in the hands of 
 an attorney employed on the fee basis, he at the same 
 time being actively engaged in the general practice of the 
 law; 3. the committee form of management, a committee 
 composed of representative members handling each case 
 on its own merits, engaging such assistance, legal and 
 otherwise, as may be deemed necessary." 1 
 
 It would seem that the work can be carried on more 
 successfully by the first method, as a salaried employee 
 of ability interested in the work of the association can 
 give much more effective services than either an agent 
 hired from without or a committee which must from time 
 to time employ legal talent. 
 
 The relation between the National Association of 
 Credit Men and the bureaus of the local associations 
 
 1 Bulletin National Association of Credit Men, July, 1910, 
 p. 510.
 
 ADJUSTMENT BUREAUS 191 
 
 have all along been mooted questions. At the Chicago 
 meeting of the National Association of Credit Men it 
 was decided that the adjustment bureau of a 
 city should be affiliated with the local associa- Relation 
 tion of its district to be recognized by the jy at j ona i 
 National Association of Credit Men. 1 It was Associa- 
 further decided that a uniform style of name t* 011 of 
 should be adopted by each adjustment bureau; M 
 
 viz., Adjustment Bureau of the bureaus. 
 
 Association of Credit Men. The advisabil- 
 ity of appointing an agent in the office of the National 
 Association to have supervision of the local association 
 was recommended. Opposition arose to too close a 
 supervision of the local bureaus by the National Asso- 
 ciation, and it was finally concluded that the super- 
 vision should be general in character only and that each 
 local bureau should be permitted to solve its own local 
 problems. 
 
 As a rule the charges of the bureau go to the treasury 
 of the local Credit Men's Association, and become a fund 
 to bear the expenses of the bureau. These j ncome 
 charges are uniform to all members of the from ad- 
 National Association of Credit Men and its justment 
 affiliated branches and are not to exceed 10 
 per cent, of the amount to be distributed to creditors 
 except for unusual services. In some local associations 
 the fee is limited to 5 per cent, of the dividends for ser- 
 vices as trustee, while a higher charge is made to 
 outsiders. 
 
 1 Bulletin National Association Credit Men, July, 1907, p. 425.
 
 192 MERCANTILE CREDIT 
 
 In another association the adjustment bureau employs 
 
 an auction house to handle the stocks of bankrupts. The 
 
 goods of the bankrupt are not sold in bulk at 
 
 a sacrifice, as is usually the case, but are 
 auction . 
 
 house. broken up in small lots and sold at retail, the 
 
 auction house handling the goods at 10 per 
 cent, commission. In this way much more is realized on 
 the stock. The adjustment bureau may fix a minimum 
 price on the goods, and if this is not secured the auction 
 house will purchase them, after which they are sold in 
 the usual way. When this method is pursued creditors 
 do not need to wait till the goods are sold but receive a 
 portion of the sum due them at once; and later when the 
 stock is disposed of, they receive the balance due them 
 in the form of dividends after the agent receives his share. 
 The experience of all the associations which have ad- 
 justment bureaus shows that estates can be closed by 
 
 „ . the bureau at a much lower cost than that re- 
 
 Expen- 
 
 ence in the quired when they go through the regular bank- 
 economic ruptcy proceedings. The Adjustment Bureau 
 closing of Q f ^he l os Angeles Credit Men's Association 
 during the year 1909 received from estates 
 $460,140 and returned to creditors in dividends $422,722, 
 the average settlement being 55.85 per cent. The hand- 
 ling of half a dozen cases in which there were no assets 
 reduced the average percentage returned to creditors. In 
 1908 the dividends returned to creditors were over 60 per 
 cent, of the liabilities. x The Chicago Adj ustment Bureau 
 
 1 Bulletin National Association of Credit Men, March, 1910, 
 p. 141.
 
 ADJUSTMENT BUREAUS 193 
 
 returned to creditors over 60 per cent, of the liabilities of 
 insolvency cases at the end of the first six months of 1909. 
 In 1909 the Spokane Bureau 1 received in claims $275,000 
 and paid to creditors 58.8 per cent, of their claims. The 
 Denver Adjustment Bureau, 2 the first to be organized, 
 made its seventh annual report October 1, 1910, and the 
 expenses on adjustment were 2.9 per cent, of the funds 
 collected. The report shows that twenty-nine cases were 
 handled, and the creditors received 41.3 per cent, on lia- 
 bilities. All creditors, whether local or foreign, whether 
 members of the association or not, receive the same atten- 
 tion, as it is the policy of the Denver Bureau to place all 
 claims on an equal basis. The bureau's success has been 
 such that during the eight years of its existence but little 
 business has been turned over to the bankruptcy court in 
 its territory. The reports of the various bureaus show 
 that in insolvency cases creditors receive from 30 to 60 per 
 cent, of their claims, whereas in insolvency cases handled 
 by other agencies creditors receive far less — amounts not 
 exceeding on the average 25 per cent, of the liabilities. 
 The adjustment bureaus accomplish this saving by 
 selling goods at greater advantage, by a better system of 
 collecting book accounts, by eliminating the excessive 
 charges of attorneys, trustees, etc., and by a prompt 
 settlement of estates. However, a number of these ad- 
 justment bureaus charge membership fees which help to 
 
 1 Bulletin National Association of Credit Men, March, 1911, 
 p. 166. 
 
 2 Bulletin National Association of Credit Men, February, 1910, 
 p. 107.
 
 194 MERCANTILE CREDIT 
 
 defray the expenses of the bureaus. Where the adjust- 
 ment bureau is operated in conjunction with a credit ex- 
 change bureau, as is the case in thirty-four of the forty- 
 four adjustment bureaus, a great force is exerted to 
 prevent failures by forcing settlements before estates get 
 into a desperate condition. 
 
 Adjustment bureaus are widely distributed throughout 
 
 the country but are more numerous relatively in the West. 
 
 There are twenty-two bureaus on each side 
 
 is n u- £ £k e Mjssiggippj river. 1 Of those east of 
 
 tion of ........ 
 
 bureaus. ^e Mississippi river, nine are south of Mason 
 
 and Dixon's line, eight are in the Middle 
 West north of the Ohio river, and five are in the Middle 
 Atlantic States. Of the five in the Middle Atlantic 
 States, Pennsylvania has four and New York one. 
 
 The special committee on adjustment bureaus of the 
 National Association of Credit Men made an extensive 
 
 report on adjustment bureaus at the annual 
 
 ences of meeting at Philadelphia in 1906. Beginning 
 
 adjust- with the 1907 annual meeting, the Adjustment 
 
 ment Bureau Committee has been a standing com- 
 
 m mittee of the National Association of Credit 
 
 managers. 
 
 Men and one of the very active committees 
 of that body. Since then there has been an annual 
 meeting of the officers of the adjustment bureaus of the 
 country, the first one meeting in Cleveland, Ohio, in 1907 
 and the last one meeting in Chicago, 111., in January, 
 1913. 
 
 1 Bulletin National Association of Credit Men, July, 1912, 
 p. 592.
 
 ADJUSTMENT BUREAUS 195 
 
 At the Chicago conference of adjustment bureau man- 
 agers in 1912, the following "rules and principles of con- 
 duct for adjustment bureaus connected with affiliated 
 branches of the National Association of Credit Men " were 
 adopted. As these were also adopted by the National 
 Association of Credit Men at its conference held in 
 Boston in June, 1912, they represent a late development 
 in adjustment bureau policy and method. 
 
 "l. The adjustment bureau to be established by and 
 under the absolute control of the local association of 
 credit men. If the local association is in- 
 corporated, it may be optional with that asso- Rules °* 
 • • iiii- i i associa- 
 
 ciation whether the adjustment bureau be tions. 
 
 separately incorporated. If the local associa- 
 tion is not incorporated, it is suggested that the adjust- 
 ment bureau be separately incorporated and governed 
 by a board of directors selected by the local association; 
 if not incorporated, governed by a committee appointed 
 by the local association. 
 
 2. Adjustment bureaus are primarily established for 
 the benefit and service of the members of the National 
 Association of Credit Men and its affiliated branches for 
 the saving of expense in administering solvent and in- 
 solvent estates in which they may be interested; but such 
 bureaus shall not handle delinquent accounts for collec- 
 tion as bureaus, nor are the managers or commissioners of 
 such bureaus to handle such delinquent accounts in their 
 official capacity. 
 
 3. A delinquent account within the meaning of Rule 
 2 is one that is considered uncollectable upon present
 
 19G MERCANTILE CREDIT 
 
 demand, and is not placed for the purpose of investigation 
 or adjustment. 
 
 "4. The adjustment bureau is to be operated by a 
 manager or commissioner selected by the governing 
 committee or board of directors. 
 
 "5. Each adjustment bureau shall have an adjuster, 
 who may be the manager, commissioner, or one of his 
 assistants. He shall make investigations at the request 
 of any member of the association at a compensation not 
 to exceed $15 per diem and expenses. 
 
 ' 6. In the absence of other agreement, should the ad- 
 juster discover upon investigation that the affairs of a 
 debtor or debtors need general adjustment, then the 
 adjustment bureau which the adjuster represents 
 shall, without further instructions, proceed to the ad- 
 justment of the debtor or debtors' affairs for the benefit 
 of all creditors; in which event, the expenses of the in- 
 vestigation shall be pro rated against all claims handled 
 by such bureau, unless otherwise provided for. 
 
 7. If the estate to be adjusted or liquidated is located 
 in a city where an adjustment bureau is located, and 
 where there are other creditors of the estate in interest, 
 there shall be cooperation between the bureau where the 
 estate is located and the originating bureau; but if the 
 estate is not located in such city, then the adjustment is 
 to be made under the supervision of the bureau where the 
 adjustment originated. 
 
 8. The manager or commissioner of the adjustment 
 bureau where the investigation or adjustment originated 
 is to advise immediately the managers or commissioners
 
 ADJUSTMENT BUREAUS 197 
 
 of all adjustment bureaus where creditors are located, 
 and also all creditors. He shall also suggest to the 
 creditors that it is preferable that claims be forwarded 
 through the local adjustment bureau, or that creditors 
 can forward claims direct. The local bureaus shall be 
 kept fully advised by the operating bureau of the prog- 
 ress of the case. 
 
 "9. An allowance not exceeding one-third of the com- 
 missions charged on claims is to be allowed the bureau 
 on such claims as are forwarded by that bureau or sent 
 direct. 
 
 "10. The adjustment bureaus are formed not to make a 
 profit, but for economical administration for the benefit 
 of those interested — therefore all charges shall be rea- 
 sonable, the schedule of charges adopted by each adjust- 
 ment bureau to be filed with the national office, and with 
 the chairman of the Adjustment Bureau Committee. 
 
 11. A committee consisting of the chairman of the 
 National Adjustment Bureau Committee, and one 
 member thereof, two adjustment bureau managers, 
 and the secretary-treasurer of the national association, 
 shall constitute a committee of complaint to arbitrate 
 all complaints between adjustment bureaus or between 
 members and bureaus, and the decision of a majority 
 of such committee shall be binding upon all parties in 
 interest, and such decision filed with the national asso- 
 ciation's committee. 
 
 12. Reports, at least quarterly, shall be furnished the 
 national office of the estates adjusted in each of the 
 local adjustment bureaus."
 
 198 MERCANTILE CREDIT 
 
 The adjustment bureau managers at their recent con- 
 ference in Chicago, January, 1913, took a decided stand 
 for uniformity in operating adjustment bureaus. It 
 was contended, however, that as some bureaus had been 
 organized for years it would be inadvisable to attempt 
 to enforce a uniform operating plan, but that uniformity 
 and a high standard of bureau efficiency could be gradu- 
 ally secured by a system of cooperative supervision. 
 To carry out this program it was recommended "that 
 the country be divided into seven zones, and that in 
 each zone there be appointed a committee of not less 
 than three nor more than five whose functions it will be 
 to have the direct oversight of the bureaus in each zone, 
 to investigate complaints, to arbitrate disputes, and to 
 bring about a cooperation of the work in each zone. 
 These committees should be appointed by the National 
 Committee on Adjustment Bureaus and the National 
 Secretary and Treasurer subject to the approval of the 
 national president. The committees should be respon- 
 sible to the National Board. " The adjustment bureau 
 managers recommended further that every local associa- 
 tion of credit men should organize an adjustment bureau 
 upon plans approved by three committees, the zone com- 
 mittee, the national committee on adjustment bureaus, 
 and the advisory committee of the board of directors on 
 adjustment bureaus. It was moreover recommended 
 that no new bureau should be organized without the 
 approval of the above named committees, and that the 
 zone committee should withdraw its official sanction 
 from any bureau which was not properly conducted.
 
 ADJUSTMENT BUREAUS 199 
 
 The report of the adjustment bureau managers will 
 be submitted to the National Association of Credit Men 
 this year for adoption. This report represents the latest 
 development in adjustment bureau work. It is believed 
 that the supervision proposed, if put in practice, will 
 enable the bureaus in each territory to work in better 
 harmony, to standardize their methods, and to do a much 
 higher grade of work than has been done heretofore.
 
 CHAPTER Xn 
 COLLECTIONS 
 
 As the success of a credit department depends in 
 great measure upon its collection service, every thor- 
 oughly developed credit department has a 
 of collec- well-organized division of the department, or 
 tions to an adjunct to the department, devoted to 
 the credit the collection of accounts. The work of 
 epa t f " granting credit is completed only with the 
 collection of the accounts created by the 
 credit department. Whether this work falls within the 
 province of the credit man, his subordinates, or some 
 allied department, the collection service should be closely 
 related to the credit department, as the efficiency of the 
 latter is measured by success in making collections. 
 The purpose of the credit department is to prevent 
 losses, and if accounts are not collected the credit depart- 
 ment is a failure. 
 
 The kind of ability needed to make collections is 
 often different from the qualifications demanded for a 
 credit man. The manager of collections 
 Qualifica- mus ^ b e a gooc j judge of human nature, and 
 collector. ne snou lcl possess the diplomacy which will 
 enable him to handle successfully the great 
 variety of credit cases with which he must deal. The 
 classes of creditors determine largely the policy to be 
 
 200
 
 COLLECTIONS 201 
 
 pursued. The most desirable creditors require but little 
 effort to make collections. However, if a business were 
 limited alone to these, a strong credit department 
 would be unnecessary and but little cost would be 
 entailed in making collections. Under present day 
 competitive conditions credit must be extended to all 
 classes, to the doubtful as well as to the safe credit 
 risks; and the manager of collections must have as 
 varied qualifications, although of a different kind, as the 
 credit man himself. 
 
 All are agreed that the first essential to successful 
 collections is to call for payment when an account is due. 
 No debtor can object to being called upon to 
 carry out his agreement to pay a debt, and in Prom Pt 
 
 colic C™ 
 
 general debtors are inclined to pay promptly tions. 
 when called on to do so. Moreover, careless- 
 ness in collecting tends to develop habits which demor- 
 alize debtors and make collections difficult. 
 
 As most collections are made by mail, a system which 
 will enable the collection office to take up promptly and 
 to handle properly all accounts is necessary Qgj ce 
 to every large business which deals extensively system to 
 in credits. Various systems of card indices follow col- 
 are in use. A common method is to place ec ons * 
 each credit account on a separate card. The card has 
 blank spaces for the name, rating, address, terms, date 
 of invoice, the amount of debt and when the account is 
 due. Some cards have also blank spaces to indicate when 
 a draft is made out for collection and when it is returned, 
 to give the comment of the debtor and a record of the
 
 202 MERCANTILE CREDIT 
 
 final disposition of the account. These cards are kept 
 in a tickler and so arranged that the one who has charge 
 of collections can turn at once to the oards having records 
 of accounts due on a certain day. If for certain reasons 
 the collection of some of these accounts is to be postponed 
 to later dates, the proper entries are made on the cards, 
 and they are placed with others which are due on the 
 same designated dates. By this system all the accounts 
 may be properly handled when due, and with little 
 effort the one who has charge of collections may know 
 when and in what order the accounts of a business become 
 due. 
 
 While this system is advantageous to most businesses, 
 in many, especially the smaller concerns, the one who 
 Advan- ^ as cnar S e of collections relies on the informa- 
 tages of tion he can obtain directly from the ledger 
 an office from day to day. Others depend on their 
 ys e * memory or on note-book memoranda and con- 
 sult the ledger when other methods fail. While the 
 keeping of credit reference and collection cards takes 
 time, this work can be done by subordinates; and as the 
 tickler may be placed on the desk of the one who has 
 charge of collections, the information he desires is at 
 hand on a moment's notice. If he depends on his ledger 
 for information he must often go into an adjoining 
 room to consult it, and while he fails to economize his 
 own time he disturbs the work of the bookkeeper or 
 accountant. 
 
 In the retail business the practice is general of making 
 collections the first of each month by rendering state-
 
 COLLECTIONS 203 
 
 ments to debtors. Of all accounts these are perhaps 
 the easiest to collect. Consumers as a class receive 
 credit with the expectation of paying their 
 bills by checks the first of each month, and me thods 
 retailers grant credit under the assumption of 
 that payments will be made promptly at the collectin g 
 close of the month. Many of the latter pre- 
 fer to have payments made in this way rather than by 
 cash. Most of the accounts rendered are itemized, and 
 after the account is returned to the seller accompanied by 
 a check it is again returned to the purchaser, receipted. 
 When goods are delivered, an itemized statement is 
 usually sent with the package. 
 
 Instead of sending accounts by mail some firms em- 
 ploy collectors to visit debtors to make collections. 
 These collectors present a statement of the account to 
 the debtor, and if the latter pays at once either in cash 
 or by check, the collector receipts the bill in the name 
 of the firm and gives it to the debtor. Whatever 
 advantages this system may give to the business houses 
 that employ collectors, debtors prefer to receive state- 
 ments of accounts through the mail and to pay by 
 check. 
 
 Accounts may be divided into (1) live and (2) tardy 
 accounts. A live account is one which is just due, or 
 one which is not yet due, while a tardy ac- Two 
 count is, as its name implies, one that is over classes of 
 due. It is the latter class of accounts which accounts « 
 receives attention in any consideration of the subject of 
 collections.
 
 204 MERCANTILE CREDIT 
 
 The consideration of live accounts is important be- 
 cause if they receive adequate attention much less effort 
 will be necessary to collect tardy accounts. 
 
 When an account is due it should be collected 
 accounts. 
 
 promptly unless there is a good reason for 
 
 granting further time to the debtor. However, before 
 an account matures the creditor should know how his 
 debtor is treating other accounts, for slowness in making 
 payments is the first dange* signal. If the debtor is 
 slow in paying other accounts, the creditor has every 
 reason to believe that he will be slow in paying his 
 account, and business failures are almost invariably pre- 
 ceded by a period of tardiness in paying debts. 
 
 When a debtor is slow in making payments, the cred- 
 itor should investigate at once the causes of his tardiness. 
 Causes of ^ ^ e various factors responsible for business 
 delay trouble the debtor himself is directly respon- 
 
 in sible for some of them, while others arise from 
 
 paying. causes over which he has no control. To 
 act wisely the creditor should have a correct interpre- 
 tation of the situation. While creditors must count 
 on debtors paying their obligations, the embarrassed 
 debtor must rely on the assistance of merchants wno will 
 sell to him if he is ever to recover from his embarrass- 
 ment. At this point the creditor has an opportunity 
 for the exercise of superior judgment. Many worthy 
 debtors have been made bankrupts by the rash actions 
 of their creditors in collecting accounts, who if leniency 
 had been shown, could have recovered and become 
 prosperous. Upon the other hand, through the free
 
 COLLECTIONS 205 
 
 granting of credit and through the failure to make col- 
 lections promptly, many debtors have developed habits 
 of slow payment and loose habits of business in other 
 respects, which have resulted in insolvency. 
 
 As soon as accounts are due debtors receive statements 
 of the account with request for payment. It is chiefly 
 to obviate the failure to present claims for 
 payment when due that systems of collection 1TS 
 are devised. However, few would advocate collecting, 
 the following of the same system or the 
 same routine in all cases when debtors fail to pay at 
 maturity. A system planned with the view of treat- 
 ing all debtors alike is a faulty system. Differences 
 in customs and practices of different trades and busi- 
 nesses and differences in personality, must be regarded 
 especially in the initial stages of tardy accounts. Before 
 more drastic methods are pursued such as the sending 
 of drafts for collection, putting accounts in the hands 
 of collectors, personal letters are usually sent to debtors 
 inquiring why the payment is not made and urging that 
 the debt be paid promptly. If the customer is a desir- 
 able one, care is taken not to lose his trade by offending 
 him. If drastic action must be taken, it is usually 
 assumed that the customer is lost to the creditor. 
 
 Perhaps the most common way of making collections 
 
 from delinquent debtors is by the draft. The sending of 
 
 a statement to a debtor when his account „,. . „ 
 
 The draft, 
 matures is the first step taken to collect a 
 
 debt. The use of a draft to collect is ordinarily the next 
 
 step. The time which elapses between the sending of a
 
 206 MERCANTILE CREDIT 
 
 statement and a draft varies with the business practices. 
 Some mail a draft at once as soon as the creditor learns 
 that a check did not come by return mail. This is, 
 however, unusual, as creditors ordinarily make allow- 
 ances for delays and some even go so far as to exhaust all 
 other means in the way of sending statements repeatedly 
 and accompanying their statements with letters to the 
 debtor, before a draft is sent for collection. 
 
 When a draft is used it is either given to a local 
 banker to be sent by him to a bank for collection in the 
 community where the debtor is engaged in business, or it 
 is sent directly by the creditor to a bank in the debtor's 
 city. If it is sent by the latter method, a letter of 
 instruction is usually enclosed with the draft in which 
 the banker is directed to collect at once and remit the 
 proceeds or to return the draft giving reasons why the 
 debtor refused to pay. At the time the draft with the 
 letter is sent to the banker, a communication is usually 
 sent to the debtor, telling him that a draft for a given 
 amount has been placed in the hands of a banker, and 
 directing him to pay the debt to the banker. If the draft 
 is placed in the hands of the creditor's bank, the latter 
 sends the draft with instructions to a bank in a commun- 
 ity where the debtor lives, and this bank notifies the 
 debtor that a draft has been placed there for purposes of 
 collection. When collections are made, banks deduct a 
 small fee for the service rendered before sending the funds 
 to the creditor. When collections are not made, banks 
 do not receive fees for the service they render only in 
 the exceptional cases where creditors mail a small fee
 
 COLLECTIONS 207 
 
 with the draft to pay bankers for their service whether 
 
 payment is made or not. 
 
 The collection agency draft system was devised by 
 
 collection agencies to facilitate the collection of small 
 
 amounts by drafts. To these drafts are _. , 
 
 The col- 
 attached stubs directing banks to place the lection 
 
 drafts in the hands of attorneys named on the agency 
 stubs, in case payment is not made to the draft 
 bank. This method has the merit of showing 
 the debtor as soon as it is presented to him that if he fails 
 to make payment the draft will be placed immediately 
 in the hands of an attorney for collection. Most debtors 
 are thus coerced into paying, not desiring to be confronted 
 with the action of an attorney to collect the debt. How- 
 ever, the system has its demerits on account of the drastic 
 action which is threatened. The credit of debtors 
 suffers in the minds of bankers when they observe the 
 extremes to which creditors are inclined to go to collect 
 their debts. It may be safely stated that in many cases 
 where these collection agency drafts are used the credit 
 of debtors does not warrant the depreciation caused by 
 the use of these drafts. 
 
 When debtors fail to pay drafts when presented, the 
 next step is to use the collection letter. At first a mild 
 letter is written requesting payment, and after 
 this each succeeding letter demanding pay- . „ ec I0 
 ment becomes stronger. At present a series 
 of collection letters is prepared by collection agencies 
 in the order named and sold to creditors. When 
 these letters are sent to debtors they are accompanied
 
 208 MERCANTILE CREDIT 
 
 by envelopes having printed on them the names of 
 the collection agency, and they consequently impress 
 debtors with the idea that they have been placed in 
 the hands of an outside agency for collection. Many 
 debtors respond more quickly in making payments on 
 this account. This is the psychology of the collection 
 letter. 
 
 Many systems of collection letters are used. Trade 
 organizations used the collection letter before it was 
 produced and sold by private agencies to creditors. 
 These are used now by many trade organizations, and 
 also by some credit men's associations. One system 
 requires members who use the collection letters to 
 notify the agency or collection bureau of the progress 
 in collecting an account, and if payment is not made it 
 takes active charge of the account. The collection 
 letter is ordinarily used only when the future trade of 
 the debtor is not considered a matter of importance and 
 no care is taken to avoid offending him. 
 
 After all other means have been exhausted the attorney 
 is resorted to as the last resource in making collections. 
 When an attorney is called in it is usually 
 Attorneys decided to enforce the collection of the account, 
 lectors. The policy of resorting to this method varies 
 widely. Some resort to a method of enforce- 
 ment soon after an account becomes delinquent, while 
 others defer such drastic action as long as it is possible to 
 do so. The costs entailed by the employment of an 
 attorney are one reason for deferring this action. 
 
 When an attorney must be employed to collect an
 
 COLLECTIONS 209 
 
 account, there is often some question as to whether the 
 debt can be collected or at least collected in full. This 
 tends to make the creditor hesitate. The attorney 
 must usually content himself with collecting the debt on 
 the installment plan, else he must bring legal action to 
 enforce a payment. Ordinarily, creditors prefer the 
 partial payment plan if the debt will be paid in full to 
 the legal action plan, in which the costs of collection will 
 be greater, and in which there will be some risk of not 
 receiving the payment of the debt in full. 
 
 To facilitate the employment of suitable attorneys in 
 a community at a distance from the place of business of 
 the creditor, attorneys' lists are furnished by publishing 
 companies. These are responsible companies with repu- 
 tations to maintain, and they endorse the attorneys on 
 their published lists. Some of these companies guarantee 
 to their subscribers the accounts collected by the attor- 
 neys on their lists. In these cases the lists are known as 
 "bonded lists" and the attorneys as "bonded attorneys." 
 Some of these companies, as a condition of being held re- 
 sponsible for the amount the bonded attorney collects, 
 require the subscriber to report at once the employment 
 of such an attorney. 
 
 Some large firms doing an extensive credit business 
 make their own lists of attorneys who are employed in 
 adjusting their accounts. They prefer to investigate 
 themselves the standing and character of all the attorneys 
 they employ in the various communities where they do 
 a credit business. This method is possible only with 
 large firms. Some do not employ local attorneys but
 
 210 MERCANTILE CREDIT 
 
 send their own attorneys to communities where their 
 services are needed. The advantage of the latter system 
 is that the business house has full knowledge of the man 
 who is entrusted in making collections. By the latter 
 method there is some disadvantage in unfamiliarity with 
 local conditions, and in some instances in an increased 
 cost in collecting debts.
 
 CHAPTER XIII 
 
 MERCANTILE CREDITS AND 
 DEPRESSIONS 
 
 It will be the aim of this chapter to trace the influence 
 of one force — mercantile credits — upon depressions and 
 crises. MacLeod states the purpose of credit 
 "to be the temporary advance or creation of ... 
 capital, to promote an operation which is 
 expected to repay the capital employed in its promotion, 
 as well as certain profits, within a defined period." 1 
 From this statement of the purposes of credit it will be 
 seen that it is connected with business transactions which 
 are more or less speculative in character, and when credit 
 is created that cannot be sustained, commercial houses 
 fail. Commercial relations are so interwoven and com- 
 mercial factors are so interdependent that one great 
 failure may bring about a multitude of others, with 
 losses of sufficient proportion to precipitate a crisis. 
 
 Mercantile institutions are at the present time so 
 organized that it is impossible to do business on a cash 
 basis. The question as to whether a cash is better than 
 a credit system is not pertinent so long as we have not 
 learned to buy and sell for cash. Our present credit 
 system has developed as a part of our present industrial 
 
 1 MacLeod: Theory and Practice of Banking, p. 252. 
 
 211
 
 212 MERCANTILE CREDIT 
 
 organization, and it is futile to discuss how things would 
 be if our industrial system were different. 
 
 Mercantile credit consists in the advancement of goods 
 or commodities for a stipulated period, with the under- 
 standing that the seller has a right of action against the 
 purchaser at the expiration of this period. Mercantile 
 credit is granted when the seller believes that the pur- 
 chaser will be able to pay at the expiration of the term of 
 credit. The theory underlying mercantile credit is that 
 the buyer will pay for the goods advanced from the pro- 
 ceeds of their sale; and the term of credit is in theory the 
 period required to sell the goods and realize on them. 
 When the goods are of such a character that a long 
 time is required to sell and to realize on them, then a 
 long term of credit prevails. 
 
 In distribution, goods may pass through the hands of 
 the following distributors: 
 
 1. The grower or importer. 
 
 2. The manufacturer. 
 
 3. The wholesaler or jobber. 
 
 4. The retailer. 
 
 5. The consumer. 
 
 The first four of these use goods as capital, and the 
 
 fifth must pay an amount for them adequate to cover the 
 
 original cost and the profits of all the dis- 
 
 anne s tributing factors. As business is now organ- 
 of distn- ..... 
 bution. lzec * ^ 1S impossible for each of these factors to 
 
 advance the capital necessary to carry on its 
 
 function and wait until it is rewarded from the profits of 
 
 its investment. The manufacturer must invest in a
 
 MERCANTILE CREDITS AND DEPRESSIONS 213 
 
 plant and then wait a considerable length of time until 
 the product is produced, sold, and paid for, before he 
 realizes on his investment. The wholesaler buys from 
 the manufacturer or grower and sells to the retailer, but 
 realizes nothing upon the capital invested in the goods 
 until they are sold; if the goods are sold on time, which is 
 often the case, he must wait often several months before 
 the goods are paid for. The retailer buys of the whole- 
 saler and realizes nothing until his goods are bought and 
 are paid for by the consumer. These distributors either 
 must have capital to conduct their business until the 
 product is sold, or else have capital advanced until they 
 realize on their sales. By having the capital advanced 
 temporarily they greatly extend their business. It is to 
 perform this function that banks of discount have 
 developed. 
 
 A credit may be recorded as a simple book account, 
 as a bill of exchange, as a promissory note, etc. A 
 creditor may secure an advancement of capital Methods 
 upon a debt expressed in the last named form, of giving 
 The manufacturer who sells goods to the mercantile 
 wholesaler on time accepts a promissory note cre l ' 
 from him, and with this he secures an advancement of 
 capital from his banker by selling the note. The whole- 
 saler is then under obligation to the manufacturer's 
 banker for the payment of the note, but in event of failure 
 to pay, the manufacturer is responsible. The whole- 
 saler may sell the same goods to a retailer on time and 
 receive a promissory note from the latter for the amount. 
 The wholesaler has this discounted by his banker, to
 
 214 MERCANTILE CREDIT 
 
 whom the retailer must pay the debt at the expiration 
 of the term of credit. In the exceptional cases where 
 the consumers give notes, the retailer may sell to the 
 consumer, accept his note and have it discounted at 
 bank, where the consumer must pay the debt when due. 
 Two persons are responsible for the payment of each 
 of these notes. For the payment of the note dis- 
 counted by the manufacturer's banker, both the whole- 
 saler and manufacturer are responsible; for the payment 
 of the note discounted by the wholesaler's banker, the 
 retailer and wholesaler are responsible; while for the 
 payment of the note sold to the retailer's banker, both 
 the consumer and retailer are responsible. 
 
 It is usually assumed that it is perfectly safe to advance 
 money upon notes which are to be paid from the sale of 
 goods, as there is real property in existence to be used 
 for the payment of the notes. In the above assumed 
 case, however, money is advanced in purchasing notes 
 to the extent of approximately three times the value of 
 the sales; or if we omit the loan of the retailer, as the 
 instance is an exceptional one, money is advanced to 
 twice the amount of the sales. The price paid by the 
 consumer for the goods must cover the entire costs, 
 together with the profits of the distributors. The 
 failure of the wholesaler, retailer or consumer to pay 
 might make it impossible for all of them to pay, in which 
 case at least two of the bankers would lose to nearly 
 twice the value of the goods. In the case assumed three 
 bankers advanced capital, each to the extent of a par- 
 ticular sale. In an industrial center frequently a banker
 
 MERCANTILE CREDITS AND DEPRESSIONS 215 
 
 advances capital to the manufacturer, wholesaler and 
 retailer for the sale of the same goods. In event of failure 
 in these cases the burden of losses is more concentrated. 
 Our confidence in the security of these loans is quickly 
 dispelled when we reflect that there is often twice as 
 much money in outstanding notes as there is property 
 to represent it. These observations will at least go to 
 show that the advancement of capital by bankers must 
 be based upon the honesty, integrity, and business 
 sagacity of borrowers rather than upon the character of 
 the individual transaction upon which the capital is ad- 
 vanced. In times of normal prosperity the likelihood 
 of loss to the bank is not great, as two persons are 
 pledged to the payment of each note. Of course, in 
 case of a collapse of a business house, losses are likely to 
 fall on the bank with which the house deals, as it is ex- 
 tremely improbable that all its obligations are so secured 
 that no losses to the bank result. With the collapse of 
 a business house, others are certain to be caught in the 
 ruin, and then the general security of these houses 
 alone prevents a disastrous reaction upon the business 
 community. 
 
 Merchants who conduct a safe business are compelled 
 to keep funds on hand to tide them over emergencies 
 when they rise. A wholesaler usually sells 
 largely on credit, and when his debtors fail to . .." 
 meet their obligations at maturity, if he pos- 
 sesses no surplus capital, he becomes unable to meet his 
 own obligations and is confronted with bankruptcy. 
 Trading up to the limit of one's means, or trading without
 
 216 MERCANTILE CREDIT 
 
 holding in one's possession a sufficient amount of capital 
 to tide over emergencies, is overtrading. When his 
 debtors fail to meet their obligations, the wholesaler is 
 often forced to have his bills or notes discounted even 
 when the rates charged are exorbitant. With him there 
 are but two options, high interest rates or bankruptcy. 
 When the financial condition of a merchant becomes pre- 
 carious, his banker, as a means of self-preservation, be- 
 comes conservative. It is often within his power to save 
 or ruin the merchant. He may save himself by permit- 
 ting the merchant to be ruined, or if he grants credit 
 to a merchant who has over-traded, he himself runs the 
 risk of being involved in the ruin of the merchant. A 
 happy set of circumstances may so prevail that a mer- 
 chant may over-trade for years without suffering loss. 
 However, losses may come to him which will cause his 
 ruin through (1) unfortunate business accidents of debt- 
 ors, (2) granting credit to unworthy business men, and 
 (3) general reverses in business conditions. 
 
 The statistics of banking and commercial failures 
 during the last thirty years furnish a very instructive 
 
 . „ object lesson on the general causes of failures. 
 
 Influence 
 
 of rising During periods of rising prices credit is freely 
 
 and falling sought and as freely granted. The incentive 
 prices on ^ rea ij ze w ide margins leads traders to ex- 
 tend their credit as far as possible and to 
 make the utmost use of their capital. While prices are 
 rising and trade is brisk, the wholesaler orders freely 
 from the manufacturer and enlarges his stock with the 
 hope that larger margins may be realized by still higher
 
 MERCANTILE CREDITS AND DEPRESSIONS 217 
 
 prices on the goods purchased. The retailer orders 
 freely from the wholesaler with a similar motive. Under 
 these conditions the manufacturers' plants are taxed 
 to the fullest capacity to meet the demands made upon 
 them. Finally, when the output of certain classes of 
 goods exceeds the real demands for them, the upward 
 movement of prices is stopped, and a scramble among 
 dealers begins in order that they may get rid of their 
 goods before they begin to decline. This vigorous com- 
 petition to dispose of stock leads to a further decline in 
 prices, and mercantile houses that have indulged in over- 
 trading go to the wall. Under these conditions houses 
 that purchase large stocks on credit, with a view to sel- 
 ling on wide margins, often find that the profits from 
 sales are inadequate to pay the original costs, and that 
 failures are certain to result unless emergency funds are 
 at hand. It takes but a few failures to react on other 
 houses which likewise have over-traded, and finally a 
 general ruin of business institutions takes place. 
 
 A condition of rising prices, of general business pros- 
 perity, preceded the panic of 1893. During 1892 trade 
 was very brisk. But few plants were idle. 
 
 Wholesalers stocked up freely and retailers, A cause of 
 
 ' the crisis 
 
 to get the advantage of wide margins, also f isqz. 
 
 purchased extensively. Unfortunately, at 
 
 such times traders are not so careful to adapt their supply 
 
 to the demands of trade, and when the reaction sets in 
 
 a great deal of unsalable stock is left to tell its story of 
 
 speculation in the production and in the sale of goods. 
 
 Distributors are more careless in granting credit in pros-
 
 218 MERCANTILE CREDIT 
 
 perous times than in other times, and when the reaction 
 sets in the ruin is more complete. When the reverses 
 came in 1893, only the institutions which exercised great 
 discrimination in granting credit, and those which 
 carefully guarded against over-trading, weathered the 
 storm in safety. 
 
 The years of 1898 and 1899, which were noted as the 
 period of recovery from the crisis of the preceding years, 
 illustrate clearly the phenomena above described. The 
 year 1899 stood out conspicuously as one of prosperity. 
 It was a year of generally rising prices. Plants were 
 running to their fullest capacity, many of them both 
 night and day. Demands were brisk in nearly all lines 
 and wholesalers and retailers competed vigorously in 
 purchasing large stocks of goods to get the advantages 
 of the wide margins which are always inevitable at times 
 of rising prices. At such times few fail. As a conse- 
 quence, in spite of our enormous increase in business 
 institutions, fewer failures with smaller losses were re- 
 corded in 1899 than in any year since 1881. In the early 
 part of 1900 the upward movement of prices was stopped. 
 Institutions which had over-traded and had given credit 
 carelessly were ruined. There were 1,437 more failures 
 in 1900 than in 1899, and the liabilities aggregated 
 $47,615,784 more than in 1899. Because of the enlarge- 
 ment of operations in building there had been con- 
 siderable speculation in building materials, and with a 
 decline in price, many dealers in lumber and machinery 
 failed. If the price reaction had been more general, the 
 failures of 1900 would have been more wide reaching.
 
 MERCANTILE CREDITS AND DEPRESSIONS 219 
 
 Dun's Review has furnished a summary of the num- 
 ber of failures, with the liabilities of the bankrupts for 
 each year since 1856. It is difficult to draw 
 any conclusions as to the percentage and Number 
 amount of failures from decade to decade f failures, 
 from these figures, as an accurate account 
 cannot be taken of the increase in wealth. However, for 
 short periods the fluctuations in the number and amount 
 of failures are very instructive. The amount of failures 
 in 1857 was enormous. For each of the next three years 
 the failures amounted to less than one-third those of 
 1857. Then in 1861 the failures attained enormous 
 proportions. During the remainder of the war and for a 
 few years following, the statistics of failures do not 
 include the Southern States. In 1873 the failures 
 amounted to over $200,000,000. In 1874 there was a 
 decline of nearly $50,000,000. Then for the next three 
 years there was an increase in failures, the maximum 
 being reached in 1878. A reaction with fewer failures 
 took place in 1879. Prosperity, as expressed in few 
 failures, continued for several years. Since then, as 
 before, few failures have occurred during periods of 
 rising and many during times of falling prices. 
 
 Commercial failures are inseparably connected with 
 credit giving. The frequency and the enormity of 
 failures are traceable to the extent and freedom of 
 granting credit. The influence of changes in distribu- 
 tive industry upon credit and failures remains to be 
 considered. When credits are long and transfers are 
 frequent, a great number of accounts that represent
 
 220 MERCANTILE CREDIT 
 
 the same property may be created, and where this is true 
 the probabilities of failure are increased. 
 
 During recent years forces have been at work not only 
 to lessen the number of distributive factors but to put 
 transactions more nearly on a cash basis, 
 in organ- Under the old distributive system, products 
 ization of passed through the hands of the grower, the 
 mercantile manufacturer, the jobber and the retailer 
 before they came into the possession of the 
 consumer. Where goods were imported the 
 number of distributing factors was greater still. While 
 these distributing agents still remain, they are not so 
 important as formerly. The department store, the 
 mail order house, the branch store, the cooperative pur- 
 chasing combines, and institutions which organize the 
 means of distribution in connection with manufacturing, 
 all lessen the distributing agents and hence lessen the 
 extent of credit created for the purpose of disposing of 
 goods. In lessening the amount of credit given they make 
 failures less likely. One of the reasons for the existence 
 of these institutions which organize the distributing 
 factors is to put buying more nearly on a cash basis; 
 hence less credit is required. The indirect influence of 
 these institutions has a remote yet positive effect on 
 credit giving. The competitive influence of these insti- 
 tutions tends to lower margins realized by distributing 
 factors. Retail dealers generally are very much in- 
 clined to say that margins are so narrow that they must 
 discount their bills if adequate profits are realized. 
 Wholesalers are practically forced to take the same
 
 MERCANTILE CREDITS AND DEPRESSIONS 221 
 
 position. In order to conduct a profitable business it 
 becomes necessary for them to have a sufficient capital 
 to tide them over from the time goods are purchased 
 until they realize on their sales. Hence the tendency 
 in the organization of distributive business to drive 
 down the margins of the distributing factors is resulting 
 in lessening credit. 
 
 Other forces have been at work in the United States, 
 which increase the liability to failure and also the 
 amount of credit giving. When insolvency 
 occurs, merchandise is a quick asset, at th 
 current value, to the extent that it conforms character 
 
 to the staple type. Articles like cotton, ofcom- 
 
 i xi it iv j - modities 
 
 leather, iron, rubber, sugar, conee, tea, etc., , . 
 
 upon which but little labor has been devoted, 
 
 can be turned into cash much more quickly and with 
 
 less loss than the more highly worked-up manufactured 
 
 products, (which may be classified under the head of 
 
 specialties or novelties). New countries manufacture 
 
 only the cruder kinds of articles. It requires generations 
 
 to develop skill in working up the more highly developed 
 
 textile products, and it has been only recently that 
 
 the United States has been taking an important 
 
 rank in this line of manufacture. The statistics of 
 
 textile manufactures in the United States from 1850 
 
 to the present time show how rapidly this line of 
 
 manufactures has grown. So long as we depended 
 
 on foreign trade for textile products, trade in them 
 
 was more nearly on a cash basis. With a decrease in 
 
 the importation of this class of goods and an increase
 
 222 MERCANTILE CREDIT 
 
 in production of them at home, trade in them has been 
 converted very largely from a cash to a credit basis. 
 So long as home production was confined to commodities 
 closely approaching the staple type and credit was created 
 for the purpose of moving them when a merchant be- 
 came insolvent, his assets were quite readily convertible 
 at current rates. But when the commodities of a mer- 
 chant are largely specialized and are the result of a 
 great deal of skill, or are produced to satisfy the demands 
 of fashion, then in event of bankruptcy the losses incident 
 to the forced sale of such goods are enormous. Hence 
 much depends upon the class of goods manufactured at 
 home in influencing the frequency and extent of failures. 
 Since we have been producing to a large extent the 
 more highly worked-up textile products, dating ahead 
 
 has been introduced and it is invariably asso- 
 . 1 , ciated with the giving of credit. When goods 
 
 are sold dated ahead, the term of credit does 
 not begin until after the expiration of the dating. Manu- 
 facturers often sell goods before they are produced, and 
 jobbers sell them before they have possession of them. 
 The payment is considered a cash payment if the goods 
 are paid for at the expiration of the time of dating, al- 
 though the goods may be delivered at that time or some 
 time in advance of the period at which they are dated. 
 Dating ahead not only actually prolongs the time of credit 
 but it indirectly leads to its extension. As all extensions 
 of credit increase failures, the practice of dating ahead 
 may be considered one of the causes of failures. There 
 is, however, one mitigating circumstance connected with
 
 MERCANTILE CREDITS AND DEPRESSIONS 223 
 
 the influence of dating ahead on insolvency. The lack 
 of adaptation of production to consumption is more 
 strikingly seen with specialties than with necessaries. 
 In dating ahead the adaptation is shifted from the pro- 
 ducer to the retailer, who stands close to the consumer 
 and is better acquainted with his wants. Hence dating 
 ahead on this account tends to decrease the losses due to 
 misapplied production. However, this economy is made 
 less effective owing to carelessness in purchasing by re- 
 tailers, carelessness that is due to the considerable length 
 of time which may be allowed to elapse between the time 
 when goods are ordered and when they may be paid for 
 under the system of dating ahead. This is due to the 
 psychological instinct which makes people more careless 
 in purchasing when the time of payment is postponed. 
 
 All these factors must be taken into account in con- 
 sidering the influences which operated in the crisis of 1893 
 as distinct from the earlier ones in the United States. 
 The census statistics for 1890 as compared with those of 
 1880 show a wonderful transition during that decade from 
 industries devoted mainly to the production of raw prod- 
 ucts to those of manufacture. During the decade the 
 population increased 25 per cent. The agricultural 
 population, however, increased but 10 per cent., whereas 
 those engaged in manufacture increased 49 per cent, and 
 those in mining 49.3 per cent. The number of acres de- 
 voted to wheat production during the decade decreased 
 5 per cent., while the corn acreage increased but 15 per 
 cent. The statistics of country and city population show 
 an increase in the town and city population at the ex-
 
 224 MERCANTILE CREDIT 
 
 pcnse of that of the country. The decade was marked by 
 a very large increase in the raw materials used in manu- 
 facture, whereas the figures on textile production show a 
 rate of increase twice as great as the increase in popula- 
 tion. The great increase of this class of products was 
 marked by falling prices, with the usual evil consequences 
 to distributing agents. This increase, the increase in 
 credit transactions which accompanies dealings in textile 
 goods, and the unsettling of normal business relations 
 caused by important changes in industry are more re- 
 sponsible for the crisis of 1893 than is usually attributed 
 to them. 
 
 It is perhaps safe to say that the work of the national 
 and local credit men's associations, the work of credit 
 exchange bureaus, the improved efficiency of mercantile 
 agencies, the introduction of system in business and es- 
 pecially in credit, and the production on definite orders, 
 more than counterbalance the weakness of the credit 
 system resulting from a prolongation of credit through 
 dating ahead, and also that coming from the influence 
 of the production of highly specialized commodities. 
 Consequently, business ruin as a result of credit giving 
 will be less complete than formerly.
 
 CHAPTER XIV 
 
 CREDIT MEN'S ASSOCIATION 
 
 I. HISTORY OF THE NATIONAL ASSOCIATION 
 OF CREDIT MEN 
 
 The Credit Men's Association can be traced to a Com- 
 mercial Congress held at Chicago at the World's Fair in 
 1893. One section of this Congress, which origin of 
 was presided over by P. R. Earling of Chicago, National 
 was devoted- to the subject of credits. The Associa- 
 chief paper presented, entitled "The Value 
 of Signed Statements," was read by Mr. W. H. Preston 
 of Sioux City, Iowa, who has since been prominently 
 identified with both national and local associations of 
 credit men. Only a small number took an interest in the 
 association, but a committee was appointed to consider 
 the advisability of organizing a national association. On 
 account of the crisis which followed, it was thought a very 
 inopportune time to organize a National Association of 
 Credit Men, and the matter was delayed. Finallyin 1896, 
 after several local organizations of credit men had been 
 formed, arrangements were made for a national associa- 
 tion to meet in Toledo, Ohio. 
 
 Opposition to the National Association came from 
 three sources: (1) Mercantile agencies feared that it 
 
 225
 
 226 MERCANTILE CREDIT 
 
 might constitute itself into a reporting agency which 
 
 would displace them, or that it would demand from 
 
 _ . . them better service than they could afford 
 
 Opposition . 
 
 t0 to give. (2) Attorneys feared that it would 
 
 National put them at a disadvantage in regulating 
 Associa- £ ees ^ e ^ c# (3) Retailers feared that it might 
 be oppressive to them. 
 
 The purpose of the National Association was well 
 stated in Article II of the Constitution: "The object of 
 Purpose of *^ e organization shall be the organization of 
 National individual credit men and associations of 
 Associa- credit men to make more uniform the basis 
 upon which credit rests; to demand a change 
 of laws unfavorable to honest debtors and the enact- 
 ment of laws beneficial to commerce in the several 
 states; to improve methods of diffusing information 
 and of gathering data with respect to credits; to im- 
 prove business customs; and to provide a fund for the 
 protection of members against injustice and fraud." 
 
 The membership was divided into two classes: (1) 
 
 The organized membership, to consist of credit men rep- 
 
 . resenting individuals, firms, or corporations, 
 
 Member- ... 
 
 ship of w "° ma y J om through the medium of local 
 
 National associations; (2) the individual memberships, 
 Associa- ^0 consist of credit men representing individ- 
 uals, firms or corporations, who may join the 
 association directly. The latter are from sections of the 
 country where no local association exists. In communi- 
 ties where there are local associations affiliated with the 
 National Association, the members of the local asso-
 
 CREDIT MEN'S ASSOCIATION 227 
 
 ciation represent it in the National Association. The 
 organized membership thus includes the membership 
 of all the local associations affiliated with the national 
 organization. At the Toledo meeting in 1896 it was esti- 
 mated that the volume of trade represented by those 
 present amounted to $213,000,000. The growth of the 
 association is indicated from the following facts. The 
 organized membership in 1900 was 2,511; the indi- 
 vidual membership was 490, making a total of 3,001. 
 This was an increase of 465 over the membership of the 
 previous year. On the first of June, 1904, the organized 
 membership was 4,528, and the individual 799, making 
 a total of 5,327.* On the first of June, 1905, the organized 
 membership was 5,085 and the individual 976, making a 
 total of 6,060, or an increase of 557 of the organized 
 and 177 of the individual membership over that of the 
 preceding year. In June, 1906, there were fifty-two 
 local associations that were affiliated with branches of 
 the national organization. Every section of the country 
 is represented. The association meets annually, and the 
 work is carried on chiefly by committees. 
 
 The scope of the work is indicated by the names of 
 the standing committees : Membership Committee, Legis- 
 lative Committee, Business Literature Com- 
 mittee, Committee on Improvement of Mer- 
 
 7 . r _ nuttees. 
 
 cantile Agency Service, Committee on Credit 
 Department Methods, Committee on Credit Coopera- 
 tion, Committee on Adjustment Bureaus, Committee 
 
 1 Monthly Bulletin of the National Association of Credit Men, 
 July, 1905, p. 24.
 
 228 MERCANTILE CREDIT 
 
 on Investigation and Prosecution, Committee on Fire 
 Insurance, Committee on Bankruptcy Law, Committee 
 on Banking and Currency, Committee on Uniform 
 Exemption Laws, Committee on Uniformity of State 
 Laws, on Federal Incorporation Laws, and on Commer- 
 cial Arbitration. 
 
 From the outset the National Association and the 
 
 local associations undertook the same kind of work. To 
 
 interchange information in regard to credit, 
 
 Differen- ^ Q ma j ie credit men more intelligent, and to 
 tiation of ....... 
 
 work of improve legislation m the interest of credit 
 
 national men, were the early objects sought. Gradually 
 and local pl ans were devised to place the organization 
 tions on a Droa cler basis, and new standing commit- 
 
 tees were organized. Some of the local asso- 
 ciations saw that their effectiveness would be increased 
 and enthusiasm for them promoted by their undertaking 
 practical work, such as the organization of adjustment 
 bureaus and bureaus for the exchange of credit informa- 
 tion. The National Association has come to see that 
 it must be organized on a broader plan, and that as a 
 recent president of its organization has said, "It must 
 stand for the general improvement of credit conditions, 
 act as a cement force between its various local organiza- 
 tions devoted to the ethical phases of credit, and act as 
 an educational center of economic problems." 1 Although 
 its work and that of the local associations overlap some- 
 what at present, the tendency is for each local association 
 
 1 F. W. Standart : Monthly Bulletin of the National Association 
 of Credit Men, January, 1905. D. 7.
 
 CREDIT MEN'S ASSOCIATION 229 
 
 to undertake the decidedly practical work and to con- 
 sider the problems of credit peculiar to its locality. The 
 National Association is limiting itself more and more to 
 the general problems of credit. It aims to supplement 
 and to coordinate the work of the local associations and 
 to cooperate with them on general problems such as those 
 of legislation. There is still a Committee of the National 
 Association on Investigations and Prosecution, but its 
 experience seems to demonstrate that this sort of work 
 can be better conducted by local associations where they 
 exist. Here, as elsewhere, the National Association finds 
 its chief efficiency in securing the cooperation of the 
 various local bureaus rather than in undertaking this 
 sort of work itself. 
 
 The most effective committees have been the following: 
 Committee on Improvement of Mercantile Agency 
 Service, Committee on Credit Department Methods, 
 and the Legislative Committee. 
 
 From the outset the credit men manifested a desire to 
 
 cooperate with the agencies in inducing merchants to 
 
 make better reports. From the beginning, 
 
 the National Association considered as one of work of 
 
 Com- 
 the chief topics the inadequacy of the agency m i t t ee on 
 
 reports, with the result that at some of the Mercan- 
 
 earlier meetings, representatives of the Dun tile 
 
 A.£T6I1CV 
 
 and Bradstreet agencies were present to de- service 
 fend their methods. It was urged that signed 
 statements should be secured from the merchant in all in- 
 stances when possible, and that if the latter refused and 
 the information had to be secured otherwise, this fact
 
 230 MERCANTILE CREDIT 
 
 should be indicated in the report of the agency. It 
 was asserted that agencies ought to have efficient repor- 
 torial staffs who were experts in dealing with business 
 men and in reporting business conditions; that a search 
 of records ought to be made in every instance, and that 
 no indefinite reports should be given; that all ratings 
 should be revised at least every six months; and that 
 new information should be furnished promptly on re- 
 quest; that all statements should be carefully tabulated. 
 It was urged that a large number of the reports were 
 written by men in various communities, usually by law- 
 yers, who relied largely on hearsay evidence, and that the 
 reports in no way indicated the sources of information. 
 It was mantained that reports, especially in country dis- 
 tricts, were inaccurate and that special reports were re- 
 ceived tardily. In all cases where a regular reportorial 
 staff was collecting information, it was said to consist of 
 an inferior set of men; and it was believed that much of 
 the antipathy of business men for the agencies and the 
 inadequacy of information was due to a lack of tact and 
 diplomacy on the part of the reporters of the agencies. 
 
 The agencies looked upon the claims of the credit men 
 as ideal and visionary. The latter were informed that 
 the carrying out of the recommendations here suggested 
 would involve a very great expense, and that the receipts 
 of the agencies would not warrant the undertaking of 
 the improvements suggested. 
 
 The agitation in favor of a higher standard had an 
 immediate effect in improving the efficiency of the agen- 
 cies. The President of the Bradstreet agency claimed
 
 CREDIT MEN'S ASSOCIATION 231 
 
 that in 1898 his company expended $150,000 more than 
 in former years in improving the service and it was said 
 that extra expenses were incurred by the Dun agency 
 for the same purpose. According to these agencies 
 their reports were secured by a more efficient set 
 of men, were better arranged and more promptly 
 rendered. 
 
 The Mercantile Agency Committee has compiled 
 statistics on the comparative efficiency of the Dun and 
 Bradstreet companies, covering in general the following 
 points: (1) Average time between asking for reports 
 and receiving them; (2) average age of the first report 
 received; (3) percentage of reports containing signed 
 statements not more than one year old; (4) the prompt- 
 ness of reporting changes; (5) arrangement and form; 
 (6) classification of reports according to excellency by 
 districts. These data were furnished by the local 
 associations and the members of the National Associa- 
 tion. When these facts were first published they at once 
 showed the comparative efficiency of the leading agencies 
 and at once a vigorous rivalry was created. So long as 
 no method exists to show definitely the comparative 
 merits of rivals, vigorous competition will be lacking; 
 whereas the fixing of a definite standard for determining 
 superiority stimulates efforts to excel as nothing else can. 
 
 The credit men claim that the suggestions made to the 
 mercantile agencies have received consideration and that 
 the service of the agencies has improved in every way. 
 The feature complained of most frequently at present 
 is the lack of accuracy in the detailed reports. One of
 
 232 MERCANTILE CREDIT 
 
 the resolutions presented at the 1905 meeting and passed 
 unanimously, was "That R. G. Dun & Co. and the 
 Bradstreet Co. be requested to discontinue in their 
 reports the expression, 'He is the reported owner of real 
 estate,' etc. The ownership of real property is a matter 
 not of supposition but of fact, and therefore easily deter- 
 mined; and we have a right to expect that they will search 
 the county records and establish the facts as to whether 
 the real estate referred to stands on record in the name 
 of the reputed owner or some one else." This resolution 
 indicates the feeling of the credit men regarding certain 
 classes of the reports of mercantile agencies. 
 
 The Mercantile Agency Committee has endeavored to 
 secure signed statements from merchants upon uniform 
 blank sheets made out by the committee. To this end 
 it has endeavored to prevail upon the agencies to use 
 its signed statements, but so far its efforts have been 
 unsuccessful. Although the agencies have modified the 
 form of the blanks formerly used, they have been unwill- 
 ing to adopt those suggested by the credit men. As 
 stated above the signed statement has many features to 
 commend it. Although statements rendered in writing 
 may be inaccurate, they are as a rule, much more truthful 
 than verbal reports. The necessity of making a signed 
 statement leads merchants to know their business more 
 accurately and to keep better books. A signed state- 
 ment has a legal significance. The merchant who makes 
 a signed statement does so with a view to secure credit. 
 If his statement is manifestly false, his offense comes 
 under the head of securing goods under false pretenses,
 
 CREDIT MEN'S ASSOCIATION 233 
 
 and the offender is criminally liable. So in all cases 
 where preferences are allowed and the bankrupt has 
 made some signed statements, the advice of his attorney- 
 is, invariably, that he shall take care of such creditors 
 first. 
 
 It is well known that different localities have different 
 classes of agency service. Everything depends on the 
 efficiency of the man having charge of the territory. In 
 some places the service of one agency is far superior to that 
 of the other, and in other localities there verse is true. 
 A resolution providing for the continuance of the investi- 
 gation of the relative merits of the two agencies, and 
 also for an investigation of localities where each is 
 deficient, was passed at the June meeting, 1905. Form X 
 shows the method of investigation by the committee. 
 
 Like other private concerns the agencies are of course 
 interested in profits, and this is kept in mind in the intro- 
 duction of improvements in service. That the service 
 rendered is not all that is desired by business houses is 
 seen in the tendency of large wholesale and banking 
 houses to employ experts whose exclusive duty it is to 
 investigate customers affairs and to study conditions 
 which directly influence credits. In doing this they are 
 limiting their agency service and are depending more and 
 more on their own agents. In this development we see a 
 tendency to return to conditions which existed prior to 
 the organization of the agency service. How far this 
 tendency will go remains to be seen. 
 
 The Committee on Credit Department Methods has la- 
 bored from the outset to secure the adoption of uniform in-
 
 234 MERCANTILE CREDIT 
 
 quiry blanks and statement blanks. At the first meet- 
 ing, forms were proposed and sent out to the various local 
 associations to be topics for discussion at the 
 
 Work of meetings in 1897. Forms were adopted at 
 Com- 
 mittee on * ne convention of 1898 which provided for 
 
 Credit giving the creditor a clear idea of the standing 
 
 Depart- f debtors and were sufficiently binding as to 
 Methods. ma ke the debtor criminally liable in case of 
 false statement. Much is gained in the adop- 
 tion of a single form or report. Merchants are not con- 
 fused by having different kinds of reports to make out; 
 they know what to expect, and the binding nature of 
 the report becomes generally known.- 
 
 At present the Committee on Credit Department 
 Methods manufactures several forms of property state- 
 ment blanks, several short payment forms, a trade in- 
 quiry blank, and unjust discount stickers. These are 
 sold to members and others. The unjust discount sticker 
 may be pasted on a letter. It contains this statement: 
 "Discount for cash is a premium for prompt payment 
 within the time and upon the terms as agreed, and when 
 not earned should not be claimed. Please add to your 
 next remittance $ " x 
 
 It soon became apparent that in order to have uniform- 
 ity in bankruptcy legislation, it was necessary to secure 
 the passage of a national law instead of trying to bring 
 about uniformity through the cooperation of the various 
 state legislatures. No matter what the skill with which 
 
 1 Monthly Bulletin of the National Association of Credit Men, 
 June, 1905 pp. 35, 36.
 
 
 
 
 
 
 
 
 
 
 
 Report 
 
 without 
 Statement 
 :>r with one 
 older than 
 one year. 
 
 Report 
 
 with 
 
 (•formation 
 
 as to Fire 
 
 I ii au ranee. 
 
 Date o[ 
 
 Receipt. 
 
 Number 
 of days 
 
 In*. 
 
 Aje ot 
 Era report 
 
 ominine 
 fractional 
 
 months. 
 
 Report 
 
 Willi 
 
 Statemenr 
 
 Chan one 
 year old. 
 
 Report 
 uitbout 
 
 orwubone 
 older than 
 one year. 
 
 Report 
 
 with 
 
 nlormati.m 
 
 as to Fire 
 
 Insurance. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 NOTE.-T1... record i. PRIVATE Tr,r only dnlo to be lurni.hod 
 
 in iho onnL 
 
 ' 
 
 ore Ik 
 
 e TOTALS. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 BRADSTREET 
 
 DUN 
 
 
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 TOWN 
 
 """ 
 
 Dole 
 
 Applica- 
 
 
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 :S 
 
 si' 
 
 5E2 
 
 ; j .;;;^;;: 
 
 CSS 
 
 ws 
 
 
 w 
 
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 :;.;■; 
 
 BS 
 
 '™- 
 
 '^. :' 
 
 •HL 
 
 ;;;r:, 
 
 .."r 
 
 
 
 
 ———--* 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 3 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 11 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 19 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 M 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 21 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 2! 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 23 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 24 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 1 
 
 25 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 c
 
 CREDIT MEN'S ASSOCIATION 
 
 235 
 
 Associa- 
 tion in- 
 instru- 
 mental in 
 causing 
 Bankrupcy 
 Act to be 
 passed. 
 
 state laws were drafted, state legislatures could always 
 be relied upon to modify the laws sufficiently to make 
 the legislation of the various states diverse. 
 On this account the National Association of 
 Credit Men, as well as most of the local asso- 
 ciations, vigorously supported the original 
 Torry bill when it was before Congress, and 
 later the law which was passed in 1898. The 
 Legislative committee has been very aggres- 
 sive in proposing changes in the law, and the 
 amendments which have been passed were chiefly due to 
 the work of this committee. During this time, however, 
 the interest of the legislative committee in procuring 
 reforms in state legislation has never ceased. 
 
 The National Committee usually works in cooperation 
 with the state associations to secure local legislation. In 
 all instances where bad laws are on the statute 
 books, cases are introduced to test their 
 constitutionality. In 1896 the New Orleans 
 Association, with the consent of the National 
 Association, took charge of all legislative 
 questions in Alabama, Arkansas, Texas, 
 Georgia, the Carolinas, Mississippi, Florida, 
 and Louisiana. Two laws were passed by the 
 Louisiana Legislature in 1896. The laws intro- 
 duced in Alabama and Arkansas were passed in 1899. 
 The chief reforms in state legislation prevented the sale 
 of goods in bulk, and prevented preferences. 
 
 When the Lodge Bill concerning the consular service 
 was before Congress, the Legislative Committee of the Na- 
 
 Coopera- 
 tion of 
 national 
 and local 
 associa- 
 tions in 
 having 
 state laws 
 passed.
 
 236 MERCANTILE CREDIT 
 
 tional Association labored in its interest. The association 
 at its June meeting passed a resolution favoring the adop- 
 tion of this law or another containing some of its 
 Worked . . _, . . . 
 
 for provisions. The prominent provisions advo- 
 
 consular cated were an improved classification and 
 service grading, the substitution of salaries for fees, an 
 increase of salaries, the application of the merit 
 system, efficiency as a test for continuance in office, the 
 Americanization of the service, and the requirement that 
 consuls must be familiar with either the French, German, 
 Spanish or Chinese languages, and "possess a knowledge 
 of the natural, industrial, and commercial resources of 
 the United States." 
 
 The variations in the provisions of the homestead and 
 exemption laws of the various states have caused an 
 Work for endless amount of confusion and annoyance to 
 uniform commercial interests. The National Associa- 
 state laws. ^ on a ^ ^ s meeting in 1905 resolved to engage in 
 a campaign of education to make possible more uniform 
 laws. It was recommended that the local associations 
 make this sub j ect a feature of special interest in the follow- 
 ing year. The National Association, through the Legisla- 
 tive committee, began an investigation of these laws with 
 a view to printing them to show their lack of uniformity. 
 
 Other matters which engaged the attention of the 
 Legislative Committee were (1) the making criminal the 
 Other mailing of a fraudulent statement concerning 
 
 laws to one's financial condition with intent to de- 
 prevent fraud by securing through it goods or money, 
 and (2) the enactment of laws designed
 
 CREDIT MEN'S ASSOCIATION 237 
 
 to regulate the carrying on of business under an assumed 
 
 or fictitious name. 
 
 Nearly all the laws of recent years providing for better 
 
 relations between creditors and debtors may be traced 
 
 to credit men's associations. In a number _ _ 
 
 . ... Influence 
 
 of notable instances these organizations have f credit 
 
 failed to accomplish their objects. How- Men's As- 
 ever, their power is growing. Statements S0Ciatl0n 
 made by Ex-president Fessenden of the New 
 York Credit Men's Association, in an address before 
 that organization in 1899, are very significant for that 
 date. "To-day we are recognized," said he, "in the 
 city and in the state, through the legislature, as a 
 factor to be consulted in all proposed laws affecting 
 merchandise credits. With all due modesty, yet 
 with full confidence in what I declare, I say to you 
 that we have it in our power to-day to dictate 
 what bills introduced into state legislatures shall or 
 shall not become laws, in so far as they affect us credit 
 men." 
 
 The Committee on Investigation went by that name 
 until the annual convention of 1898 when it was changed 
 to the Committee on Investigation and Pros- r nan „ e * 
 ecution. Nearly all the local associations investiga- 
 have similar committees and as a rule they ^ on Com - 
 work in cooperation with the national com- 
 mittee. Cases of insolvency are investigated and when 
 evidence exists to show that there has been a fraudulent 
 conversion of assets, the evidence is placed with a prose- 
 cuting attorney and the merchant is prosecuted. The
 
 238 MERCANTILE CREDIT 
 
 purpose of the committee is not to make collections but 
 to prosecute the guilty. 
 
 At the meeting of 1898 a series of resolutions was 
 
 passed which provided for the employment of attorneys 
 
 to investigate and prosecute frauds. Pro- 
 
 Prosecu- v i s j on was a \ so made for urging the local 
 
 uon of , 
 
 fraud. associations to report to the Investigation 
 
 Committee of the National Association all 
 cases of failure, whether fraudulent or not. It was 
 made the duty of this committee to investigate the 
 debtor's commercial record, present affairs, capacity and 
 character in order to make recommendations to the in- 
 volved creditors as to a reasonable compromise if the 
 debtor was honest, and as to the extension of such aid as 
 would enable the debtor to continue in business. 
 
 In 1899 after the national bankruptcy law was passed, 
 a plan was submitted by the national secretary to the 
 local associations for discussion at their meetings. The 
 plan provided for the submission of all offers for the 
 compromise of indebtedness to the Investigation Com- 
 mittee of the State and National Associations, and cred- 
 itors were pledged to refuse offers of compromise until the 
 investigation by the constituted authorities should take 
 place. The spirit if not the letter of this plan was later 
 carried out. A fund was voted to be used in the investi- 
 gation and prosecution of fraud, and individual credit- 
 ors were pledged not to accept compromise offers of 
 settlement. 
 
 The difficulties involved in carrying on the work of 
 investigation and prosecution by the National Associa-
 
 CREDIT MEN'S ASSOCIATION 239 
 
 tion were seen to be almost insurmountable and the 
 Board of Directors of the National Association at their 
 meeting in 1903 decided to abandon opera- 
 tions under the investigation and prosecu- Prosecu ~ 
 
 tion 
 tion fund as far as new cases were concerned. Bureau. 
 
 The following year, however, the National 
 Association, instructed the directors to reorganize the 
 Investigation and Prosecution Bureau as an adjunct to 
 the national work, and recommended "that a trust fund 
 of $50,000 be raised with which to equip and maintain 
 the bureau." 1 
 
 The Secretary-Treasurer immediately sent out com- 
 munications to the local associations to obtain opinions 
 on the proposed plan with reference to the collection of 
 the fund. The plan suggested did not meet with ap- 
 proval of the local associations, and the board of directors 
 at its next meeting decided to abandon the project. 
 They recommended that the work be taken up by the 
 local associations in their respective districts, and that 
 the costs of investigation and prosecution be borne by 
 the association or associations interested. This seems to 
 have been the best way of disposing of the matter, since 
 the local associations can organize much more effectively 
 to investigate and prosecute cases in their own district 
 than a committee or bureau of the National Association 
 can handle the cases arising in all parts of the country — 
 often, indeed, in those parts with which they are but 
 slightly familiar. 
 
 1 Resolution of National Association, 1904. Bulletin, June 
 19, 1905.
 
 240 MERCANTILE CREDIT 
 
 The Committee on Credit Cooperation was organized in 
 1904. It was not thought advisable to establish a credit 
 Credit Co- excnan g e bureau, but it was considered desir- 
 operation able that there be a greater interchange of 
 Com- ledger experience among members of the As- 
 
 sociation. The committee appointed limited 
 itself to advocating a large degree of interchange of in- 
 formation, and this committee was retained for 1905. 
 Many local associations and many trades have credit 
 exchange bureaus. 
 
 The Committee on Fire Insurance that was recently 
 installed, at first used its influence to induce debtors who 
 Com- ^ad an msumc i en t amount of fire insurance to 
 
 mittee on insure themselves adequately. Since then it 
 Fire In- h as prevailed on many of the local associations 
 surance. ^ o a pp } n ^ standing committees on fire insur- 
 ance. At the National Convention of Credit Men held 
 in Minneapolis in June, 1911, the Fire Insurance Com- 
 mittee submitted the following resolutions, which show 
 clearly the position of this committee with reference to 
 fire insurance. 
 
 "Resolved, That the National Association of Credit 
 Men in convention assembled, recognizing that the 
 present conditions of fire insurance and fire waste are 
 imposing an unwarranted and unnecessary burden 
 upon our people, makes an earnest appeal to its 
 members and particularly its affiliated branches to 
 double and redouble their efforts to secure relief from 
 these conditions. 
 
 "First, by using every means at hand, and especially the
 
 CREDIT MEN'S ASSOCIATION 241 
 
 literature of our association, to give the public in general 
 a thorough understanding of the problems. 
 
 "Second, by making a conscientious study of local 
 hazards especially as cited in the reports on cities and 
 towns as issued by the engineers of the National Board 
 of Fire Underwriters, and, acting upon them, demanding 
 of the municipal authorities that such hazards be reduced 
 or eliminated. 
 
 "Third, by endeavoring to secure in every state the 
 enactment of a fire marshal measure modeled as closely 
 as possible upon the bill as introduced, largely through 
 the instance of this association, in the Legislature of the 
 State of New York. 
 
 "Fourth, by keeping in touch with the state depart- 
 ments formed under the fire marshal laws with a view to 
 securing from them the highest possible efficiency. 
 
 "Fifth, by cooperating with other organizations, such 
 as state fire protection associations formed to reduce the 
 losses of their respective states." 
 
 II. LOCAL ASSOCIATIONS OF CREDIT MEN 
 
 When the National Association of Credit Men was 
 formed in 1896, there were thirteen local associations 
 of credit men. 1 In July, 1912, there were ninety-one 
 local credit men's associations affiliated with the National 
 Association and thirty-seven states were represented. 
 
 1 These were located in the following cities: New York, Detroit, 
 Cincinnati, Sioux City (Iowa), Portland (Oregon), St. Joseph 
 (Missouri), St. Louis, Kansas City, Memphis, New Orleans, 
 Louisville, Nashville, St. Paul and Minneapolis.
 
 242 MERCANTILE CREDIT 
 
 The purposes of the early associations were (1) to 
 reform the legislation of the states regarding bankruptcy, 
 (2) to prevent creditors from being defrauded, (3) to 
 make more uniform the conditions under which credit is 
 given, (4) to increase and diffuse knowledge in regard to 
 credit, and (5) to make unity of action possible where 
 the interests of credit men were involved. The progres- 
 sive work of the associations was done by the committees. 
 The legislative committees were especially active. 
 Laws in the various states were introduced at their sug- 
 gestion, and through cooperation with the National Asso- 
 ciation of Credit Men, a campaign was begun which has 
 tended to make the laws of the various states more 
 uniform. 
 
 Most of the local associations hold several meetings 
 each year, some as often as once a month. The topics 
 for discussion at these meetings cover a wide range. They 
 are usually those of immediate interest to credit men, such 
 as The Bulk Sales Law, Corporation Reports, Credit 
 System in Commercialism, The Adjustment Bureau, 
 Credits, Credit Exchange, Law for the Credit Man, The 
 Bankruptcy Act, Mercantile Agency Service, Collec- 
 tions, Idealism in Business, Systems and Methods of 
 handling Accounts and Collections, Fraudulent Cases, 
 The Bankruptcy Law and its Repeal, etc. 
 
 Soon after some of the local credit men's associations 
 were formed, plans were adopted for exchanging credit 
 information. With some of the associations the credit 
 clearing house work became a prominent feature. Some 
 have organized both a credit exchange bureau and an
 
 CREDIT MEN'S ASSOCIATION 243 
 
 adjustment bureau. In other cases the Adjustment 
 Bureau work has been introduced without a Credit 
 Exchange Bureau. When the Clearing House Bureau 
 was organized as a part of the work of the association, 
 the exchange of credit information became an adopted 
 policy.
 
 PART II 
 
 LEGISLATION
 
 CHAPTER XV 
 BANKRUPTCY LEGISLATION 
 
 The right to contract and the enforcement of contracts 
 are almost as old as the race. In primitive societies public 
 opinion and custom compelled the enforce- contracts 
 ment of contracts. They cover a variety of of primi- 
 things, but usually are concerned with com- tive 
 mercial agreements. The trade relations of e * 
 
 people were the earliest relations between families and 
 states. Barter was, of course, the earliest form of the 
 trade relation. When the buyer did not have goods to 
 exchange for the commodities of the seller, he gave wam- 
 pum, beads, or some of the many other instruments used 
 by primitive people, which could be exchanged by the 
 seller for goods needed. These were the earliest and 
 crudest forms of money. When the medium of exchange 
 did not exist or was not in possession of the buyer, he 
 agreed to deliver goods or services to the seller as a com- 
 pensation for the commodities received. This was the 
 earliest kind of contract. It had the sanction of the 
 public opinion of the group and was enforced by that 
 sanction. 
 
 When political organization became more definite, 
 states prescribed by formal laws what the people 
 should do and should not do, which was deemed 
 imperative to the welfare of the states. In this 
 
 247
 
 248 MERCANTILE CREDIT 
 
 development of state activity laws governing trade 
 relations were everywhere passed. These laws always 
 
 favored the creditor. He had parted with 
 1 isla- something valuable and took chances on a 
 tion with loss until the state gave him some redress. 
 reference ^o protect the creditor the early laws 
 
 were of a drastic character. At that time 
 the right of action againt the debtor's property was 
 of less significance to the creditor than it is now. 
 He frequently had but little property, and the sur- 
 render of the person of the debtor either for his im- 
 prisonment or for the taking of his life was considered 
 necessary to protect the interests of the creditor. All 
 the early bankrupt laws provided either imprisonment 
 for the debtor or the death penalty. Until the nineteenth 
 century the death penalty for those who failed to pay 
 their debts was very common. 
 
 In conformity with the changes in industrial organiza- 
 tion in modern times, and especially in the nine- 
 teenth century, the relations between debtors and credi- 
 
 ,, . tors, and also contract relations, have changed. 
 
 Modern 
 
 views with The spirit of commercial interdependence 
 
 reference has given rise to the idea that the granter 
 to the re- Q £ cre( j}t j s m a measure a partner of the 
 between debtor. In the big undertakings of the 
 debtors present day, business cannot be carried on 
 and # without borrowed capital. To carry on 
 
 enterprises and to develop resources, under- 
 takers must borrow money. In lending, the creditor 
 makes an investment and takes chances on the outcome.
 
 BANKRUPTCY LEGISLATION 249 
 
 He inquires into the character, earning ability, etc., of 
 the borrower and makes his investment based upon his 
 investigations. The borrower invests the capital pro- 
 cured in an enterprise more or less hazardous, with the 
 hope of realizing returns which are roughly in proportion 
 to the risks of the undertaking. In new countries 
 investments involving great risks are made much more 
 frequently than in older countries, and interest rates are 
 consequently higher since they cover risks. Great busi- 
 ness risks are necessary to the rapid development of a new 
 country, and often the rapidity of the development is pro- 
 portional to the degree of risk. Although many succeed, 
 a great many fail, and those who succeed render impor- 
 tant social services. Where this situation prevails, the 
 honest investor who has been unfortunate cannot be 
 looked upon as a criminal. The creditor who considers 
 the nature of his investment and who accepts a high rate 
 of interest because the risk is hazardous, has no special 
 claim in equity against the debtor who deals honestly 
 with him aside from the surrender for the creditor's bene- 
 fit of the property of the debtor. In accordance with 
 this conception of business ethics, which became pro- 
 nounced in the early half of the last century, laws were 
 passed in England and America dealing leniently with 
 honest debtors. These laws first prohibited the death 
 penalty and imprisonment. Then they held the bank- 
 rupt responsible in debt payment for only the amount 
 of property which he possessed at the time of his failure. 
 Any other legal position than this would not have been
 
 250 MERCANTILE CREDIT 
 
 in keeping with the commercial development above 
 described. 
 
 Every modern state regulates by bankruptcy or insol- 
 vency laws the relations between creditors and their 
 debtors who fail to pay their debts. Ordi- 
 Modern narily an insolvent is one who cannot pay his 
 
 ulate debts or one whose liabilities exceed his assets. 1 
 relations Insolvency is necessary to bankruptcy pro- 
 between ceedings. In some countries, France, Austria, 
 and Germany, a stoppage of payments results 
 creditors, necessarily in bankruptcy proceedings. In 
 England, Denmark, Norway, and the United 
 States, "Acts of bankruptcy" are necessary to bring 
 about an adjustment of bankruptcy; while in other 
 countries the courts must determine what conditions of 
 the cessation of the payment of debts will result in bank- 
 ruptcy proceedings. 2 In Belgium, Italy, and Spain the 
 payment of debts may be suspended under certain 
 circumstances without the debtors going into bank- 
 ruptcy. In Italy the consent of a majority of the 
 creditors is necessary for a suspension of payments. 
 In both Belgium and Spain debtors are allowed to 
 establish with creditors compositions which forestall 
 bankruptcy. 
 
 In all the southern countries of Europe except Spain, 
 bankrupt laws are applicable only to traders, whereas in 
 the northern countries of Europe and in the United 
 States all classes of debtors are subject to the bankruptcy 
 
 1 See Lenthold : Russiche Rechtskunde, Leipzig, 1879. 
 
 2 Dunscombe: Bankruptcy.
 
 BANKRUPTCY LEGISLATION 251 
 
 laws. It was not until 1881 that Spain established a 
 bankruptcy law for traders as well as non-traders. 
 As early bankruptcy laws were drastic in 
 character, the privilege of bankruptcy was a whic j 1 
 doubtful one. But since bankruptcy has bank- 
 come to mean a cancellation of debts if the ruptcy 
 
 bankrupt has not been dishonest and if he , 
 
 . apply- 
 
 surrenders his property, the trader enjoys 
 
 advantages over other classes in countries where bank- 
 ruptcy is denied to nontraders, since there the latter 
 class must pay all their debts in full. 
 
 In all countries distinctions are made with reference 
 to causes of insolvency based upon the culpability of the 
 debtor who goes into bankruptcy. In some j n _ 
 countries notably France, Belgium, Italy, and solvency, 
 Switzerland, a distinction is made between sim P le 
 insolvency, simple bankruptcy, and fraudu- ruDtcv 
 lent bankruptcy. A failure without any fraudu- 
 fraudulent circumstances attending it, is an lent bank- 
 insolvency. Degree of guilt is recognized as up cy " 
 a distinction between simple bankruptcy and fraudulent 
 bankruptcy, for each of which offences a prison sentence 
 is prescribed. Such offences as excessive personal ex- 
 penses, speculating in stocks, giving preferences to 
 creditors, failing to keep proper books, etc., are recog- 
 nized as causes of simple bankruptcy. In many other 
 countries in which the above terms are not used, we 
 find similar distinctions in which the treatment of the 
 debtor depends upon whether or not he was guilty of 
 misconduct.
 
 252 MERCANTILE CREDIT 
 
 There are three ways in which bankruptcy proceedings 
 may be initiated: (1) by declaration of the debtor him- 
 T . . . self; (2) by the petition of one or more cred- 
 
 of bank- itors; and (3) by action of the court which 
 ruptcy has jurisdiction. In some countries bankrupts 
 
 pr0 " are given the privilege of applying for a judg- 
 
 ment of bankruptcy. In others, as soon 
 as the debtor is unable to pay his debts, it is made his 
 duty to make known the condition of his affairs. The 
 petition of the debtor is an act of bankruptcy both in 
 England and the United States. In many countries 1 
 any creditor regardless of the amount of his claim, may 
 place a debtor in bankruptcy by petition. 
 
 In most countries in former times as soon as bankruptcy 
 
 proceedings were instituted the bankrupt could be put 
 
 in prison. Recently the rigor of these laws 
 
 Treatment ^ as \ Deen lessened and imprisonment is re- 
 
 of debtor . . 
 
 during sorted to only m exceptional cases. In all 
 
 bank- instances the declaration of bankruptcy de- 
 
 ruptcy prives the debtor of the possession and control 
 
 ceedings. °^ ^is property, until his relations with his 
 
 creditors have been adjusted. Since the period 
 
 of becoming insolvent is a gradual one, the time at which 
 
 the debtor's control of his property must cease is in 
 
 nearly all countries extended back beyond the time of the 
 
 declaration of bankruptcy. The laws and practices of 
 
 countries vary greatly on this point. 
 
 In the adjudication of bankruptcy a court of compe- 
 tent jurisdiction has charge of affairs. In the various 
 
 1 France, Spain, Italy, Belgium, Germany, Austria and Hungary.
 
 BANKRUPTCY LEGISLATION 253 
 
 countries this court appoints trustees, administrators, 
 etc., to take control of affairs, to investigate the con- 
 duct of the bankrupt, to take charge of the B an jj_ 
 estate, and to insure to each creditor his valid ruptcy 
 claims. Everywhere an assembly of creditors P ro " 
 is given privileges and rights which vary with 
 the laws of the country. But whatever the system in 
 vogue, the property of the debtor is administered and 
 distributed among the creditors under the supervision of 
 the court that has charge of the bankruptcy proceed- 
 ings. In the closing up of the bankrupt's affairs, certain 
 precautionary measures are everywhere employed. An 
 inventory giving a full description of the bankrupt's 
 property and an estimate of its value, is taken. All 
 creditors must prove claims against the estate. To 
 guard against the misappropriation of funds, the admin- 
 istrators are held responsible for misconduct and negli- 
 gence; in many cases they are required to give bond, and 
 in some cases the funds received must be kept in a public 
 treasury. 
 
 In many countries the ordinary course of bankruptcy 
 procedure may be avoided by arrangements between the 
 debtor and creditor, known as compositions, by which 
 they themselves agree to terms of settlement. By the 
 composition the debtor retains or is restored to the man- 
 agement of his business and is often discharged from a 
 portion of his liabilities when he carries out certain stipu- 
 lations. An extension of time to meet his obligations is 
 sometimes granted the debtor. As it is impossible to 
 secure unanimity of action among creditors, in most
 
 254 MERCANTILE CREDIT 
 
 countries a majority of them is given power to bind the 
 
 minority in making compositions. However, a double 
 
 majority is required, that is, numerically and in assets 
 
 varying from a simple majority in number and three-fifths 
 
 in value as in Spain, to a two-thirds majority in number 
 
 and four-fifths in value as in Hungary. The approval of 
 
 the proper judicial authority is required in all countries. 
 
 The method of discharge is different in England from 
 
 that of the Continent. On the Continent the court must 
 
 either approve or reject the composition agreed 
 
 The dis- U p on by creditors. It has no right to modify 
 
 charge of . . 
 
 debtor. **, nor can it grant a debtor the privilege of a 
 
 composition on his own motion. In England 
 on the other hand the court may discharge a debtor from 
 his debts after he has paid a portion of them. In Eng- 
 land Legislation of this sort more lenient to debtors 
 began in the reign of Queen Anne and culminated in the 
 Acts of 1883 and 1890. 
 
 Within the last fifty years what is known as Preventive 
 Compositions have been adopted by several European 
 p re _ countries and the United States. They are 
 
 ventive arrangements entered into between creditors 
 com- an d debtors by which the latter avoids going 
 
 posi ons. though bankruptcy proceedings. They are 
 intended primarily for the benefit of insolvent debtors, 
 but are beneficial to creditors also. When the debtor 
 makes a request for the privilege of entering into a com- 
 position with his creditors, he is usually required to 
 report to the court the names of his creditors, their 
 residences, the amounts owed each, a statement of his
 
 BANKRUPTCY LEGISLATION 255 
 
 assets, and a proposition for composition. While nego- 
 tiations are pending, the debtor cannot transfer any por- 
 tion of his property, or do anything which will affect the 
 condition of his estate. During this period all suits and 
 executions against the debtor are suspended. The compo- 
 sition must be agreed to by a majority of the creditors, 
 the action of which is usually binding on all the rest. 
 
 The first English law providing for a preventive com- 
 position; passed in 1869, placed the control of the compo- 
 sition almost exclusively in the hands of the creditors 
 and debtor, with only a nominal control by public 
 authority. The clerk of the court was required to register 
 the composition, but in doing this his power was restricted 
 to his seeing that necessary formalities had been complied 
 with. This Act was exceptional in legislation of this 
 class, for the negotiations were free from judicial control 
 and the agreements entered into did not require the con- 
 firmation of a court. 
 
 The laws of 1883 and 1890 reversed the policy of the 
 law of 1869 by giving the court supervision over the 
 negotiations between creditors and debtor, by making 
 the confirmation of the court necessary to the validity 
 of agreements between them, and by giving the court the 
 power of veto; that is, of refusing to approve a composi- 
 tion when it seemed that the interests of all classes war- 
 ranted such action. In all the Continental countries, 
 the proper court exercises supervision over composi- 
 tions, and the confirmation of a composition is necessary 
 to the validity of an agreement. 
 
 In most countries certain civil, commercial, and polit-
 
 256 MERCANTILE CREDIT 
 
 ical rights are lost to debtors through bankruptcy pro- 
 ceedings. European countries may be classified in three 
 
 groups with reference to the severity of bank- 
 Treatment 
 of bank- ru P* l aws: (1) I n France, Belgium, Spain, 
 
 rupts in Italy, and the Netherlands the debtor must 
 
 different p a y a jj y s debts m f u \\ before he can be 
 
 restored to full civil rights; (2) in Germany 
 and Austria, as a rule, the debtor is restored to all 
 his rights upon the conclusion of bankruptcy proceed- 
 ings; (3) in England the debtor is restored to all his 
 rights when he is discharged by the court and a certif- 
 icate is given him to the effect that his insolvency was 
 due to misfortune. He is also freed from all disabilities 
 when the bankruptcy is annulled after it has been 
 established that his debts have been paid in full. 
 
 In the first two of the above groups there are many 
 exceptions. In Spain and Italy a debtor is restored to 
 his rights when a composition has been granted and all 
 its conditions have been fulfilled. In the Netherlands 
 a debtor is treated similarly if he has acted throughout 
 in good faith. In France and Belgium before the debtor 
 can be restored to his rights he is required to pay all his 
 debts, even those from which he has been excused by the 
 terms of the composition. In Spain after those who have 
 obtained a composition have complied with its condi- 
 tions they may be given all their rights; whereas all 
 other bankrupts must pay their debts in full to obtain the 
 same privileges. As a rule, fraudulent conduct prevents 
 the restoration of rights to a bankrupt, and in some coun- 
 tries the fraudulent are punished with penal servitude.
 
 CHAPTER XVI 
 
 THE BANKRUPT LAW OF 1800 
 
 Although the Constitution of the United States has 
 
 been in force 123 years, in but thirty-one years have we 
 
 had national bankrupt laws. In this respect 
 
 our experience has been different from that Wat j onaI 
 
 bankrupt 
 of most foreign countries. England has had i aws 
 
 a bankruptcy law since the reign of Henry 
 VIII, her last Act having been passed in 1890. Prac- 
 tically all other European countries have bankruptcy 
 systems. It must not be inferred, however, from our 
 experience with national bankrupt laws, that the United 
 States is opposed to bankruptcy legislation. Many of 
 the states have insolvency or some form of bankruptcy 
 laws, and the opponents of national bankruptcy legisla- 
 tion in Congress have usually contended that this class 
 of legislation should be left with the various states. 
 
 Authority for a national bankrupt law was given by the 
 following clause of the Eighth Section of Article I of the 
 Constitution: Congress "shall have power to Right to 
 establish a uniform rule of naturalization and legislate 
 uniform laws on the subject of bankruptcy on bank " 
 throughout the United States." The changed g i ve n the 
 attitude in favor of leniency to debtors is seen national 
 
 in the discussion in the Constitutional Con- g° vern - 
 i ,i • i «■»* ment by 
 
 vention; when this clause came up, Mr. the con _ 
 
 Sherman observed that bankruptcies were in stitution. 
 
 257
 
 258 MERCANTILE CREDIT 
 
 some cases punishable with death by the laws of 
 England; and he did not choose to grant a power by 
 which that might be done here." 1 In reply Mr. Gou- 
 verneur Morris said "that this was an extensive and 
 delicate subject. He would agree to it because he saw 
 no danger of abuse of the power by the legislature of 
 the United States." 2 Connecticut was the only state 
 that voted in the negative on this clause. 
 
 That the interests of the creditor class were uppermost 
 at the time, however, may be inferred from the following 
 clause of the forty-second number of the Federalist 
 written by Madison; viz, "The power of establishing 
 uniform laws of bankruptcy is so intimately connected 
 with the regulation of commerce, and will prevent so 
 many frauds where the parties or their property lie, or 
 be removed into different states, that the expediency of 
 it seems not likely to be drawn in question." No men- 
 tion is made of the rights of debtors. 
 
 The issue to define the scope of Congress in legislation 
 
 on bankruptcy was first drawn between the strict and 
 
 e t loose constructionists of the Constitution, the 
 
 Scope or 
 
 legislation former claiming that the powers of Congress 
 °f were restricted to those specially granted in 
 
 Congress. the Const j tut i on# ^h en t he Constitution 
 
 was adopted, the bankruptcy legislation of other coun- 
 tries was limited to traders. The strict constructionists 
 
 1 Journal of the Constitutional Convention, pp. 650-665- 
 Madison. 
 
 2 Journal of the Constitutional Convention, pp. 650-665. 
 Madison.
 
 THE BANKRUPT LAW OF 1800 259 
 
 consequently claimed that the clause of the Constitution 
 giving Congress the right to pass bankruptcy laws limited 
 the power of Congress in legislation to traders. The 
 Supreme Court has since settled this dispute in conform- 
 ity with loose constructionist theory in holding that the 
 Constitution granted to the national government the 
 right to legislate in bankruptcy not only for traders but 
 for all classes of business men. 
 
 The depredations made on our commerce by Great 
 Britain and France prior to 1800 disorganized our trade, 
 and both debtor and creditor classes believed Law of 
 that it would be to their mutual interests to 1800 
 have a bankruptcy act passed which corre- limited to 
 sponded to the English law. It was in com- 
 pliance with their demands that the first National Bank- 
 ruptcy Act was passed April 4, 1800. The Act which 
 was limited to five years, was an involuntary law; that is, 
 action to make a man a bankrupt had to be brought by 
 creditors. Like the English law and other bankrupt 
 laws of the time, it was limited to traders — "merchants, 
 traders, bankers, brokers, factors, and insurers." Other 
 business classes, farmers, mechanics, laborers, and pro- 
 fessional men of all classes were excluded from its 
 provisions. 
 
 Two principles have since been incorporated into the 
 bankruptcy or insolvency laws of the most progressive 
 countries: (1) The relief of the honest debtor p r i nc j p i es 
 from imprisonment; and (2) The cancellation in bank- 
 of the debts of the bankrupt if dishonesty has ruptcy 
 not been proved, and if his property has been
 
 260 MERCANTILE CREDIT 
 
 surrendered for the benefit of his creditors. The first 
 principle has usually preceded the second. Practically 
 all European nations of to-day have accepted the first 
 principle, but not all of them have accepted the second 
 principle. In England, upon the other hand, the dis- 
 charge or cancellation of the debts of honest bankrupts 
 has been allowed since the reign of Queen Anne, while 
 freedom from imprisonment was made possible at the 
 beginning of the nineteenth century. 
 
 A distinction has been made as to kinds of business 
 with reference to the culpability of the man failing. 
 They were classified from the point of view of hazard and 
 public utility, and those engaged in precarious occupa- 
 tions who failed were treated more leniently by the law 
 than those failing in other business pursuits. Under 
 the influence of the mercantile system, international 
 trade was considered the occupation of greatest utility 
 to a nation. It was likewise considered the most hazard- 
 ous enterprise. Prior to the nineteenth century all 
 bankrupt laws in England related to traders, and 
 the bankrupt laws of most of the countries of southern 
 Europe to-day are limited to traders. The mercantile 
 teachings with reference to the comparative utility of 
 enterprises had nowhere been swept away by 1800. 
 It should be said, too, that during the eighteenth century 
 trade was carried on under hazardous conditions. Credit 
 was used more to carry on trade than in enterprises of 
 any other sort. Large amounts of capital were not 
 needed in manufacture until the industrial revolution, 
 and the development of agriculture in the eighteenth
 
 THE BANKRUPT LAW OF 1800 261 
 
 century was not dependent upon credit. The distinc- 
 tion which we find between occupations, by the laws of 
 the period, had a real economic basis in the eighteenth 
 century. Views to this effect were expressed by Mr. 
 James A. Bayard while speaking on the repeal of the law 
 of 1800, on February 18, 1803. "The most diligent and 
 honorable merchants may be ruined without committing 
 any fault. Not so as to the other classes of citizens; 
 either the cultivators of the soil, the mechanics, or 
 those who follow a liberal profession. They live on the 
 profits of their labor, not on profits derived from credit." 
 Blackstone 1 in his commentaries on the laws of Eng- 
 land states clearly the English theory with reference 
 to bankruptcy in his time. Referring to the _. . 
 laws of Rome he says that "The laws of stone's 
 England, more wisely, have steered in the views on 
 
 middle between both extremes; providing at bank " 
 
 ruptcy. 
 once against the inhumanity of the creditor, 
 
 who is not suffered to confine an honest bankrupt after 
 his effects are delivered up; and at the same time taking 
 care that all his just debts shall be paid so far as the 
 effects will extend. But still they are cautious of 
 encouraging prodigality and extravagance by this in- 
 dulgence to debtors, and therefore they allow the benefits 
 of the laws of bankruptcy to none but actual traders; 
 since that set of men are, generally speaking, the only 
 persons liable to accidental losses, and to an inability 
 of paying their debts, without any fault of their own. 
 
 1 Blackstone's Commentaries on Laws of England, Book 2, 
 Ch. 3, p. 935, Lewis's edition.
 
 262 MERCANTILE CREDIT 
 
 If persons in other situations of life run in debt without 
 the power of payments, they must take the consequences 
 of their own indiscretion, even though they meet with 
 sudden accidents that may reduce their fortunes; for the 
 law holds it to be an unjustifiable practice for any 
 person but a trader to encumber himself with debts of 
 any considerable value. If a gentleman or one in a 
 liberal profession at the time of contracting his debts, 
 has a sufficient fund to pay them, the delay of payment 
 is a species of dishonesty, and a temporary injustice to 
 his creditor; and if at such time he has no sufficient fund, 
 the dishonesty and injustice is the greater. He cannot 
 therefore murmur, if he suffers the punishment which he 
 has voluntarily drawn on himself. But in mercantile 
 transactions the case is otherwise. Trade cannot be 
 carried on without mutual credit on both sides: the 
 contracting of debts is therefore here not only justifiable 
 but necessary. And if by accidental calamities, as, 
 by the loss of a ship in a tempest, the failure of brother 
 traders, or by the non-payment of persons out of trade, a 
 merchant or trader becomes incapable of discharging 
 his own debts, it is his misfortune and not his fault. 
 To the misfortunes therefore of debtors, the law has 
 given a compassionate remedy, but denied it to their 
 faults; since, at the time that it provides for the security 
 of commerce, by enacting that every considerable trader 
 may be declared a bankrupt, for the benefit of his creditors 
 as well as himself, it has also (to discourage extravagance) 
 declared that no one shall be capable of being made a 
 bankrupt, but only a trader; nor capable of receiving
 
 THE BANKRUPT LAW OF 1800 263 
 
 the full benefit of the statutes, but only an industrious 
 trader." Traders, however, were not benefited by- 
 bankruptcy laws until provision was made for a discharge 
 which involved the cancellation of their debts after they 
 surrendered their property for the benefit of their 
 creditors. There are those who claim that bankruptcy 
 laws were of no benefit to traders until they included 
 voluntary provisions making it possible for debtors 
 to invoke the laws for their own benefit. However, 
 American experience with the first National Bankrupt 
 Act, as will hereafter be seen, tends to disprove this 
 contention. 
 
 The law of 1800 was restricted to merchants and 
 traders. As in the case of subsequent American bank- 
 rupt laws and most foreign laws of a similar 
 
 character, the commission by a debtor of acts , ° could 
 
 ' J be de- 
 
 of bankruptcy was necessary to his adjudgment c i are d 
 
 as a bankrupt. From a general point of view bank- 
 the debtor could be declared a bankrupt when ru P ts °y 
 he was guilty of fraud, or when he exhibited a 180 o 
 disinclination to pay his debts. Specifically a 
 debtor could be adjudged a bankrupt for the commission 
 of any one of the following offenses: (1) When in order to 
 defraud his creditors he left the state where he usually 
 resided; (2) when he concealed himself for the purpose of 
 fraud; (3) when he conveyed his property for fraudulent 
 purposes; (4) when he preferred creditors; (5) when he 
 willingly and fraudulently permitted himself to be ar- 
 rested; (6) when he remained in prison over two months 
 or when he escaped from it for purposes of fraud; (7)
 
 264 MERCANTILE CREDIT 
 
 when he did not within a reasonable time make provi- 
 sion for the payment of his debts after his property had 
 been attached. 
 
 The law made a distinction between the fraudulent 
 
 bankrupt and the debtor guilty of bankruptcy without 
 
 fraudulent intent. A debtor could be ad- 
 
 hf 11 a judged a fraudulent bankrupt, for which offense 
 could be h e could be imprisoned for a term of from one 
 adjudged to ten years, and could be ever afterward 
 a fraudu- d en i ec i the benefits of the act for any one of the 
 rupt. following offenses : (1) Refusing, within forty- 
 
 two days after being adjudged a bankrupt 
 and receiving notice of the execution of bankruptcy, to 
 surrender himself to the commissioners of the bankrupt 
 to be examined by them with reference to the state of 
 his affairs; (2) refusing to surrender all of his property 
 to the commissioners except the minimum allowed by the 
 Act; (3) testifying falsely with reference to his property, 
 its transfer, etc., and all books, papers, etc., relating 
 to it; and (4) upon conviction of a wilful default. If, 
 while being examined by the commissioners of bank- 
 ruptcy, the bankrupt committed "wilful or corrupt per- 
 jury, " he could be indicted for it, and was made subject 
 to imprisonment for a term of from two to ten years. 
 
 Upon the other hand, the bankrupt who surrendered 
 his property to the commissioners to be divided among 
 his creditors and who gave a thorough and exact report of 
 his affairs, should be discharged. A discharge meant not 
 only freedom from imprisonment, but a cancellation of 
 all the debts which the debtor then owed.
 
 THE BANKRUPT LAW OF 1800 265 
 
 The judge of the district court of the United States 
 had charge of all cases of bankruptcy arising in the 
 district. The petition to make a debtor a g ank _ 
 bankrupt had to be presented to him by a ruptcy 
 creditor, who was required to give bond to P r0 ~ 
 indemnify the alleged bankrupt for damages e ings * 
 in case bankruptcy was not established. When the 
 petition was filed, it became the duty of the judge to 
 appoint commissioners residing in the district, not to ex- 
 ceed three, to determine on the question of bankruptcy 
 and, in case the debtor was adjudged a bankrupt, to take 
 charge of his property. When notice was served upon 
 the debtor, summoning him to appear and answer the 
 charge of bankruptcy, it was his privilege to demand that 
 a jury should inquire into the facts of the case, at which 
 time the judge issuing the commission should preside. 
 As soon as the debtor was declared to be a bankrupt, the 
 commissioners should appoint a time and place for the 
 meeting of creditors, at which time they were required to 
 prove their debts and elect an assignee or assignees to 
 take charge of the debtor's property. As soon as the 
 assignee was elected it became the duty of the com- 
 mission to transfer to the assignees all the property of 
 the debtor, except the minimum allowed by law, which 
 was of a personal character. The commissioners were 
 also authorized to recover all property illegally con- 
 veyed or concealed and to place it in the hands of the 
 assignees. 
 
 After four months and within twelve months of 
 the issuing of the Commission of Bankruptcy, the assign-
 
 266 MERCANTILE CREDIT 
 
 ees were required 1 to appoint a place of meeting of the 
 assignees, commissioners, and creditors, after giving thirty- 
 days notice. At this meeting accounts were to be bal- 
 anced, and the property of the debtor was to be divided 
 among the creditors in proportion to the claims of each. 
 In case the bankrupt's entire estate was not divided at 
 the first meeting, a second meeting was to be called for 
 the distribution of the remnant of it within eighteen 
 months after the Commission was issued. The allow- 
 ances to the assignees for their services were to be made 
 by the commissioners, but "the district judges in each 
 district shall fix a rate of allowance to be made to the 
 commissioners of bankruptcy." 2 
 
 The only property of the bankrupt which was not 
 required to be surrendered were the clothing, beds, and 
 
 _. bedding of himself and family. If the assets 
 
 The 
 
 amount of °f the bankrupt paid 50 per cent, of his debts, 
 
 property then he was allowed 5 per cent, of the net 
 allowed a va i ue f hj s estate, provided that this amount 
 did not exceed $500. If his estate paid 75 
 per cent, of his liabilities, he was allowed 10 per cent, 
 of the proceeds of his estate, if this amount did not ex- 
 ceed $800. But if the assets of the bankrupt did not 
 pay 50 per cent, of his debts, then he was to receive 
 what the commissioners would allow, the amount not to 
 exceed $300 or 3 per cent, of the net value of the estate. 
 If the bankrupt was not proved to be dishonest, his debts 
 were to be cancelled after his estate was surrendered 
 
 1 A single assignee might have control of the estate. 
 
 2 Section 47.
 
 THE BANKRUPT LAW OF 1800 267 
 
 for the benefit of his creditors. The bankrupt, however, 
 was to lose all title to the allowance of a portion of his 
 property, and a right to a discharge which freed him 
 from the payment of the balance of his debts, if it could 
 be proved that he had permitted a creditor to present 
 a fictitious or unfair claim. He was to suffer the same 
 penalty if he had lost at any one time fifty dollars, or 
 $300 in all, in gaming or wagering. A bankrupt who 
 failed a second time could be relieved from punishment, 
 but he could not be discharged from the payment of 
 all his debts, unless his assets paid 75 per cent, of his 
 obligations. 
 
 In one sense the law was intended as an experiment as 
 its operation was limited to five years. However, it 
 was repealed December 19, 1803, after it had been in 
 force somewhat over three years. The vote in the 
 Lower House, 94 to 13, showed that the sentiment there 
 against the law was very strong. 1 
 
 The chief arguments for the retention of the law, were 
 as follows: 
 
 1. The correct policy would permit the law to expire 
 by its own limitation. As it was intended as an experi- 
 ment, five years should be allowed to test R easons 
 its value. General commercial distress de- for re- 
 manded the kind of law which was passed in tainingthe 
 1800. Radical amendments, which experience 
 
 has proved necessary, should be incorporated in the law 
 and it may then be of permanent value. 
 
 2. Well-informed writers and merchants believe that 
 1 In the Senate the vote in favor of repeal was 17 to 12.
 
 268 MERCANTILE CREDIT 
 
 more privileges should be given to men engaged in trade 
 than in other callings. The exemption of property from 
 the payment of just debts is not a violation of justice in 
 certain circumstances in the case of commercial concerns. 
 Although inability to pay debts ordinarily results from 
 idleness or imprudence, in the case of commerce risks are 
 so great that nothing can guard against failures. 
 
 3. Relief to unfortunate worthy traders cannot be 
 granted by states, since their laws are various and contra- 
 dictory. Of all occupations, trade is widest in range, 
 and laws governing trade should be equally wide and 
 extensive. 
 
 4. Credit and trade are the chief sources of wealth 
 accumulation. It would be unwise to have regulations 
 which would hinder their natural development. 
 
 5. The bankrupt law did not always operate in favor 
 of the debtor, as the opponents of the law claimed. 
 Under the insolvent laws of the states the debtor can 
 determine when he will go into insolvency. Under the 
 national bankrupt law the debtor cannot decide when he 
 will go into bankruptcy, while creditors can take action 
 to stop the reckless and hazardous career of a debtor by 
 initiating proceedings to make him a bankrupt. 
 
 6. The bankrupt law lessens the temptation to fraud 
 since there is less opportunity for concealment of fraudu- 
 lent conduct. Moreover, if it is considered desirable, 
 state legislatures may, without violating the national law, 
 pass laws providing drastic treatment for fraud. 
 
 7. The primary purpose in providing by constitutional 
 enactment for the giving of power to the national govern-
 
 THE BANKRUPT LAW OF 1800 269 
 
 ment to pass bankruptcy laws, was to establish the na- 
 tional credit upon a firmer basis. The repeal of the 
 law will mean a return to the partial and inadequate 
 system of the states with reference to credit and debts. 
 
 8. If the law was retroactive as to the relations be- 
 tween debtors and creditors, as many claim, and con- 
 sequently injurious, its repeal before the expiration of 
 five years will change again the relations of debtors and 
 creditors, and on this account be harmful. 
 
 The arguments in favor of the repeal of the law were 
 the following: 
 
 1. As Congress was responsible for the evils of the 
 law, which were numerous, it would be wrong to permit 
 the law to expire by limitation. Those who ordinarily 
 try to avoid bankruptcy are now placing themselves in 
 a position to get its benefits. 
 
 2. The bankrupt law had a bad effect on the morals of 
 the mercantile world; it created credits and Arguments 
 excited a spirit of extravagance in expenditure, for the 
 The opponents of the law pointed out that as repeal of 
 a result of the law small traders were often 
 
 found living in ease and great luxury. 
 
 3. The provisions of the law operated in favor of the 
 debtor. Although the commission of bankruptcy was 
 always taken out at the instance of a creditor, it was 
 pointed out that the creditor who took the initiative in 
 most instances was a friend of the debtor who acted 
 under his guidance. The commission of fraud led to 
 demoralizing consequences. 
 
 4. The bankrupt law could not be carried into effect
 
 270 MERCANTILE CREDIT 
 
 successfully without a resort to a class of laws to prevent 
 fraud, passed by England and other countries, which 
 were so drastic in character as to be abhorrent to our code 
 of morals. 
 
 5. The expenses of going through bankruptcy were out 
 of proportion to the assets to be divided, owing to the 
 high fees of the commissioners and assignees. 
 
 6. Trade does not need any special protection. The 
 commercial world is always fair to honest debtors. 
 
 7. The law was harmful in that it enlarged the powers 
 of the federal courts and of the general government. It 
 was claimed that many powers were given the general 
 government by the Constitution without a view to their 
 exercise. 
 
 8. Of most weight in securing the repeal of the law was 
 the contention that it was partial in its application, since 
 it discriminated in favor of the merchant and trader to 
 the detriment of the farmer and mechanic. If the 
 merchant failed, he could be relieved from the payment of 
 all his debts, whereas if the farmer or mechanic failed, he 
 was under obligation to cancel every item of his indebted- 
 ness. If the farmer loaned to the merchant and the lat- 
 ter failed, the farmer was then unable to collect a part 
 of the debts due him. If on account of the failure of 
 the merchant the farmer failed, the latter was afforded 
 no protection whatever by the law. It was stated that 
 our law was a modified form of the English law at that 
 time, and it was argued that as our economic conditions 
 were very different from those of Great Britain a good 
 law there might prove to be a very poor one here. There
 
 THE BANKRUPT LAW OF 1800 271 
 
 the dominant industry was commerce, and hence the legis- 
 lative favoritism to the mercantile classes. Here the 
 chief industry was agriculture, and it was unjust and 
 detrimental to the general good to discriminate against 
 the farming class. It was claimed that a preferred sys- 
 tem that treated all insolvents alike had been adopted 
 by some of the states. 
 
 9. Of importance, secondary only to the last argument, 
 was the contention that while justice dictated the 
 liberation of the body of the bankrupt, that same justice 
 demanded that the obligation to pay just debts was 
 eternal. When the law was passed, it was claimed to be 
 retroactive and to be the cause of great harm to creditors 
 by enabling debtors to be discharged from the payment 
 of obligations incurred before the passage of the Act. 
 
 The clause in the law which relieved from seizure the 
 property acquired by the bankrupt after he was dis- 
 charged, arose from the newer credit relations and was in 
 the interests of the public welfare. The discharge of the 
 debtor formerly meant simply relief from punishment. 
 It was assumed that he was under both moral and legal 
 obligations to pay his debts. Relief from the legal 
 obligation to pay was looked upon by many as the be- 
 stowal of an unwarranted and dangerous favor. It was 
 held that if the government relieved debtors from paying 
 their debts in full, it permitted the violation of contracts, 
 and that its effect would be demoralizing. It was 
 claimed that in making it easy for the debtor to go 
 through bankruptcy proceedings, by which a portion of 
 his debts could be cancelled, the government would
 
 272 MERCANTILE CREDIT 
 
 work harm upon industry since carelessness in borrow- 
 ing and in investing would result. That an effective 
 protest should be made against the release of the honest 
 bankrupt from the payment of his future earnings shows 
 how little headway our modern ideas of credit and busi- 
 ness had made at the time.
 
 CHAPTER XVII 
 
 BANKRUPTCY ACT OF 1841 
 
 The second National Bankruptcy Act of the United 
 States was passed Aug. 18, 1841, went into effect Feb. 1, 
 
 1842, and was repealed on the 3rd of March, 
 
 1843, having been in operation slightly over gl a 
 thirteen months. Shortly after the repeal second 
 of the law of 1800, agitation was begun for a National 
 new bankruptcy act. Interest in such a law ankru P t 
 was always strongest after periods of depres- whatpro- 
 sion, since debtors and their friends were par- posed Acts 
 ticularly vigilant in importuning Congress to aimed t0 
 pass a bankruptcy act which would remove pii^. 
 the burdens from the former class and permit 
 
 them to begin business again. Bankruptcy Bills 
 were frequently before Congress, but the friends of such 
 measures were particularly aggressive in 1818, 1820, 
 1822, and 1826. Most of these measures were copied 
 after the English law then in force, and all the friends of 
 the measures appealed to English experience to prove the 
 need of such a law here. In nearly all cases the proposed 
 measures limited the benefits of the law to traders, and in 
 most cases they were involuntary measures. All of 
 them proposed three things: 1. The surrender of the 
 property of the debtor for the benefit of his creditors; 2. 
 the relief of the debtor from punishment if dishonesty 
 
 273
 
 274 MERCANTILE CREDIT 
 
 had not been proved; 3. the discharge of the debtor 
 from the obligation to pay his debts. In all these dis- 
 cussions, the State Rights" advocates were strongly- 
 opposed to a national bankrupt act, whereas in general 
 the loose constructionists favored such a law. 
 
 It was urged that the trader or merchant ought to be 
 governed by a different set of rules than that governing 
 farmers, mechanics, wage-earners, professional men, etc. 
 
 The business of the traders and merchants is 
 
 traders more speculative and hazardous than that of 
 
 were the latter classes and in the nature of things 
 
 made a must be so. With the former it was claimed 
 
 f that failure is frequently due to misfortune 
 
 and miscalculation; and, where this is true, 
 the welfare of both the state and the creditor class as 
 well as that of the debtors demands the discharge of 
 the debtor, a thing which relieves his future earnings 
 from attachment to pay his debts. 
 
 In the discussion in the House in 1822, it was pointed 
 out that the first Bankruptcy Act of England was passed 
 
 in the reign of Henry VIII; that this Act 
 
 oreign then remained in force through all political 
 expen- . ° c 
 
 ence. an( ^ industrial vicissitudes; and that the only 
 
 changes which were made in it consisted in 
 lessening the rigor of the law with reference to debtors. 
 Other nations had bankruptcy laws with varying degrees 
 of severity. The chief difference between them con- 
 sisted in the required proportion and number of creditors 
 whose opinion, in regard to the effects of the debtor, 
 should control and bind the rest.
 
 BANKRUPTCY ACT OF 1841 275 
 
 In 1819 a report was made by the chancellor and 
 judges of the Supreme Court of New York to the Legisla- 
 ture of that state on its insolvency law. This „ 
 
 New 
 body reviewed the insolvency legislation of York's 
 
 New York beginning with the law of 1784. experience 
 
 It commented favorably on the Act of 1813, withinso1 - 
 
 vent lfl.ws« 
 which required every insolvent debtor to 
 
 make application for relief in the county where he resided 
 or was imprisoned. It was pointed out that the insolvent 
 law in New York was intended to relieve the debtor 
 from the payment of his debts and to free him from 
 imprisonment after he had surrendered his property for 
 the benefit of his creditors. At this time, in New York, 
 those not free holders charged with small debts could not 
 be imprisoned for a longer period than 60 days; and any 
 one owing debts less than $500 might be discharged, 
 whereas if one owed debts larger in amount, an appli- 
 cation for a discharge must be made. This committee 
 recommended the repeal of the State Insolvency Law, 
 claiming that a National Bankrupt Act would be superior 
 to the insolvency laws of the states. 
 
 It was claimed that commercial interests were in need 
 of a law to keep the debtor "in failing circumstances, 
 from disposing of his property partially among 
 his creditors, or from fraudulently wasting it, f UrP i° Se ,. 
 or converting it to his own use." 1 The rupt i aw# 
 preservation of the debtor's estate and its 
 protection in the interests of the creditors were to be the 
 chief factors in a national bankrupt law if this committee 
 
 1 Niles Register, Vol. 16, p. 85, Sup.
 
 276 MERCANTILE CREDIT 
 
 had the making of the law. It was held moreover that 
 
 a permanent law to relieve debtors would be demoralizing. 
 
 The chief argument for a bankrupt Act at this time 
 
 was that the act would discharge debtors who had 
 
 become involved in debt owing to extravagant 
 
 Reasons speculation and the unsettled industrial con- 
 assigned . . . 
 for pass- ditions. It was claimed that the Embargo, 
 
 ing a Non-intercourse Acts, and the War of 1812-14 
 
 bankrupt jj a( j ru i ne( j thousands. After the war the 
 
 Act in . - 
 
 1822. opening up of new lands with the attending 
 
 land speculation, and the unsettled banking 
 and monetary situation of the country, had caused many 
 more to fail. Many of these were not fraudulently 
 culpable, it was argued, but were simply unfortunate; 
 and for this reason their debts should be cancelled and 
 they should be permitted to start in business again. 
 Commercial prosperity and even the interest of the 
 creditors themselves demanded this. 
 
 The arguments of the opposition, however, at this 
 time prevailed. They argued that the cancellation of 
 Arguments debts would violate contracts and the effect 
 of those would be demoralizing. They insisted that 
 opposed to such a law would be an invitation to conduct 
 hazardous enterprises and then repudiate 
 just debts in case of business failure. They claimed 
 that the industrial conditions in England were so different 
 from those in America that a good law there might be 
 a very poor one here, and that it was unwise to follow 
 the English precedent. Some claimed that the bank- 
 ruptcy legislation in England was a failure. Quotations
 
 BANKRUPTCY ACT OF 1841 277 
 
 were made from the report of the English commission of 
 bankruptcy of 1818 to show this. The English law was 
 limited to traders, but by a loose construction of the 
 law it was extended to many other classes. It was 
 pointed out that it would be impossible to tell who 
 were traders and who were not. If the proposed law 
 included others than the trading class, it would demoral- 
 ize those who had absolutely no need for a bankruptcy 
 law. The law before Congress in 1822 contained a clause 
 extending the provisions of bankruptcy to "other per- 
 sons actually using the trade of merchandise, by buying 
 and selling, in gross or retail." 1 It was claimed that this 
 clause would include the miller who converts wheat 
 into flour, and the distiller who purchases grain for 
 manufacturing purposes, and many others who would 
 not logically belong to the merchant or trading class. 
 In 1827 another Act was introduced to include farmers 
 within the provisions of the law. The influence of the 
 law on the farmer in withdrawing him from his regular 
 occupation and tempting him into the questionable 
 occupation of speculation in lands and other fields for 
 which he had no qualifications, was dwelt on at consider- 
 able length. Between the repeal of the law of 1800 and 
 the passage of its successor in 1841, important decisions 
 were made by the courts affecting bankruptcy, deci- 
 sions which determined in large measure the subsequent 
 course of legislation on bankruptcy. 
 
 Those who were opposed to the extension of power 
 by the United States Government saw in the enactment 
 
 1 Abridged Debates, House, Vol. 7, p. 280.
 
 278 MERCANTILE CREDIT 
 
 of a national bankrupt law another encroachment of 
 the federal power on the prerogatives of the states. 
 Since the insolvent laws of the states were in 
 Arguments force so long as there was no national bank- 
 of those rU p£ j aw ^ an( j smce ^ latter abolished them 
 opposed to . . 
 
 extension where the provisions of these laws were m 
 
 of power conflict with the national law, the States 
 by the Rights advocates viewed national legislation 
 
 Govern- on bankruptcy with much concern. It was 
 ment. argued that without a national bankrupt 
 
 law the federal courts are chiefly concerned 
 with the settlement of controversies between citizens of 
 the different states. One debater claimed that the 
 national law would effect a judicial consolidation of 
 the Union, and would introduce radical changes in the 
 relations between the state and federal courts. This 
 contention, however, proved to be unfounded. 
 
 It was pointed out that a national law would impose 
 heavy burdens on both debtors and creditors in attend- 
 ing the federal courts. At this time, North 
 Inconvcn.™ 
 ience of Carolina constituted but one federal district; 
 
 attending consequently all the citizens of the state 
 federal would be required to attend the same bank- 
 ruptcy court. Pennsylvania was divided into 
 two districts, the sessions of each court being held at 
 Philadelphia and Pittsburg, cities 300 miles apart. 
 Under modern conditions with many railways and fast 
 trains, a burden almost unbearable would be imposed on 
 people to go the distance required of residents of those 
 districts at that time. But in the early twenties there
 
 BANKRUPTCY ACT OF 1841 279 
 
 were no railways anywhere, and the highways over 
 which the people would have to travel were in such a 
 condition as to make attendance at these courts for 
 the great majority of them, wholly impracticable. 
 These facts were pointed out in these discussions, and 
 they furnished the chief reasons for the defeat of the 
 proposed laws. 
 
 The friends of these measures claimed that the clause 
 requiring the consent of two-thirds of the creditors 
 for the distribution of the estate of the debtor and for 
 his subsequent discharge, adequately safeguarded the 
 interests of the creditors. The opponents of these laws 
 claimed that this clause offered no safeguard whatever; 
 that the remoteness of the federal courts from the places 
 of business of most of the creditors would prevent them 
 from attending its sessions, and that the discharge of the 
 debtor and the cancellation of his debts, would be 
 made relatively easy. It was thus claimed that while 
 these measures pretended to give adequate protection 
 to the creditors, this protection was only apparent and 
 not real. However, the arguments of the advocates of 
 a national bankrupt law proved unavailing until after 
 the crisis of 1837. 
 
 The right of a state to legislate on bankruptcy when 
 a national law is in force, and the distinction between 
 insolvency and bankruptcy laws and the right of a state 
 to grant a discharge to a debtor when debts were owed 
 a creditor in another state, were frequently mooted 
 questions. The first two of these were answered by the 
 Supreme Court of the United States in 1819, through
 
 280 MERCANTILE CREDIT 
 
 Chief Justice John Marshall in the famous case of 
 
 Sturgis vs. Crowninshield. 1 
 
 On the first proposition the court held that "The rights 
 
 of the states to pass bankrupt laws are not extinguished 
 
 by the enactment of a uniform bankrupt law 
 
 Court deci- throughout the Union by Congress, for they are 
 
 sions on suspended only so far as the two laws conflict. 
 
 bankrupt States are not forbidden to pass such laws. 
 
 . , It is simply a question of the exercise of such 
 
 vent laws. ^ J n 
 
 power by Congress." State laws have always 
 been effective during the absence of a national law. 
 When a national law is passed, they cease to be operative 
 but go into effect again when the national law is repealed. 
 State laws on bankruptcy not in violation of the national 
 law are also held to be valid by this decision. 
 
 With reference to the second proposition it was gen- 
 erally assumed that an insolvent law dealt with the per- 
 son of the bankrupt, and the bankrupt laws dealt with 
 his property. It was also held that insolvent laws are 
 enforced by debtors, and bankrupt laws by the creditors. 
 The decision of the Chief Justice on these points is 
 as follows: 2 "But if an act of Congress should dis- 
 charge the person of the bankrupt, and leave his future 
 acquisitions liable to his creditors, we should feel much 
 hesitation in saying that this was an insolvent, and 
 not a bankrupt act; and therefore unconstitutional. 
 Another distinction has been stated, and has been uni- 
 formly observed. Insolvent laws operate at the instance 
 
 1 Sturgis vs. Crowninshield, 4, Wheaton, 122. 
 
 2 Sturgis vs. Crowninshield, 4, Wheaton, 122.
 
 BANKRUPTCY ACT OF 1841 281 
 
 of an imprisoned debtor; bankrupt laws operate at the 
 instance of a creditor. But should an act of Congress 
 authorize a commission of bankruptcy to issue on the 
 application of a debtor, a court would scarcely be 
 warranted in saying that the law was unconstitutional, 
 and the commission a nullity." This decision of the 
 Chief Justice shows clearly that there is no necessary 
 distinction between an insolvent and a bankrupt law, 
 based either upon provision of the law or the conditions 
 of its enforcement. This decision established also the 
 constitutionality of a voluntary bankrupt law. 
 
 The third proposition in dispute, the right of a state 
 insolvency law to discharge a debtor from obligations 
 owed citizens of another state, was settled by the case 
 Ogden vs. Saunders brought before the Supreme Court in 
 1827. * The decision established clearly two points: 
 First, the right of a state to discharge by an insolvency 
 law, a debtor from obligations owed citizens if con- 
 tracted subsequently to the passage of the law; and 
 second, the unconstitutionality of an insolvency law 
 which discharges a debtor from obligations owed in 
 another state, or contracted prior to the enactment of 
 the law. 
 
 In 1837 and for several succeeding years, the country 
 was visited by an industrial depression far more serious 
 than any that preceded it. This was due to 
 a variety of causes, prominent among which , ™ * 
 were the over-speculation in lands and other 
 securities, an inferior monetary system, the adoption of 
 
 1 Ogden vs. Saunders, 12, Wheaton, 213.
 
 282 MERCANTILE CREDIT 
 
 the policy by the government, with but little warning, 
 that payment for government lands had to be made in 
 specie, and the failure of crops in the United States in 
 1835, 1837, and 1838. Thousands of people in all walks 
 of life failed, and recuperation from the panic was ex- 
 ceedingly slow. 
 
 All the arguments for a national bankrupt law which 
 
 would cancel the obligations of debtors heretofore made 
 
 after periods of temporary distress, were now 
 
 The Act of repea t ec i with great vigor. Finally after a 
 1841 was , l , , f „ ° , . , , 
 
 passed. long an0 - heated discussion in which charges 
 
 were made bordering on corruption, the bill 
 passed both Houses of Congress and was signed by the 
 President, August 19, 1841. The measure at first con- 
 tained a provision requiring the Act to go into operation 
 shortly after its passage. This feature was amended so as 
 to postpone the time for it to go into effect until Febru- 
 ary 1, of the following year, with the result that an un- 
 successful attempt was made to repeal the law before 
 it went into operation. The bill was passed at an extra 
 session, and Congress had convened again before the Act 
 became a law. 
 
 This Act provided for voluntary as well as involuntary 
 bankruptcy. Any one could become a voluntary bank- 
 rupt who owed debts not "created as a conse- 
 Provisions 
 of Act. quence of a defalcation as a public officer, or 
 
 Voluntary while acting in a judiciary capacity as execu- 
 
 bank- ^ QT ^ administrator, guardian, or trustee," and 
 
 who conformed to certain definite conditions 
 
 laid down by the law. He was required to make a list
 
 BANKRUPTCY ACT OF 1841 283 
 
 of his creditors, give their residence, state the amounts 
 owed each, furnish an inventory of all of his property 
 and state its location. After he had furnished these 
 statements under oath, together with a declaration of 
 his inability to pay his debts, the court was empowered 
 to declare him a bankrupt. 
 
 The voluntary feature of the law was new in our legis- 
 lation and met with great opposition. It was modeled 
 after the English law of 1827, which provided for volun- 
 tary bankruptcy. 1 It was pointed out in the discussion 
 in Congress that voluntary bankruptcy prevailed in 
 England long before the passage of her so-called volun- 
 tary Act; and that at this time England legalized what 
 had long been the custom there under involuntary 
 bankruptcy. A failing debtor would arrange with a 
 friendly creditor to commit an act of bankruptcy and 
 have the creditor bring suit in bankruptcy. By this 
 method it was within the power of debtors to determine 
 when and how they could become bankrupts without a 
 voluntary law. The friends of voluntary bankruptcy 
 claimed that what had been the custom there could be 
 practised here, and that no new or extraordinary privi- 
 leges were given debtors by the Voluntary Bankrupt Act. 
 
 The law of 1841 limited involuntary bankruptcy to 
 the merchant class — including "merchants, bankers, 
 factors, brokers, underwriters, and marine involun- 
 insurers, who owed debts to the amount of tary bank- 
 $2,000 and were guilty of fraud." The peti- Tnptc7 ' 
 tion of one or more creditors to whom not less than 
 
 1 Abridged Debates, Vol. 14, p. 713.
 
 284 MERCANTILE CREDIT 
 
 $500 was owed, was adequate to make a debtor a 
 bankrupt. The commission of any one of the following 
 offenses would make a debtor an involuntary bankrupt: 
 (1) To depart from the state with intent to defraud 
 creditors; (2) to conceal himself to avoid arrest or to have 
 himself fraudulently arrested or to have his goods taken 
 fraudulently in execution; (3) to conceal or to remove his 
 goods to keep them from being detached or taken in 
 execution; (4) to make a fraudulent conveyance. When 
 a person was declared to be a bankrupt under these 
 conditions, upon petition to the court he was entitled to a 
 trial within ten days to determine the facts of bankruptcy. 
 If the bankrupt lived a great distance from the place 
 where the court was held, the court might at its discre- 
 tion, have the bankruptcy proceedings held in the county 
 where the bankrupt resided. This feature was incor- 
 porated into the Act partly to meet the objections of 
 those who insisted that a National Act imposed heavy 
 and unnecessary burdens on those who were compelled to 
 travel long distances to attend the federal courts. 
 
 Transfers or conveyances of property for the purpose 
 of preferring creditors were violations of this Act. All 
 Prefer- payments or transfers made to those not bona 
 ences. fide creditors or purchasers were considered 
 
 Penalties. fraudulent acts. In these cases it was made 
 the duty of the assignee to recover property fraudulently 
 conveyed as assets of the bankrupt. The bankrupt 
 guilty of the above frauds was to be refused a dis- 
 charge in bankruptcy. All dealings and transactions of 
 a bona fide character made by the debtor more than
 
 BANKRUPTCY ACT OF 1841 285 
 
 two months before the petition to make him a bank- 
 rupt was filed, were not invalidated by this Act if the 
 other party to these dealings had no knowledge of a 
 prior Act of bankruptcy or of the intention of the 
 debtor to take advantage of the bankrupt Act. If a 
 voluntary bankrupt preferred a creditor subsequent to 
 the first of January preceding the passage of the Act 
 he could not be discharged unless a majority of his 
 creditors who had not been preferred, gave their con- 
 sent to his discharge. 
 
 After the petition of bankruptcy was filed it was the 
 duty of the court to appoint an assignee who should take 
 control of the property and property rights 
 of the bankrupt. The assignee was required men t f 
 to make sales, transfers, etc., as the court assignees. 
 
 ordered. All moneys received were to be Tneir 
 
 duties* 
 transferred to the court within sixty days after 
 
 their collection. A division of the assets among cred- 
 itors was to be made as often as once every six months. 
 The assignee was given power to redeem mortgages or 
 other pledges and to collect all moneys owed the bank- 
 rupt. For the purpose of closing estates as early as 
 possible the court could require the assignee to reduce 
 the property of the bankrupt to money and to divide it as 
 early as was possible in the interests of the creditors. 
 It was provided that there should be exempted from 
 
 seizure " the necessary household and kitchen 
 
 r . Exemp- 
 
 furmture," and such other articles and neces- tions 
 
 saries as the assignee having reference to the 
 
 circumstances of the bankrupt should designate,
 
 286 MERCANTILE CREDIT 
 
 but altogether not to exceed the sum of $300. The 
 
 wearing apparel of such bankrupt, and that of his wife 
 
 and children were also to be exempted. 
 
 The bankrupt who surrendered his property and 
 
 carried out the orders and directions of the court and 
 
 _ . , was not guilty of fraud, was entitled to a full 
 
 Discharge. , 
 
 discharge by the court unless a majority in 
 
 number and in value of his creditors who had proved 
 their debts had filed written objections to it. The dis- 
 charge and certificate of discharge could not be granted 
 until the court published in a newspaper for seventy days 
 a notice to all creditors to appear at a particular time and 
 place and show reason why a discharge should not be 
 given. The court might, if it chose, notify creditors 
 personally if they lived a long distance from where the 
 sessions of the court were held. 
 
 The opponents of the law seriously objected to this 
 feature. They claimed that in every country where a 
 bankrupt law was in force, the consent of from one-half 
 to four-fifths of the creditors in number and amounts 
 owed, was necessary to a discharge. In the above named 
 provision the debtor could be discharged unless over one- 
 half of his creditors objected to it; and the method of 
 informing creditors of the application for a discharge 
 was not such as would insure the enlightenment of a 
 very large percentage of them on the action taken by 
 the debtor. 
 
 Debtors guilty of fraud as defined in the Act could not 
 be discharged. Involuntary bankrupts who failed to 
 keep proper books could not be discharged. When a
 
 BANKRUPTCY ACT OF 1841 287 
 
 discharge was refused by the court on account of ob- 
 jections of creditors or because of fraud, the bankrupt 
 might, if he petitioned within ten days, appeal the case 
 to the next circuit court and demand a trial by a jury. 
 When once discharged a debtor could not be discharged 
 a second time unless his assets paid 75 per cent, of his 
 debts. 
 
 The District Court in every district, had jurisdiction 
 over bankrupt cases. Petitions in bankruptcy were to 
 be made to the District Court where the bank- c ourts 
 rupt resided. After the petition, notices of having 
 it were to be published by the court in one jurisdic- 
 or more newspapers of the district at least 
 twenty days before the hearing. At this meeting 
 creditors had to establish their claims. The Circuit 
 Court within the district had concurrent jurisdiction 
 with the District Courts in all suits brought by the as- 
 signee with reference to the bankrupt estate or by any 
 one else against the assignee. All suits to be valid had 
 to be brought within two years after the decree of 
 bankruptcy. 
 
 The preference feature was introduced in this Act. 
 In the distribution of the assets of the debtor, the follow- 
 ing debts were preferred in the order named: 
 
 (1) Debts due to the United States; (2) debts Who were 
 
 preferred 
 due the sureties of a debtor; (3) wages of debtors. 
 
 laborers not to exceed $25 for services per- 
 formed within six months of the bankruptcy of the em- 
 ployer. It was claimed in the House that one of the 
 purposes of the law was to treat all creditors alike, and
 
 288 MERCANTILE CREDIT 
 
 that in preferring certain creditors its fundamental 
 purpose was defeated. It was insisted also that it was 
 unfair to others to make the United States Government 
 a preferred creditor. 
 
 Since the Act was passed in the summer of 1841 at a 
 special session, and since it was not to be enforced until 
 February 1, 1842, ample opportunity was given to re- 
 peal it before it went into effect. It was claimed that 
 on one day it was laid on the table by a majority of 11, 
 and the following day after a night when the wine flowed 
 freely, it was taken from the table and passed. It was 
 claimed also that the friends of the bankruptcy Act 
 held up the Land Distribution Bill and prevented the 
 passage of the latter act until after the former had been 
 passed. The unsuccessful attempt to repeal the law 
 before it went into operation did not hinder its opponents 
 from beginning an early campaign for its repeal. They 
 felt that the experiences of the summer and early au- 
 tumn in which hundreds of those who were insolvent 
 went through bankruptcy proceedings, would win to 
 their side many of those who had been in sympathy 
 with the law. The undue haste in taking advantage 
 of the law's voluntary features and in insisting on a dis- 
 charge from debts, was responsible for the change in 
 sentiment. 
 
 The constitutionality of the law again concerned the 
 members of Congress. The chief points of attack in this 
 regard were its voluntary and retroactive features. The 
 law was objected to in these respects, not only on con- 
 stitutional grounds, but in the interests of public policy.
 
 BANKRUPTCY ACT OF 1841 289 
 
 It was argued that the law was unconstitutional on 
 account of its retroactive features. One senator (Ben- 
 ton of Missouri) argued that the discharge of 
 a debtor without the consent of creditors that t ^ e 
 or a certain percentage of them was unconsti- law was 
 
 tutional, and was not the practice of any of unconstl - 
 
 .... , , tutional. 
 
 the progressive countries which have bank- 
 ruptcy laws. The same authority held that the volun- 
 tary provisions interfered with the insolvency laws of 
 the states and was on this account, unconstitutional. 
 It was claimed that the Constitution of the United States 
 gave Congress the power to pass bankruptcy and not 
 insolvency laws. It was also claimed that the right of 
 states to pass lien laws was paramount and this right 
 was prohibited by the National Act. 
 
 On the other hand, it was argued that it was too nar- 
 row a construction of the Constitution to limit the power 
 of Congress in bankruptcy legislation to the kind of a 
 law England had when the Federal Constitution was 
 adopted. A progressive state would allow some elas- 
 ticity in legislating under the Constitution. It was also 
 maintained that one cannot draw a hard and fast line 
 between an insolvent and a bankrupt law. In general, an 
 insolvent law discharges the person of a debtor only, while 
 a bankruptcy law is more general, and may not only dis- 
 charge the person of a bankrupt but also free him from 
 the payment of his debts after he has surrendered all his 
 property to pay his debts. It was also asserted that the 
 legal requirement for the consent of a majority of cred- 
 itors in number and in value to discharge a debtor, was
 
 290 MERCANTILE CREDIT 
 
 unnecessary from a constitutional point of view. These 
 arguments on the constitutionality of the bankrupt law 
 were made in apparent ignorance of the Supreme Court 
 decisions above referred to. 
 
 Some of the opponents of the law insisted that it 
 had been responsible for all kinds of injustice, ine- 
 quality, and fraud and for these reasons it should be 
 repealed as soon as possible. It was maintained that 
 many who had heretofore been solvent were ruined by re- 
 lieving their debtors from the liability to pay their debts. 
 
 Those who opposed the repeal of the law held that 
 
 its evils could be traced chiefly to its retroactive 
 
 features. Some claimed that it should be 
 
 r !° g amended by repealing its voluntary provi- 
 
 sions. Others argued with a great deal of 
 wisdom that the worst evils of the law had already been 
 experienced, and that if it were repealed now, the chief 
 sufferers would be those who were made insolvent by 
 the undue haste with which their debtors went through 
 the bankruptcy court, and who were consequently reduced 
 to bankruptcy by the la w itself. * The opponents of repeal 
 contended that these people should now be given a fair 
 chance to secure the benefits of the Bankruptcy Act 
 themselves. It was claimed that at this time the law 
 would be administered primarily with respect to prospec- 
 tive cases, those with which the law should ultimately 
 deal. It was held, moreover, that those who would vote 
 to repeal the law would be responsible for future retroac- 
 tive legislation with all the abuses which such legislation 
 
 1 See address, Buchanan of Pennsylvania, A. D., Vol. 14, p. 713.
 
 BANKRUPTCY ACT OF 1841 291 
 
 entails. The sentiment favoring repeal was too strong 
 
 at this time, and no argument could withstand it. 
 
 The preamble 1 to the bill providing for the repeal 
 
 of the law introduced in the Senate by Mr. Benton on 
 
 December 7, is as follows: "Whereas the _ 
 
 Repeal. 
 Bankrupt Act of 1841 is unconstitutional and 
 
 immoral, and violates the rights of the states and of 
 
 individuals, and is invalid and void, and ought not to be 
 
 permitted to remain on the Statute-book." 
 
 The bill which passed the House permitted the cases 
 which were pending to take their course under the law. 2 
 "The repeal shall not extend to or affect any D> 
 case which, at the time this Act goes into tion of 
 effect, shall be pending before any court; nor pending 
 to any proceeding which, at said time, shall cases - 
 have been in progress, under and by virtue of the said 
 Act hereby repealed." 3 The motion to repeal passed the 
 House by a vote of 140 to 71. 
 
 When the House bill went to the Senate, a motion was 
 offered by Senator Benton striking out the above section 
 which permitted all bankruptcy cases pending when 
 the Act was repealed, to be settled in accordance with the 
 law. His amendment substituted certain clauses that 
 were in the Senate bill he introduced, clauses that fol- 
 lowed closely the methods of closing estates provided 
 by the law of 1800. 
 
 1 Benton's speech, A. D., Vol. 14, p. 610. 
 
 2 Abridged Debates, Vol. 14, p. 658. 
 
 3 Prior to this vote a motion to amend the Bankruptcy Act by 
 repealing the voluntary features was defeated by a vote of 136 
 to 73.
 
 292 MERCANTILE CREDIT 
 
 These required the consent of two-thirds of one's 
 creditors for a discharge, that the insolvent laws and the 
 lien laws of the states remain in force, that a person 
 subject to involuntary bankruptcy should not have the 
 privilege of voluntary bankruptcy, and that the opera- 
 tions of the law be prospective only. In the discussion 
 it was claimed that the amendment requiring changes in 
 legal procedure for pending cases would cause a great 
 deal of confusion, and that the repeal of the law which 
 they thought was imperative at this time would be de- 
 layed and would possibly be defeated by the fact that 
 the law was sent back to the House. The amendment 
 was defeated and the House bill was passed by a vote 
 of 32 to 13. The law was repealed with the exception 
 that cases already pending were to be settled according 
 to the provisions of the law.
 
 CHAPTER XVIII 
 BANKRUPTCY ACT OF 1867 
 
 For twenty-four years after the repeal of the National 
 Bankruptcy Act in 1843 the country was without a 
 bankruptcy law. Within this period the Agitation 
 friends of National bankruptcy legislation for a third 
 had before Congress various bills, all of which bankrupt 
 were rejected. A National Bankruptcy Act 
 was on the program of the Pierce Administration in 
 1853. In 1864 an unsuccessful effort was made by 
 Congressman Thomas A. Jenckes of Rhode Island, a 
 champion of bankruptcy legislation to secure the passage 
 of a law. Since the sentiment favorable to such legis- 
 lation is always strongest after periods of industrial 
 depression, the settled conviction was reached at the 
 close of the Civil War that the time for a National 
 Bankruptcy Act had arrived. The debates on this 
 subject in Congress in 1866-67 show that the form of 
 the Act was the only subject in question. 
 
 The first Bill introduced in the House after the war, 
 
 was defeated March 28, 1866, by a vote of 73 to 59. 
 
 However, a motion to reconsider the measure . . , 
 
 A bank- 
 was soon afterward passed by a vote of 83 rupt 
 
 to 45. This measure provided for both measure 
 involuntary and voluntary bankruptcy, and defeated 
 according to its provisions a large body of 
 marshals and other officers were required to enforce the 
 
 293
 
 294 MERCANTILE CREDIT 
 
 law. This latter feature was objectionable to many, 
 others opposed the extension of the involuntary provi- 
 sions to all classes, and still others objected to the laws 
 retroactive features. It was claimed in the debate that if 
 the proposed Bill became a law a "swarm of office holders 
 would swoop down on the estates of bankrupts, and noth- 
 ing would be left for the creditors." 1 The same speaker 
 insisted that Congress was not asked for a compulsory 
 Bankrupt Act, and that it would be a great injustice to 
 inflict compulsory bankruptcy on mechanics and farmers. 
 Congress was asked to pass a law to relieve unfortunate 
 debtors from the obligation of paying their debts with 
 
 future earnings, since a provision for this pur- 
 Should the p 0Se was considered of paramount importance, 
 laws of the ^ e H° use was at first opposed to any inter- 
 states be ference with the exemption laws of the states, 
 abolished w hich as they stood left the debtor a mini- 
 B & kr ^ mum amount of property after going through 
 Act? insolvency proceedings. On this subject the 
 
 Senate and House clashed. It was claimed 
 in the House that contracts between debtors and credi- 
 tors were made with a full knowledge of the exemption 
 laws of the states, and that no harm could come to a 
 creditor if these laws of the states were observed in the 
 National Bankruptcy Act. It was argued, moreover, 
 that the national government did not have the consti- 
 tutional right to set aside the exemption laws of the 
 states. In the Senate it was held that a recognition of 
 
 1 Speech, Rep. Paine: Congressional Globe, 1865-66, Part 2, 
 p. 1689.
 
 BANKRUPTCY ACT OF 1867 295 
 
 the exemption laws of the states would defeat uniformity 
 in bankrupt legislation and practically incorporate the ex- 
 emption laws of the states into the National law. It was 
 urged too that the annulment of these laws of the states 
 would not work an injury to debtors, since the latter 
 would receive something from the National Act in the 
 form of a discharge from future debts, a discharge which 
 could not be granted by the states in any of their laws. 
 
 The sectional question, which at this time was ex- 
 tremely bitter, played a part in the discussion. Creditors 
 of northern cities petitioned Congress to pass 
 a National Bankruptcy Act to assist them in sect j ona i 
 collecting debts in the South. The most question 
 valuable property of the South was in estates, m the 
 and the southern land owners were influential ? 
 in the state legislatures. It was claimed that 
 if creditors should fail to collect claims in state courts, 
 they would succeed in the United States Courts under a 
 national bankrupt law. The sectional feeling was still 
 further reflected in the views of some northern congress- 
 men, of which Charles Sumner was a conspicuous ex- 
 ample, who were in favor of denying voluntary bank- 
 ruptcy to those whom they termed rebels. 1 
 
 A compromise measure was agreed upon which passed 
 both Houses and was signed by the Presi- a com- 
 dent in 1867. Like its predecessor, it pro- promise 
 vided for both voluntary and involuntary measure- 
 bankruptcy, but unlike its predecessor, it extended the 
 involuntary provisions to all classes of bankrupts. 
 
 1 Congressional Globe, 1867, Part 2, p. 169.
 
 296 MERCANTILE CREDIT 
 
 The District Courts of the United States were given 
 jurisdiction in their respective districts in all matters 
 
 pertaining to bankruptcy, and they were 
 District required to be open at all times for the trans- 
 the United ac ^ on °f business under this Act. These 
 States Courts were given power to hold their sessions 
 
 given ju- a £ an y pl ace i n the district, after having given 
 in the Act a dequate notice. This provision was intended 
 of 1867. to correct defects in the two preceding laws, 
 
 defects arising from the inconvenience of 
 creditors and witnesses in attending sessions of the 
 court. The Circuit Courts of the United States were 
 given "a general superintendence and jurisdiction of all 
 cases and questions arising under the Act; they were 
 also given the power to hear cases as a court of equity 
 upon petition or other regular process." An amend- 
 ment to the law in 1874 gave the Circuit Courts con- 
 current jurisdiction with the district courts in all cases 
 at law or equity brought against the assignee in bank- 
 ruptcy, or by the latter against any person having an 
 adverse interest with reference to the property or 
 property rights of the bankrupt. 
 
 ADMINISTRATION OF THE LAW 
 
 It was made the duty of the judges of the District 
 Courts to appoint in each congressional district, upon 
 Duties of * ne recommendation of the Chief Justice of 
 District the Supreme Court, one or more registers in 
 Courts and bankruptcy " to assist the judge of the District 
 Court in the performance of his duties under
 
 BANKRUPTCY ACT OF 1867 297 
 
 this Act." The register was required "to receive the 
 surrender of a bankrupt, to administer oaths in all pro- 
 ceedings before him, to preside at meetings of creditors, 
 to take proof of debts, to make all compilations of divi- 
 dends, and all orders of distribution, and to furnish the 
 assignee with a certified copy of such orders, and of the 
 schedules of creditors and assets filed in each case." He 
 was also required to audit and pass on the accounts of 
 assignees, and to do such administrative business of the 
 court as the district judge should direct. He was to keep 
 memoranda of the proceedings coming before him and 
 to forward to the clerk of the District Court a certified 
 copy of these memoranda. The judge of the District 
 Court could require the register to go any place within the 
 district for the purpose of performing the various func- 
 tions of his office. All cases in equity could be appealed 
 from the District Courts to the Circuit Courts, but no 
 cases could be appealed from the Circuit Courts to the 
 Supreme Court unless the matter in dispute exceeded 
 $2,000. This Act was amended in 1874 with reference 
 to the latter provision, so that no case could be appealed 
 from the Circuit to the Supreme Court unless the amount 
 at issue exceeded $5,000. 
 
 In the provisions stated above is found another attempt 
 to bring the bankruptcy court within easy access of the 
 people. The registers to be appointed were Attempt 
 to be lawyers, and they were to have almost to make 
 
 complete charge of cases in bankruptcy. As the courts 
 , . , , . , , . , ,. convenient 
 
 one was to be appointed m each legislative t0 iiie 
 
 district and as the register could be required people.
 
 298 MERCANTILE CREDIT 
 
 to hold his court at any place within the district, 
 the arguments against the former laws with reference 
 to the expense and inconvenience in attending these 
 courts could not be applied with equal force to the Bank- 
 ruptcy Act of 1867. 
 
 The law which first passed the Senate required the 
 circuit judges to appoint the registers upon the recom- 
 mendation of the Chief Justice of the Supreme 
 
 Reasons Court. This provision was amended in the 
 
 whv 
 
 district House by placing the obligation to appoint reg- 
 
 judges isters on the district judges. When the House 
 should amendment returned to the Senate, it provoked 
 registers a S rea * deal of discussion, which showed that 
 partisanship had much to do in determining 
 where the appointing power should be placed. In favor 
 of the House Amendment it was claimed that since the 
 district judges have charge of the cases in bankruptcy, 
 and the registers work under them, the latter should 
 be appointed by the former. It was claimed, moreover, 
 that the district judges would know the members of the 
 bar from which the appointments must be made, whereas 
 the circuit judges could not in the nature of things know 
 the lawyers, and the appointments would be dictated by 
 politicians. It was thought that the office of Chief 
 Justice of the Supreme Court would be degraded by 
 making the Chief Justice responsible for partisan 
 appointments. 
 
 On the opposite side it was argued that the district 
 judges were amenable to the circuit judges, and that the 
 registers, who were subordinates of district judges,
 
 BANKRUPTCY ACT OF 1867 
 
 299 
 
 should be also under the authority of the Circuit Judge. 
 It was claimed that as the Chief Justice of the Supreme 
 Court is the head of the judicial system of 
 the United States, the appointment of officers 
 of the court by him would not degrade his 
 office any more than the appointment of 
 government employees by the President of the 
 United States degrades the latter's office. A 
 compromise was finally reached, which placed 
 the appointment of the registers in the hands 
 of the district judges upon the recommenda- 
 tion of the Chief Justice of the United States. 
 
 Reasons 
 why 
 circuit 
 judges 
 should 
 appoint 
 registers. 
 Compro- 
 mise 
 adopted. 
 
 VOLUNTARY BANKRUPTCY 
 
 Any person owing debts to exceed $300 might apply 
 
 for the benefits of this Act to the judge of the Judicial 
 
 District in which the debtor resided for six __ 
 
 Who 
 months previous to filing the petition, by m j g ht 
 
 stating his place of residence, his inability to become 
 
 pay his debts, and his willingness to surrender voluQ tary 
 
 all his property for the benefit of his creditors. 
 
 The requirement that the debtor must owe $300 before 
 
 he could go into bankruptcy was intended to prevent 
 
 those who owed small amounts incurred chiefly by living 
 
 beyond their means, from cancelling their debts. The 
 
 debtor was required "to annex to his petition a schedule 
 
 verified by oath before the Court" or before an agent of 
 
 the court giving a full statement of all his debts, the names 
 
 of his creditors, there places of residence, the nature of 
 
 each debt, and the manner by which it was incurred.
 
 300 MERCANTILE CREDIT 
 
 He was required to give also a statement of any existing 
 mortgage or pledge given for payment in case there was 
 either of such in existence. The filing of this petition 
 was considered an act of bankruptcy, provided that the 
 applicant took an oath of allegiance to the United States 
 and that the court was convinced that the debtor owed 
 debts in excess of $300. * The judge was required to 
 order such notices published in the newspapers as the 
 warrant prescribed. He was required also to cause a 
 written or printed notice to be sent by mail or by 
 messenger to the creditors to the effect: (1) "That a 
 warrant in bankruptcy has been issued against the estate 
 of the debtor; (2) that the payment of any debts or the 
 delivery of property to the debtor or the transfer of any 
 property is forbidden; (3) that a meeting of the creditors 
 of the debtor will be held to prove their debts at a court 
 of bankruptcy, to be held at a specified time not less than 
 ten nor more than ninety days after the issuing of the 
 warrant." 
 
 The creditors were required to elect, at their first 
 meeting, one or more assignees of the debtor's estate. 
 
 The choice was to be made "by the greater 
 of part in value and in number of the creditors 
 
 assignees, who have proved their debts." 2 If the as- 
 Property signees were not chosen at this meeting the 
 , . register might appoint them if there was no 
 
 opposition, and the district judge might ap- 
 
 1 This clause was for the benefit of those who shortly before had 
 participated in the secession movement. 
 
 2 Section 12, The Bankruptcy Act of 1867.
 
 BANKRUPTCY ACT OF 1867 301 
 
 point if he chose to do so; but he must appoint the as- 
 signees if there was opposition to their appointment by 
 the register. The approval of the judge was necessary 
 to the election or to the appointment of an assignee. As 
 soon as the assignee was appointed "the judge shall (or 
 where there is no opposing interest the register may) con- 
 vey to the assignee all the property and property rights 
 of the bankrupt with the following exceptions:" (1) The 
 necessary household and kitchen furniture, and such 
 other necessities of the bankrupt as the assignee might 
 designate taking into account the circumstances of the 
 family, but the whole amount was not to exceed $500. 
 (2) "The wearing apparel of the bankrupt, and that of 
 his wife and children." 1 (3) "The uniform, arms, and 
 equipment of any person who is or has been a soldier 
 in the militia or in the service of the United States." 
 (4) Such property as was exempted from seizure, 
 attachment or "levy on execution by the laws of the 
 United States." (5) Other property not included in the 
 foregoing exceptions, which was exempted from levy 
 in the payment of debts by the state where the bankrupt 
 resides, "to an amount not exceeding that allowed by 
 such state exemption laws in force in 1864." 
 
 The assignee was given power to dispose of the prop- 
 erty of the bankrupt to the best interest of the creditors. 
 
 An account of all money received by him as 
 
 . i , , i . , , Duties of 
 
 assignee was to be kept, which account any 
 
 creditor might examine at any reasonable 
 
 time. He was also given the same rights to collect 
 
 1 Section 14, The Bankruptcy Act of 1867.
 
 302 MERCANTILE CREDIT 
 
 debts owed the estate of the bankrupt as the 
 debtor would have in the absence of bankruptcy pro- 
 ceedings. 
 
 The court might require its bankrupt to submit to an 
 examination under oath regarding all matters pertaining 
 
 to his property, its condition, his accounts, 
 An exam- .11 . 
 
 ination of e * c ' The court might also require the at- 
 
 the bank- tendance of any other person for a similar 
 
 rupt and investigation. The wife of the bankrupt 
 his flffflirs 
 
 might also be required to attend court to be 
 examined as a witness and if she refused, the bankrupt's 
 discharge was to be denied unless the latter proved to the 
 satisfaction of the court that "he was unable to procure 
 the attendance of his wife." 
 
 The following debts were entitled to priority, each to 
 be paid in full in the following order: (l) The costs of 
 
 closing up the estate; (2) debts owed the 
 
 Debts en- United States including all taxes and assess- 
 
 titled to /\ii 7 , 
 
 priority. ments; (3) debts owed the state and taxes 
 
 and assessments under the laws of the state; 
 
 (4) wages due an operator, clerk or house servant not 
 
 to exceed $50 for labor performed within six months of 
 
 the time of the first publication of proceedings in 
 
 bankruptcy; (5) all debts due any one who by the laws 
 
 of the United States is entitled to preference. 
 
 DISCHARGE 
 
 Any time between six months and a year after the 
 adjudication in bankruptcy the debtor may apply for a
 
 BANKRUPTCY ACT OF 1867 303 
 
 discharge from his debts. The court is then required 
 to give notice by mail to all creditors and to publish a 
 notice once a week in newspapers having a 
 general circulation in the district, calling a What P re ~ 
 meeting of creditors to show why the debtor discharge, 
 shall not be discharged. Here follows a long 
 list of things which will prevent a bankrupt from secur- 
 ing a discharge, of which the chief ones are: (1) Swear- 
 ing falsely regarding any matter pertaining to his estate; 
 (2) concealing a portion of his estate or any of his records 
 or falsifying his records; (3) giving a preference within 
 four months previous to the beginning of proceedings in 
 bankruptcy or making a fraudulent assignment of his 
 property; (4) losing a part of his property in gambling; 
 (5) admitting a false or fictitious debt against his estate, 
 or failing to disclose the fact that such a debt had been 
 proved; (6) failing as a "merchant or tradesman" to 
 keep proper books of account. 
 
 No person discharged under this Act can be discharged 
 a second time on his own petition if his assets do not 
 
 pay 70 per cent, of his debts, unless three- _ ,. 
 . Condi- 
 
 fourths in value of his creditors who have ^ oas Re- 
 proved their claims give their consent in termining 
 writing to his discharge. Any bankrupt, a second 
 however, who has proved to the satisfaction 
 of the court that he paid all his debts at the time of 
 his previous bankruptcy or who has been released vol- 
 untarily by his creditors, may be discharged under the 
 same conditions as if he had not been a bankrupt 
 previously.
 
 304 MERCANTILE CREDIT 
 
 An amendment was before the Senate requiring as a 
 condition necessary to a discharge that the assets of a 
 bankrupt should pay 50 per cent, of his debts, or else 
 that a majority of his creditors should vote for his dis- 
 charge. This amendment was opposed on the ground 
 that its acceptance would defeat the Bill. The interests 
 of those who desired a discharge from debt were so 
 strongly represented in Congress, that its defeat was in- 
 evitable. At this time a requirement that 50 per cent, 
 of the debts should be paid would exclude from the priv- 
 ileges of discharge all but very exceptional bankrupts. 
 
 INVOLUNTARY BANKRUPTCY 
 
 A person might be made an involuntary bankrupt for 
 
 any one of the following reasons: (1) Absenting himself 
 
 from the state or territory where he lives or 
 Who may ,. . .. 
 
 be made concealing himself to defraud his creditors; 
 
 an in- (2) concealing or removing his property, 
 
 voluntary giving away or disposing of it, to defraud or 
 delay action on the part of his creditors; (3) 
 while insolvent or in contemplation of insolvency dis- 
 posing of or transferring his property with intent to 
 prefer creditors or otherwise to defeat the operations of 
 the law; (4). committting an act of bankruptcy and 
 being adjudged a bankrupt on petition of one or more 
 creditors whose total debts amounted to at least $250, 
 provided the petition was filed within six months of the 
 act of bankruptcy. 
 
 When a petition was filed to make a debtor a bankrupt, 
 if the evidence was sufficient the court might order the
 
 BANKRUPTCY ACT OF 1867 305 
 
 debtor to appear before it to show why he should not 
 be made a bankrupt. If the petitioners could not 
 establish their charges the debtor was to be A petition 
 dismissed, and he had the right to collect to make a 
 damages. If the charges preferred in the debtor a 
 petition were found to be true, the court an up ' 
 should adjudge the debtor a bankrupt and was required 
 immediately to issue a warrant for the taking possession 
 of his property. The property should be taken, dis- 
 posed of, and distributed in the same manner as if the 
 debtor became a bankrupt on his own petition. 
 
 At a meeting of the creditors, three-fourths in value of 
 the creditors whose claims had been proved might decide 
 what action should be taken in the interests of c ontro i of 
 the creditors with reference to the estate of the debtor's 
 debtor. They might decide that the estate esta * e b 7 
 should be settled and divided among the cred- 
 itors by trustees, under the direction of a committee of 
 the creditors, the creditors to have the right to nominate 
 one or more trustees to close the estate. However, the 
 sanction of the court when it deemed that the interests 
 of the creditors would be promoted by this action, was 
 necessary. When three-fourths in value of the creditors 
 whose claims had been proved filed their consent that 
 the estate of the bankrupt be wound up and settled 
 by the trustees, it became the duty of the bankrupt or 
 his assignee to transfer the estate to the trustees, the 
 latter having the same power in holding and disposing 
 of the property as the assignee would have had if the 
 resolution of the trustees had not been passed.
 
 306 MERCANTILE CREDIT 
 
 The bankrupt in involuntary proceedings had the same 
 right to petition for a discharge in bankruptcy and was 
 entitled to the same treatment as if he became a bankrupt 
 on his own initiative. 
 
 All the fraudulent acts which made a debtor an 
 Punish- involuntary bankrupt made him guilty of a 
 mentfor misdemeanor, and upon proof of this in any 
 
 amis- court of the United States he might be 
 
 demeanor. • j * , ,1 ,-t 
 
 imprisoned tor not more than three years. 
 
 At the outset the law was acceptable to both debtors 
 
 and creditors. It had been carefully drawn after the 
 
 best models. The chief models used in 
 
 Modeled framing the laws were the Insolvency Law of 
 
 after the Massachusetts and the Bankruptcy Act of 
 law of . 
 
 Massa- England. Unforeseen defects appeared in 
 
 chusetts practice, and it proved much more unsatis- 
 and the factory than either of the former laws. An 
 Bankrupt English Act of 1831 established a system of 
 Act. officials to handle the cases of bankrupts, and 
 
 this law was not repealed until 1869. This 
 Act provided for a court of review, composed of a chief 
 judge and three junior judges, to take charge of bankrupt 
 cases. Thirty official assignees were appointed to act 
 with creditor assignees. The machinery for closing 
 estates was cumbrous, slow, and expensive, and proved 
 very unsatisfactory. 
 
 The American Act of 1867 proved even more unsatis- 
 factory than the English law. The methods of closing 
 estates were slow and expensive, and the courts were not 
 held at places where they were easy of access by the
 
 BANKRUPTCY ACT OF 1867 307 
 
 people. The law would have been repealed long before 
 1878 if it had not been for the disturbed industrial con- 
 ditions of the United States. The compensa- 
 tion of all officers and attaches of the court , e e . °, 
 
 the Act of 
 was in fees, and the earnings of each officer 1867. 
 
 were not in proportion to his services. The 
 failure to limit definitely the work of each official for which 
 fees might be received made the costs of closing an estate 
 subject to the desires of the officers who had it in charge. 
 The answer of an English candidate for admission to the 
 bar to the question "What is the province of the courts 
 in bankruptcy?" seemed to state quite accurately the 
 conditions under which the Bankruptcy Act of 1867 
 operated, viz., "To see the estate of the bankrupt 
 equally divided between the officers of the court and the 
 attorneys engaged in the cause." 
 
 The law presupposed the appointment of high grade 
 lawyers as registers. Instead of these, broken down 
 politicians and men who were failures in the class of 
 practice of the law were frequently appointed, registers 
 Although the duties of the registers were a PP ointed « 
 limited and their powers were restricted, means were 
 devised to extend these powers and increase their fees. 
 
 In case this was done a voluntary petitioner would bring 
 his schedule to the register, the latter would induce him 
 to change it under the assumption that it was Methods 
 not made out properly for which he would re- employed 
 ceive a fee; he received another fee also for t0 make 
 giving an oath. In proving his claims the oi estates 
 creditor would be induced to change his affi- expensive.
 
 308 MERCANTILE CREDIT 
 
 davit for which the register would receive fees. When 
 the creditor could not attend a meeting of creditors, 
 he had to give a power of attorney, for which the 
 register received another fee. In taking proofs the 
 register found other ways of securing fees. When 
 proofs were objected to, the objection had to be put 
 in writing; a time and place were assigned for hearing 
 cases, and another opportunity was presented to the 
 register to increase his income. The register and as- 
 signee frequently worked together, and the former was 
 in a position to help the latter to secure an income much 
 above what the law assumed he would receive. The 
 marshal and clerk of the court were also permitted to 
 receive exorbitant fees for the labor they performed. 
 The system of the court officials to secure the bulk 
 of the bankrupt estate was such that in a few years 
 most creditors decided to settle their claims out of 
 court. 
 
 An amendment was passed in 1870 which provided 
 that any one "who stopped or suspended and had not 
 The resumed the payment of commercial paper 
 
 amend- within a period of fourteen days" could be 
 ment of proceeded against as a bankrupt. With the 
 
 1870 
 
 panic of 1873 many influential creditors saw 
 that they might become debtors at any time, and that 
 under the above amendment they could be proceeded 
 against for the suspension of the payment of commercial 
 paper. Their influence was at once exerted to modify 
 the involuntary provisions of the bankruptcy law. In 
 his message to Congress in 1873, President Grant pointed
 
 BANKRUPTCY ACT OF 1867 309 
 
 out some of the weak points in the law that would make 
 themselves felt in a period of commercial depression, 
 and recommended either the entire repeal of the law or 
 else the repeal of the involuntary provisions. He claimed 
 that the involuntary provisions continued to embarrass 
 the country; that in times of monetary stringency even 
 prudent business men were made bankrupts although 
 their assets might exceed their liabilities; and that this 
 country had gotten into such a nervous state that the 
 filing of a petition by an unfriendly creditor often ruined 
 responsible business men. 
 
 The important changes introduced in the bankruptcy 
 law of 1867 by the amendments of 1874 had to do with 
 changes in the involuntary features, and the provision 
 for settlement out of court. 
 
 The Act of 1867 as amended in 1870 made the sus- 
 pension of payment of commercial paper for fourteen 
 days by a banker, merchant or trader a reason 
 for action in involuntary bankruptcy. An Amen " 
 amendment of 1874 made the fraudulent ^874. 
 stopping of payment or the suspension of 
 payment in the ordinary course of business for forty days 
 a cause for action in involuntary bankruptcy. 
 
 Under the Act of 1867 a debtor could be adjudged a 
 bankrupt upon petition of one or more creditors if their 
 debts aggregated $250. This clause was amended in 
 1874 so as to require the petition to make a debtor a 
 bankrupt to come from at least one-fourth of the cred- 
 itors whose debts amounted to at least one-third of the 
 provable debts of the bankrupt. In all cases where
 
 310 
 
 MERCANTILE CREDIT 
 
 The 
 
 Amend- 
 ment of 
 1874 
 
 weakened 
 the in- 
 voluntary 
 law. 
 
 action was initiated by petitioners not in conformity 
 with this amendment, the cases were to be dismissed at 
 the expense of the petitioners. 
 
 This amendment practically repealed the involuntary 
 provisions of the law. The risk to the creditors in all 
 but very exceptional cases was entirely too 
 great for them to take action to throw a debtor 
 into bankruptcy. It was claimed that no one 
 could be made an involuntary bankrupt ex- 
 cept by his own consent. An involuntary 
 bankrupt received his discharge more easily 
 than one who sought voluntarily for the bene- 
 fits of the law. By a perverse ingenuity the 
 law was so constructed that it was to the interest of 
 the debtor to be made an involuntary bankrupt, al- 
 though the creditor preferred that the debtor go into 
 bankruptcy voluntarily. 
 
 The suggestion for the other important change in the 
 law of 1867 came from the English law of 1869 providing 
 for settlements outside of court. This pro- 
 vision enabled the debtor to offer terms of 
 composition which, if accepted by a majority 
 in number representing three-fourths in value 
 of the creditors at a meeting called by the 
 court, and if confirmed by the signatures of 
 the debtor and two-thirds in number and one- 
 half in value of the creditors, became binding. 
 The debtor or a representative of him was 
 required to be present at this meeting and "produce a 
 statement showing the whole value of his assets and debts 
 
 A second 
 amend- 
 ment of 
 1874 
 enabled 
 estates to 
 be settled 
 out of 
 court.
 
 BANKRUPTCY ACT OF 1867 311 
 
 and the names and addresses of the creditors to whom 
 such debts respectively are due." 
 
 Since the law of 1867 and the preceding laws were 
 modeled to a certain extent after the English laws, it was 
 quite natural for us to go to the English 
 amendments of 1869 for suggestions when an ^j^ of 
 amendment of the law of 1867 was contem- settling 
 plated. The English law of 1869 permitted estates 
 the debtor to petition for the liquidation of his . 
 
 affairs by arrangement, or by offering directly 
 to his creditors terms of composition. The latter method 
 is simpler and less expensive than the one described in the 
 preceding paragraph. The debtor offers to settle at so 
 much on the dollar, and if his offer is accepted by his 
 creditors, he is discharged. This law left matters to too 
 great an extent in the hands of debtors in that they were 
 permitted to pursue the practice of going among creditors 
 to obtain proxies before a meeting was called and before 
 concerted action could be taken. No definite control 
 was exercised over the debtor's statement of his assets 
 and his liabilities, and consequently this route to settle- 
 ment became the recourse of the dishonest. Settlement 
 by composition in England became a failure. 
 
 In the United States a difference of opinion prevailed 
 as to the value of settlements by composition. Settle- 
 ments were made at much less expense than that re- 
 quired by going through bankruptcy, and the extraor- 
 dinary abuses reached in England in settlements by 
 composition did not prevail here. However, the law in 
 the United States did not protect creditors by adequate
 
 312 MERCANTILE CREDIT 
 
 safeguards against fraudulent debtors by requiring a 
 careful examination of their books and a thorough ex- 
 amination of their affairs before accepting their terms 
 of composition. 
 
 The amendments of 1874, instead of improving the 
 
 law, had only made matters worse. At the session of 
 
 Congress in which the amendments were 
 
 Elements p asse( j the House was in favor of a repeal of 
 of . 
 
 weakness * ne bankrupt law. In 1876 the sentiment 
 
 in the within the House was so overwhelmingly 
 
 amend- against the law that the House voted to repeal 
 1874 it without debate. A memorial requesting its 
 
 repeal gives us some clue to the arguments 
 which influenced the members. It was claimed that 
 fraudulent preferences were not prevented by the law, 
 that large debts were often incurred with the expecta- 
 tion of compromise, that the closing of estates was un- 
 reasonably prolonged, and that the expenses of settling 
 estates discouraged bankruptcy proceedings altogether. 
 
 A bill providing for the repeal of the law was intro- 
 duced by Senator MacCreery of Kentucky, October. 17, 
 A bill to 1877. It was submitted to the Judiciary 
 repeal the Committee, which reported favorably for 
 law - repeal April 10, 1878. In introducing the 
 
 bill Senator MacCreery said that "the only ones who 
 will regret the repeal are those who have fattened on 
 the fees and those getting ready for its advantages." 
 
 The legislators at this time were divided into three 
 camps: 1. Those who wanted the law amended; 2. 
 those who wanted immediate and unconditional repeal ;
 
 BANKRUPTCY ACT OF 1867 313 
 
 3. those who desired the repeal of the law but who wished 
 
 a delay of the repeal of the voluntary provisions until 
 
 January 1, 1879. The extremes to which we 
 
 had gone in bankruptcy may be seen from the ^ lverse 
 
 . . views of 
 
 fact that every one was in favor of an imme- mem bers 
 
 diate repeal of the involuntary portion of the of 
 
 law. When the repeal of the law of 1841 Congress 
 
 was up for consideration, the voluntary pro- ruptcy 
 
 visions of that law were aimed at chiefly as 
 
 they were considered unconstitutional and dangerous 
 
 to industrial stability. 
 
 Senator Matthews of Ohio introduced an amendment 
 repealing the law of 1867 but substituting a simple law 
 abolishing involuntary bankruptcy and mak- An 1 10 
 ing possible a discharge in voluntary bank- repeal the 
 ruptcy when the assets paid 50 per cent, of the Involun- 
 debts. It was provided that a discharge 
 should not be extended to what had been acquired fraud- 
 ulently or to obligations that had been incurred by means 
 of a breach of trust. After much discussion this amend- 
 ment was rejected. It was claimed that the amendment 
 should go back to the Judicial Committee, a process 
 which would delay action, and Congress was in no mood 
 to postpone the time for the repeal of the law. 
 
 Much difference of opinion prevailed on the postpone- 
 ment of the time when the repeal of the voluntary pro- 
 visions of the law should take effect. Those Time at 
 favoring postponement felt that some time which the 
 should be given for the adjustment of affairs ^q^^ g0 
 to the new conditions, and some time for those into effect.
 
 314 MERCANTILE CREDIT 
 
 contemplating bankruptcy to begin action. Those 
 
 opposed to postponement contended that delay would 
 
 cause a demoralization in business by the great rush of 
 
 prospective bankrupts to the bankruptcy courts. 
 
 Some of the prominent members of the Senate believed 
 
 that a national bankruptcy act would be superior to 
 
 the insolvency laws of the various states, 
 
 repealed an< ^ though they admitted that the law of 
 
 to take 1867 was a failure, they hoped that it might 
 
 effect at fo e amended so as to meet the approval of 
 
 members of Congress. The difficulties in the 
 exception ° 
 
 of cases in way of preparing a satisfactory law to satisfy 
 
 process of the industrial conditions in the various states 
 
 were pointed out. It was contended that the 
 ment. 
 
 framing of a satisfactory law for England was 
 
 a difficult thing. This was to be seen in the fact that 
 although she was a commercial nation and did not en- 
 joy the variety of industrial interests possessed by the 
 United States she made frequent changes of the bank- 
 ruptcy law. By a large majority in both Houses, the 
 bill was finally repealed to take effect at once, with the 
 exception that cases in process of settlement were not to 
 be affected by the repeal. 
 
 In the eleven years the law was in force over 100,000 
 bankrupt cases were considered. The distribution of 
 these cases shows that commercial interests in any sec- 
 tion of the country determine the importance of the law 
 to it. One district of Florida had in all these years but 
 one case, whereas Massachusetts alone had 9,000 cases. 
 
 The law proved a failure because of the costs of settle-
 
 BANKRUPTCY ACT OF 1867 315 
 
 ments, delays in closing up affairs, the inaccessibility of 
 
 the courts, and the failure of the involuntary provision 
 
 by the Amendment of 1874. The law died 
 
 of these diseases, says a critic: "fees, obstruc- , y 
 
 law was a 
 tions to involuntary proceedings, and com- f a n ure . 
 
 positions." Opinions differ with reference to 
 compositions, but all were agreed that costs in settling 
 estates and the shortcomings of the involuntary provi- 
 sions were important factors in defeating the law. 
 
 If the officials of the court had been paid salaries in- 
 stead of fees and if penalties had been imposed when 
 estates were not settled within a given period, the law 
 would have been greatly improved. It was made too 
 easy to go into bankruptcy and too difficult to force an 
 unwilling debtor into bankruptcy and bring about a 
 proper disposing of his estate. The United States courts 
 were too inaccessible, and lawyers and others did not seem 
 to be familiar with the workings of the law. It is always 
 easier to repeal a bad measure than to correct its defects, 
 and therefore the easiest policy was pursued by Congress.
 
 CHAPTER XIX 
 BANKRUPTCY ACT OF 1898 
 
 The law of 1867 would have been repealed before 1878 
 
 if it were not for the fact that a large class of business 
 
 men believed that the class of interests they 
 Conven- . 
 
 tions to represented would be best served by a national 
 
 formulate bankrupt law. They consequently hoped 
 a bank- ^ na ^. ^he law of 1867 might be amended in 
 such a way as to eliminate its worst features. 
 Shortly after it was repealed a campaign was started by 
 them for the purpose of enacting a national law, which 
 they hoped would be permanent. National conventions 
 were held in Washington in 1881 and 1884, in St. Louis in 
 the spring of 1889, and in Minneapolis in the fall of 1889. 
 Believing that the fundamental weakness of the law of 
 1867 consisted in its administrative features, that is, in 
 the unnecessary delays and in the great costs in closing 
 up estates, and in the inaccessibility of the federal courts, 
 they at once proceeded to frame a law in which these 
 defects would be eliminated. Representing commercial 
 and business interests they were naturally concerned 
 chiefly in raising the plane of credit and consequently in 
 having a strong involuntary law. The first two conven- 
 tions approved a Bill framed by Judge Lowell of Massa- 
 chusetts. It was believed to be too severe on debtors, 
 however, and finally at the Minneapolis convention the 
 
 316
 
 BANKRUPTCY ACT OF 1898 317 
 
 so-called Torry Bankrupt bill, containing less drastic fea- 
 tures than the Lowell, was approved. 
 
 In accepting this measure the convention had in mind 
 (1) the rights of the creditors, to the extent of giving 
 Purposes them ample protection against the dishonest 
 of the debtors, and preventing the latter from being 
 
 proposed discharged; (2) the rights of the debtor to the 
 extent of giving liberal remedies in voluntary- 
 bankruptcy and protecting the honest from persecution; 
 (3) the need for a law that would be in every respect 
 national in its scope, inexpensive, and as simple as possible 
 in its operation. 
 
 The measure proposed by the Minneapolis convention 
 
 was amended frequently. It passed the House in the 
 
 Fifty-first Congress, was defeated there in the 
 
 Fifty-third Congress, and was passed again in Efforts to 
 
 the Fifty-fourth Congress. A voluntary bank- P a jj s the 
 
 ruptcy measure introduced by congressman pr0 posed 
 
 Bailey of Texas, passed the House in the by the 
 
 Fifty-third Congress but was not submitted busmess 
 
 men's 
 to a vote in the Senate. In the first session of conven . 
 
 the Fifty-fifth Congress practically the same tion. 
 measure passed the House by a majority of 76. 
 In the second session of this Congress the measure which 
 passed the House, and which became with the amend- 
 ments of the Senate the National Bankrupt Act of 1898, 
 was introduced by Congressman Henderson, and was 
 the original Torry Bill with amendments. 
 
 The author in speaking for the measure claimed that 
 it would accomplish the following objects: "(1) Treat
 
 318 MERCANTILE CREDIT 
 
 the honest bankrupt with consideration and in a reason- 
 able time discharge him; (2) punish in a human way 
 
 dishonest bankrupts; (3) reduce the estate of 
 Whcit it was 
 claimed a bankrupt to cash quickly and give it to the 
 
 that the creditors; (4) give creditors a hearing at each 
 
 measure stage of the proceedings; (5) substitute in- 
 would ac- . -. . ,.,. 
 
 comnlish expensive compromises for expensive litiga- 
 tion." 
 Under this law all debtors except corporations could 
 petition to become voluntary bankrupts. Each peti- 
 tioner in voluntary bankruptcy was required 
 o untary ^ Q ^ e a schedule of his property under oath, 
 ruptcy. giving in detail a list of creditors, the amounts 
 due each, and the security held by them. He 
 was required to surrender all his property aside from what 
 the exemption laws of his state permitted him to keep, 
 while his creditors were to take control of his property 
 and to distribute the dividends. Judges or referees could 
 make adjudications or dismiss petitions. Fraudulent 
 conveyances could be recovered, and if the bankrupt 
 committed an offense punishable by this Act he could 
 be tried in another court for a criminal offense. The 
 estates of voluntary and involuntary bankrupts were to 
 be administered in precisely the same way, and the rights 
 of the two classes of bankrupts were identical. 
 
 All debtors except farmers, wage earners, and national 
 banking institutions owing debts in excess of $1,000 
 Involun- could be made involuntary bankrupts. The 
 tary bank- petition must allege one or more acts of bank- 
 ruptcy, ruptcy, which include insolvency, inability
 
 BANKRUPTCY ACT OF 1898 319 
 
 or unwillingness to pay debts or to keep property from 
 getting away by preferences. 1 The title of the trustee 
 begins with the date of adjudication but the condition 
 of the property relates back to the time of filing the 
 petition and the bankrupt is in precisely the same 
 position as any defendant in law or equity proceed- 
 ings. 
 
 A petition to make a man a bankrupt may be filed 
 within four months after the commission of an act of bank- 
 ruptcy. "Such time shall not expire until _ . . 
 
 1 Petitions 
 
 four months after the date of the recording or in mvo i_ 
 
 registering of the transfer or assignment when untary 
 the act consists in the debtor's having made a bank ~ 
 transfer of any of his property with intent to 
 hinder, delay or defraud his creditors; or for the purpose 
 of giving a preference as hereinbefore provided, or a 
 general assignment for the benefit of his creditors, if 
 by law such recording or registering is required or per- 
 mitted, or, if it is not, from the date then the beneficiary 
 takes notorious, exclusive, or continuous possession of the 
 
 1 "Acts of bankruptcy by a person shall consist of his having 
 (1) conveyed, transferred, concealed, or removed, or permitted to 
 be concealed or removed, any part of his property with intent to 
 hinder, delay, or defraud his creditors, or any of them, or (2) trans- 
 ferred, while insolvent, any portion of his property to one or more 
 of his creditors with intent to prefer such creditors over his other 
 creditors; or (3) suffered or permitted, while insolvent, any cred- 
 itor to obtain a preference through legal proceedings, and not 
 having at least five days before a sale or disposition of any property 
 affected by such preference vacated or discharged such preference.'' 
 Five acts of bankruptcy were enumerated by the law, two of which 
 were voluntary acts of bankruptcy.
 
 320 MERCANTILE CREDIT 
 
 property unless the petitioning creditors have received 
 actual notice of such transfer or assignment." 1 A settle- 
 ment may be made between debtors and creditors after 
 the debtor has been examined in open court or at a 
 meeting of his creditors. 
 
 A bankrupt must petition for a discharge not sooner 
 than one month or later than one year after adjudication. 
 
 In exceptional instances the time of filing the 
 Petitions . . . _ 
 
 in invol- petition may be extended six months. He 
 
 untary must be discharged unless he has been found 
 
 bank- guilty of dishonesty or fraud with reference 
 
 to his property. The confirmation of a com- 
 position discharges the bankrupt from all debts except 
 those which were agreed to be paid by the terms of the 
 composition. 
 
 The Nelson Bill, primarily a voluntary measure, passed 
 the Senate, and the matter of bankruptcy was submitted 
 
 to a joint committee of both House and Senate. 
 The bill ip^ measure adopted was known as the 
 which 
 passed Henderson Bill because the law which finally 
 
 was a passed was, from an administrative or pro- 
 
 com " > cedure point of view, the House measure. 
 
 ~,~„ *,„.<> However, it will be seen that this measure was 
 in principle more nearly the Senate Bill than 
 the House measure. The two measures differed chiefly on 
 (1) grounds of involuntary bankruptcy, (2) offenses for 
 which a bankrupt could be imprisoned, and (3) restric- 
 tions to be placed on a discharge. 
 
 1 United States Bankruptcy Law of 1898, Ch. 3.
 
 BANKRUPTCY ACT OF 1898 321 
 
 The House Bill 1 stipulated nine grounds for denying 
 a bankrupt a discharge. These were reduced by the 
 conference committee to two : (1) Committing Q roun( j s 
 an offense punishable by indictment; and (2) for 
 keeping fraudulent books. The four grounds denying a 
 on which a bankrupt could be imprisoned in g 
 
 accordance with the provisions of the House Bill were 
 changed to two by the conference committee: (1) 
 concealing property from the trustee; and (2) committing 
 perjury by making a false statement. 
 
 The law which passed both Houses of Congress and 
 was signed by the President, July 1, 1898 defines courts 
 of bankruptcy as follows: the District Courts 
 of the United States in the several states, the bank _ 
 Supreme Court of the District of Columbia, ruptcy 
 the district courts of the several territories, provided 
 and the United States Courts in the terri- ^.g 
 tories. The courts have the power to try 
 and to punish bankrupts or to discharge them, "to 
 confirm or reject compositions between debtors and 
 creditors," to appoint receivers or marshals to take charge 
 of the property of bankrupts upon application of those 
 interested, and to authorize them or trustees to manage 
 the property for limited periods in the best interests 
 of the estate, and "to cause the estates of bankrupts 
 to be collected, reduced to money, distributed, etc." 
 
 Any one of five acts makes a man a bankrupt: (1) 
 Concealing or removing his property with intent to 
 
 1 Congressional Record, Vol. 31, Part 7, p. 6296, Fifty-fifth Con- 
 gress, second session.
 
 322 MERCANTILE CREDIT 
 
 defraud his creditors; (2) While insolvent transferring 
 his property with intent to prefer creditors; (3) While 
 A t which i ns °l ven t permitting a creditor to obtain a 
 made a preference through legal proceedings without 
 debtor a having discharged such preference at least 
 an up . g ve ^ a y g b e f ore a final disposition of any 
 property affected; (4) Making a general assignment for 
 the benefit of his creditors; (5) "Admitting in writing 
 his inability to pay his debts and his willingness to 
 be adjudged a bankrupt on that ground." 1 
 
 Only the first three of the five acts come under the 
 head of involuntary bankruptcy. Under this act a per- 
 son is not considered insolvent if the aggre- 
 When gate of his property, exclusive of that which 
 
 debtor be Bas been concealed or conveyed with fraudu- 
 made an lent intent, is sufficient in amount to pay his 
 involun- debts. A fraudulent act of itself does not 
 bankrupt ma ^e a man a bankrupt. Even when dis- 
 honesty is established, if the alleged bankrupt 
 proves his solvency under the above conditions the case 
 must be dismissed, and the costs, including the fees of 
 the attorney of the defendant, must be borne by those 
 who bring the suit. To insure the payment of expenses, 
 the petitioner must file a bond sufficient to cover 
 costs. 
 
 Any one except a corporation may become a voluntary 
 bankrupt, and any one except a wage earner and a farmer 
 may be forced into bankruptcy. State or national 
 banks cannot be adjudged bankrupts. 
 
 1 See Amendments to the Act of 1898.
 
 BANKRUPTCY ACT OF 1898 323 
 
 The bankrupt is required to attend the first meeting 
 of his creditors, and he must " submit to an examination 
 concerning the conduct of his business, the ^hat a 
 cause of his bankruptcy, the amount, kind, bankrupt 
 and whereabouts of his property, and all is required 
 matters which may affect the settlement of 
 his estate." 1 He is also required to obey all other law- 
 ful orders of the court, examine the correctness of all 
 claims filed against his estate, and notify his trustee as 
 soon as he learns of any attempt of creditors to evade 
 the provisions of the Act. 
 
 A bankrupt may offer terms of composition to his 
 creditors, after he has been examined in open court, at a 
 meeting of his creditors, and after he files a 
 schedule of his property and a list of his cred- y mle S es 
 itors, which the law requires. The bankrupt bankrupt, 
 may apply for the confirmation of a composi- 
 tion when this application has been accepted in writing 
 by a majority of his creditors representing a majority 
 of accounts against him. The court is required to con- 
 firm a composition when it feels that it is to the best 
 interests of the creditors, and it is satisfied that the bank- 
 rupt is not guilty of an act which would prevent his dis- 
 charge. After one month and within twelve months 
 after being adjudged a bankrupt, a person may apply to 
 the court for a discharge. When the court has given all 
 opposed to the discharge a reasonable opportunity to 
 testify, it must discharge the applicant if it is satisfied 
 that he has not committed an offense punishable with 
 
 1 United States Bankruptcy Law, 1898, Ch. 3, Section 7.
 
 324 MERCANTILE CREDIT 
 
 imprisonment or concealed his financial condition with 
 fraudulent intent and, "in contemplation of bankruptcy, 
 destroyed, concealed, or failed to keep books from which 
 his true condition might be ascertained." 
 
 The bankruptcy law does not modify in the least the 
 exemption laws of the states. 
 
 Courts of bankruptcy are required to appoint a suffi- 
 cient number of referees so that each county may "con- 
 
 _ , stitute at least one district" when the ser- 
 
 Each 
 
 county an vices of a referee are needed. In the absence 
 
 adminis- of a judge of bankruptcy, referees have all the 
 trative powers of judges except the right to pass on 
 
 the application of bankrupts for composi- 
 tions and discharges. 
 
 The creditors of a bankrupt estate at their first meet- 
 ing may appoint one or three trustees to manage the 
 
 _ estate. When the creditors do not appoint a 
 
 Trustees; 
 
 their trustee, the court is required to do so. The 
 
 duties and trustees may be either individuals competent 
 
 compen- ^ Q ac ^ as trustees, or corporations which are 
 
 s 3. f"i o n 
 
 permitted either by their charters or by law 
 to act in this capacity. The chief duties of the trustees 
 are to control the estates in question, reduce the prop- 
 erty to money, keep full accounts, and set apart the bank- 
 rupt's exemptions, dividends, etc. Trustees 1 may be 
 allowed by courts "not to exceed 3 per cent, on the first 
 $5,000 or less, 2 per cent, on the second $5,000 or part 
 thereof, and 1 per cent, on such sums in excess of $10,000." 2 
 
 1 Changed by the Amendment of 1903. 
 
 2 United States Bankruptcy Law, 1908, Ch. 5, Section 48.
 
 BANKRUPTCY ACT OF 1898 325 
 
 An important provision of the law is the prevention 
 
 of preferences. Under this Act a debtor shall be deemed 
 
 to have given a preference if, while insolvent, 
 
 he has permitted or given a judgment against Prefer " 
 ,. ,. . . , ences pre- 
 
 himself to some creditor, or transferred prop- vented. 
 
 erty to the latter, the effect of which will be 
 to enable some creditor or creditors to receive a larger 
 percentage of his debt than other creditors. If a debtor 
 gives a preference within four months before the filing 
 of a petition, or after the filing of the petition and be- 
 fore he is adjudged a bankrupt, and the person receiving 
 it has reason to believe that it was intended as a prefer- 
 ence, the trustee will have power to collect the value of 
 the property from the one so preferred. 
 
 All taxes or debts "owing by the bankrupt to the 
 United States, state, county, district or municipality" 
 must be paid out from the proceeds of the Debts 
 estate before any dividends are paid to cred- which 
 itors. The debts which have a preferred nave 
 claim to the assets of a bankrupt have priority pnonty. 
 in the following order: (1) The cost of preserving the 
 estate after the filing of the petition; (2) "the filing fees 
 paid by creditors in involuntary cases; (3) the cost of 
 the administration of the estate, including reasonable 
 fees to an attorney for the bankrupt in both involuntary 
 and voluntary cases; (4) wages due workmen, not to 
 exceed $300 for each person, which were earned within 
 three months prior to the commencement of proceedings; 
 (5) debts owing to any person which by the laws of the 
 states or the United States are entitled to priority."
 
 326 MERCANTILE CREDIT 
 
 The Torry Bankruptcy Bill was first introduced in 
 Congress in 1890 and was presented to each succeeding 
 congress until the law of 1898 was passed, 
 trasted ^ e same se * °^ circumstances which were 
 interests responsible for former bankruptcy laws de- 
 of debtors termined this law. The United States had 
 ... gone through a period of industrial depression 
 
 from 1893 to 1898, and hundreds of business 
 concerns which had heretofore been prosperous were now 
 bankrupts. As insolvents desire a law which will dis- 
 charge them from their debts, a very different demand was 
 made for the passage of a bankrupt law near the closing 
 years of the panic than when the Torry Bill was first 
 introduced in 1890. Debtors are naturally in favor of 
 a voluntary bankrupt law, which will enable those who 
 cannot pay their debts to go into bankruptcy and get a 
 discharge from their obligations. The creditors, upon 
 the other hand, are primarily interested in an involuntary 
 law, since through it credit may be maintained on a high 
 plane; they are interested in a voluntary law only to 
 the extent that they desire the burdens lifted from the 
 shoulders of honest debtors. The Torry Bill, since it 
 was constructed by business interests for the purpose of 
 elevating the plane of commercial credit, was supported 
 mainly by commercial bodies in all sections of the 
 country. The Bill which finally passed was the result 
 of a struggle between the friends of the voluntary bank- 
 ruptcy law and those of the involuntary and was conse- 
 quently a compromise measure. 
 
 The chief opponents of the Torry Bill were the fol-
 
 BANKRUPTCY ACT OF 1898 327 
 
 lowing: (1) The older business men who had had experi- 
 ence with the bankruptcy law of 1867, and as a result 
 of that experience were convinced of the im- c^f 
 practicability of any national law; (2) the opponents 
 larger business houses, which on account of of the 
 their organization are in favor of the granting 
 of preferences. (They have credit agents in all sections 
 of the country who have an accurate knowledge of the 
 financial status of the customers of the House. They 
 know how much credit to give and the conditions under 
 which credit should be granted. It is doubtful if such 
 business concerns could be aided by a National Bank- 
 rupt Act which rigidly forbids preferences.) (3) the 
 bankrupts and those primarily interested in having 
 bankrupts discharged. 
 
 From 1879 to 1906 there were 171,389 failures, repre- 
 senting liabilities of nearly three billion dollars. In the 
 debates in Congress the condition of these unfortunates 
 was vividly portrayed, and a vigorous appeal was made 
 to pass a voluntary bankruptcy act which would enable 
 these bankrupts to be discharged at once. To a certain 
 extent the question was also made a sectional one. The 
 chief advocates of the voluntary measures were from the 
 South and the Mississippi Valley section of the West. 
 In the House the only sections which registered a major- 
 ity vote against the Henderson Bill were the South 
 and the states of the North in immediate proximity to the 
 Mississippi river. 
 
 The law is strong in its administrative features, and for 
 this reason it has been saved from repeal. It provides
 
 328 MERCANTILE CREDIT 
 
 for a bankruptcy court in every county in the United 
 States, and on this account the opposition to the former 
 
 laws because of the inconveniences and costs 
 Elements Q f attending the national courts has disap- 
 in the law. peared. The functions of the trustees and 
 
 referees are clearly stated, and their fees 
 are limited. The closing up of estates is put in the 
 hands of creditors, and as the fees of officials cannot be 
 collected until all the business affairs are settled the 
 best inducement is offered to settle estates as early 
 as possible. 
 
 One of the fundamental defects of the law was the 
 definition of bankruptcy it introduced. Under this Act 
 
 a person is not considered insolvent when the 
 swea aggregate of his property, exclusive of any 
 
 property which he "may have conveyed or 
 concealed with intent to defraud, hinder, or delay his 
 creditors," shall not at a fair valuation be sufficient in 
 amount to pay all his debts. This definition of insol- 
 vency is different from any previous definition of the time. 
 Ordinarily an insolvent is one who cannot pay his debts 
 when they mature, or one whose liabilities exceed his 
 assets. If solvency is proved by the alleged bankrupt 
 at the time an action to make him a bankrupt is taken, 
 in the great majority of instances the case must be 
 dismissed, and the costs involved, including attorneys' 
 fees of the defendant must be borne by those who bring 
 the suit. In this we see clearly the handwriting of the 
 debtor classes. 
 
 In order to put a man in bankruptcy petitioners must
 
 BANKRUPTCY ACT OF 1898 329 
 
 give bond to indemnify the alleged bankrupt for costs in- 
 curred if they fail to prove their case. Under the law of 
 1867 the creditors took no risks. With this law the 
 creditor takes all risks, the burden of proof is imposed 
 upon him, and he bears the costs if his action has been 
 hasty. In proving fraud everything seems to depend on 
 the intent of the debtor, and the whole burden of proof is 
 with the creditor. Even if fraud is proved the petitioner 
 is liable for damages done the debtor if the property of 
 the latter, aside from what has been fraudulently manip- 
 ulated, is adequate to pay his debts. To protect the 
 honest debtor the law shielded the dishonest, and it did 
 not make fraud a crime. In some cases it was necessary 
 for the creditor to prove that the debtor kept books before 
 the latter could be compelled to produce them. The 
 involuntary law, the one most desired by creditors in the 
 interests of a sound credit system, was thus hedged about 
 by so many limitations as to make it at times of doubtful 
 value. 
 
 A good involuntary law is necessary to all bankruptcy 
 legislation. Without it a debtor can determine when he 
 
 will become a bankrupt, and in his liberty to 
 
 Advan- 
 do so there are many dangers. He could sell tages of a 
 
 his property in bulk, transfer it as he pleased, good in- 
 permit liens on his estate to secure preferences, voluntar y 
 and then await a sufficient lapse of time 
 before announcing his desire to have a bankrupt's priv- 
 ileges, to shield his fraudulent conduct from a bankruptcy 
 court. With a good involuntary bankruptcy law the 
 conduct of the debtor is checked, for if he is guilty of
 
 330 MERCANTILE CREDIT 
 
 fraud he does not know at what time action may be 
 taken against him, and a bankruptcy court may be 
 called on to pass judgment upon his methods. A well- 
 balanced law ought to protect creditors from fraud as 
 well as debtors from oppression, 1 and one of the defects 
 of this original law consists in erecting barriers to prevent 
 the prosecution of dishonest debtors. 
 
 Preferences are strictly prohibited by the law. Any 
 
 judgment which is procured or permitted to be made in 
 
 favor of any one while the debtor is insolvent, 
 
 Prefer- ^ e effect of which will give one creditor a 
 
 ences pre- . 
 
 vented. larger percentage ol his debt than any other 
 
 person, is considered a preference; also, if a 
 bankrupt gives a preference within four months before 
 filing a petition or after filing the application and before 
 the adjudication of the estate, the property or its value 
 may be received by the trustee. The latter feature has 
 made uncertain the work of the credit man. All liens 
 secured or claims obtained against a debtor depend for 
 their validity upon the probability of the debtor's going 
 into bankruptcy within four months from the date of 
 such preferences. Creditors have all along taken their 
 chances. They have secured preferences in the same way 
 as formerly, and have taken chances on having to surren- 
 der their claims. Even where creditors have secured 
 preferences, they have often been debarred from taking 
 action against debtors for further claims, since by doing 
 so they would be compelled to surrender the advantages 
 
 1 The law has been greatly improved in these respects by 
 amendments.
 
 BANKRUPTCY ACT OF 1898 331 
 
 already secured. A man who had a claim secured for 
 $50,000 would not be likely to take action to obtain the 
 payment of a debt of $25,000 if by doing so the debtor 
 would be forced into bankruptcy, and the $50,000 would 
 have to be surrendered to be equally divided between all 
 the creditors. 
 
 Under the law of 1867 the restrictions upon voluntary 
 bankruptcy were very stringent and discharge was 
 difficult. Under the law of 1898 discharge is 
 comparatively easy. But two things prevent . 
 a discharge: (1) An offense which is punish- from 
 able by imprisonment; 1 (2) failure to keep bank- 
 records or a destruction of records with intent ru P* c y 
 to commit fraud. Neither a fraudulent prefer- . 
 
 ence nor the sale of goods in bulk will prevent 
 a discharge. A failure to keep books or a destruction of 
 records is inadequate to prevent a discharge unless in 
 doing so fraudulent intent can be proven. If a debtor 
 swears to his true condition, gives his property to his 
 creditors, and turns his estate over to them, he must be 
 discharged. Most laws both abroad and at home make 
 the payment of a certain percentage of debts a condi- 
 tion necessary to a discharge. Not a cent needs to be 
 turned over to creditors to permit a discharge if it can be 
 shown that the debtor has no more property than the 
 laws of the state permit a bankrupt to have. 
 
 The law does not interfere with the exemption laws of 
 the states. In this respect it does not provide for the 
 uniformity which credit men desire. The laws of the 
 
 1 See subsequent amendments.
 
 332 MERCANTILE CREDIT 
 
 states are very different on this point. Some exempt a 
 
 certain minimum both of personal property and real 
 
 estate. Others leave the homestead with the 
 
 Law does bankrupt without regard to its value. In 
 
 not 
 
 interfere Texas the bankrupt is allowed $5,000 for the 
 
 with lot upon which the homestead stands, and the 
 
 exemption nom estead also whatever its value may be. 
 
 states In both Wisconsin and Kansas the homestead 
 
 is exempt. In these states if a man is about 
 to become a bankrupt, a large part of his property may 
 be put in a homestead and his creditors have no recourse. 
 To give credit with safety, the credit man must have a 
 knowledge of the homestead laws of the various states, 
 and consequently different practices must be followed by 
 credit men in giving credit. 
 
 With all its defects the friends of national bankruptcy 
 legislation believed that it was superior to the insolvency 
 legislation of the various states. 
 
 The amendments to the Act of 1898, approved Febru- 
 ary 5, 1903, were attempts to correct shortcomings which 
 
 experience in putting the law into practice 
 Amend- p ro ved to exist. To the two causes prevent- 
 1903. m S the discharge of a bankrupt four others 
 
 were added: (l) Securing property upon a 
 written false statement to secure credit; (2) transferring 
 or concealing property four months prior to the filing of 
 a petition in bankruptcy with intent to defraud creditors; 
 (3) having been granted a discharge in voluntary bank- 
 ruptcy within six years; (4) refusing to obey any of the 
 orders of the court during bankruptcy proceedings.
 
 BANKRUPTCY ACT OF 1898 333 
 
 Another amendment gives creditors power at a meet- 
 ing for the purpose of examining a bankrupt to examine the 
 wife of a bankrupt on matters concerning business trans- 
 acted by her, to determine if she has "been a party to any 
 business of the bankrupt." This amendment is of value 
 in all cases where the husband keeps his property in his 
 wife's name, pretending to act as her agent. Any other 
 person may be called before the court to be examined 
 with reference to his business relations with the bankrupt. 
 
 The fees received by trustees were changed by another 
 amendment to the law. Aside from the fee allowed by 
 the court when the petition in bankruptcy is filed, trus- 
 tees may be allowed commissions on all disbursements 
 made by them not "to exceed 6 per cent, on the first $500 
 or less, 4 per cent, on all sums in excess of $500 and less 
 than $1,500, 2 per cent, on moneys in excess of $1,500 and 
 less than $10,000, and 1 per cent, on moneys in excess of 
 $10,000." 
 
 Many other amendments, not of a radical character yet 
 essential in strengthening weak points in the law, were 
 passed. The amendments of the Act of June, 1906, were 
 all of a minor character. 
 
 In each of the last three years— 1908, 1909, and 1910— 
 bills have been before Congress to amend the National 
 Bankruptcy Act for the purpose of making it 
 more satisfactory to creditors. The bill Pr °P ose 
 
 mcflsurc 
 
 introduced in 1908 by Congressman Sherley f 1908. 
 of Kentucky, was framed at a conference of 
 representatives of the National Bar Association, the 
 National Association of Credit Men, the National Board
 
 334 MERCANTILE CREDIT 
 
 of Trade, the Merchants' Association of New York, and 
 the Commercial Law League of America. It was con- 
 sidered too radical a measure and was defeated. In 1909 
 a bill somewhat less radical, also introduced by Congress- 
 man Sherley, passed the House but was not reported out 
 from the committee of the Senate to which it had been 
 consigned, and was consequently defeated. 
 
 Some very important amendments were passed in 1910. 
 One of the most important regulated the compensation 
 of receivers and trustees. It was claimed that 
 Amend- ^ 00 muc h f th e assets of estates were absorbed 
 1910 ky these officials, the courts holding that 
 
 limited they had unlimited discretion in their allow- 
 compen- ances t these assets. Neither the law of 1898 
 ffi . nor the amendments of 1903 and 1906 at- 
 
 court. tempted to limit the fees of receivers, and in 
 
 practice they received more for their services 
 than trustees both when they were mere custodians of an 
 estate for a week or two and when they had charge of 
 an estate conducting the business for several months. 
 The amendments reduced the compensation of all the 
 officers to commissions, which varied with the amounts in- 
 volved and were computed upon the actual cash realized 
 by creditors. The maximum amount which could be 
 paid officials was stipulated, the courts having power to 
 allow less if they chose to do so. 
 
 Trustees were allowed a fee of five dollars when the 
 petition was filed except when a fee is not required of a 
 voluntary bankrupt. 1 Trustees, receivers, and marshals 
 
 1 Section 48 of Act.
 
 BANKRUPTCY ACT OF 1898 335 
 
 were to receive a commission on all moneys disbursed or 
 turned over to any person "not to exceed 6 per cent, on 
 the first $500 or less, 4 per cent, on moneys in excess of 
 $500 and less than $1,500, 2 per cent, on moneys in excess 
 of $1,500 and less than $10,000, and 1 per cent, on moneys 
 in excess of $10,000. M1 
 
 In the case of the confirmation of a composition, the 
 trustee, receiver or marshal may be allowed by the 
 court commissions not to exceed 1/2 per cent, of the 
 amount to be paid creditors. It is further stipulated 
 that when the receiver or marshal acts as a mere custo- 
 dian, and does not carry on the business of the bankrupt 
 he shall not receive "more than 2 per cent, on the first 
 $1,000 or less, and 1/2 per cent, on all above $1,000 
 on moneys disbursed by him or turned over by him 
 to the trustee and on moneys subsequently realized 
 from property turned over by him in kind to the 
 trustee." 2 Before any allowance is made a notice 
 must be given to the creditors specifying the amount 
 requested. 
 
 Another section of the Act was amended so that re- 
 ceivers, marshals or trustees could be authorized to con- 
 duct business of bankrupts for limited periods. In such 
 cases the maximum compensation which can be allowed 
 them by courts is fixed at " 6 per cent, on the first $500 or 
 less, 4 per cent, on moneys in excess of $500 and less than 
 $1,500, 2 per cent, on moneys in excess of $1,500 and less 
 than $10,000, and 1 per cent, on moneys in excess of 
 
 1 Section 48 of Act. 
 
 2 Section 48— d.
 
 33G MERCANTILE CREDIT 
 
 ^OOO." 1 In case of the confirmation of a composi- 
 tion the commissions cannot exceed 1/2 per cent, of the 
 amount paid creditors. 
 
 Another amendment increased the power of trustees, 
 giving them control over "all property in the custody 
 or coming into the custody of the bank- 
 Powers of rU pt cy court," 2 and vesting in them "all the 
 trustees 
 increased, rights, remedies, and powers of a creditor 
 
 holding a lien by legal, or equitable proceed- 
 ings; and also, as to all property not in the custody of 
 the bankruptcy court, shall be deemed vested with all the 
 rights, remedies, and powers of a judgment creditor 
 holding an execution duly returned unsatisfied." 
 
 The purpose of this amendment was to give the trustee 
 the same right which any creditor would have if bank- 
 ruptcy proceedings had not been instituted. A decision 
 of the Supreme Court in the case of York vs. Cassell, 
 held that the title of a trustee is simply that of a debtor, 
 and that he has no more power than the bankrupt had. 
 It held that if the bankrupt cannot set aside a transfer 
 the trustee cannot do so because he has no more power 
 than the bankrupt has. The effect of this decision was 
 to prevent the creditors from setting aside a conveyance 
 or preventing the evils of secret liens, because when the 
 bankruptcy court took possession of the property the 
 creditors were no longer free to act. 
 
 Another amendment makes it possible for the bank- 
 rupt to offer terms of composition to his creditors after 
 
 1 Division E., Section 48. 
 
 2 Section 47.
 
 BANKRUPTCY ACT OF 1898 337 
 
 he has been examined in open court or at a meeting of 
 
 the creditors, and after he has filed a schedule of his 
 
 property and a list of his creditors. When a 
 
 ., r i . •,., ,. Composi- 
 
 majonty of his creditors representing a ma- ^ 
 
 jority of the claims against him accept his 
 terms, he may apply for the confirmation of a composi- 
 tion which the court is required to grant when it is 
 convinced that such action is in the interest of creditors 
 and that the bankrupt is not guilty of an offense which 
 would prevent his discharge. Although it is possible for 
 a debtor to make a composition with his creditors under 
 the common law, under this bankruptcy statute a com- 
 position agreed to by a majority in number and amount 
 of the creditors and approved by the court, is binding on 
 all creditors, even including those who do not agree to it. 
 Settlements by composition have the merit often of 
 freeing from the stigma of bankruptcy one who is in- 
 solvent, of providing for a quick settlement, and of giving 
 creditors in most instances larger shares than they would 
 receive by regular bankruptcy proceedings. 
 
 The amendment of 1874 to the law of 1867 provided 
 for compositions both before and after adjudication in 
 bankruptcy. The English Bankruptcy Act of 1890 per- 
 mits compositions of creditors with debtors under the 
 supervision of the court, and these official settlements 
 have become common in England. They have the 
 merit (1) of making speedy settlements between debtors 
 and creditors, (2) of preventing the creditor from being 
 stigmatized as a bankrupt, and (3) of reducing court 
 expenses for the administration of an estate.
 
 338 MERCANTILE CREDIT 
 
 By the law of 1898 any person who owed debts except 
 
 a corporation could become a voluntary bankrupt. An 
 
 amendment of 1910 gives all corporations 
 Corpora- .... 
 
 tions may except public and quasi-public corporations 
 
 become the privilege of voluntary bankruptcy. "Any 
 voluntary person, except a municipal, railroad, insurance, 
 or banking corporation, shall be entitled to 
 the benefits of this act as a voluntary bankrupt." 1 
 The extension of the voluntary provisions to corpora- 
 tions was seriously objected to by the opponents of the 
 law. Corporations are formed, they argued, so that 
 individuals may restrict their liability or be free from 
 liability altogether. Why should we enlarge the op- 
 portunity, they urged, for people to free themselves from 
 the payment of their just debts? 
 
 Another amendment is very explicit with reference 
 to corporations that may be made involuntary bank- 
 Corpora- ru Pt s - I* states that " any moneyed, business 
 tions as in- or commercial corporation, except a munici- 
 voluntary p a ^ railroad, insurance, or banking corpora- 
 an rupts. t . on owing debts of Si, 000 or over, may be 
 judged an involuntary bankrupt." 2 The same cor- 
 porations may be made involuntary bankrupts that 
 have the right of voluntary bankruptcy. Prior to this 
 only those corporations which were "engaged principally 
 in manufacturing, trading, printing, publishing, mining 
 or mercantile pursuits could be made involuntary bank- 
 rupts." In differentiating between these and other 
 
 1 Division a, Section 4. 
 
 2 Division b, Section 4.
 
 BANKRUPTCY ACT OF 1898 339 
 
 corporations many anomalous distinctions were made by 
 the courts in determining what are trading corporations, 
 or corporations engaged in mercantile pursuits. Laun- 
 dry companies, livery stables, mercantile agencies, 
 hotels, and companies which construct bridges and piers, 
 etc., have been by different courts included and excluded 
 from the class of corporations which come within the 
 province of the involuntary bankruptcy law. It was 
 chiefly for the purpose of avoiding confusion resulting 
 from diverse decisions of the courts that an attempt was 
 made to substitute a logical for an arbitrary classifica- 
 tion of corporations. 
 
 The law excluding wage earners and farmers from 
 the provisions of involuntary bankruptcy remained 
 unchanged. 
 
 The original law governing the discharge of bank- 
 rupts was strengthened by the amendments of 1903. 
 A new amendment was added in 1910. A trustee is 
 given the power of opposing the discharge of a bankrupt 
 when he is authorized to do so at a meeting of creditors 
 called for the purpose. The expenses incurred by the 
 trustee are borne by the estate and are thus distributed 
 among the creditors, whereas heretofore any creditor 
 who opposed the discharge of a bankrupt was compelled 
 to do so at his own expense. 
 
 In the section pertaining to the filing and dismissing 
 of petitions it was provided in the former law that "a 
 voluntary or involuntary petition shall not be dismissed 
 by the petitioner or petitioners for want of prosecution 
 or by consent of parties until after notice to the cred-
 
 340 MERCANTILE CREDIT 
 
 itors." But no provision was made to notify the cred- 
 itors other than the petitioners, since the court had no 
 The filing means of knowing the names of the other 
 and dis- creditors. The practice was common in many 
 missing of districts of dismissing involuntary petitions 
 by request of the bankrupt, after the consent 
 of the petitioners was secured. In some cases courts 
 of bankruptcy have been used as a means of giving 
 preferences by having proceedings dismissed after the 
 petitioning creditors were paid in full. An amendment 
 to the above clause prevents this abuse since the court 
 must, "before entertaining an application for dismissal, 
 require the bankrupt to file a list, under oath, of all his 
 creditors, with their addresses," so that the intent of 
 the law can be carried out by actually notifying all the 
 creditors of the petition for a dismissal. 
 
 Another paragraph is added to the division on Pre- 
 ferred Creditors. It makes more definite the matter of 
 preferences where the instrument of transfer must be re- 
 corded. If the registry of transfer is made within four 
 months before the filing of the petition in bankruptcy, 
 and the bankrupt is insolvent, and if the transfer operate 
 as a preference and the person benefited by it has 
 grounds to believe that the transfer is in effect a prefer- 
 ence, it is within the power of the trustee to recover the 
 property. In this case the amendment dispenses with 
 the requirement of proof that the debtor intended to 
 give a preference, a thing which is always difficult to 
 prove. 
 
 The Bill introduced in 1908 was very carefully drawn
 
 BANKRUPTCY ACT OF 1898 341 
 
 and became the model for the measures submitted in 
 
 1909 and 1910. Some concessions were made to those 
 
 who opposed bankruptcy legislation, and con- T , 
 
 sequently some provisions deemed very im- proposed 
 
 portant were not included in the amend- measure 
 
 ments of 1910. One of these sections modi- 
 
 more 
 fies the definition of insolvency so that a person ra dical 
 
 would become insolvent when the aggregate than the 
 
 of his property, exclusive of that "which is law which 
 
 D3.SS6(1 
 
 exempt from being taken on execution 
 under the laws of the United States or of the state or 
 territory in which the proceedings in bankruptcy were 
 begun," is inadequate at a fair valuation to pay his 
 debts. The property excluded from valuation as a part 
 of the assets of the debtor under the present law, is that 
 which has been concealed, conveyed, etc., with intent 
 to defraud. The necessity of inserting the additional 
 clause was made obvious in the litigation of cases in 
 states which have liberal exemption laws. The opposi- 
 tion to this clause was so strong that it was struck out 
 of the Bill proposed in 1909, and it failed to pass as one 
 of the amendments of the Act of 1910. The justice of 
 the proposed change in determining insolvency cannot be 
 called in question since the alleged bankrupt should have 
 an adequate amount of property to pay his debts, which 
 would be divided in case of bankruptcy among his 
 creditors. 
 
 Another amendment proposed in the Act of 1908, but 
 which failed to pass in 1910, made the failure to account 
 satisfactorily "for a loss or deficiency of assets which
 
 342 MERCANTILE CREDIT 
 
 contribute to his bankruptcy" an objection to a dis- 
 charge. This feature is new in bankruptcy legislation, 
 having been introduced for the first time in the English 
 Bankruptcy Act of 1890. 
 
 Many speeches were made in both branches of Congress 
 favoring the repeal of the law. Motions to repeal the 
 Attempt ^ aw were defeated in the House in 1909 by a 
 to repeal vote of 182 to 111, and in 1910 by a vote of 
 
 law of 166 to 90. These votes practically ended the 
 
 1898 
 
 efforts of the opponents of national bank- 
 ruptcy legislation to consign the law of 1898 to the same 
 fate as its predecessors met. 
 
 The arguments in opposition to the Bankruptcy Act, 
 
 and especially to the amendments to it, made by the 
 
 minority of the judiciary committee may be 
 
 summarized under the following heads: (1) 
 ments f v ' 
 
 against The proposed amendments are in the inter- 
 national ests of organized special classes; (2) the wide 
 
 n " , expanse of territory gives a large variety of 
 ruptcy leg- ... . . 
 
 islation industrial and commercial interests to which 
 
 when Act one uniform law is not adapted; (3) the costs 
 of 1910 f c i os i n g estates under a national Act are 
 pending. greater than under state laws; (4) the primary 
 object of the bankruptcy law is to relieve un- 
 fortunate debtors from the weighty oppression of debts 
 impossible for them to pay, and the proposed amend- 
 ments are especially hard on the debtor classes. 
 
 The proposed amendments were urged by creditors in 
 behalf of creditors, but it would not be difficult to prove 
 that the changes contemplated would also benefit honest
 
 BANKRUPTCY ACT OF 1898 343 
 
 debtors. Opposition to the law seemed to be aroused 
 
 by interests independent of debtors and creditors that 
 
 would profit by a repeal of the law. 
 
 There is no reason why one uniform bankruptcy law 
 
 would not apply to all American conditions of bankruptcy 
 
 just as many other laws on the statute books . . 
 
 Advan- 
 apply to a whole set of conditions of one tages f a 
 
 kind or another. The strong argument for a National 
 
 National Bankruptcy Act is the weakness of Bankru Pt 
 
 Act* 
 the state insolvency laws, which are in opera- 
 tion in the absence of a national statute. Most states 
 have no laws authorizing the involuntary seizure and dis- 
 tribution of the debtor's property. The southern states 
 as a rule and many of the western states as has been 
 shown, are hostile to this sort of legislation, and have 
 consequently opposed the passage of involuntary laws by 
 the United States Government. Trade and commerce 
 are now national in their scope, and the best state insol- 
 vency laws are inefficient, owing to their limitations to 
 state lines. Such laws have no power to bind property 
 outside of a state or to relieve a debtor of his obligation 
 to pay in full his creditors residing in another state; 
 and in most large failures the debtor's property is not 
 wholly in one state, nor do all his creditors reside in 
 one state. 
 
 It has not been and perhaps cannot be proved that 
 the costs of closing estates under the National Act are 
 greater than under state laws. Much may be said in 
 favor of the contention that the purpose of the Act of 
 1898 was to relieve debtors. However, the fundamental
 
 344 MERCANTILE CREDIT 
 
 purpose of modern bankruptcy legislation is not to re- 
 lieve debtors, but to divide the estates of bankrupt 
 debtors equitably among creditors, with the least ex- 
 pense, and without injury to honest debtors.
 
 CHAPTER XX 
 STATE INSOLVENCY LEGISLATION 
 
 The inadequacy of state insolvency laws has all along 
 been the strong argument for national bankruptcy legis- 
 lation. The necessity for the regulation of g an ^_ 
 trade between the states was the paramount ruptcy and 
 argument for the adoption of the Constitu- the Con ~ 
 tion of the United States. The Union was 
 about to split up into the various states because each 
 had its own way of regulating commerce between itself 
 and other states, and contentions arising from unjust 
 discriminations frequently led to the verge of civil war. 
 As a part of this movement to place the control of inter- 
 state commerce in the hands of the national government, 
 the constitution conferred on the general government 
 the power of passing bankrupt laws. 
 
 The limitations on the powers of the states in their 
 insolvency legislation proved to be an additional reason 
 for the assumption of this power by the gen- 
 eral government. In almost every large fail- insolvency 
 ure the debtor's property is not wholly within laws are 
 one state nor do all the creditors reside in inade- 
 one state. The insolvency laws of a state 
 cannot enable a debtor to be discharged from the pay- 
 ment of debts owed in another state. Complete dis- 
 
 345
 
 346 MERCANTILE CREDIT 
 
 charge is thus in many cases impossible of attainment 
 under state laws. In most bankrupt laws and in the in- 
 solvency laws of many of the states, the desires of a cer- 
 tain percentage of the creditors in number and in amount, 
 bind the rest with reference to terms on which estates are 
 closed. But under the insolvency laws of a state no 
 decision of the creditors of a debtor of that state can bind 
 creditors residing in other states. 
 
 As a rule the state laws define an insolvent as one 
 who is unable to pay his debts as they mature in the or- 
 dinary course of business. All that have 
 Definition mso i venC y laws of any kind provide for vol- 
 insolvent. untary insolvency, and a number of the states 
 provide also for involuntary insolvency. 
 As a rule in voluntary insolvency, debtors in failing 
 circumstances may apply to the court having juris- 
 diction, offering to surrender their property 
 
 Voluntary ^ Q ^ Q divided among their creditors. At the 
 insolvency . ..... , 
 
 laws. ^ ime °* presenting their petition or subse- 
 
 quently, they are required to give the names 
 of their creditors, their places of abode, the amounts 
 owing each, etc. Usually this statement is made under 
 oath. The assignment of the debtor's property does not 
 affect that which under the laws of the state is left with 
 insolvents. In some states, California, Wisconsin, 
 Nevada and Massachusetts, 1 the debtor must owe a 
 certain sum of money before he can apply for the bene- 
 fits of the law. 
 
 1 The amount required in California and Wisconsin is $300; in 
 Nevada $500; in Massachusetts $250, and in Idaho $300.
 
 STATE INSOLVENCY LEGISLATION 347 
 
 Maine, Vermont, Massachusetts, Rhode Island, Con- 
 necticut, Maryland, Minnesota, Louisiana, Nevada, and 
 California have involuntary as well as vol- i nvo i un _ 
 untary insolvency laws. The petition to tary 
 make a debtor a bankrupt must be filed by insolvency 
 creditors with the judge of the local court, 
 charging him with an attempt to evade the payment of his 
 just debts. The debtor's fleeing from the state where he 
 resides, removing his property, or concealing his property 
 with the apparent intention of defrauding his creditors, 
 preferring creditors, allowing judgment to be executed in 
 favor of creditors, or taking action in contemplation of in- 
 solvency, are the usual conditions which give creditors 
 the right to force a debtor into insolvency. Some officer 
 of the court takes charge of the debtor's property, a meet- 
 ing of the creditors is called, at which the debtor may 
 attend, and the petitioning creditors are required to 
 establish one or more of the above charges before the 
 court can act favorably on their petition. With a few 
 minor differences the laws of the various states with 
 reference to involuntary insolvency are similar. Some 
 states require the petition of a certain number of the 
 creditors, and others require the owing of a minimum 
 debt, as requisite to involuntary proceedings. 
 
 After the petition is granted the methods of Method of 
 
 procedure 
 procedure in both voluntary and involun- in both 
 
 tary bankruptcy are practically the same, voluntary 
 
 The debtor must furnish to the court under and in ~ 
 
 oath a list of his creditors, their residence, bank _ 
 
 the amounts owing each, and his total assets, ruptcy.
 
 348 MERCANTILE CREDIT 
 
 At a meeting of the creditors called by the court, they 
 are required to prove their claims against the debtor's 
 estate, and those proving their claims elect an assignee 
 or assignees to take charge of the debtor's property. 
 
 In most of the states a double majority is required, that 
 is, a majority of creditors who hold claims representing 
 over one-half of the amounts owed by the debtor. The 
 assignee possesses the same privilege with reference to 
 the debtor's property as the latter would enjoy in the 
 absence of insolvency proceedings. He collects all debts 
 owed the debtor's estate, and under the supervision of 
 the court, distributes the debtor's property equally among 
 the creditors. In most states he is required to give bond 
 for the faithful discharge of his duties. Some states 
 prescribe conditions under which he may be removed. 
 Some states prescribe that he be allowed a reasonable 
 compensation or compensation on a percentage but even 
 under the common law, he is to be allowed reasonable 
 pay for his services. In several states the debtor selects 
 his own assignee. When making an assignment in In- 
 diana 1 and Ohio 2 the debtor may select his own trustee, 
 unless creditors representing over one-half of his debts 
 object, in which case the Circuit Judge chooses the trus- 
 tee. In Wyoming 3 the assignee selected by the failing 
 debtor must give adequate notice of his appointment in 
 newspapers and must have the property which comes in 
 his possession appraised by two trustees. 
 
 1 Brown's Annotated Statutes Review, 1208. 
 
 * Bates' Annotated Ohio Statutes, Vol. 2, Section 3141-3167. 
 
 1 Wyoming Compiled Statutes, 1910.
 
 STATE INSOLVENCY LEGISLATION 349 
 
 In some western states, notably Utah and Oklahoma, a 
 voluntary assignment for the benefit of creditors is void 
 under the following conditions: (1) if a prefer- 
 ence is granted on a contingency; (2) if it tends . 
 to coerce a creditor to release or compromise solvency 
 his demand; (3) if it provides for the payment in Utan 
 of a claim known to be false; (4) if it reserves . 
 any interest to the debtor not allowed by state 
 laws before the debts are paid; (5) if it confers power on an 
 assignee to delay the disposition of the property. 
 
 An existing attachment is not made void by proceed- 
 ings in insolvency unless there is a specific law prohibiting 
 such attachments. On this account in the states 1 where 
 no such laws exist, creditors are vigilant in securing pre- 
 ferred claims by getting attachments on the debtor's 
 property. However, the laws of many of the states 
 make attachments void when obtained within a prescribed 
 time previous to insolvency. Even in such cases, vigi- 
 lant creditors secure preferred claims, taking chances 
 that the time of these claims will not fall within the pre- 
 scribed limit. 
 
 Many states make the conveyance of property imme- 
 diately preceding insolvency proceedings to keep it from 
 falling into the hands of creditors fraudulent, and such 
 property may be reclaimed by the assignee. In these 
 states false claims paid out immediately preceding 
 insolvency proceedings may also be recovered by the 
 assignee. 
 
 When an estate is closed all the creditors share equally 
 
 1 Dunscomb: Bankruptcy, p. 163.
 
 350 MERCANTILE CREDIT 
 
 in proportion to their claims after the preferred debts are 
 
 paid. These in order of priority of claim are (1) debts 
 
 due the United States; (2) debts and taxes 
 
 re erre owec j ^he state: (3) in some cases the claims 
 debts. 
 
 of a landlord for rent; (4) in many states, 
 
 wages for labor performed within a limited period pre- 
 ceding insolvency ; (5) preferred creditors. 
 
 The conditions of discharge vary in different states. 
 As a rule the debtor must surrender his property for the 
 
 benefit of his creditors, giving a correct in- 
 Conditions . . , ' *T , . .. 
 
 of dis- ventory of it, the names of his creditors, their 
 
 charge in residences, and the amounts owed each. In 
 different gome cases he is required to state the causes 
 of his indebtedness. In some states he may 
 file a petition for his discharge when he surrenders his 
 property; in other states he must postpone his ap- 
 plication several months. After his property is divided 
 among his creditors, if he has not been guilty of fraud, he 
 may be discharged by the court from the payment of 
 the residue of his debts. Fraudulent conduct, which 
 prevents a discharge, often means, as in Wisconsin, 1 
 
 (1) swearing falsely regarding his estate and debts, 
 
 (2) selling or transferring property after petitioning to be 
 adjudged a bankrupt, (3) secreting his estate or books, 
 and (4) preferring creditors or permitting an unfair claim 
 to prevail against the estate. 
 
 In some states, especially in New England, the desires 
 of the creditors are considered in granting a discharge. 
 
 1 Wisconsin Statutes, 4282-4206. 
 
 2 Revised Laws, 1902, Vol. II, pp. 1433-1468.
 
 STATE INSOLVENCY LEGISLATION 351 
 
 In Massachusetts, if the assets do not pay 50 per cent, of 
 the debts, a debtor cannot be discharged without the 
 consent of a majority in number and in value B ank _ 
 of the creditors. If the debtor becomes a ruptcy in 
 bankrupt a second time, then the consent of New 
 three-fourths in number and amount of the ng an 
 creditors is necessary to a discharge. The debtor is pre- 
 vented from receiving a discharge if he has failed to keep 
 proper books; however, in this case if he is not guilty of 
 fraud, the court may discharge him after six months, if 
 his debts do not exceed $5,000 and if two-thirds in num- 
 ber and amount of his creditors consent to his discharge. 
 In Maine 1 a debtor may be discharged if he is not 
 guilty of fraud. A second discharge requires the consent 
 of a majority in number and value of his 
 
 creditors, and a third requires the consent of Discliar g e 
 ji /* i i ii r i from debts 
 
 three-fourths in number and value of the in i/i a i ne 
 
 creditors. When a debtor is a voluntary 
 
 bankrupt the consent in writing of a majority in number 
 
 and amount of his creditors is necessary to a second and 
 
 a third discharge. 
 
 When a debtor applies for a discharge in New York, 3 
 he must send with his application the petition of his 
 creditors to whom he owes at least two-thirds of his 
 debts. 
 
 The insolvency law of Rhode Island 3 makes a distinc- 
 tion between traders and other classes. If the insolvent 
 
 1 Revised Statutes, 1903, pp. 628-648. 
 1 Consolidation Laws, VI, pp. 860-928. 
 3 Rhode Island, General Laws, 1909, pp. 1221-1239.
 
 352 MERCANTILE CREDIT 
 
 petitioning for a discharge is a merchant, manufacturer 
 or trader, "he shall not be discharged if he has, within 
 four months prior to being adjudged insol- 
 solvency vent, failed to keep or has destroyed his books 
 law in of account, or papers, from which his true 
 
 Rhode condition may be known, with intent to 
 
 I sl 8.11(1 
 
 hinder, defraud or delay his creditors; if he 
 has given a preference, or made a false statement in 
 writing to secure credit, or if he has suffered a lien to be 
 secured on his property." 
 
 Texas 1 has a peculiar assignment law. A debtor may 
 make an assignment for the benefit of as many creditors 
 as will accept the terms of payment made 
 Insolvent p OSS ible by the distribution of his property. 
 Texas. ^ ne insolvent is then discharged from the 
 
 payment of further sums to these, providing 
 that the debtor's assets will pay one-third of the claims 
 of these. The insolvent is not discharged, however, from 
 the payment of all claims in full of those who do not 
 accept the terms of settlement and who consequently 
 receive nothing from the distribution of the assets of the 
 debtor. 
 
 Insolvent laws in the earlier sense, that is, that action 
 the purpose of which was to secure a discharge from 
 Imprison- P r i son > must be initiated by debtors are uni- 
 ment for form in Arkansas, Illinois, Kentucky, Mon- 
 insol- tana, New Jersey, New York, North Carolina, 
 
 VCDCV 
 
 Ohio, Pennsylvania, and Wisconsin. As a 
 rule in these states, when a debtor is arrested and placed 
 1 Civil Statutes, Sayles 21, pp. 61-73.
 
 STATE INSOLVENCY LEGISLATION 353 
 
 in jail, he applies to the court for a discharge from jail, 
 
 appending to his petition an inventory of his property, 
 
 giving its amount and value, stating the names and 
 
 residence of his creditors, and declaring that he is willing 
 
 to surrender his property for the benefit of his creditors. 
 
 The court calls a meeting of the creditors to enable them 
 
 to give reasons why the debtor should not be discharged. 
 
 If it is established that the debtor has not committed a 
 
 punishable offense under the law, he is discharged from 
 
 prison. In most cases the debtor is given the privilege 
 
 of a trial by a jury if he desires it. When convicted of 
 
 certain classes of frauds, in several states debtors may be 
 
 sent to prison. 
 
 The most complete bankruptcy laws are found in New 
 
 England. All of the New England States have both 
 
 voluntary and involuntary bankruptcy laws. 
 
 The creditors elect their assignee and the de- . . 
 
 sires of the creditors as a rule, are considered in in New 
 
 discharging an insolvent from his debts. The England 
 
 law states in great detail what the insolvent ery , . 
 ° complete. 
 
 is required to do both in voluntary and in in- 
 voluntary insolvency. The Acts preventing a discharge 
 are very clearly set forth. Several months preceding the 
 Acts of insolvency the debtor cannot grant preferences, 
 and attachments made within that period may be 
 dissolved. 
 
 In her insolvency laws Georgia makes the same dis- 
 tinction between traders and non-traders as was formerly 
 observed in England, and is still observed on the conti- 
 nent. Traders only may be made involuntary bankrupts
 
 354 MERCANTILE CREDIT 
 
 whereas all other classes have the privilege of voluntary- 
 bankrupts. Any person is defined as a trader 1 "who is 
 engaged in buying and selling real estate or 
 Insolvent p ersona l property, or who is a banker, broker, 
 Georgia commission merchant or manufacturer of arti- 
 cles which exceed in value $5,000 a year." 
 When a debtor fails to pay his debts as they mature, 
 creditors representing one-third of the unsecured debts 
 may petition the court of equity to collect the debts. 
 The chancellor has the right to grant injunctions and to 
 appoint receivers. After the appointment of receivers 
 no creditor can acquire a preference or secure a lien or 
 judgment against the property of the debtor. After 
 the debtor has surrendered all his property for the benefit 
 of his creditors, the chancellor may recommend that the 
 creditors release him from further liability to pay the 
 balance of his debts; but the power to do so is wholly in 
 their hands. 
 
 Corporations, other than municipal, have the privilege 
 of making an assignment, but in doing so they are not 
 permitted to prefer creditors. 2 Persons and firms in 
 making an assignment may prefer creditors, giving 
 mortgages, liens, etc. Assignments must convey all 
 property and lists of creditors with their addresses and 
 the amounts owed each must be furnished. Within 
 fifteen days the assignor and assignee must prepare lists 
 of property with its valuation, which must be kept on 
 file in the County Clerk's office for ten days. Al 
 
 1 Code of State of Georgia, Vol. I, 1911. 
 
 2 Code of State of Georgia, Vol. I, 1911.
 
 STATE INSOLVENCY LEGISLATION 355 
 
 creditors must be notified, and they have the privilege 
 of inspecting these lists. 
 
 Louisiana has both a voluntary and an involuntary in- 
 solvency law. 1 Her insolvency law resembles the bank- 
 ruptcy system of the continent and on that 
 
 Insolvent acC0 unt it has from the American point of 
 
 law in 
 
 Louisiana, view some peculiar features. Upon failure 
 
 to pay his debts a judgment creditor may 
 compel his debtor to produce his property by petitioning 
 the court to have the property surrendered. The court 
 then requires the debtor to file a list of his property, the 
 names of his creditors, their residences, and the amounts 
 owing them. The judge then calls a meeting of the credit- 
 ors at which a majority in number and amount determine 
 if the debtor's property is to be surrendered. If the 
 property is to be surrendered the creditors elect syndics 
 who take control of the property. Upon refusal to sur- 
 render his property, a debtor may be sent to jail. 
 
 A fraudulent debtor is defined as one who has neglected 
 to declare any of his property, "who has changed or 
 concealed his books," who has given a preference within a 
 year of the acts of insolvency or who committed any 
 other act to defraud his creditors. When the debtor is 
 convicted of fraud by a jury he is to be sentenced to 
 imprisonment for three years, and is to be deprived in 
 the future of the privileges of the insolvency law. If the 
 debtor is guilty simply of granting an unjust preference 
 he may be relieved from imprisonment by restoring to 
 
 1 Constitution and Revised Laws of Louisana, 1904, Vol. I, 
 pp. 810-825, Solomon Wolff. I
 
 35G MERCANTILE CREDIT 
 
 his creditors the amount unlawfully conveyed. If the 
 preference was given within three months of his failure, 
 the preferred creditor loses his advantage and the debtor 
 is to be denied the privileges of the insolvency law.
 
 CHAPTER XXI 
 
 LAWS REGULATING THE SALE OF GOODS 
 IN BULK 
 
 Previous to 1900 but three states Louisiana, Oregon, 
 and Minnesota, had laws regulating the sale of goods in 
 Origin of Du ^. In January, 1910, 1 thirty-nine states 
 movement and the District of Columbia had laws 
 for bulk governing the sale of goods in bulk. The 
 rapidity of the movement in the direction of 
 legislation of this class amounting to almost a crusade, 
 was primarily the result of action taken by the National 
 Association of Credit Men in 1897. Believing that 
 rigid legislation regulating sales of this class would 
 place credit on a higher plane, this organization through 
 its legislative committee carried on a persistent campaign 
 in every state in the Union. 
 
 A model law was framed by the National Association 
 
 and then each state in turn was asked to pass the law or 
 
 one including its most important provisions. 
 
 The uniformity in the bulk sales laws of the laws 
 
 different states is the best evidence of the passed as 
 
 singleness of purpose back of this legislative * esult of ■ 
 
 movement. One judge in writing the majority 
 
 J » » . campaign. 
 
 opinion declaring a law unconstitutional 
 
 1 The states not having bulk sales laws at this time were Illi- 
 nois, Iowa, Missouri, Arkansas, Alabama, Kansas, South Dakota 
 and Wyoming. 
 
 357
 
 358 MERCANTILE CREDIT 
 
 comments on this fact. 1 "Statutes that are passed pro 
 bono publico rarely sweep the country with such irresist- * 
 able momentum, while much fantastic legislation has re- 
 sulted from organized crusades upon legislatures by the 
 advocates and supporters of special classes. This 
 statute is evidently of that kind, which has been so fre- 
 quent of late, a kind which is meant to protect some 
 class in the community against the fair, free and full com- 
 petition of some other class, the members of the former 
 class thinking it impossible to hold their own against 
 such competition, and, therefore, flying to the legislature 
 to secure some enactment which will operate favor- 
 ably to them or unfavorably to their competitors." 
 Whatever may be said of the motives ascribed 
 by this judge to those responsible for this and other 
 legislative campaigns, the results achieved were 
 accomplished by careful planning and by persistent 
 efforts. 
 
 In the absence of legislation of this sort practices are 
 resorted to which are injurious to trade. Credit is 
 Regular granted because of the necessity of paying 
 methods debts from the proceeds of goods purchased. 
 of busi- it i s granted under the assumption that the 
 customary methods of trade will be followed 
 by the retailer and that the latter will pay his debts when 
 his goods are sold. When goods are sold in bulk, the 
 customary methods of the merchant are abandoned. The 
 seller does not need to make provision to liquidate the 
 
 1 Judge Werner in declaring the New York law of 1902 uncon- 
 stitutional.
 
 THE SALE OF GOODS IN BULK 359 
 
 liabilities, and the creditor has no claim whatever against 
 the stock after it is sold. 
 
 In selling goods on time the jobber or manufacturer 
 considers the credit standing of the purchaser, his 
 business ability in his particular trade, his chance for 
 success, his honesty, integrity, etc., which are all a 
 matter of record. He assumes as a matter of course 
 that the business in which the customer is engaged will 
 be carried on in the customary way. If the seller be- 
 lieved that the regular retail methods would be abandoned 
 and that the entire stock would be sold at one time to a 
 single purchaser, ordinarily the goods would not be 
 shipped, and commercial credit would not be granted. 
 It is for these reasons that bulk sales laws make different 
 requirements of those who sell goods in bulk from those 
 who follow the same methods of trade that are assumed 
 when credit is granted, and the advocates of stringent 
 legislation insist that no harm or inconveniences will 
 come to honest merchants by these distinctions. 
 
 The chief abuse arising from the sale of goods in 
 bulk takes as a rule this form. A merchant who has pur- 
 chased a stock of goods chiefly on credit, sells 
 his entire stock to a single purchaser. He abuse 
 realizes at once on the sale and his creditors which the 
 are helpless in the absence of legislation to bulk sales 
 
 cover this specific case. The purchaser may " . 
 ^ 1 J corrects. 
 
 be aware often of the motives of the seller, but 
 if the purchase is made at an unreasonably low figure 
 he has no financial interest in exposing the purposes of 
 the seller.
 
 360 MERCANTILE CREDIT 
 
 Another irregularity aimed at by the bulk sales law 
 is the transformation of a business from the single entre- 
 preneur or partnership organization into the corporation. 
 The purchasing corporation practically buys up the entire 
 stock, good will, etc., and perhaps the buildings and equip- 
 ment, although the original owner may become a stock- 
 holder in the corporation to the extent of his original 
 possessions in the business, and without a law governing 
 such sales, the creditors of the seller have no more title 
 to his property than if it had been disposed of outright. 
 
 To correct these abuses the National Association of 
 Credit Men has proposed a specific law, the chief provi- 
 
 The pro- s * ons °* wn i° n nave ^ een incorporated in 
 
 visions of nearly all the laws of the states which have 
 
 the model restricted sales in bulk. The important 
 
 provisions of this law are the following: 
 
 (1) Five days before the sale, the seller and purchaser 
 must make a detailed inventory showing the quantity and 
 as far as possible the cost price of each article to be sold; 
 
 (2) five days before the sale the purchaser must make an 
 inquiry as to names, places of residence or of business 
 of all creditors of the seller and the amount owing each 
 creditor. A written answer to these inquiries must be 
 secured from the seller and retained six months after the 
 time of sale; (3) the purchaser, five days before the sale, 
 must notify all creditors of the proposed sale, the cost 
 price of the goods to be sold and the price to be paid for 
 them; (4) five days before the sale the seller must answer 
 all questions in writing truthfully, and a failure to do so 
 or a failure to make complete and true answers will be
 
 THE SALE OF GOODS IN BULK 361 
 
 treated as a misdemeanor and be dealt with accordingly. 
 A failure to carry out the above provisions makes the 
 sale fraudulent and void as against the creditors. 
 
 Bulk sales are made frequently as low as 40 or 50 
 per cent, of the real value of goods, and in such cases the 
 sale is usually made with intent to defraud, 
 and the purchaser is in collusion with the ^ Ven ^ ry 
 seller. In compelling an inventory to be to be sold 
 made giving the cost price of the goods to be and noti ~ 
 sold and the proposed selling price, the real C V-? n ° 
 purpose and nature of the transaction is 
 made obvious. The purchaser is required to give these 
 facts to the creditors of the seller several days before the 
 sale takes place, and if the latter is attempting to sacrifice 
 the goods with fraudulent intent, his efforts may be 
 thwarted by those concerned. The time limit required 
 of purchasers to notify creditors prior to the sale varies in 
 the different state laws, but in no instance is it less than 
 five or more than ten days. 
 
 Most of the laws contain a clause stating that the 
 Act shall not apply to sales by executors, administrators, 
 receivers, assignees or trustees in bankruptcy for the 
 benefit of creditors or to public officers conducting sales 
 in their official capacity. 
 
 The form of the laws vary with the time of their en- 
 actment. Louisiana has the most drastic law on sellers 
 and purchasers of goods in bulk, but this law Louisiana 
 was passed (1896) before the crusade against bulk sales 
 bulk sales was begun by the National Associa- law ' 
 tion of Credit Men. This law makes it a misde-
 
 3G2 MERCANTILE CREDIT 
 
 meanor to purchase goods under a fictitious name 
 with intent to cheat or to defraud, and a penalty of a 
 fine or an imprisonment from six to twelve months is 
 provided. Buying on credit and selling out in the usual 
 course of trade with intent to cheat the seller is also 
 treated as a misdemeanor for which the above penalty is 
 provided. One who purchases goods in bulk which were 
 not paid for by the seller, without securing a written 
 sworn statement from the seller that the goods had been 
 paid for, is considered guilty of a misdemeanor for which 
 the usual penalty for that offense in Louisiana, is imposed. 
 Fraudulent intent is established in this Act by the failure 
 of the vender of goods in bulk to pay the sellers for their 
 goods; and by the failure of the purchaser to secure from 
 the seller a signed or sworn statement. 
 
 The Oregon law which was passed in 1899 required 
 the purchaser of goods in bulk to obtain a written state- 
 ment from the seller containing names and 
 
 addresses of creditors and the amounts owed 
 Oregon 
 law. each, and these facts were to be communicated 
 
 to the creditors personally or by registered 
 
 letter several days before the consummation of the sale. 
 
 Failure to comply with the provisions of the Act makes 
 
 the sale fraudulent, and a right of action is given to 
 
 creditors of the seller against the purchaser of goods in 
 
 bulk. The making of a false statement by the seller is 
 
 considered perjury or a misdemeanor, and the offender 
 
 is subjected to the penalties imposed by the laws of the 
 
 state for such offenses. The Minnesota law, passed also 
 
 in 1899, contains all these provisions except the last one.
 
 THE SALE OF GOODS IN BULK 363 
 
 With unimportant exceptions all the laws contain these 
 provisions, the important difference being with reference 
 to the making of a false statement by the seller a 
 criminal offense. Of the states which were first to pass 
 bulk sales laws, seventeen made the giving of a false 
 statement by the seller, with reference to his goods 
 which were sold in bulk, either a misdemeanor or 
 perjury. The laws of seventeen other states do not 
 make the giving of a false statement a criminal offense, 
 but simply make the sale of goods in bulk void and 
 fraudulent. The first law passed by Ohio in 1902, 
 which was declared unconstitutional, made the giving 
 of a false statement by the seller a misdemeanor, but 
 the second law passed by Ohio in 1908, also declared 
 unconstitutional, contained no provisions whatever with 
 reference to a false statement. 
 
 In most of the laws governing bulk sales the seller is 
 required to furnish to his purchaser an inventory of 
 the stock to be sold, giving the cost price of each item 
 so far as he can, and in some instances the what most 
 selling price of the entire stock. He is also bulk sales 
 required to furnish him a list of his creditors, laws 
 their residence, and the amounts owed each. " m 
 
 As a rule, this data, together with a notice of the 
 time of sale, is to be furnished by the seller to the 
 creditors from five to ten days preceding the time of 
 sale. In the states where it is required that this inven- 
 tory is t o be preserved, it must be retained six months. 
 In but few instances do the laws require a public record 
 of the inventory. The California law of 1903 requires
 
 364 MERCANTILE CREDIT 
 
 the seller of goods in bulk to file in the office of the 
 county recorder, at least five days before the sale, a 
 notice of the sale, the name of the purchaser, and a 
 statement of the character of the property to be sold 
 and the purchase price. Under this law the purchaser is 
 freed from any responsibility in making the transaction. 
 The Connecticut law of 1903 requires the seller to re- 
 cord in the office of the town clerk, in the town where the 
 recorder conducts his business, a notice of his 
 
 The Con- m t en tion to sell the property in bulk, a de- 
 
 necticut . 
 
 law> scription of it, and the name 01 the purchaser. 
 
 The purchaser is free from any obligation 
 
 with reference to the creditors of the seller except that the 
 
 sale is void if the above requirement is not carried out. 
 
 The South Carolina law (1906) requires the seller of 
 
 goods in bulk, who intends to retire from the retail 
 
 business, to make a complete inventory of all 
 The South ^q property he proposes to sell with a state- 
 Carolina , , J. , i i • f i- 
 j aw> ment of the ruling wholesale price ol each 
 
 item. The inventory must also include a 
 complete list of his creditors with the amounts owed 
 each and his statement under oath that the facts re- 
 ported are true. The inventory must be furnished the 
 purchaser, and copies must be retained in his own 
 possession six months. Ten days before the termina- 
 tion of the sale, the seller and purchaser must give notice 
 to all creditors of the seller of the intended sale and 
 purchase. The inventory of the property must be re- 
 tained by both seller and purchaser six months, and be 
 subject to inspection by any of the creditors. A failure
 
 THE SALE OF GOODS IN BULK 365 
 
 to carry out any of these requirements makes the sale 
 fraudulent, and gives the creditors of the seller a title to 
 property in the hands of the purchaser, and the latter 
 is made liable for the value of any property he sells. 
 
 Three Acts passed in 1907 introduced new features 
 governing the responsibility of purchasers and sellers. 
 The Nebraska law requires the customary New 
 inventory to be made by seller and purchaser, features 
 and the notice by the purchaser to the credi- in bulk 
 tors of the seller of the intended purchase of 
 the property. The inventory and the notice may be 
 omitted if the seller files with the county clerk where the 
 stock is situated an agreement with his creditors waiv- 
 ing the requirement of the inventory and notice. 
 
 The North Carolina law makes a bulk sale void unless 
 the seller makes an inventory of the property with the 
 cost price of each item which he proposes to sell and 
 notifies all his creditors of the proposed sale. How- 
 ever, the inventory and the notice may be waived if 
 the seller executes a bond to a trustee covering the 
 value of the goods conditioned upon the use of the pro- 
 ceeds of the sale to pay creditors the amounts due them 
 after making adequate allowance for the value of the 
 personal property allowed by law. 
 
 The Nevada law makes the usual requirement of in- 
 ventory, notice to creditors of the seller, and considers 
 a false statement by the seller perjury, for which offense 
 a heavy penalty is given. All the provisions of this Act, 
 however, may be waived if the seller secures the consent 
 of a majority in number and amounts of his creditors.
 
 366 MERCANTILE CREDIT 
 
 In four states, New York, Utah, Ohio and Illinois, 
 laws have been declared unconstitutional, but in the 
 
 Laws de- nrs ^ * wo °^ ^ nese new ^ aws nay e been passed, 
 claredtm- The New York Act of April 11, 1902, was 
 constitu- declared unconstitutional but a new Act ap- 
 tional * proved May 3, 1904, is in force. In Utah 
 
 the law of March 14, 1901, was declared unconstitutional, 
 but the law of March 9, 1905, is still in force. The 
 Ohio Act of April 4, 1902, was declared unconstitu- 
 tional by the Supreme Court of the state June 7, 1904, 
 and a new law passed April 30, 1908, has also been de- 
 clared unconstitutional. The Illinois law passed May 
 13, 1905, was declared unconstitutional June 18, 1908. 
 
 In all other states the bulk sales laws are in force. In 
 seven of these, Washington, Tennessee, Massachusetts, 
 Connecticut, Michigan, Kentucky, and Oklahoma, the 
 laws were declared constitutional by the Supreme Courts 
 of the states after the issues were squarely drawn on 
 constitutionality by lower courts. 
 
 The objections to the laws on constitutional grounds 
 were based chiefly upon the infringement of the common 
 law, being in restraint of trade, of restricting the right 
 of contract, of imposing hardships on certain classes of 
 people, and of infringing on the property rights of 
 classes of producers. 
 
 The first Ohio law which was declared unconstitutional 
 was more drastic than most laws of this class. In con- 
 trasting the Ohio law with others to which 
 
 „, . , the attention of the court had been directed 
 
 Ohio law. 
 
 that had been declared to be constitutional,
 
 THE SALE OF GOODS IN BULK 367 
 
 the comment was made that they "present substantial 
 differences from those which are involved in the present 
 inquiry." The sale of an entire stock of merchandise 
 outside of the regular course of trade is considered 
 fraudulent against the creditors of the seller unless 
 the following regulations are carried out: (1) The seller 
 must deliver to the purchaser (a) a complete list of all 
 his creditors with their addresses, (b) the amounts owed 
 each, and (c) the books or original invoices "from which 
 the cost price of the merchandise can be ascertained"; 
 (2) the seller and purchaser are required six days before 
 the sale to make an inventory showing the cost price to 
 the seller of each item included in the sale; (3) the list 
 of creditors, books, invoices and inventory must be 
 retained by the seller six months after the sale, subject to 
 the inspection of the creditors of the seller; (4) the pur- 
 chaser is required to notify in person or by registered 
 letter all the creditors of the seller at least five days 
 prior to the sale of the goods to be sold, their cost price 
 and their selling price. 
 
 If the seller fails to comply with the requirements of 
 the law or if his report to the purchaser is incorrect, and 
 in consequence of this any creditor is wronged or de- 
 frauded, the seller's offense is considered a misdemeanor 
 which is subject to a fine or imprisonment or both. 
 
 The decision of the Supreme Court was given in the 
 case of Miller vs. Crawford, June 7, 1904. 1 The court 
 stated as a fundamental proposition from the Bill of 
 Rights that "the terms of the instrument compel the 
 
 1 70 Oh. St. 207.
 
 368 MERCANTILE CREDIT 
 
 conclusion often stated that the holding of private prop- 
 erty, its acquisition and its use are subservient only to the 
 welfare of the public." The following propo- 
 
 , sitions determined the decision of the court: 
 
 of 
 
 Supreme 1. "For every restriction upon the enjoyment 
 Court on anc [ use f property there must be substantial 
 
 , rs 10 reasons of a public character: 2. if a re- 
 law. x ' 
 
 striction is placed upon the alienation of 
 property, it must be for the entire body of the people or, 
 at least, of all who are within the reason of its restric- 
 tion; 3. a distinction sometimes thought important 
 between property in lands and in chattels upon the 
 ground that the former is derived from the state, will 
 at least justify the conclusion that legislative control 
 over chattels is not greater than over lands; 4. the 
 express limitations which the constitution imposes upon 
 the legislature apply to the exercise of powers which are 
 truly legislative in character, and since none but legis- 
 lative power is committed to it, the exercise of that 
 power is also confined within all the limitations which are 
 suggested by its nature." 
 
 The court then goes on to analyze the Act to show that 
 its provisions are in conflict with these principles. It 
 is asserted that a sale of goods in bulk is absolutely void 
 unless all of the various provisions of the Act are com- 
 plied with. The requirements of the seller cannot be 
 carried out when he does not know who all his creditors 
 are and the amounts he owes each. The Act took effect 
 as soon as it was passed, and it applied to stocks of 
 merchandise however long they were in the possession
 
 THE SALE OF GOODS IN BULK 3G9 
 
 of the merchant. The requirement that the seller 
 should transfer to the purchaser books or original 
 invoices to show the cost price of goods was declared 
 impossible of accomplishment when the seller did not 
 have adequate data. The decision states, moreover, that 
 the purchaser cannot in the nature of things have the 
 knowledge necessary for a compliance with the law. 
 
 The court goes on to say " Applying the familiar and 
 unquestioned rule that the validity of an Act is to be 
 determined by its practical operation and not by its title 
 or declared purpose; this Act, under the guise of prevent- 
 ing fraud in such sales, prohibits them altogether, and 
 thus places on the enjoyment of property an important 
 restriction which no public interest requires and which 
 the constitution therefore forbids. One who challenges 
 the soundness of this conclusion should be prepared to 
 maintain the validity of an Act expressly forbidding sales 
 of stocks of merchandise in bulk. By the Act the Legis- 
 lature has attempted to discriminate unwarrantably 
 among debtors and creditors. It does, in liens, apply to 
 sales in bulk by wholesale as well as by retail dealers in 
 merchandise. But conceding, for present purposes, that 
 when reasons for legislative discrimination exist, then 
 sufficiency is to be determined finally by the legislature; 
 no reason is suggested by council, nor does any occur to 
 us, for a legal discrimination in the relation of debtor 
 and creditor between those who come into that relation 
 with respect to the purchase and sale of merchandise and 
 those between whom it exists with respect to chattels in 
 general. Although the Act applies to all the creditors
 
 370 MERCANTILE CREDIT 
 
 of the seller, it applies to those only who are creditors 
 of the owner of a stock of merchandise, and thus an un- 
 reasonable burden is imposed upon a limited class of 
 debtors for the supposed benefit of a limited class who 
 are creditors." 
 
 With reference to decisions affirming the constitution- 
 ality of corresponding laws in other states, the court 
 asserts that if the reasoning in those cases were accepted 
 as sound, "the cases would be plainly distinguishable by 
 essential differences in the provisions of the statutes, and, 
 in one instance at least, by a difference in the constitu- 
 tional provisions involved." 
 
 A law passed April 30, 1908, was drawn in such a 
 
 manner as to free it from the provisions which made 
 
 the previous law unconstitutional. This law 
 
 Til A 
 
 has also been declared unconstitutional, 
 second 
 Ohio law. While the former law contained more rigid 
 
 provisions than most of the laws of other 
 states, the provisions of this law are mild as compared 
 with those of some states regarding fraudulent convey- 
 ances. A sale of goods in bulk made with fraudulent 
 intent is void against the creditors of a seller, and when 
 creditors bring suit a receiver may be appointed to take 
 possession of the assets of the debtor. Unless the seller 
 at least seven days previous to the transfer, records in 
 the office of the county recorder where the business is 
 conducted a notice of his intention to sell the goods with 
 their description and the conditions of the transfer, it will 
 be presumed that the goods were sold with fraudulent 
 intent. The above requirement may be dispensed with
 
 THE SALE OF GOODS IN BULK 371 
 
 when the sale is made "by order of a court or by an ex- 
 ecutor, administrator, guardian, or assignee." 
 
 The case at issue was one in which a merchant sold 
 his goods without having not less than seven days pre- 
 vious to the sale published with the recorder The 
 
 of the county as the law required, his in- Su P reme 
 
 Court's 
 tention to sell his goods in bulk. The cred- decision 
 
 itors of the seller brought suit against the pur- on second 
 chaser of the goods claiming that they were law - 
 sold with fraudulent intent. 1 Both the Common Pleas 
 and the Circuit Courts decided in favor of the de- 
 fendant, and upon appeal, the Supreme Court upheld 
 the decision of the lower court in 1911. In its deci- 
 sion the Supreme Court followed the same line of ar- 
 gument it pursued in holding the former bulk sales law 
 unconstitutional. The Court held that this law imposed 
 upon a certain class of people in selling goods obligations 
 and burdens not imposed on others, as fraudulent intent 
 is presumed if those who sell goods in bulk do not 
 file with the county recorder at least seven days prior to 
 their sale their intention to do so, and they are required to 
 prove that the sale was not made with fraudulent intent 
 when they do not comply with the above named require- 
 ment of the law. All other venders of goods or those who 
 sell in any other way than in bulk are not required to give 
 public notice of their intention to sell, and in no other case 
 is fraudulent conduct assumed before the person is proven 
 guilty. Commenting on this the Court says "Counsel 
 have not communicated to us any view upon which we 
 1 Ohio State Reports, V. 84, pp. 328-345.
 
 372 MERCANTILE CREDIT 
 
 could sustain the proposition that laws can be equal 
 which accord to one, without proof, rights upon which 
 they accord to others only upon proof." The decision 
 is then concluded with the following significant statement: 
 " It seems to us that this act very plainly from its nature, 
 takes its place among the enactments which constitute 
 the promoted legislation of the state not suggested by 
 comprehensive views of the rights and interests of all the 
 people, but furthered by those who desire to obtain ad- 
 vantages not accorded by the general law." 
 
 The Bulk Sales law of Tennessee which contains the 
 same provisions as the corresponding laws of a majority 
 
 of the states was declared constitutional by 
 Supreme J 
 
 Court the Supreme Court. The Act required an 
 
 decision inventory of goods to be sold, a correct report 
 
 "* from seller to purchaser of the cost price of the 
 
 Tennessee. 
 
 goods, the names and addresses of the cred- 
 itors of the former, while the purchaser was to notify the 
 seller's creditors of the intended purchase several days 
 in advance. In the case 1 which came up, the issue on 
 constitutionality was definitely drawn. 
 
 An attempt was made to set aside the Act as class 
 legislation because it applied to those dealing in mer- 
 chandise and not to such other persons as farmers, manu- 
 facturers, etc. In reply to this the court held that "the 
 statute is a mere regulation of the mercantile business, 
 designed to secure to creditors of merchants a just par- 
 ticipation in the distribution of the assets of such mer- 
 chants, and to prevent fraudulent preferences and 
 
 1 Jno. F. Neas vs. Borchus & Co.
 
 THE SALE OF GOODS IN BULK 373 
 
 practices by them, and is a valid exercise of the police 
 
 power of the state." The court held that the act was 
 
 valid for the following reasons: 1. "It was intended to 
 
 prevent the practice of fraudulently selling out goods to 
 
 the injury of creditors by merchants; 2. it was merely a 
 
 regulation of the business of merchandising; 3. it is not 
 
 class legislation, and that the limitation of the Act to 
 
 merchants is not an arbitrary classification, that it does 
 
 not take away the property of the citizen, but only 
 
 regulates the sale of merchandise in such manner as to 
 
 prevent frauds." 
 
 The Michigan law which contains the usual provisions l 
 
 of bulk sales laws was declared constitutional by the 
 
 Supreme Court Sept. 20, 1906. It was con- g 
 
 tended that the Act was class legislative for court 
 
 two reasons: "First, because it limits its decision 
 
 operation to merchants, and does not include !?,. , . 
 
 c i i • Michigan, 
 
 farmers, manufacturers, etc.; second, that it 
 
 does not relate to merchants who owe no debts." The 
 court held that "a sufficient reason for not including in 
 its provisions merchants who owe no debts is found in 
 the apparent purpose of the Act, which is to protect 
 creditors. If there be no creditors, there is no one 
 requiring protection." With reference to the other con- 
 tention, the court held that "it is easy to discover reasons 
 for apprehending and guarding against fraudulent dis- 
 position of stocks of merchandise by debtor owners which 
 would not relate to other species of property." After 
 quoting from another decision, the court asserted that 
 1 See case of Howard W. Spun, et al. vs. Dayton A. Travis, et al.
 
 374 MERCANTILE CREDIT 
 
 this is not class legislation. "It is well known that the 
 business of retailing goods, wares, and merchandise is 
 conducted largely upon credit and furnishes an oppor- 
 tunity for the commission of frauds upon creditors not 
 usual in other classes of business." 
 
 The Supreme Court of Washington sustained the 
 constitutionality of the Bulk Law 1 of that state even 
 
 though the law was more drastic in one 
 
 Supreme ° 
 
 Court particular than bulk laws of most other states, 
 
 decision in Aside from the usual provisions of such laws, 
 Washing- the Washington law definitely stipulates that 
 the making of a false statement knowingly or 
 wilfully "by the seller to the purchaser with reference 
 to his creditors, the amounts owed them, etc., is con- 
 sidered perjury, and upon conviction the seller may be 
 either imprisoned or fined." 
 
 The Act was objected to on constitutional grounds for 
 the following reasons: (1) It deprives persons of their 
 property without due process of law; (2) it is in restraint 
 of trade. It was contended that the constitution was 
 violated on the first ground because the Act restricted 
 the right of an owner to dispose of his property. The 
 court replied that "the Act does prohibit owners of 
 certain kinds of property from disposing of it in a par- 
 ticular way, without complying with certain conditions, 
 but it is not for that reason necessarily unconstitutional. 
 Statutes familiar to every person, such as those regulating 
 the mortgaging and sale of personal property, requiring 
 certain articles of food made in imitation of other well- 
 
 1 John H. McDaniels vs. J. J. Connelly Shoe Co.
 
 THE SALE OF GOODS IN BULK 375 
 
 known articles to be branded with their true names, 
 regulating the sales of poisons, and the like, are statutes 
 restricting the rights of an owner in relation to his prop- 
 erty, yet such statutes, in so far as they tend reasonably 
 to prevent injury to the public, and frauds among indi- 
 viduals, are uniformly held constitutional." 
 
 With reference to class legislation the court contends 
 that "it is well known that the business of retailing goods, 
 wares and merchandise is conducted largely upon credit, 
 and furnishes an opportunity for the commission of 
 frauds upon creditors not usual in other classes of busi- 
 ness. In fact, charges of fraud made against retail 
 dealers who have sold their stocks in bulk are among the 
 most common with which the courts are called upon to 
 deal. Legislation therefore which restricts the absolute 
 right of persons engaged in such business to transfer 
 their property, so long as it applies to all persons engaged 
 therein, is not class legislation within the meaning of the 
 constitution, merely because it does not apply to all 
 owners of property." 
 
 The court also concludes that the Act is not in restraint 
 of trade; that it does not prevent the sale of goods in 
 bulk; and although it will restrict the sale of goods in 
 this manner it is only one of the cases "where private 
 desire must yield to the public good." 
 
 The contention that bulk sales laws interfere with the 
 freedom of contract and are in restraint of trade is best 
 answered by Justice Vann of the Court of Appeals of 
 New York in giving the dissenting opinion of the court 
 which stated the bulk sales law of that state unconstitu-
 
 376 MERCANTILE CREDIT 
 
 tional. With reference to this the former law, the decision 
 says, "When a merchant owes more than he can pay he 
 has no substantial equity in his stock of 
 Appeals goods, and the claims of his creditors are supe- 
 decision rior to his own. He may be imprisoned on 
 in New c i v }j p rocess an d punished criminally for mak- 
 ing a fraudulent disposition of his property, 
 and any person who is a party or privy to the fraud may 
 be punished in the same way. Interference with his 
 liberty and property by such methods has never been 
 successfully questioned as a violation of fundamental 
 rights. Many restraints upon the freedom of contract, 
 some of which reach back to colonial history, have passed 
 without challenge, or, if challenged, have uniformly been 
 sustained as valid. The Statute of Frauds, the act to 
 prevent fraudulent conveyances, insolvent laws, the 
 Recording Act, the prohibition of usury, lien laws, regula- 
 tions in relation to chattel mortgages, conditional sales, 
 and preferences by corporations in general assignments, 
 show in how many ways and in what varied forms the 
 legislature may properly restrain freedom of action in 
 commercial transactions in order to promote the general 
 welfare." The decision goes on to say further that " Such 
 interference with liberty and such limitation upon the use 
 of property, although arbitrary and inconvenient, have 
 always been regarded as valid in order to prevent fraud 
 and to promote justice. While commerce is hampered 
 to a limited extent in some ways, it is protected and pro- 
 moted to a much greater extent in other ways." 
 
 With reference to the "freedom of contract" the
 
 THE SALE OF GOODS IN BULK 377 
 
 decision goes on to say: "Is freedom of contract inter- 
 fered with more by requiring notice of creditors before 
 certain sales are made than by forbidding certain other 
 sales altogether? The statute is intended to interfere 
 only with those who buy and sell in bad faith toward the 
 creditors of the vendor. It doubtless interferes with 
 some who act in good faith, but so do the other statutes 
 referred to. In order to prevent injustice and fraud, leg- 
 islation for time out of mind has placed some restraint 
 upon commercial transactions, and where the legislature 
 has jurisdiction to act the method of suppressing the evil 
 is wholly within its sound discretion."
 
 INDEX 
 
 Accomodation paper, 45 
 Adjustment Bureaus, 184-199 
 Amendments of 1870, 308, 309; 
 
 1874, 309, 310, 312; 
 
 1903, 332; 1910, 334 
 Assets, 116, 117 
 Assignees, 285, 300, 301 
 Attorney as source of credit 
 
 information, 122, 165- 
 
 167; 
 as Collectors, 208 
 
 Babylon, 8 
 
 Bank note, 21 
 
 Bank references, 167 
 
 Banker, 13 
 
 Banking credit, 38, 39, 40, 42, 
 
 43, 44, 45, 55, 77, 78, 
 
 103 
 Banking functions, 39, 40 
 Banking institutions, 12, 13 
 Bankrupt, 256, 263, 264, 266, 
 
 267, 302, 322, 323 
 Bankrupt Law of 1800, 257- 
 
 272 
 Bankrupt law, purposes of a, 
 
 275 
 Bankruptcy, 331 
 
 in New England, 351 
 Bankruptcy Act of 1841, 273- 
 
 292; 1867, 293-315; 
 
 1898, 316-344 
 
 advantages of, 343, 344 
 
 Bankruptcy legislation, 247- 
 
 256, 342 
 
 Bankruptcy proceedings, 252, 
 
 253, 254, 265 
 Barter, 10, 14 
 Bill of exchange, 7, 8, 31, 32, 
 
 33 
 Bill of lading, 33, 34 
 Blackstone on bankruptcy, 261, 
 
 262 
 Bonds, 25, 26, 50 
 Book account, 11, 21, 22, 23, 
 
 67, 68, 69 
 Book-keeping and credit, 99, 
 
 119 
 Bulk sales' laws, 357-377 
 
 Capital, 9, 17 
 
 Card index system, 174, 176 
 
 Checks, 26, 27, 28 
 
 Cheque bank, 28 
 
 Cicero, 7 
 
 Closing of estates, 186, 187, 
 
 192 
 Code of XII Tables, 7 
 Collateral loans, 46 
 Collection letter, 207 
 Collections, 15, 200-210 
 Collector, 200 
 Commercial loan, 14 
 Compositions, preventive, 254, 
 
 337 
 Confidence, 14, 15 
 Connecticut bulk sales' law, 
 
 364 
 Corporations, 60, 338, 339 
 Courts of bankruptcy, 321 
 
 379
 
 380 
 
 INDEX 
 
 Credit, 9, 10, 13, 15, 17, 18 
 kinds of, 37, 41, 58, 59 
 Credit department, 46, 132, 
 
 200 
 of banks, 130, 131 
 Credit economy, 4 
 Credit Exchange Bureau, 170- 
 
 183 
 Credit information, sources, 61, 
 
 63, 96 
 Credit inquiry forms, 111,164 
 Credit instrument, 19, 65 
 Credit limitations, 128-130 
 Credit man, 94-107, 160 
 Credit Men, National Associa- 
 tion of, 225-241 
 Local Association of, 228, 
 
 235, 241-243 
 Credit Men's Association, 172, 
 
 191 
 Credit office, 108-133 
 Credit reference, 125 
 Credit report system, 175, 176 
 Credit transactions, 13 
 Creditors, 7, 84, 248-250, 305, 
 
 326 
 Crisis of 1893, 217-218; 1837, 
 
 281 
 
 Dating ahead, 70-73, 222, 223 
 Debtor, 248, 249, 250, 252, 
 
 264, 305, 322, 326 
 discharge of, 254, 286, 302, 
 
 303, 304, 331, 350, 351 
 Debts, 325 
 Definitions, 19 
 Dominus, 6 
 Drafts, 11 
 
 bank, 30, 31, 32 
 
 Drafts to collect accounts, 205, 
 206, 207 
 
 Economic evolution, 4 
 Economic goods, 17 
 Emperor Leo, 7 
 Europe, 9 
 
 Fairs, 9 
 
 Family ledgers, 6 
 
 Fawcett, 4 
 
 Federal courts, 278, 279, 296- 
 
 298 
 Floating loans, 47 
 Foreign bills of exchange, 9, 11 
 
 Greece, Banking systems of, 8 
 
 Hildebrand, 4 
 
 Insolvent, definition, 346 
 Insolvency law, 352, 356 
 Insolvency legislation, State, 
 
 345-346 
 Installment sales, 90, 91 
 Insurance, 117, 118, 240 
 Interest rates, 63, 64, 79 
 Inventory, of goods to be sold, 
 
 361 
 Investment credit, 48, 53 
 Involuntary bankrupt, 338 
 Involuntary bankruptcy, 283, 
 
 284, 304, 318-320, 347 
 Involuntary insolvency law, 
 
 347-348 
 Involuntary law, to repeal, 
 313 
 
 Johnson, 10, 16 
 
 Laughlin, 4, 14 
 Legislation, 248, 258
 
 INDEX 
 
 381 
 
 Letters of credit, 29 
 
 Levasseur, 18 
 
 Louisiana Bulk sales' law, 361 
 
 Macleod, 4, 5 
 
 Manufacturing industry, 12 
 
 Markets, 9 
 
 Medieval times, 9 
 
 Medium of exchange, 10 
 
 Mercantile agency, 134-157 
 
 Mercantile credit, 38, 42, 51, 
 54-58, 75-77, 103, 213, 
 214 
 and depressions, 211-224 
 
 Mercantile industry, 94 
 
 Mercantile loans, 16 
 
 Merchants, 9 
 
 Michigan Supreme Court's de- 
 cision on Bulk sales' 
 law, 373, 374 
 
 Mill, 4 
 
 Minneapolis system, 173 
 
 Money, 10, 16 
 
 Money changers, 9 
 
 Money economy, 4 
 
 Mortgage loans, 16 
 
 Natural economy, 4 
 Negotiability, 8, 20 
 New Orleans system, 173 
 New York Court of Appeals 
 
 decision on Bulk sales' 
 
 laws, 376, 377 
 Note broker, 66 
 
 Ohio Law, 366, 370 
 
 Ohio Supreme Court decision 
 
 on Bulk sales' law, 
 
 368-372 
 
 Oregon Bulk sales' law, 362, 
 
 363 
 Over-trading, 215, 216 
 
 Pandects, 5 
 
 Paper money, 47 
 
 Personal credit, 38, 43, 75-93 
 
 Petitions, 340 
 
 Preferences, 284, 285, 325, 
 
 330 
 Preferred debts, 350 
 Primitive credit, 5 
 Productive process, 13 
 Promissory note, 11, 19 
 Property statement, 112, 127 
 Public credit, 12 
 
 Reformed code, 6 
 Registers, 296, 297, 298, 307 
 Rome, 8 
 
 South Carolina Bulk sales' law, 
 
 364 
 Stipulation, 7 
 Stock certificates, 24 
 Stock, preferred and common, 
 
 25 
 Supreme Courts decision on 
 
 Bulk sales' law, 364 
 
 Terms of credit, 62 
 Torry Bill, 327 
 Traders, 259, 260, 274 
 Traveling credit representative, 
 
 168, 169 
 Traveling salesman, 122, 158- 
 
 165 
 Trustee, 324, 336
 
 382 
 
 INDEX 
 
 Voluntary bankrupt, 338 
 Voluntary bankruptcy ,282, 283, 
 
 299, 318, 347, 348 
 Voluntary insolvency laws, 346 
 Voluntary insolvency in Utah, 
 
 349 
 Voluntary law, 329 
 
 Wage earner, 13 
 
 Warehouse receipt, 35-36 
 
 Washington's Supreme court 
 decision on Bulk 
 sales' law, 374, 375 
 
 Wealth, 17, 18 
 
 Webster, Daniel, 17
 
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