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 CREDIT AND ITS USES
 
 CREDIT 
 AND ITS USES 
 
 BY 
 
 WILLIAM A. PRENDERGAST 
 
 D. APPLETON AND COMPANY 
 
 NEW YORK AND LONDON 
 
 1922
 
 Copyright, 1906, by 
 D. APPLETON & COMPANY 
 
 Printed in the United States of America
 
 )o PREFACE 
 
 > 
 
 The people who take a deep interest in credit are di- 
 vided into two classes: first, those to whom it appeals as 
 an interesting and necessary study in the field of economic 
 -"' phenomena ; and second, those who are actively engaged 
 •in dispensing it, as a vital complement of commercial 
 fj usage and requirement. 
 
 ^ The purpose of this work is to demonstrate the all- 
 powerful influence of credit in the ministration of the 
 ■world's affairs; to explain the principles involved in the 
 *\ question, and to show how its practical application to mer- 
 'Cantile life depends so completely on a correct knowledge 
 ^^and observance of those principles. The writer appre- 
 ^ elates the delicate and important nature of the task he has 
 i attempted to perform, and offers this contribution to what 
 rf has already been said on the subject with a realization of 
 ^ its deficiencies, 
 rt During the last ten years credit men of banks and 
 business concerns have exhibited much interest in the 
 study of credit; but in the furtherance of the very com- 
 mendable effort made by many of them to encourage in- 
 vestigations in it there has always been a disposition to 
 dismiss the academic features of the subject in favor of 
 what are termed its practical elements. The author has 
 sought to give to both the academic and practical sides 
 their full measure of attention, and to accord to each its 
 due prominence. If he has succeeded in doing so he will 
 feel that his labors have not been without favorable result
 
 Vi PREFACE 
 
 In the preparation of Parts III and IV, and also 
 Chapter XIX of the book, which are concerned with the 
 administration of credits and the question of credit insur- 
 ance, the writer has asked the views of active and practical 
 credit men in every section of the country — this in justice 
 to those who will do him the honor of reading the book, 
 and especially to those who desire to familiarize them- 
 selves with the duties of credit work. Although the writer 
 has been a credit man, he considers that in offering a book 
 of this character to the public it would not be proper to 
 confine himself solely to his own experiences or opinions ; 
 but, in the interests of a broad discussion of credit dis- 
 tribution and management, he should add to them, wher- 
 ever necessary, a statement of the methods of others, in 
 order that no ideas worthy of recording might be over- 
 looked. In every instance, however, where conclusions are 
 drawn they are the author's own. 
 
 The writer takes this formal and public means of ex- 
 pressing to all those who have so considerately helped him 
 by their counsel his very heartfelt sense of obligation. 
 The number of those who belong in this category is too 
 large to permit the mention of the individual names, a 
 condition which the writer regrets. A specially cordial 
 word of thanks, however, is due to Mr. James G. Cannon, 
 Vice President of the Fourth National Bank of Xew 
 York, for the opportunity afforded the writer to use the 
 facilities of the credit department of that institution in 
 preparing the material for the chapter on " The Credit 
 Department in Banking Credit," and also the forms in- 
 corporated in that chapter. 
 
 W. A. P.
 
 M 
 
 / 
 
 CONTENTS 
 
 PART I. CREDIT: ITS FUNCTION AND ORGANIZATION 
 
 CHAPTER PAGB 
 
 I. The Theory of Credit 3 
 
 II. The Credit System 16 
 
 PART II. PRIMARY DIVISIONS OF CREDIT 
 
 m. Banking Credit 35 
 
 IV. Capital Credit 49 
 
 V. Public Credit: National, State, and Municipal 
 
 Credit 68 
 
 VI. Individual or Personal Credit .... 82 
 
 VII. Commercial Credit 99 
 
 PART III. THE CREDIT DEPARTMENT AND SOURCES 
 OF CREDIT INFORMATION 
 
 VIII. The Credit Department in Banking Credit . 121 
 
 IX. Sources of Credit Information (A): Salesmen's, 
 
 Attorneys', and Bank Reports .... 150 
 
 X. Sources of Credit Information (B): Written 
 References and Inquiry Forms. — Written and 
 Signed Statements. — Oral Investigations. — 
 Traveling Credit Representatives and Special 
 
 Reports 177 
 
 rii
 
 Viii CONTENTS 
 
 CKAPTES VAOB 
 
 XI. Sources of Credit Information (C): The Mer- 
 cantile Agency 190 
 
 XII. Sources of Credit Information (D): Credit 
 
 Cooperative Methods 203 
 
 PART IV. CREDIT-OFFICE ADMINISTRATION 
 
 Xlli. The Analysis of Credits: (A) The Elements 
 
 of Credit. — (B) Quick and Fixed Assets . 219 
 
 XIV, Methods for Safeguarding Credits: (A) Gen- 
 eral Expenses with Special Reference to 
 Rent. — (B) "Credit Lines and Limitations." 
 — (C) Fire Insurance and Its Relation to 
 Credit. — (D) Comparative Statement Forms 233 
 
 XV. The Credit Man : Duties, Methods, and Charac- 
 teristics 251 
 
 XVI. Collections (A): Collections, Their Nature. — 
 Systematic Methods. — Unfavorable Develop- 
 ments, Their Effects upon Further Credit. — 
 Treatment of Tardy Accounts. — Collections 
 Through Drafts, Draft Systems . . . 263 
 
 XVII. Collections (B): Collection Letters. — At- 
 torneys-at-Law as Collectors. — Adjustment 
 Bureaus or Administration by Creditors. — 
 Suspended Accounts 281 
 
 PART V. GENERAL QUESTIONS 
 XVIII. Legal Redress: The Bankruptcy Act . , 297 
 
 XIX. The Effort to Systematize Protection from 
 
 Credit Losses: Credit Insurance . , , 323 
 
 XX. Organization and Educational Movements in 
 Credit: (A) Organization for the Improve- 
 ment OF Conditions ArFEcrma Credit. — (B) 
 The Study of Credit 334 
 
 Index 343
 
 LIST OF FORMS 
 
 9)RU PAGB 
 
 1, — Form used when an account is being opened .... 126 
 
 2. — Property Statement Form to be used by a firm in making 
 
 a statement of its affairs to a bank . . . facing 128 
 
 3. — Property Statement Form — a style different from Form 2 
 
 facing 130 
 
 4. — Property Statement Fonn for use of corporations . facing 132 
 5. — Property Statement Form for use of corporations — a style 
 
 different from Form 4 facing 134 
 
 6. — General form of inquiry letter 135 
 
 7. — General form of inquiry letter addressed to banks . . . 136 
 
 8. — Form of Collateral Note facing 136 
 
 9. — Form of letter used by banks when making revisions of 
 
 credit information 138 
 
 10. — Comparative Statement Form or comparison of statements 
 
 facing 138 
 
 11. — Property Statement Form used by a bank in making a 
 
 statement of its affairs facing 140 
 
 12. — A briefer form used by a bank in making a statement of its 
 
 affairs facing 142 
 
 13. — Form used by a Banking Credit Department for listing bills 
 
 receivable offered as collateral 143 
 
 14. — Form of letter used when revising credit information in re- 
 gard to banks 144 
 
 15. — ^Form used in a bank to show the general state of a borrow- 
 er's account when a loan is under consideration . . . 145 
 
 16. — Index card showing the name of a customer or correspondent 
 
 of a bank, and also Mercantile Agency ratings . . . 147 
 
 17. — Form for the use of salesmen in furnishing credit information 155 
 
 17A. — Reverse side of Form 17 156 
 
 ix
 
 X LIST OF FORMS 
 
 FORU PAOI 
 
 18. — Brief form for use of salesmen in furnishing credit information 159 
 
 19. — Attorneys' Report Blank 167 
 
 19A. — Reverse side of Form 19 168 
 
 20.— Trade Inquiry Form 179 
 
 21. — A Property Statement Form adopted and reconunended by 
 
 the National Association of Credit Men . . . facing 182 
 
 22. — Property Statement Form of style different from Form 21 . 
 
 facing 184 
 
 23. — Type of Inquiry Ticket in Credit CoSperative Bureau work . 209 
 
 24. — Daily Experience Form used by Credit Co6perative Bureau . 
 
 facing 210 
 25. — System of Remarks used by Merchants' Credit Association . 
 
 facing 212
 
 BIBLIOGRAPHY 
 
 American Commonwealth, The. James Bryce. 
 
 American Government, The. B. A. Hinsdale. 
 
 Ancient Law. Henry Sumner Maine. 
 
 Collier on Bankruptcy (Fifth Edition). William H. Hotchkiss. 
 
 Constitutional Limitations. Thomas M. Cooley, 
 
 Credit. J. Laurence Laughlin. 
 
 Credit, Its Meaning and Moment. Clark W. Bryan. 
 
 Credit Man and His Work, The. E. St. Elmo Lewis. 
 
 Credit System in France, Great Britain, and the United States, The. 
 
 Henry C. Carey. 
 Credits, Collections and Their Management. William H. Preston. 
 Democracy in America. Alexis de Tocqueville. 
 Economics for Beginners. Mrs. Millicent Garrett Fawcett. 
 Federalist, The. 
 
 Funds and Their Uses. Frederick A. Cleveland. 
 Giving and Getting Credit. Frederick B. Goddard. 
 History of Europe during the Middle Ages. Henry Hallam. 
 Industries and Wealth of Natioris. Michael G. Mulhall. 
 Inquiry Into the Nature and Effects of the Paper Credit of Great 
 
 Britain, An. Henry Thornton. 
 Introduction to the ConstitiUional Law of the United States, An. 
 
 John Norton Pomeroy. 
 Introduction to the Study of Economics. Richard T. Ely. 
 Lectures on Commerce. Edited by Henry Rand Hatfield. 
 Loan Credit in Modern Business. Thorstein B. Veblin. 
 Lombard Street. Walter Bagehot. 
 Modem Bank, The. A. K. Fiske. 
 Money and Banking. Horace White. 
 Money and Credit. Wilbur Aldrich. 
 
 xi
 
 Xii BIBLIOGRAPHY 
 
 Outlines of Economics. C. J. Bullock. 
 
 Physics and Politics. Walter Bagehot. 
 
 Practical Treatise on Business, A. Edwin T. Freedley. 
 
 presidential Problems. Grover Cleveland. 
 
 Principles of Political Economy. John Stuart Mill. 
 
 Sketch of an Act to Establish a Uniform System of Bankruptcy 
 
 Throughout the United States. John Lowell. 
 Spirit of Laws. Charles de Secondat Montesquieu. 
 Theory of Credit, The. Henry Dunning Macleod. 
 Trust Problem, The. Jeremiah W. Jenks. 
 Ways and Means of Payment. Stephen Colwell. 
 Wealth of Nations. Adam Smith. 
 Whom to Trust. P. R. Earling. 
 Work of Wall Street, The. S. S. Pratt. 
 
 In addition to the foregoing there has been consulted a large 
 number of pamphlets and articles on credit and business questions, 
 as well as official publications and statistical matter issued by 
 commercial organizations.
 
 PART ONE 
 
 CREDIT, ITS FUNCTION AND 
 ORGANIZATION
 
 CHAPTER I 
 
 THE THEORY OF CEEDIT 
 
 The number of those who are affected either directly 
 or indirectly by the dispensation of credit represents a 
 very large proportion of the inhabitants of the civilized 
 world. In view of the constantly expanding area and 
 influence of commerce and commercial customs which sub- 
 sist mainly upon the operations of the great organism of 
 credit, it could almost be claimed that in these days, at 
 least, all sections of the world, civilized and uncivilized, 
 are susceptible to the subtle and lasting control which 
 credit diffuses. 
 
 It is the general acceptation that money and credit 
 constitute one of the elements or branches of political 
 economy ; for this reason no utterance on credit would 
 be adequate that did not include at least a reference to 
 this great theme. Political economy, or the science of 
 economics, is variously defined ; but the differences refer 
 more to form of expression than divergence of actual con- 
 ception or interpretation. The meaning of the term has, 
 however, undergone considerable change in the course of 
 the ages, as is shown by the fact that in its earliest use 
 it was known among the Greeks as " the art of prudent 
 and systematic household management." The changes 
 wrought by the new institutions that rose upon the wrecks 
 
 3
 
 4 CREDIT AND ITS USES 
 
 of the Grecian and Roman systems of local and state rule 
 broadened the scope of political economy until it was re- 
 garded as embracing the more important and extensive 
 management of state and national affairs, or " the art of 
 directing the incomes, the industry, the consumption, and 
 expenditures of the State and its subjects with frugality 
 and care." 
 
 Political economy was formerly considered a depart- 
 ment or function of statesmanship ; and the definition just 
 quoted will readily suggest why this was so, as the task 
 of directing the incomes, the industry, the consumption, 
 and expenditures of the state and its subjects should be 
 the great and precious care of those who direct the des- 
 tinies of nations. As one authority says, in the nineteenth 
 century, political economy was divorced from statesman- 
 ship and came to be looked upon as a " neutral science." 
 It is also true that since this separation the science of 
 political economy has made tremendous strides, not only 
 in the wealth of new material brought forth by its follow- 
 ers, but in the influence their teachings have exercised upon 
 the multitude. In referring to this change as having 
 taken place in the last century, we are not unmindful that 
 the first great clarion note which announced the coming 
 of this change was in the form of Adam Smith's master- 
 piece, " The Wealth of [N^ations," which appeared in the 
 last quarter of the eighteenth century. We are indebted 
 to Messrs. J. B. Say and John Stuart Mill (types of a 
 distinguished school of writers) for their services in de- 
 fining the tenets of latter-day political economy. Their 
 terse descriptions of the study as the " Production, Con- 
 sumption, and Distribution of Wealth " and the " Pro- 
 duction, Distribution, and Exchange of Wealth," respec-
 
 THE THEORY OF CREDIT 5 
 
 lively, have become familiar terms in the discussion of 
 social, economic, and political questions. There can be 
 no question that the lucidity with which they have put 
 forth their views has contributed greatly to a better com- 
 prehension of the theories involved in the rights, oppor- 
 tunities, and wants of mankind ; and this notice, however 
 brief and imperfect, is a necessary adjunct of any writing 
 on credit. The relation of credit to these quantities must 
 not be overlooked or disregarded, especially by those who 
 are its guardians and dispensers. Before leaving this 
 branch of the subject, it should be said that the light that 
 has been thrown upon the economic issues of the past 
 hundred years from the study of the phenomena which 
 constitutes political economy, has certainly served to make 
 a better, a happier, a more contented people. It has en- 
 abled them to better imderstand their wants and provide 
 for them, to better appreciate their rights and defend 
 them, to discern their opportunities and take advantage 
 of them; so that we can add what has been so well said 
 by others on this point, that political economy is the 
 " ordered knowledge of the social phenomena arising out 
 of man's activity in the acquisition and use of wealth." 
 
 In considering credit as a science, we are met by many 
 conflicting and contradictory ideas and statements. A 
 number of writers have regarded credit merely as one of 
 the elements entering into the larger sphere of economics, 
 and not as a separate and distinct entity. It has, in fact, 
 been a favorite remark of many lay writers, especially 
 business men engaged in credit work, " that credit can 
 hardly be called an exact science " ; but rarely has there 
 been any substantial effort made to prove this statement 
 either by reference to the authorities or by personal argu-
 
 6 CREDIT AND ITS USES 
 
 ment. Science is " any department of knowledge in which 
 the results of investigation have been worked out and 
 systematized, an exact and systematic statement of knowl- 
 edge concerning some subject or group of subjects." Are 
 we prepared to say that the principles of credit have been 
 worked out and systematized to such an extent and with 
 such precision that we are warranted in claiming that 
 credit has been reduced to a science? Mr. Macleod has 
 taken a more advanced position on this question than any 
 other writer, and as is usual with him makes his assertions 
 with extreme positiveness. He claims that he has worked 
 out the bearings and principles of credit from the earliest 
 uses to the present time, and brought the subject to scien- 
 tific demonstration. He admits that this demonstration 
 is the outcome of the world's experience during 2,238 
 years. In other words, from the time of the Romans to 
 his own day the process has involved the study and exposi- 
 tion of its methods and practices, the judicial interpreta- 
 tions of the question in all its forms, and the reduction 
 of the different quantities known as credits or debts to 
 algebraic demonstration. 
 
 The origin of credit dates back many years, and at- 
 tempts have been made to mark it with the honor of 
 extreme antiquity. Mr. Aldrich, in his " Money and 
 Credit," treats entertainingly of the customs supposed to 
 be prevalent in Babylon and Phoenicia, from which it is 
 shown that " credit instruments " were to all intents and 
 purposes in use in those ancient lands. There can be no 
 question, however, that credit was used by the Romans, 
 and Mr. Macleod has given a very clear picture of their 
 ideas and practices, which he confidently claims form the 
 basis of the origin of credit. Another strong argument
 
 THE THEORY OP CREDIl 7 
 
 In support of this position is the fact that the fundamental ^ 
 bases of the laws affecting credit of even this day can be 
 traced, as he says, to the legislation of Justinian. These , 
 laws show indubitably that the Romans practiced credit 7 
 in its most modern utilities, and instituted the custom of 
 using credits as the basis of providing themselves with 
 capital when needed. It is a remarkable thing that the 
 system of credit originated by the Romans, and which "^ 
 differs in no essentials — if at all — from the purposes 
 and functions of credit which we employ to-day, should 
 have practically disappeared imtil a few centuries ago, 
 barring the banking credit of some of the Italian cities / 
 and that of the Bank of Amsterdam in the Middle Ages. 
 This may also be looked upon as another reason why the 
 theory or principles of credit have not been more thor- 
 oughly understood and appreciated, but it is certain that 
 the theory of the question must have for its foundation 
 some known position, customs, and laws, for it is claimed 
 that " concrete practice always precedes abstract theory." 
 The elementary principles of credit may be compre- 
 hended thus: that credit is the natural sequence of man's 
 desires to avail himself of the use of certain species of 
 property; and for the repayment of this property in its 
 original or equivalent form, he utilizes certain elements 
 of both tangible and intangible character to induce the 
 owner to part with his property to him. The tangible 
 element is represented by the property of him who is 
 seeking credit and which he pledges either by actual trans- 
 fer or lien, or by the good faith that is reposed in him, 
 that he will preserve that property either in its original 
 or equivalent form so that it will serve as a practical basis 
 of his ability to redeem the obligation incurred. Where
 
 8 CREDIT AND ITS USES 
 
 the question of good faith enters, there the intangible 
 takes a place as one of the elementary principles of credit ; 
 also this question of good faith may be the only basis upon 
 which credit is sought or extended, and at times is, to a 
 great extent, the only basis recognized in mercantile credit. 
 Good faith covers character and its elements, respectabil- 
 ity, honesty, uprightness, the manner in which a man's 
 abilities will be exercised, whether industriously or slug- 
 gishly, and we shall later see credit is, to a very large ex- 
 tent, dependent upon these intangible elements. When we 
 consider, as Professor Ely has said, that " the character- 
 istic instrument of exchange in our day is not money but 
 credit, and its development measures the perfection of 
 modern exchange," we can understand the pervading in- 
 fluence of this branch of economics. 
 
 The author does not desire to expound or exploit any 
 favorite ideas or theories simply for the sake of pride of 
 originality, but, on the contrary, to express only those 
 views which have a justification in practice and in the 
 principles and statements of the authorities, as will be 
 shown by the following accepted definitions on the ques- 
 tion of credit. 
 
 1. A general view. 
 
 v^ " Credit is the confidence that is reposed in the ability and pur- 
 
 pose of men to meet future obligations." 
 
 2. Mr. Henry Thornton : " An Inquiry into the iN'a- 
 ture and Effects of the Paper Credit of Great Britain." 
 
 " Commercial credit may be defined to be that confidence which 
 subsists among commercial men in respect to their mercantile 
 affairs. This confidence operates in many ways: it disposes them 
 to lend money to each other, to bring themselves imder various
 
 THE THEORY OF CREDIT 9 
 
 pecuniary engagements by the acceptance and indorsement of 
 bills, and also to sell and deliver goods in consideration of an equiva- 
 lent promised to be given at a subsequent period." 
 
 3. Mr. Henry C. Carey: "The Credit System in 
 France, Great Britain, and the United States." 
 
 "Credit cannot exist without confidence in the security of prop- </ 
 erty and in the disposition of the purchaser of a commodity to pay 
 for it at the time appointed. No man parts with his property 
 except when he believes that an equivalent will be returned." 
 
 4. Mr. Walter Bagehot : " Lombard Street." 
 
 (a) "Credit — the disposition of one man to trust another — is / 
 singularly varying." 
 
 (b) "Credit is an opinion generated by circumstances and vary- 
 ing with those circumstances. The state of credit at any par- 
 ticular time is a matter of fact only to be ascertained like other 
 matters of fact; it can only be known by trial and inquiry." 
 
 5. Mr. Henry Dunning Macleod, M. A. : " The Theory 
 of Credit." 
 
 "Credit is the present right to a future payment or credit is; 
 therefore, the right or property of demanding something from 
 some one else. It is the right to a future payment; it is the name 
 of a certain species of right or property. Gold and silver money 
 may be called metallic credit." 
 
 6. Mrs. Millicent Garrett Fawcett : " Political Econ- 
 omy for Beginners." 
 
 "Credit is a power to borrow. If the credit of an individual 
 is good, it is because there is general confidence in his ability to 
 pay, and therefore he can borrow at a low rate of interest. If the 
 credit of an indi\'idual is bad, he is not able to borrow except at a 
 high rate of interest, because his ability to pay is doubted. The 
 credit of different people in the same age and country can be ac- 
 curately measured by the rate of interest which they pay for borrow 
 ing."
 
 10 CREDIT AND ITS USES 
 
 7. Prof. J. Lawrence Laugblin : " Credit." 
 
 "Credit is machinery invented to aid in accomplishing the 
 purposes of capital ; if an essential function of capital is to discount 
 the future, the essential characteristic of credit is the element in it 
 of futurity. The connection is not far to seek." 
 
 "To get credit, therefore, is to obtain a transfer to oneself 
 of commodities under an obHgation (variously expressed, accord- 
 ing to different habits and circumstances) to return an equivalent 
 amount at a fixed date in the future." 
 
 8. Prof. Richard T. Ely : " Outlines of Economics." 
 
 (a) "A word of many meanings." 
 J (6) "Credit is a transfer of goods for a promised equivalent." 
 
 9. Mr. Wilbur Aldrich : " Money and Credit." 
 
 "Credit may ... be defined to be an economic quantity 
 arising out of a business as a going concern, and proportional in 
 amount to the reputation of the business, its property, and the 
 rapidity and regularity of its cash turnover. The use of credit 
 does not tie up or hamper the free use of the material capital 
 belonging to the concern using its credit. Only business men 
 have credit in a commercial sense, and it is not the moral char- 
 acter of a person which gives him credit, but his business reputa- 
 tion. A corporation may have this business reputation. To have 
 credit a business man or concern must be known to be regular in 
 paying debts, and the business must be a paying one, giA'ing 
 reasonable expectation of continued ability to meet obligations 
 promptly." 
 
 10. Prof. Erederick A. Cleveland : " Eunds and Their 
 
 Uses." 
 
 "These two judgments lie at the basis of all credit; on these 
 two elements does the value of credit rest. (1) A judgment that 
 the one promising is able to fulfill his promise. (2) A judgment 
 that he will be xoillmg. Willingness is another name for 'honesty' 
 or 'integrity.' Confidence is nothing more or less than the result
 
 THE THEORY OF CREDIT 11 
 
 «f judgment that a person is both able and willing to do what he 
 promises." 
 
 11. Mr. Frederick B. Goddard: "Giving and Getting 
 
 Credit." 
 
 "Commercial credit is the name of that trust which is reposed 
 in men because of their character and resources. In other words, 
 it is an estimate of ability and disposition to fulfill business engage- 
 ments, which confers purchasing power; power to command the 
 industrj- or capital of others." 
 
 12. Prof. C J. Bullock: "Introduction to the Study 
 of Economics." 
 
 "Credit may be defined as the power to secure commodities or 
 ser\'ices at the present time in return for some equivalent promised 
 at a future time." 
 
 The foregoing estimates of credit have not been se- 
 lected with a view to proving any one or chosen concept 
 of the subject; they may be reasonably and reliably ac- 
 cepted as a fair and average expression of competent 
 authorities on the meaning and range of the question. 
 From them we can assuredly draw accurate conclusions 
 as to the influences affecting credit, as well as a definite 
 judgment of its theory or principles. An analysis of the 
 definitions submitted reveals this result: that the prin- 
 ciples involved in credit are : 
 
 A. That it rests largely on confidence, trust, faith, and good 
 opinion, 
 
 B. That it is not moral character (per se), but business reputa- 
 tion that establishes and maintains good credit. 
 
 C. That it is a power inherently resting upon the qualities 
 enumerated (in A) to borrow money or any other class of property. 
 
 D. That one of the principal elements entering into credit is 
 that of futurity, or a deferred fulfillment of an obligation.
 
 12 CREDIT AND ITS USES 
 
 Professor Laughlin in his treatise on " Credit " dis- 
 counts the theory or general opinion, we might say, that 
 credit is largely dependent on confidence; and holds that 
 confidence only enters into the case as it relates to the ele- 
 ment of futurity. It is not my desire to hreak a lance 
 with the gifted Laughlin, but I do take issue with the 
 attempts to make it appear that the element of confidence 
 is a subordinate one ; and that, especially in mercantile 
 credit, the theory of " goods to goods " has a controlling 
 place. A system where credit is based upon collateral 
 properties may be superficially more advantageous than 
 one where the element of risk is predominant, but it is 
 with the present world we are dealing; it is with man 
 as we know him and as he is that we are doing business, 
 and that business must be regulated as we find him. The 
 part that confidence plays in credit has always been a sub- 
 ject of controversy, due to the fact that most writers on 
 the subject of economics being unfamiliar with mercantile 
 life and custoins, fail to distinguish between the systems 
 of banking credit and mercantile credit ; and give most of 
 their attention to the functions of instruments of credit. 
 
 No matter how earnest may be the effort or persuasive 
 the argument, it is simply impossible to dismiss " con- 
 fidence " as the leading requisite of credit. It is notice- 
 able that even where staid economists treat the question 
 solely as one of " value based on collateral value," we find 
 many authorities who can be quoted to the contrary; for 
 example, Mill says : 
 
 "As the confidence on which credit is grounded extends itself, 
 means are developed by which even the smallest portion of capital, 
 the sums which each person keeps by him to meet contingencies 
 are made available for productive uses."
 
 THE THEORY OF CREDIT 13 
 
 Mr. Walter Bagehot says: 
 
 "Credit means that a certain confidence is given, and a certaia 
 trust reposed. Is that trust justified? and is that confidence wise? 
 These are the cardinal questions. To put it more simply — credit 
 is a set of promises to pay; will those promises be kept? Espe- 
 cially in banking, where the 'liabilities,' or promises to pay, are 
 so large, and the time at which to pay them, if exacted, is so 
 short, an instant capacity to meet engagements is the cardinal 
 excellence." 
 
 It will be observed that Mr. Mill speaks of the con- 
 fidence on which credit is grounded. Could anything be 
 clearer than this in setting forth confidence as " the 
 primary element in credit " ? But further, and quite as 
 conclusive, Mr. Bagehot says in referring to confidence 
 and trust as elements of credit, " These are the cardinal 
 questions." But probably the most striking statement as 
 to the place that confidence fills and should fill in credit 
 comes from Mr. Mill, whom we have just quoted. In 
 speaking on the benefits of credit, he says : 
 
 "This benefit will be reaped far more largely, whenever, 
 through better laws and better education, the community shall 
 have made such progress in integrity that personal diarader can 
 be accepted as a sufficient guarantee not only against dishon- 
 estly appropriating, but against dishonestly risking what belongs 
 to another." 
 
 Mr. Macleod in considering credit never relinquishes 
 his theory as to the legal environment of credit and his 
 definition is, therefore, of more than ordinary interest, 
 differing as it does so radically in phraseology and con- 
 tent from almost all other definitions, whether of the Eng- 
 lish, French, or German schools. He says, " Credit is a 
 present right to a future payment," and there could be no
 
 14 CREDIT AND ITS USES 
 
 better expression. A merchant sells a bill of goods; he 
 parts with possession of the property, and it, as well as 
 the title to it, passes to the person to whom the sale has 
 been made. What does the merchant hold as against the 
 sale ? Simply the " right " to collect the equivalent of the 
 sale at the appointed time of payment or settlement. He 
 cannot retake the goods forcibly except under certain con- 
 ditions which are not germane to this phase of the discus- 
 sion ; he cannot compel the customer to give him back the 
 goods; all he holds is the right to expect and exact pay- 
 ment when the latter is due. He can dispose of that right 
 (as Mr. Macleod says) and raise funds upon it. If that 
 right exists only in the form of a book account, he can dis- 
 pose of it just the same as if it were an instrument of 
 credit (a check, note, draft, etc.) by selling to another 
 or transferring to another the " right " to exact payment 
 in his place. The case differs in no way if the merchant 
 at the time the sale is made accepts a note for the amount 
 of the invoice — the note is nothing more than the " right " 
 (expressed in words) to a certain sum of money at a cer- 
 tain time ; and this note or " right " can be sold, or dis- 
 counted, or used as borrowing material. Mr. Macleod's 
 own words on this question are worthy of full notice, as 
 follows : 
 
 "Every case of a 'Loan' of Money or a Sale of goods 'on Credit' 
 is an exchange ; or an act of commerce. In exchange for the Money 
 or the Goods a Right of action is created; and is the price of the 
 goods. This Right of action is a Saleable Commodity; which may 
 be bought and sold like any material chattel: and it has value 
 because it will be paid in money. This Right of action may cir- 
 culate in commerce exactly like a piece of money, and effect ex- 
 changes exactly like a piece of money, until it is paid off and 
 extinguished: and then it ceases to exist."
 
 THE THEORY OF CREDIT 15 
 
 The endeavor has been to provide an exposition of the 
 " theory of credit " which would accord in all essential 
 respects to the best thought obtainable, and especially such 
 a description of the nature of the study as would be easily 
 applicable to the ordinary usages of trade and industry, 
 r.nd therefore well within the ready gi'asp of business men, 
 to whom a thorough knowledge and dialectic appreciation 
 of the principles of credit is highly essential.
 
 CHAPTER II 
 
 THE CEEDIT SYSTEM 
 
 Me. Stephen Colwell, in his work on " Ways and 
 Means of Payment," calls attention to the difference be- 
 tween " credit " and the " credit system." The principle 
 of credit, viewed as an abstract proposition, must not be 
 confounded with the great system by means of which 
 transactions in credit are conducted, and the tremendous 
 volume of debts and credits brought into being, passed 
 from hand to hand in the routine of business, and finally 
 liquidated. 
 
 Mr. Macleod has given us an almost classical interpre- 
 tation of the credit system, which, he says " comprehends: 
 1, the creation of obligations ; 2, the transfer of credits or 
 debts; 3, the extinction of obligations." 
 
 In these three processes we see the origin, the exist- 
 ence, and the wiping out of a business transaction based 
 on credit. Much may happen during the life of a credit 
 to alter its value ; the general character of a credit or debt 
 depends very largely on the nature of the conditions or 
 forces that bring it into life; what is commenced well 
 usually prospers, and a good account will be rendered 
 when the end has arrived. It will be apparent that the 
 character of credit transactions is predicated on the tone 
 or morale of the system itself, for all credit systems are 
 16
 
 THE CREDIT SYSTEM 17 
 
 not good, and all have their weaknesses as well as their 
 virtues. " The main point on which one system of credit 
 differs from another is soundness." 
 
 As the requirements of commerce, due to the discoveiy 
 of new lands and increase of population (and the general 
 tendencies of modern civilization) have become more and 
 more exacting, the system of credit has been subjected to 
 a tremendous development; but from a scientific view- 
 point this is merely the natural evolution of economic 
 forces, evident always to the keen observer of the condi- 
 tions underlying the nature and expansion of commerce. 
 
 Those who have investigated the theory and system 
 of credit, whether from the viewpoint of scientific proposi- 
 tions or commercial customs of ancient or modern applica- 
 tion, are unanimous in declaring that their fimdamental 
 precepts rest upon immutable decrees of use and treatment, 
 which man must observe with unceasing faithfulness if he 
 would obey the dictates of wisdom and prudence. To dis- 
 regard these laws will inevitably produce distrust and 
 disaster. 
 
 A duty of more than ordinary importance rests upon 
 those who regulate and control the system of credit. The 
 terms " regulation " and " control " are somewhat figura- 
 tive, for the system of credit does not physically submit 
 itself into the hands of any few men or interests. It is 
 probably one of the weaknesses of the system that its good 
 management must depend upon the collective judgments 
 and will of a very great number of men and interests, 
 each acting for himself, almost always on his own indi- 
 vidual ideas of right and wrong, of accuracy and inac- 
 curacy, responsible only to himself. No wonder that there 
 should be a demand for a cooperative rather than an indi-
 
 18 CREDIT AND ITS USES 
 
 vidual interest. Much has been done toward the question 
 of wise regulation by the watchfulness, as well as by the 
 ministering influences of the clearing houses, especially in 
 times of stress and danger ; but the " regulation " and 
 " control " should be constant, active, energetic, and pow- 
 erful ; and the credit system will never have reached that 
 state" of soundness which the general judgment of men, 
 even to-da}'^, claims should be attained, until those who 
 have this great trust in their hands take the necessary steps 
 to bring about the results that wisdom and conservatism 
 demand. 
 
 A system of credit is in itself a proof that the ideas 
 and customs of the people have reached a state of de- 
 velopment associated with advanced civilization. Among 
 backward races and peoples credit is not used; more 
 primitive and simpler methods satisfy the desires of such 
 peoples; Mr. Henry C. Carey says (" The Credit System 
 in France, Great Britain, and the United States ") : " The 
 existence of a system of general credit is evidence that the 
 people comprising the community in which it exists be- 
 lieve that their neighbors are honest and will pay the debts 
 they may contract." This is another reminder of the 
 prominence and prevalence of confidence in the structure 
 of credit, and in every branch of the subject we find con- 
 fidence ever present as a determining factor in the opera- 
 tions of credit. 
 
 The credit system must naturally have had its incep- 
 tion in the earliest form in which credit was practiced, 
 this form assuming the character of " personal credit." 
 Therefore, " personal credit resting solely on the good 
 faith of the creditor was the earliest form in which credit 
 appeared." The needs and exactions of commerce devel-
 
 THE CREDIT SYSTEM 19 
 
 oped this form of credit until it was in general practice, 
 and thus we have the present system of credit. The span- 
 ning of the many years during which this system became 
 the force it is to-day was accompanied by many changes 
 in men's methods, manners, and customs, and the present 
 system is the fruition of a long travail of economic evolu- 
 tion. Mr. Bagehot says: 
 
 " Credit is a power which may grow, but cannot be constructed. 
 Those who live under a great and firm system of credit must con- 
 sider that if they break up that one they will never see another, 
 for it will take years upon years to make a successor to it." 
 
 It is therefore necessary to bring the study forward 
 from the sphere of personal credit or " credit in its sim- 
 plest form," " that of money lent by one person to another 
 and paid directly into his hands," to that stage where it 
 occupies the most prominent place in the movements of 
 commerce. Credit holds this place of prominence not 
 alone by virtue of its organic merit as an economic force, 
 but also from the fact that its utilities have been exer- 
 cised and adjusted by such means as enable it to satisfy 
 fully the demands of commerce, viz., by the use of instru> 
 ments of credit. 
 
 We now come to an extremely interesting and ramify- 
 ing function of credit as well as one of its most illuminat- 
 ing principles, and that is the uses of " credit as a substi- 
 tute for money." These uses take different forms, namely : 
 bills of exchange, accommodation bills, promissory notes, 
 bank notes, and checks. They are all evidences of actual 
 indebtedness, except in their primary state, when given 
 for accommodation, and as such, when accepted in satis- 
 faction of an account or debt of any kind, they are
 
 20 CREDIT AND ITS USES 
 
 credits pure and simple. But they do not represent credit 
 given only to the person who originally tendered the note, 
 we will say, in payment of an account to his creditor; 
 but the creditor, in nearly all cases, secures credit for 
 himself upon this same paper by either tendering it in 
 turn in payment of an indebtedness of his own, or by 
 discounting it with a bank or money lender, which inter- 
 ests may renegotiate it for purposes of their ovm. A note 
 for $1,000 may be used six times over, and in several 
 of these instances employed in the purchase of goods, 
 thus proving the absolute soundness of the argument that 
 credit is a creator of purchasing power. 
 
 This brings to the forefront another feature of the 
 functions and effects of credit. Bills of exchange, notes, 
 checks, etc., given from hand to hand, distributed from 
 one district to another, become a part of the circulating 
 medium of the country, and to the extent that these in- 
 struments of credit represent real and tangible property, 
 they contribute life and stability to this branch of our 
 circulating medium, and in the ratio that they represent 
 fictitious undertakings and purely speculative enterprise, 
 they make for unsoundness fraught with dangerous com- 
 plications to that medium. 
 
 Mr. Mill holds that credit being only permission to 
 use the capital of another, the means of production can- 
 not be increased by it, but only transferred. This state- 
 ment has considerable bearing upon the workings of the 
 credit system, as the functions of that system have been 
 held by many to augment the purchasing power of a 
 nation, or to add to the means of production. Means of 
 production refer to those methods through which the pro- 
 ductive capacity of the country can be utilized. If from
 
 THE CREDIT SYSTEM 21 
 
 any cause capital is hoarded, or general irapoverisbment 
 should exist among a people, they assuredly have not the 
 means and cannot secure the means with which to pur- 
 chase machinery, tools, and other necessary equipment to 
 either start or maintain manufactures, or mining, or the 
 other numberless forms of industry in which an intelli- 
 gent people are interested ; and also the absence of proper 
 equipment to till the soil and harvest the crops reduces 
 the power and results of production. 
 
 As the productive capacity of a people measures its 
 material power and prestige, the credit system should be 
 tested and utilized to its full legitimate strength in order 
 to draw out the best fruits of that capacity. The uses of 
 the credit system put a developing power into the hands 
 of the people with which they further their productive 
 capacity, and credit thus becomes a creator of purchasing 
 power. Mr. Mill enters a qualifying statement as to the 
 purchasing power of credit, or its effects as purchasing 
 power, when he says: 
 
 "Credit, in short, has exactly the same purchasing power with 
 money; and as money tells upon prices not simply in proportion 
 to its amount, but to its amount multiplied by the number of 
 times it changes hands, so also does credit; and credit transferable 
 from hand to hand is in that proportion more potent than credit 
 which only performs one purchase." 
 
 It is an economic truism that the credit system draws 
 wealth into the channels of trade and productivity; in 
 fact, this is the primal function of credit. Personal quali- 
 ties are reckoned as wealth, and the credit system, in pro- 
 viding means for the activity and display of these per- 
 sonal qualities, is performing just as important a duty as 
 when it brings about the introduction of material " pros-
 
 22 CREDIT AND ITS USES 
 
 perity " in the uses of trade. Economically, personal 
 qualities are a part of the wealth of every people, although 
 many hold that such qualities should not be included and 
 that wealth refers to " those objects that are external to 
 man." 
 
 No enumeration of the advantages of credit sets forth 
 the great merits of the system in more forceful style than 
 that of Professor Conrad of Halle, in his lectures on 
 political economy which are quoted in full by Professor 
 Ely in his article on " German Cooperative Credit 
 Unions." It is a graphic presentation of the origin and 
 utilities of those institutions. The statement which fol- 
 lows comprises the quotation to which reference has been 
 made, with the exception of division No. 9, which is Pro- 
 fessor Ely's own : 
 
 "(1) Credit furnishes a more perfect and convenient means 
 of payment in large sums and between distant places than the 
 precious metals, saving time and labor. This is effected by means 
 of notes, checks, and bills of exchange. (2) Credit takes the place 
 of corresponding amounts of gold and silver. This is a saving, as 
 it enables us to employ the precious metals for other useful purposes. 
 (3) Capital is employed more productively. He who possesses 
 capital, but is for any reason unable to make use of it, transfers it 
 to another for a compensation, to the benefit of both, as weU as 
 that of the public economy. It is given, cceteris paribits, to 
 him who is ready to pay the highest price for its use ; that is, in 
 general, to him who can employ it most productively. (4) The 
 laborers, artisans, and traders, although unprovided with means 
 of their own, may by the use of credit obtain capital to assist them 
 in their labors, and that without sacrificing their independence. 
 This point is to be particularly borne in mind as of especial weight 
 in judging the credit unions. Credit is thus of importance in 
 avoiding that separation of capital and labor which excites so much 
 bad feeUng, and which forebodes danger to modern civihzation.
 
 THE CREDIT SYSTEM 23 
 
 (5) Credit gathers together the smallest sums, which, by means of 
 joint-stock companies and otherwise, are economically employed. 
 Capital is concentrated, but its returns are disseminated among 
 the people, politically a weighty point. (6) The possibility of em- 
 ploying every sum, however minute, urges people on to saving. 
 (7) Credit binds together the interests of those having deaUngs 
 with one another. Under a highly developed system of credit 
 economy, it is the interest of each to show himself worthy of trust ; 
 this can be of advantage in the moral education of a people. (8) It 
 enables men to save for their old age, and make provision for their 
 families in case of their death. Were there no such thing as credit, 
 the best one could do would be to heap up, and then consume after- 
 wards, the capital gathered together. (9) Capital, when obtained 
 under favorable circumstances, yields a larger return than the 
 interest. Were it otherwise, borrowing, except in case of special 
 need and distress, would cease. The prudent and skillful laborer 
 who can command credit is thus enabled to obtain, besides his 
 wages, a surplus from the use of the capital. Credit, well used, is 
 therefore economically as productive as a favorable climate or a 
 high education of a people." 
 
 A discussion of the foregoing will show how these 
 advantages of credit affect our everyday life and demon- 
 strate the growth and usefulness of the credit system. 
 
 (1) It would be impossible to carry on the business 
 of the commercial world to-day unless we had such agen- 
 cies as notes, checks, and bills of exchange: First, for 
 the reason that the stock of precious metals would not be 
 adequate to the discharge of the daily clearings of com- 
 merce ; and second, that it would utterly disorganize busi- 
 ness procedure if we had to depend upon the transfer of 
 the precious metals in order to effect the extinguishment 
 of obligations. The delays, even with our present excel- 
 lent transportation facilities, would be the cause of much 
 inconvenience, and the very nature of these commodities
 
 24 CREDIT AND ITS USES 
 
 would make their use for this purpose cumbersome and 
 unscientific. Further, the expense involved in moving 
 the precious metals for such purposes would add a con- 
 siderable percentage to the cost of doing business: the 
 expense entailed would refer not only to the cost of ship- 
 ping, as far as distance and bulk are concerned, but, 
 more important still, to the risk undergone in handling 
 them. Under our present system of exchange, domestic 
 and foreign, the largest transactions can be adjusted with 
 absolute safety to the interests of all concerned with a 
 celerity which is marvelous and at an expense which is 
 minimized to cheapness. For instance, we see transactions 
 involving millions upon millions treated under our pres- 
 ent system of foreign exchanges — credit — with as little 
 concern almost as that with which the ordinary man pur- 
 chases an overcoat. 
 
 (2) Credit, in taking "the place of corresponding 
 amounts of gold and silver," performs another useful 
 function; for, as Professor Conrad says, a saving is 
 effected which permits the employment of these precious 
 metals for other purposes. These other purposes are com- 
 prehended in that proportion of the precious metals used 
 in the arts, and it is impossible to compute the effect 
 which the introduction of these elements into the arts 
 has upon the culture of the people. Employed in this 
 form, they call for a character of workmanship which 
 must be of the highest skill and proficiency, and the re- 
 quirement of such skill and proficiency produces an appre- 
 ciable effect upon the mechanical genius of the times. 
 Further, the use of the precious metals in the arts affords 
 employment to a great body of helpers and auxiliaries 
 whose wage-earning capacity provides new sources of con-
 
 THE CREDIT SYSTEM 25 
 
 sumption for the product of the labor of other fields and 
 enterprises. 
 
 (3) Credit as a means of employing capital more pro- 
 ductively. This thought is in harmony with the views of 
 Mr. Mill (who preceded Professor Conrad), set forth 
 with great distinctness in his " Principles of Political 
 Economy." It is certainly an immense advantage to those |. 
 who have little or no capital of their own, to be able to 
 call upon those who are plentifully provided, and thus 
 secure the means with which to embark in business. They 
 may realize therefrom a return sufficient to not only pay 
 the interest on the capital borrowed, but also a fair return 
 of interest on their own investment, and a profit from the 
 net results of the business. Credit, in bringing about the 
 lending of money or other form of property or credit to 
 those qualified to use it providently and successfully in 
 business enterprises, has conferred an inestimable bless- 
 ing upon mankind. The benefits accrue not alone to him 
 who borrows, but to him who lends, for, as Mr. Mill so 
 pungently says, " if it were not for credit, many peoplei 
 who possess capital but have no means of utilizing it them- 
 selves, would find it useless and profitless," so that the' 
 influence of credit works doubly to benefit him who lends 
 as well as him who borrows. 
 
 (4) The benefits which credit confers upon the laborers 
 or artisans or traders who through it secure capital to 
 assist them in their efforts to work out a livelihood. This 
 idea, as Professor Conrad explains, is of particular appli- 
 cation to the organizations known as credit unions and 
 which are the subject of the article by Professor Ely, 
 already referred to. A word as to these credit unions 
 will be useful in explaining the fourth advantage or bene-
 
 26 CREDIT AND ITS USES 
 
 fit of credit. The German Cooperative Credit Unions are 
 the product of a cooperative society founded by Herr 
 Schulze (Schulze-Delitzsch) in 1849, which had for its 
 object the purchase of raw material among certain inter- 
 ested tradesmen. From this small beginning has grown a 
 really vast system of cooperative banks. Schulze-Delitzsch 
 wisely provided in the very commencement of these enter- 
 prises that those who wished to avail themselves of the 
 loan advantages of the institutions must become members, 
 and " they thus themselves indirectly furnished the se- 
 curity for the credit afforded them." These banks are 
 credited with great success, and in 1892 were said to 
 number 1,000, to have a membership of 500,000, and a 
 paid capital of $30,000,000. They represent a very close 
 analogy to our own building and loan associations, and it 
 is not necessary to explain what a wonderful good has been 
 effected in this country through the fact of men being 
 able to secure the credit with which to provide their 
 families with homes. 
 
 (5) Credit is a force in gathering together small sums 
 by which " capital is concentrated " and its fruits dis- 
 tributed among the people. The savings bank is the prin- 
 cipal means by which these small sums are accumulated 
 and utilized as capital. By the system of savings banks 
 and other forms of saving devices, these small and of 
 themselves unproductive sums constitute a vast accumula- 
 tion which is a striking addition to the capital of the 
 country ; and not only are they such an addition, but they 
 are in such form that they can be made serviceable to 
 promote the productivity of the nation. 
 
 (6) Credit, by the employment of "every sum, how- 
 ever minute," inculcates saving propensities among the
 
 THE CREDIT SYSTEM 27 
 
 people. This benefit must be self-evident: First, there is 
 the incentive offered of a return on the money saved; sec- 
 ond, there is the encouragement, which a little earning 
 will furnish, to strive for even better results ; third, habits 
 of thrift are developed in the people ; fourth, independence 
 of thought and action inevitably follow on thrift and 
 economy. 
 
 (7) " Credit binds together the interests of those who 
 have dealings with one another." Here we have expressed 
 in another form a thought of Mr. Carey: that the exist- 
 ence of a system of credit is evidence that the people 
 living under that system have faith in the good inten- 
 tions of each other ; a system of credit brings forcibly be- 
 fore men's minds the fact that it is an honor to be of good 
 repute, and he who is of good repute in a business sense 
 is he who is in good credit. To bring men together in 
 hearty cooperation to accomplish the ends of business life 
 and to make the possession and practice of sterling ethics 
 a prerequisite to membership in the profession of busi- 
 ness is a great moral uplift, or, as Professor Conrad ex- 
 presses it, a " great advantage in the moral education of 
 a people." 
 
 (8) Credit, as a means of making, through prudent sav- 
 ing, provision for one's family after death, illustrates the 
 possibilities that present themselves for safely investing 
 capital so that the income earned will represent a deposit 
 from which running expenses may be drawn and the sur- 
 plus of such income utilized in the form of additions to 
 capital already acquired. 
 
 (9) Professor Ely has given us an insight into an- 
 other phase of credit, viz., that it is the desire and expec- 
 tation of those who seek and obtain capital to make it
 
 28 CREDIT AND ITS USES 
 
 produce a larger return than the mere interest to be 
 earned, and this increment is really what in economics 
 would be denominated profit. It is this expectation that 
 leads men to embark in business, and to make investments 
 even though the risks involved may be many and serious ; 
 and it must be borne in mind that this spirit of adven- 
 ture in trade has had a very considerable effect upon the 
 progress of commerce, and in the absence of that spirit 
 many of the powers that commerce and credit have mani- 
 fested would be latent. 
 
 While credit and the credit system have their benefits 
 and advantages, they have their weaknesses and their 
 evils. It is therefore essential to draw attention to the 
 abuses which may generate in a system of credit, and from 
 which there does not appear to be any kno\vn means of 
 escape, if we are to accept the views of the great doctors 
 of economics w^ho have diagnosed the subject in every 
 phase. These abuses are those which inevitably lead to 
 commercial crises, and which all authorities agi-ee would 
 be obviated if men would simply regard the unwritten 
 laws of prudence and good management; but as human 
 skill, energy, knowledge, and capacity are included in the 
 category of wealth, it is the veritable inability of laws of 
 any character to control the exercise of these personal 
 elements which renders the abuses of credit an almost un- 
 avoidable occurrence. The consensus of opinion is that 
 the evils of credit may be said to principally manifest 
 themselves in " speculation " and overtrading, which not 
 infrequently lead to fraud, extravagance, and embezzle- 
 ment. Some writers also claim that credit may be used 
 to create a monopoly, and we do not have to go far in this 
 day to see the truth of this claim.
 
 THE CREDIT SYSTEM 29 
 
 The inevitable consequence of speculation and over- 
 trading is failure to liquidate, and a general failure to 
 liquidate means a panic. We are using here the homely 
 word panic because it is the one most in use and also 
 very descriptive of what really develops from the condition 
 mentioned. It is patent that the credit system serves to 
 encourage speculation, for under the workings of that 
 system a man may pursue his way in business long after 
 he is unable to pay in full ; and, fighting off the evil day, 
 he is engaged in a constant speculation with fate. Mr. 
 Macleod has given us a description of this state of affairs 
 which is exceedingly true to nature, as follows : 
 
 "All commercial crises therefore originate in the overcreation 
 of credit, and this is innate in the modern system of credit. Sup- 
 pose that at any time the commercial world started with a perfectly 
 clean slate. "When such multitudes of persons are trading on 
 credit, it must inevitably happen that a considerable number will 
 speculate unsuccessfully, and create an excess of credit, which can- 
 not be redeemed by fair means. All excess of credit may be con- 
 sidered as so much virus or poison in the body commercial. How- 
 ever, by various tricks and devices known to traders, they can keep 
 themselves afloat many years after they are utterly insolvent ; and 
 thus the poison continually accumulates. Then perhaps a fever 
 of speculation takes place, giving rise to the creation of vast masses 
 of speculative paper, and then, the poison having accumulated to a 
 sufficient extent, bursts forth in a tumor or an abscess, called a 
 commercial crisis." 
 
 To the credit system must also be attributed much of 
 the extravagance that takes place in all spheres of life. 
 Men who are known to be living beyond what is called 
 their " means/' or their earning capacity and income, are 
 permitted to take advantage of the credit market and con- 
 tinue in their extravagances. This condition is respon-
 
 30 CREDIT AND ITS USES 
 
 sible for a great deal of the fraud and embezzlement that 
 takes place, and much human suffering would be avoided 
 if there were greater discretion shown in holding men fast 
 to their " credit limits," by which is meant the establish- 
 ing of a standard of credit-giving so high that only those 
 who could reach that standard would be accorded the bene- 
 fits of credit. 
 
 As to credit leading to monopoly, it is of course 
 assumed that when this idea is advanced as showing an 
 evil in credit, its corollary is that monopoly itself must 
 be evil. This is, however, a suggestion outside the pur- 
 view of this discussion. There are numberless instances 
 where credit and the credit system have been utilized to 
 create a monopolistic power. Whether these particular 
 instances will develop for good or for evil remains to be 
 seen. As an example, a man who is undoubtedly gifted 
 with marked financial prescience, in a few years secured 
 control of a great railway system almost entirely through 
 trading on his credit. Our credit system not only permits 
 such a circumstance, but the methods w^hich have crept 
 into the credit system encourage it. So long as the col- 
 lateral offered is adequate, the system will survive; but 
 when men acquire the power to influence loans of many 
 millions, there is always the danger of their power assum- 
 ing an arrogance and carrying with it demands that are 
 not strictly safe or legitimate. It is against this possible 
 danger that the credit system should guard. 
 
 Mr. Mill tells us that " credit given by dealers to un- 
 productive consumers is never an addition but always a 
 detriment to the sources of public wealth." An unproduc- 
 tive consumer passes the effects of the credit he receives 
 to the powers of destruction.
 
 THE CREDIT SYSTEM 31 
 
 There are some who assert that the world would be 
 better without credit, and that the endless prodigality and 
 speculation which it promotes would be avoided if all 
 trade were upon a cash basis, or if, to go farther, we should 
 reach that Utopian stage where the wants and the oppor- 
 tunities of men would be so regulated that the existence of 
 money could be dismissed with commercial safety and 
 with profit to the happiness and integrity of the individ- 
 ual. But it is not with idealisms we have to treat, but 
 rather the credit system as we find it, a system which 
 typifies an " inexorable law of political economy which 
 cannot be resisted."
 
 PART TWO 
 PRIMARY DIVISIONS OF CREDIT
 
 CHAPTER III 
 
 BANKING CREDIT 
 
 It is not the purpose of this work to proceed with 
 any extended dissertation on the subject of banking credit 
 or banking. It is essential, however, that sufficient atten- 
 tion should be accorded to this " highest form of credit " 
 in order to show its preeminent relation to and influence 
 upon the commercial structure. Without banking credit 
 the endurance of the commercial structure would not only 
 be an unpromising but a negligible quantity. While it is 
 true that commerce obtained and exerted a strong influ- 
 ence upon the development of civilization prior to the in- 
 stitution of what we now recognize as banking, it is only 
 since banking became the leverage of commercial exten- 
 sion and activity in a modern sense that commerce has 
 become the irresistible stream of progress. 
 
 Banks are the custodians and dispensers of credit in 
 its universal sense. The exercise of this credit is not a 
 personal, selfish possession, but a commercial trust. The 
 business of the world cannot be accomplished without the 
 dispensation of this credit, l^atural as well as artificial 
 influences and conditions justify this statement. Those 
 entitled to credit should receive it without relation to per- 
 sonal or ulterior considerations, for unless this freedom 
 
 35
 
 36 CREDIT AND ITS USES 
 
 of credit is exercised the uses of credit are diverted from 
 their proper channels. 
 
 It is not intimated that a bank is supposed to provide 
 its customers with permanent capital. Such a presump- 
 tion is at variance with sound banking and financial 
 safety. Such a practice, if resorted to and continued, will 
 reveal those false systems of credit which have produced 
 such calamities in the world, and against the resort to 
 which we have been so solemnly warned by the economists. 
 It will not require much argument to show the inutility 
 of a bank keeping its customers furnished with " per- 
 manent capital," for the thought is opposed to the very 
 spirit of banking. Good banking credit is based on loans 
 made with due regard to correct judgments ; on collaterals 
 that are subject to prompt and full liquidation; or loans 
 consisting of paper, made and indorsed by persons of 
 sufficient flexible means to enable them to honor their obli- 
 gations without delays. To have large sums of money lent 
 under conditions that the bank cannot avail itself of the 
 proceeds of the loan with promptitude is an evidence of 
 all that is reprehensible in banking. The bank must be in 
 a position to cancel its ovm obligations just as a merchant 
 must dispose of his, with this very marked difference to 
 the disadvantage of the banker, viz. : a merchant may have 
 a large amount of indebtedness falling due on a certain 
 day ; he may be accommodated by his bank with a credit 
 sufficient to satisfy the demands upon him. If he be owing 
 his banker, he may be able to secure an extension on the 
 loan ; if he be merely owing book accounts, he may be able 
 to put off his creditors with what is a reasonable excuse 
 for his nonpayment; but a bank, when it is called upon 
 to discharge its obligations, must pay. Failure to do so
 
 BANKING CREDIT 37 
 
 means its downfall ; explanations, excuses, promises — none 
 of these are sufficient. 
 
 Banks are said to be institutions " for lending, borrow- 
 ing, issuing, or caring for money." While the caring for 
 money may be the first interpretation of a bank's duty that 
 would occur to the lay mind, still the " caring for money " 
 must not be accepted too literally, for the stock or supply 
 of money compared with the demands and clearings of 
 the market appears to be a secondary consideration. As 
 Professor Ely says, " Money ... is entirely inadequate 
 to explain the magnitude of present commercial transac- 
 tions," for while in prosperous or noraial times the dis- 
 parity between the money supply and the gross volimie 
 of business creates no alarm and in fact attracts little 
 attention, still our recollections are yet keen with the 
 thoughts of the calamitous effects of the abridgment of 
 the gold supply a comparatively few years ago. This 
 condition, therefore, of relatively small money supply to 
 great mass of business transactions is a species of phe- 
 nomena with which scientists and economists have strug- 
 gled for years, and so far with few satisfactory revealed 
 results. 
 
 The very nature of banking business, which is almost 
 entirely credit, puts into the hands of the banking com- 
 munity a power which it is difficult to estimate, and quite 
 as difficult to cope with. How far-reaching this power has 
 become may be realized when it is apparent that the ability 
 of nations to undertake any very great enterprises or carry 
 on costly wars is dependent almost absolutely upon the 
 dispositions of the banks of the world. They can prevent 
 war or they can enforce peace. Their dictum may mean 
 either realization or disappointment for a people. Their
 
 38 CREDIT AND ITS USES 
 
 tremendous, overwhelming power does not rest upon ilie 
 fact that thej are simply " care takers of money," but 
 upon the greater fact that they are the manufacturers of 
 credit, and the world submits to their drastic economic 
 power with the docility of a child to a stern, unbending 
 master. 
 
 • Banks are divided into three distinct classes, viz. : 
 Banks of issue or circulation, banks of deposit, and banks 
 of discount. There are certain features of these classi- 
 fications distinguishable in the very early history of bank- 
 ing, and it is undoubtedly from ancient practices that 
 banks of discount and deposit have had their rise. The 
 issuance and circulation of notes, especially a bank's own 
 notes, having nothing behind them but the capital and 
 character of those constituting the bank, is a development 
 of the credit system. The method by which a bank of 
 issue operates will be shown later. It is not material to 
 this statement of banking credit to give a description of 
 the historical beginnings and developments of banking: 
 the latter, as we understand it, is the result of a series 
 of experiments and vicissitudes running through the past 
 four hundred years. 
 
 It has always been a favorite practice of a certain 
 brand of politicians to decry the influence of banks in 
 public affairs, and endeavor in every possible way to 
 prejudice the popular mind against these institutions. 
 People are likely at some time or other to become restive 
 under the domination of an institution or set of men who 
 are really beyond their control, as banks and bankers ac- 
 tually are. Nor are we losing sight of the fact that our 
 national banking system, as well as that of England and 
 other nations, is subject to legislative surveillance and
 
 BANKING CREDIT 39 
 
 action, which, however, are usually spent when the laws 
 concerning the creation and system of the banks are 
 adopted. l!^o legislature can expect to control the progress 
 of these institutions and the power that by natural proc- 
 esses becomes theirs. This power has been, and probably 
 always will be a target for loose- jointed reasoning and 
 political agitation. As Hallam has pointed out, where 
 the advice and wishes of the directors or protectors of 
 the Bank of Genoa were interposed in public affairs, it 
 was invariably in the direction of that which was health- 
 ful to the public weal. The same thing can be said in 
 these days in respect to the advice and services of the 
 banking community in public matters, especially in regard 
 to the upbuilding and preservation of a sound public 
 credit. Credit is a most delicate, sensitive quantity, and 
 the banking business being credit in its highest sense, it 
 must not only be treated with all the circumspection its 
 very nature calls for, but it must also be protected from 
 the attacks of those who, although animated by entirely 
 sincere views, would do irreparable injury to the credit 
 system in their desire to advance their political principles 
 or ambitions. It is quite important that the public should 
 be thoroughly educated as to the vast benefits that accrue 
 to commerce and civilization from that species of credit 
 dispensed by banks. Banks act as the depositories of the 
 funds of the people, and exercise safe keeping over those 
 funds. This safe keeping also involves the manipulation 
 of these funds in the form of good loans or discounts at 
 rates of interest which will yield a profit for the deposi- 
 tors. But further still, it means the employment of these 
 funds in the channels of trade in such a manner as to 
 bring forth the greatest results, and in this way to en-
 
 40 CREDIT AND ITS USES 
 
 hance the commercial credit, the wealth, and the enter- 
 prise of the community. Our attention has been drawn to 
 the fact that the activities of banks have served to create 
 a remarkable expansion in the field of credit which no 
 other known influence has ever produced, or seemed likely 
 to produce, and this also should be remembered when the 
 potency of banking is under discussion. This expansion 
 in credit has also been attended with considerable alarm 
 on the part of some thinkers who cannot bring themselves 
 to believe that it is the product of an entirely healthy 
 growth ; and on the other hand, they marvel at the possi- 
 bility of a proper redemption of this vast ocean of credit. 
 Mr. Macleod says: 
 
 "Credit always has to be redeemed and if this can be done; 
 the Credit has been sound. Hence Credit is never excessive, what- 
 ever its absolute amount may be, as long as it always returns into 
 itself." 
 
 The fact that no contingency is probable under which 
 all this credit would have to be redeemed at one time is, of 
 course, one of the great measures of safety to the credit 
 system. The methods of that system preclude such a pos- 
 sibility, and the history of banking experience and prac- 
 tice has enabled us to understand this point with absolute 
 clearness. Adam Smith explains this phenomenon thus: 
 
 " A particular banker lends among his customers his own prom- 
 issory notes, to the extent, we shall suppose, of £100,000. As 
 those notes serve all the purposes of money, his debtors pay him 
 the same interest as if he had lent them so much money. This 
 interest is the source of his gain. Though some of those notes are 
 continually coming back upon him for payment, part of them 
 continue to circulate for months and years together. Though he 
 has generally in circulation, therefore, notes to the extent of 
 £100,000, £20,000 in gold and silver may, frequently, be a sufficient
 
 BANKING CREDIT 41 
 
 provision for answering occasional demands. By this operation, 
 therefore, £20,000 in gold and silver perform all the functions which 
 £100,000 could otherwise have performed." 
 
 It will be seen that while, as Mr. Smith says, twenty 
 per cent of gold and silver are sufficient to sustain the 
 amount of credit referred to, still a certain quantity or 
 percentage of gold and silver is necessary to carry on gen- 
 eral business, and the constant and easy circulation of 
 coin wherever required serves to promote and support 
 public credit and confidence. Montesquieu says that: 
 
 "Money is a sign that represents the value of all merchandise: 
 Paper is the sign of the value of specie." 
 
 Paper is not only the sign of the value of specie, but 
 when readily accepted it is a sign of the confidence of 
 the public in the accessibility of a sufficient quantity of 
 specie to satisfy business demands. The instant, almost, 
 that the public comes to believe that the quantity of specie 
 available is inadequate, then paper loses its mystic power, 
 because the influence that upholds it has withdrawn its 
 favoring protection. 
 
 On reading the weekly bank statements, the first 
 thought that would probably occur to the uninitiated 
 would be. How can that vast amount of credit be sus- 
 tained by such a relatively small amount of reserve ? The 
 danger is an imaginary, not a real one, if the reserves 
 be sufficient to respond to the demands which are likely to 
 be made in the usual course of business, which, Mr. Bage- 
 hot contends, must be determined by the nature of the 
 bank's liabilities. 
 
 The question with which this discussion most concerns 
 itself is the relation of banking credit to commerce, which
 
 42 CREDIT AND ITS USES 
 
 practically covers the whole field of banking. The rela- 
 tionship of commerce to banking is evidenced by what are 
 known as instruments of credit, or documents or advices 
 of different forms and uses which can be made to serve 
 as mediums of exchange in the very same sense that 
 money is employed. The economic necessities which have 
 created these instruments of credit are nothing more than 
 the ordinary requirements and practices which are part 
 of our daily business life. A merchant having purchased 
 a bill of goods on a specified term of credit, gives to the 
 seller a bill of exchange, drawn on himself, representing 
 the amount of the invoice. The seller, needing money for 
 his own business, passes this bill of exchange, with his 
 indorsement thereon, to another from whom he has made 
 a purchase, or to whom he may be in debt for any other 
 reason. The third person to whom the bill of exchange 
 is given passes it on again in liquidation of an indebted- 
 ness of his own, and so on. In this way that bill of ex- 
 change may serve in the effacement of many different 
 accounts, and return to the drawer literally covered with 
 indorsements. What is true as to the function of a 
 medium of exchange, which the particular bill referred 
 to has discharged, may be equally true of many other 
 forms of credit instruments which may be called to mind. 
 Promissory notes, drafts, checks, bills of lading, and ware- 
 house receipts are all credit instruments which can be 
 used as mediums of exchange or substitutes for money. 
 It is in these several forms that loans made by banks are 
 evidenced, and it is mainly upon the convertibility of 
 these instruments of credit that a bank must depend to 
 maintain its own credit in the discharge of its obligations 
 to its depositors. In banking credit, therefore, everything
 
 BANKING CREDIT 43 
 
 may be said to rely upon the character of the acceptances 
 or collaterals which the bank receives in consideration of 
 its loans, and it is proper, under the circumstances, to in- 
 quire, if only briefly, into the general nature of the credit 
 instruments which are regarded as the more highly desira- 
 ble and therefore safest. A leading writer says: 
 
 " Notes, bills, drafts, checks, book credits, or any form of obliga- 
 tion resulting from a credit transaction, come into existence, not 
 antecedent to, but as a consequence of, a transfer of goods involving 
 futurity. Paper is purely fictitious and illegitimate which is not 
 the outcome of an operation in goods; and we are enabled to test 
 whether loans are legitimate, or not, according as we know whether 
 the discounts are gi-anted, or not, for actual transfers of salable 
 goods. This test gives us the means of drawing the line between 
 sound and unsound banking." 
 
 This statement draws the line of demarcation with a 
 distinctness that leaves one in no doubt as to the view 
 of the writer. However, to stamp paper with the title of 
 illegitimacy stains its character. As a large quantity of 
 the paper handled by banks does not consist of credit 
 instruments that have their being as the direct result of 
 " actual transfers of salable goods," it is pertinent to in- 
 quire whether paper not blessed with such origin is an 
 evidence of unsound banking. 
 
 " A " is a retired merchant of means : his son desires 
 to make a trip to a foreign country for the purpose of look- 
 ing over some business propositions. He has not the 
 funds, so he asks his father to give him his (the father's) 
 note for $1,500, which he can discount at a bank and 
 avail himself of the proceeds. " A " complies with the 
 request, the note is given and used; the responsibility of 
 " A " is unquestioned, and it is this responsibility which
 
 44 CREDIT AND ITS USES 
 
 the bank takes into account when it discounts the note. 
 This transaction is not the result of an actual transfer in 
 goods. Is it fictitious and illegitimate paper? 
 Another writer takes this view: 
 
 "When one wishes to borrow money upon his general credit, 
 he makes his promissory note, which is in no way based upon par- 
 ticular property. But we may remark that notes are not negotiated 
 in the market upon the goodness of a man's character or upon 
 confidence in his honesty; but that they depend upon the maker's 
 reputation for wealth and for regular payment of his debts, or, in 
 other words, upon his commercial rating. 
 
 "In the commercial world, and with banks which discoimt 
 notes, it is a part of the business to see that an ample amount of 
 property is behind every note taken. An indorser is always re- 
 quired, and if the maker is at all unknown or suspected of financial 
 unsoundness, another good indorser, or even more than one, must 
 be procured ; so that, to the lay mind, several times the amount of 
 property promised by the note is readily available for its payment. 
 One not accustomed to business is astounded at the requirements 
 of a bank before it will discount a note seemingly perfectly secure. 
 This is to make up for the remoteness and indefiniteness of the 
 connection between the note and the property which may by law 
 be ultimately devoted to its payment." 
 
 The opinions expressed in the last quotation represent 
 the conditions under which many loans are negotiated. 
 There has always been considerable discussion as to what 
 constitutes absolutely real paper or fictitious paper. The 
 gist of Mr. Thornton's estimate of the question is as 
 follows : 
 
 "Real notes (it is sometimes said) represent actual property. 
 There are actual goods in existence which are the counterpart to 
 every real note. Notes which are not drawn in consequence of a 
 sale of goods are a species of false wealth by which a nation is 
 deceived. These supply only an imaginary capital, the others 
 indicate one that is real.
 
 BANKING CREDIT 45 
 
 "In answer to this statement it may be observed, first, that the 
 notes given in consequence of a real sale of goods cannot be consid- 
 ered as on that account certainly representing any actual property. 
 Suppose that A sells £100 worth of goods to B at six months' credit, 
 and takes a bill at six months for it; and that B, within a month 
 after, sells the same goods, at a like credit, to C, taking a Hke bill ; 
 and again, that C, after another month, sells them to D, taking a 
 like bill, and so on. There may then at the end of six months 
 be six bills, of £100 each, existing at the same time; and everyone 
 of these may possibly have been discounted. Of all these bills, 
 then, only one represents any actual property. 
 
 "In order to justify the supposition that a real bill (as it is 
 called) represents actual property, there ought to be some power 
 in the billholder to prevent the property which the bill represents 
 from being turned to other purposes than that of paying the bill 
 in question. No such power exists; neither the man who holds 
 the real bill nor the man who discounts it, has any property in the 
 specific goods for which it was given : he as much trusts to the general 
 ability to pay of the giver of the bill, as the holder of any fictitious 
 bill does. The fictitious bill may, in many cases, be a bill given 
 by a person having a large and known capital, a part of which the 
 fictitious bill may be said in that case to represent. The supposition 
 that real bills represent property, and that fictitious bills do not, 
 seems, therefore, to be one by which more than justice is done to one 
 of these species of bills, and something less than justice to the other." 
 
 It would appear that it is very largely upon the char- 
 acter, position, and wealth of its maker and indorsers 
 that the acceptability of a note is determined. A note 
 which owes its origin to " an actual transfer of salable 
 goods " does not seem to derive any strength or merit 
 from that particular fact, unless, as Mr. Thornton says, 
 these goods are pledged as collateral for the payment of 
 the note in the event of the default of the maker; and 
 further, much might also depend upon the nature of the 
 goods, their constancy in demand, their nonliability to
 
 46 CREDIT AND ITS USES 
 
 depreciation or perishability. It is not contested that in 
 banking credit the quality of the collateral very often de- 
 termines whether or not the loan shall be made ; for many 
 ■who could command little, if any credit, because of sraall- 
 ness of means and poorness of reputation, may be accom- 
 modated if they can produce at the bank acceptable col- 
 laterals. But, on the other hand, much of the business 
 of banking credit is based on the general character, the 
 ability, the means or wealth, and the reputation for 
 prompt payment of the borrower and his indorsers. Mr. 
 Bagehot remarks: 
 
 "There is a cardinal difference between banking and other 
 kinds of commerce ; you can afford to run much less risk in banking 
 than in commerce, and you must take much greater precautions." 
 
 Every one will quickly recognize the force of this state- 
 ment. The reasons why this " cardinal difference " ex- 
 ists are obvious. Banks and bankers are trustees for 
 fimds and other property placed with them for safe keep- 
 ing. The fact that depositors entertain sufficient confi- 
 dence in banks and bankers to intrust their property to 
 them, imposes a responsibility which thoughtful, conscien- 
 tious men will treat with a prudence indicating the high- 
 est moral purpose and endeavor. It is certain that the 
 very essence of trusteeship is a rigorous regard for the 
 interests of those who are the beneficiaries of the trust, and 
 all this suggests an ability, a thoroughness, an economy, 
 and a prescience in management which might not be fol- 
 lowed with the same sense of exactitude in case one were 
 simply merchandising or speculating with his own prop- 
 erty. In addition, it is hardly necessary to call attention 
 to the fact that the percentage of profits in banking is
 
 BANKING CREDIT 47 
 
 smaller than in most commercial callings; and this em- 
 phasizes the need of extreme care in the lending of funds, 
 for a loss in one case will wipe out the profits of a mass 
 of transactions. The smallness of the profit also necessi- 
 tates an advance in the rate of interest charged where 
 some doubt may be felt as to the desirability of the loan. 
 The bank exacts a greater interest charge in order to pro- 
 tect itself against the aggravated possibility of loss. This 
 principle is so firmly embedded in banking and other 
 branches of credit that it is accepted as a matter of 
 course. On its face this seems an injustice — that the 
 poorer man should have to pay the higher interest charge. 
 The answer is that the rights and interests of the depos- 
 itors must be safeguarded at all hazards ; further, the 
 man of lesser means is not the constant active force in 
 the commercial world as is his more affluent neighbor, 
 and the injustice spoken of finds its relief in the opera- 
 tions of the inviolable law of averages. 
 
 Adverting to the application of credit conditions in 
 the relations of borrowers and bankers, there is assumed 
 the consideration of what may be said to be a more prac- 
 tical phase of the study of credit, as differentiated from 
 its technical or scientific character. The relations existing 
 between the bank and its customers are synonymous with 
 those prevailing between commercial creditor and debtor. 
 In the latter case the consideration is a commodity called 
 merchandise ; in banking credit, a commodity known as 
 money — both commodities representing degrees of value, 
 one depending for its extrinsic value upon the ability of 
 the merchant to dispose of his goods, and the other, money, 
 apparently combining elements of intrinsic as well as ex- 
 trinsic value.
 
 48 CREDIT AND ITS USES 
 
 In the case of the commercial creditor the property in- 
 trusted to the debtor invariably consists of goods or mer- 
 chandise. When a bank affords an accommodation to a 
 borrower it gives him the use of funds, this use being 
 evidenced by a credit that is allowed him. Credit is also 
 the determining factor in the transaction between the 
 merchant and the debtor, for the debtor has a credit con- 
 ferred upon him, and the creditor, in his turn, holds a 
 credit or debt, which he has a perfect right to dispose of 
 for his own uses, and in many cases does dispose of for 
 the purposes of his business, realizing upon it the neces- 
 sary means with which to prosecute that business. This 
 analogy between banking credit and commercial or mer- 
 cantile credit indicates the perfect workings of the credit 
 system, which ramifies through all economic life. It is 
 palpable that without the ministrations of banking credit 
 the commercial system would be, as stated, " an unpromis- 
 ing and negligible quantity."
 
 CHAPTER IV 
 
 CAPITAL CEEDIT 
 
 The second division of credit is capital credit, or the 
 credit represented by bonds, mortgages, shares in incor- 
 porated companies, or other forms of long-time invest- 
 ments. The title given to this division of credit is in 
 accordance with the nature of its functions. It differs 
 from banking credit, the latter referring entirely to that 
 character of loan business where the loans are of a tem- 
 porary nature, as the vitality of banking business requires 
 they should be. It will be recalled that any tendency on 
 the part of banks to lend their credit or funds in the 
 form of permanent capital was deprecated in the preced- 
 ing chapter, and in this consists the essential difference 
 between banking and capital credit. Capital credit means 
 the employment of capital in credit transactions in s dif- 
 ferent form from that in which capital is invested in &. 
 business enterprise by those who expect to make that busi- 
 ness their occupation and realize substantial rewards in 
 the shape of profits. 
 
 It may be asked why general investors should not ex- 
 pect to be the recipients of large profits to the same extent 
 as any other type of investor. The difference is this: 
 where a few men invest their funds in a business, those 
 funds invariably represent their entire available means or 
 
 40
 
 50 CREDIT AND ITS USES 
 
 wealth. Thej are working for themselves alone, and the 
 profits of the business, whatever thej may be, go to the 
 owners alone. These owners, in order to reap this profit 
 — which may be moderate or large, according to the nature 
 of the business — have placed all they possess at the risk 
 of the business. Its failure means their absolute im- 
 poverishment, with all attendant hardships. On the other 
 hand, the general' investor, who is seeking merely a nom- 
 inal or reasonable interest upon the funds invested, is 
 careful to so place those funds that his investments will 
 be very well distributed, and should any one or two of 
 them prove to be losing ventures, he has others upon which 
 to depend for an income. His loss then, if any, is a par- 
 tial one, while the man who has been seeking large profits 
 and has failed will in all probability lose all. 
 
 One of the important things in which the people should 
 be educated is to understand the fallacy of a large earning 
 capacity for money — that is, a capacity beyond the well- 
 known average earning rates of interest. They should 
 appreciate that where rates above those which have a 
 recognized standing are promised or guaranteed, if paid 
 in any cases, it has been at the expense of the principal 
 deposited, or by other dishonest means. Whether the 
 rank and file, a term the expressiveness of which makes 
 it admissible, can ever be educated to a comprehension of 
 such conditions is problematical, but the effort should be 
 made to accomplish so worthy a purpose even if the pros- 
 pects be not assuring. 
 
 No matter to what element in the commercial or finan- 
 cial sphere we may direct our attention, we find it de- 
 pendent on credit. It is a part of the inner nature of 
 every branch of commercial or financial activity, and the
 
 CAPITAL CREDIT 51 
 
 one strong reason for this is that in every case where a 
 loan or an investment is made, the investment is made 
 U];on the belief of the party acting that he has reason to 
 rely upon the solvency, the soundness, the permanency of 
 the credit of the person or institution with whom he is 
 dealing, and he displays that " confidence upon which 
 credit is grounded." 
 
 Capital credit or investment credit arises from per- 
 fectly natural but exacting forces or causes. In times of 
 prosperity, or a normal state of the commercial system, 
 it makes its presence felt with an ease that no artificial 
 influences could account for or command. In fact, in 
 such times it needs no prompting to show itself and dis- 
 play its energies. Whenever want of confidence finds its 
 way into the market, with lightning rapidity investments 
 are withheld and capital seeks the storm cellar. 
 
 The reasons for making investments may be briefly 
 stated. First, capital unemployed involves insecurity. It 
 may be deposited in hands which through some unlooked 
 for happening might prove to be unreliable. Hoarded 
 near the person there is all the danger of fire or thieving, 
 and the security of capital demands that it should not be 
 left subject to any of these contingencies, but placed under 
 auspices where the possibility of danger and loss are 
 minimized. Second, capital seeks a spot where its utilities 
 may be exercised in yielding a reward in the shape of a 
 reasonable interest for its owner. Capital which is not 
 earning a reward is useless in every way. It adds noth- 
 ing to the income or means or prospects of the owner or of 
 the world at large. The interests of society require that 
 capital should be invested, not only that its owners may 
 have the means of support which its earning capacity will
 
 52 CREDIT AND ITS USES 
 
 provide, but that the social system may have the benefits 
 of its existence. Third, the productive capacity of the 
 world will be strengthened and augmented by the use of 
 capital. Its non-employment imposes upon such capital as 
 is active an abnormal burden, subjecting it to too large 
 a share of the responsibilities and toils generated by the 
 demands of society, unduly sapping its vitality. On the 
 other hand, a general and steady employment or invest- 
 ment of capital distributes its burdens and responsibili- 
 ties in a manner that effectively promotes an evenness 
 and fullness of productivity to the betterment of all 
 mankind. 
 
 The next step is to investigate the avenues through 
 which investment funds are mainly drawn. In his lec- 
 ture on " Investments," Mr. D. R. Forgan, Vice-President 
 of the First National Bank of Chicago, explained these 
 sources in the follovdng very descriptive summary: 
 
 "1. Savings banks' deposits, representing not an expansion of 
 commercial credit, but the savings of the common people. 
 
 "2. That portion of the deposits of commercial banks which 
 represents the accumulation of the profits of business and which 
 may be \vithdrawTi from business. 
 
 "3. The funds of life and fire insurance companies. 
 
 "4. The funds of educational, charitable, and benevolent insti- 
 tutions, 
 
 "5. The fimds of estates in cases where the executors decide 
 to exchange the assets at risk of general business for permanent 
 investments, which call for no business management on the part of 
 the owner. 
 
 "6. The funds of retired business men who follow the same 
 course for similar reasons. 
 
 "7. The investment accounts of commercial banks maintained 
 for the purpose of having some assfit,s which can be converted into 
 cash immediately in case of need.
 
 CAPITAL CREDIT 53 
 
 "8. That portion of the increment derived from former invest- 
 ments which the holders do not spend." 
 
 The availability of these funds for investment pur- 
 poses is predicated upon the very reasons set forth, as, 
 (1) Security, (2) Earning Power, and (3) The Assist- 
 ance of Productivity, and very little thought on the matter 
 will show how cogently these reasons influence those in 
 charge of these numerous and very diverse sources, to 
 provide themselves with the best character of investment 
 the market affords. Another very strong reason why 
 people or interests desire to invest their ready capital in 
 reliable and well-earning enterprises is the fact that the 
 capital, having been so disposed, relieves them of the 
 necessity of giving it personal supervision, and their part- 
 ing with it involves an immediate and radical change of 
 supervisors or guardians. In many cases this change is 
 advisable and desirable. It may be that a man has no 
 longer the capacity with which to apply himself to ar- 
 duous business duties, and the fact of his being able to 
 secure for his capital a safe home where it will earn for 
 him a steady income, not only relieves his mind of a great 
 strain, but affords him a revenue which is sufficient prob- 
 ably for his needs, and all without the necessity of his 
 unduly risking or impairing that capital in the slightest 
 respect. 
 
 Having considered some of the reasons for the prompt, 
 steady, and safe investment of funds, it is in order to re- 
 view the different forms of investment which are usually 
 employed. These forms cover a wide range of natural, 
 financial, and industrial forces, but as far as the elements 
 of capital credit are concerned, the same requirements aud
 
 54 CREDIT AND ITS USES 
 
 influences apply. These forms of investment are usually 
 the following: 
 
 A. Bonds and mortgages, real estate. 
 
 B. Government bonds. 
 
 C. State bonds. 
 
 D. Municipal bonds. 
 
 Public-service utilities, as, 
 
 E. Railroad bonds and shares. 
 
 F. Municipal street-car-line bonds and shares. 
 
 G. Telegraph and telephone securities. 
 H. Gas and electric lighting securities. 
 
 I. Waterworks bonds. 
 J. General industrial securities. 
 K. Bank and trust company shares. 
 
 Investments in bonds and mortgages covering real es- 
 tate have long been, and probably will always continue to 
 be, a favorite recourse of capital. Eeal estate is to a great 
 extent the oldest form of investment. 
 
 The modernity of corporate credit proves the mother- 
 hood of real-estate investment or credit, and it is likely 
 that for the purposes of a large class of investors this 
 motherhood has powerful attractions. Mr. Macleod has 
 advanced some very interesting theories on the question of 
 what he calls " property in land," especially in respect 
 to the subject of credit, and submits this proposition : 
 
 "Suppose that we saw a piece of land on which there were 
 actually existing products of the value of £3,000. Suppose that 
 we wished to purchase that piece of land. Would the ouTier of the 
 land be content to sell it to us for £3,000? Most assuredly not. 
 He would say that though there were only products of the value of 
 £3,000 on the land in actual existence at the present time, yet that 
 land would produce a similar amount of products to the end of time. 
 He would say that we must purchase not only the right to the 
 existing products of the land, but also the right to the annual
 
 CAPITAL CREDIT 55 
 
 products of the land to the end of time — that is, an infinite series 
 of future products which will only come into existence year by year." 
 
 "Thus property in land consists of two perfectly distinct parts: 
 the right to the products which have already come into existence; 
 and the right to the products which will only come into existence in 
 future." 
 
 This statement of the matter, which is authoritatively 
 fundamental, proves that in real-estate investments much 
 depends not only on the present value of the land and its 
 appurtenances, but upon the possibilities of an enhance- 
 ment in value. These possibilities are represented by the 
 actual produce which the land may bring forth, and also 
 its adaptability to other elements of improvement, such 
 as manufacturing or even dwelling purposes. The point 
 which determines this improvement is the desire or de- 
 mand for its utilization in a way that will lead to an ad- 
 vance in earning capacity. This earning capacity is rep- 
 resented economically by the productive opportunities or 
 enhancements obtainable. Therefore, the productive ca- 
 pacity and enhancements in value typified by earning 
 power, represent, as Mr. Macleod claims, " the credit of 
 the land." The possibilities for improvement in value, 
 i. e., earning power, are certainly of the greatest moment 
 where an investment in real estate is contemplated, al- 
 though they are very often not given deserved attention. 
 The transaction usually hinges upon the percentage of 
 margin represented in the loan (the leeway being from 
 forty to fifty per cent) and the probability of this margin 
 being sustained during the life of the bond and mortgage. 
 Where such securities are permitted to nm for a long term 
 of years, it will be seen how important it is that the 
 " credit of the land " shall be not only a well-sustained
 
 66 CREDIT AND ITS USES 
 
 one, but an advancing one, in order that the ratio of mar- 
 gin may be constantly increasing, thus insuring the greater 
 safety of the principal at stake, and where a piece of prop- 
 erty is yielding steady and strong profits, the better capac- 
 ity there will exist for the prompt payment of interest 
 and other necessary charges. Further than this, when 
 values are advancing with steadiness, there is the oppor- 
 timity of securing larger advances of capital for the pro- 
 motion of its productive power, involving a progressive 
 state of the world's wealth, economically and socially. 
 
 From all this must be eliminated, as having any proper 
 relationship to wise investment, the placing of loans or 
 capital in quarters which are under or subject to what 
 are called "boom" conditions. This is simply a species of 
 the wildest speculation, in which the element of tangible 
 credit in the land is entirely lost sight of, and people 
 operate in land in the same reckless manner as they enter 
 into other speculative ventures. No character of specula- 
 tion, when its force has been spent and " the bottom 
 dropped out," leaves a community in a more impoverished 
 condition than that which obtains in the proverbial " boom 
 town." It is true that the most substantial fortune which 
 has ever been created in this country is the result of land 
 investments, but this fortune represents not the results 
 of " speculation " but the most prudent character of 
 capital investment, and its vast increment is a tribute to 
 the financial genius of the man who foresaw this " credit 
 in the land." Possibly some exception will be taken to 
 the statement that this fortune is the most substantial that 
 we know of ; but is the point subject to argument ? It is 
 not the greatest fortune in volume, by any means, but it 
 represents certain natural forces which are not liable to
 
 CAPITAL CREDIT 57 
 
 the shrinkage that is apt to overtake other great fortunes 
 any time; it is not subject to the intense jealousies the 
 volume of other great fortunes has aroused ; it is not sub- 
 ject to the constant criticism, espionage, and attack from 
 legislative sources that other fortunes must constantly cope 
 with ; it is not amenable to the imminence of government 
 regulation, and possible govermnent ownership which 
 other interests must face, with a consequent diminution 
 in earnings, for the inevitable tendency of government 
 regulation is a reduction in charges to the people, and this 
 will involve a reduction in returns to the investors in 
 many different forms of public-service utilities. 
 
 The second of the stated series of investments are 
 those known as national, state, and municipal securities. 
 It is purposed to extend to these branches of capital credit 
 a more specific description in the succeeding chapter, to 
 which they are more closely related, but their mention at 
 this time is essential to an orderly statement of the usual 
 proclivities of those who invest their capital. These in- 
 vestments are graded in proportion to the " credit stand- 
 ing " of the different governmental entities from which 
 they emanate. 
 
 IText in order may be named investments which belong 
 to the family of public-service utilities. The latter term 
 is not always employed in the broad sense that would 
 cover great national railroad systems, express companies, 
 or domestic marine facilities, which are more generally 
 referred to as " common carriers." The investment in 
 bonds and shares of railroads is one of the most popular 
 forms of capital credit, although the shares representing 
 both preferred and common stock of these corporations 
 are the basis of the greatest system of public gambling the
 
 58 CREDIT AND ITS USES 
 
 world has ever kno'un. Tlie bonds of strong railroad com- 
 panies are among the best investments, but there is neces- 
 sity for caution in respect to even them, which is illus- 
 trated in the requirement of certain States that the bonds 
 of railroads shall only be available for investment pur- 
 poses on the part of savings banks (than which there is 
 no more sacred trust) on condition that the roads shall 
 have acquired and preserved for a specified period a cer- 
 tain average interest-paying capacity. This well-consid- 
 ered and necessary legislative requirement has established 
 a standard of credit which the management of every road 
 naturally desires to enjoy, and it imposes not only the 
 responsibility but the incentive to reach the required state 
 w^hich will give the corporation the standing and reputa- 
 tion involved in the condition laid down. 
 
 There are many different elements which enter into 
 the credit standing of a railroad corporation, for it is 
 upon its credit standing that it must depend for a prompt 
 and effective sale of its securities. A short time ago one 
 of the gi'eat railroad systems of this country, contemplat- 
 ing a vast scheme of extensions and betterments, an- 
 nounced a very considerable issue of new stock. There 
 were some who thought that owing to certain unhealth- 
 ful conditions of the market this was an ill-advised under- 
 taking. In the face of much public pessimism the 
 securities offered were accepted and assimilated by the 
 investment market with an alacrity that was pleasing as 
 a measure of general financial confidence, but also highly 
 complimentary as well as advantageous to the reputation 
 of the particular railroad in showing that its credit was 
 of the most stable character. Among the qualities that 
 contribute to the credit of a railway corporation, and, as
 
 CAPITAL CREDIl 59 
 
 a corollary, the desirability of its bonds for Investment 
 purposes, may be mentioned : 
 
 (1) The extent and value of its holdings. 
 
 (2) Advantages of environment : 
 
 (a) Agricultural. 
 
 (6) Manufacturing and commercial. 
 
 (c) Municipal. 
 
 (3) Convenient and good class of railroad connections. 
 
 (4) Management. 
 
 (5) Equipment. 
 
 (6) Service. 
 
 (1) The real property of a railroad Is one of its sub- 
 stantial assets. This real property may consist of rights 
 of way and termini, and also considerable tracts of land 
 abutting the rights of way. This property is very often 
 acquired by subvention from the government or locality 
 through which the road is passing, and it is also an object 
 to a great railroad to possess valuable lands on its route 
 so that it may be the beneficiary of their productive 
 capacity: for instance, mineral lands and timber proper- 
 ties. These not only redound to the benefit of the road 
 through profits acquired from leasing or selling them to 
 others who may desire to operate or exploit them, but 
 through the revenue derived from the business of moving 
 the products of these different chambers of industrial 
 activity. 
 
 (2) The nature of a territory through which a rail- 
 road operates is a vital element in its success ; a road 
 traversing an arid country with few manufacturing inter- 
 ests, and not touching any important commercial centers, 
 is a proposition doomed to failure. The latter picture 
 may seem to be an extravagant one, but it is not, as there
 
 00 CREDIT AND ITS USES 
 
 have been many euch. As a rule, these untoward enter- 
 prises are projected with a view to finally connecting with 
 or forming a link of some already well-established road, 
 or one having considerable promise, and in that way 
 ultimately bringing about an association that will be 
 an advantageous one. On the other hand, a road pass- 
 ing through a richly agricultural domain, with important 
 cities and manufacturing utilities to draw from, taps the 
 vitalities of these sources of trade, and the freight and 
 passenger business acquired is a valuable one. A word 
 as to the influence upon a railroad enterprise exerted by 
 its proximity to leading financial quarters. The element 
 of contiguity is a powerful help in the maintenance of a 
 good reputation and enables a road to market its securi- 
 ties to great advantage, other conditions being equal. It 
 might be said that so large an amount of foreign capital 
 being represented in the holdings of American railroads 
 would be a contradiction of this theory, but it does not 
 affect the question, distribution of capital being an eco- 
 nomic necessity and practice. 
 
 (3) Desirable connections are a necessary adjunct of 
 successful railroading, for they contribute to the comfort 
 of individuals and also expedite travel, as well as secure 
 quick transfers of freight. They are also an enabling in- 
 fluence in the promotion of closer and better business 
 arrangements with other roads, which, necessarily, have 
 a great bearing upon the opportunities of the road for 
 transacting its business. 
 
 (4) The quality and influence of the management of 
 a railroad depend entirely upon the question of person- 
 ality. When one considers the number of enterprises, 
 railroad and other, which fall into disrepute, bringing loss
 
 CAPITAL CREDIT 61 
 
 and sometimes poverty to investors, the necessity of good 
 management is manifest. It will be no answer to say 
 that in great corporations (railroad and others) the 
 systems evolved for their management will largely carry 
 the business through, for no system, however well con- 
 sidered, ramified, or specialized, will be adequate unless 
 directed by the highest type of human ability. Every 
 day produces some new necessity in business administra- 
 tion, and the greater the business, the greater will be the 
 necessities. These necessities cannot be met and solved by 
 system alone. System is an inanimate thing; it may 
 serve for a time to regulate; it cannot devise, invent, or 
 create. 
 
 (5) The character of the equipment is another impor- 
 tant feature of a railroad's standing and earning power — 
 and this refers to freight as well as passenger facilities. 
 Good equipment promotes safety and comfort, and these 
 are considerations entering into the calculations of people 
 in determining the character of a railroad. A road having 
 a reputation for poor forwarding and dispatching facili- 
 ties, for accidents and ^vTecks, with much loss of life (and 
 also loss to itself in equipment and damage penalties), 
 loses in character and injures its credit. It may be 
 pointed out that accidents and %\Tecks are, to an extent, an 
 inevitable consequence of railroading, that provision is 
 undoubtedly made for them in the preparation of budg- 
 ets; also, that some very important roads have had ex- 
 tremely serious ■\\Tecks attended with an undue percentage 
 of loss of life, and that it does not impair the value or 
 marketability of their securities. There no doubt are 
 instances of this chfxracter relating to some very powerful 
 and long-established systems, and while their unfavorable
 
 62 CREDIT AND ITS USES 
 
 experiences may not seem to have had any appreciable 
 effect upon the marketability of their securities, the bal- 
 ance sheet must have been affected to the extent that such 
 losses would figure, and this, it will be admitted, has a 
 direct effect upon the earning capacities of these systems. 
 
 (6) Service is a leading factor in the reputation of a 
 railroad. Attention, kindliness, and courtesy popularize 
 a road. In cases where a railroad has a monopoly of a 
 certain territory, and takes advantage of this monopoly 
 to so economize in its service and equipment as to cause 
 discontent among its patrons, it is obvious that its repu- 
 tation is to that extent impaired. This discontent may 
 lead to the organization of a competing line, or an erup- 
 tion of local feeling and influence in favor of some method 
 that would cause a cessation of the monopoly. 
 
 It may be claimed that, after all, the balance sheet 
 and no mere sentimental considerations determine the 
 acceptability of a bond upon the market ; but all these 
 qualities or influences have a bearing upon the balance 
 sheet. 
 
 In all public-service utilities the nature and assumed 
 value of the franchise is a significant item. It lacks 
 tangibility except as far as past earning capacity may 
 enable one to determine upon an approximate value, for 
 the breaking of a monopoly represented in the franchise, 
 or a greater degree of competition where no monopoly 
 existed, will impair the earning power, and in this way 
 reduce if not almost obliterate the value of the franchise. 
 
 A railroad bond is supposed to represent the actual 
 pro])erty of the road, franchises and all other property, 
 corporeal and incorporeal. The following description, 
 taken at random from a number of bond offerings, will
 
 CAPITAL CREDIT 63 
 
 suffice to indicate the nature of the security behind a 
 bond, although the character and volume of the collateral 
 is a matter of individual and constant variance. 
 
 "The entire capital stock of the Rio Grande Western Railway 
 is owned by the Denver & Rio Grande Railroad Company, eighty- 
 five in cash having been paid for the Common Stock, and an exchange 
 made for the Preferred Stock on the basis of eleven shares of Denver 
 & Rio Grande for ten shares of Rio Grande Western. At the time 
 that the Denver & Rio Grande acquired control of the Rio Grande 
 Western the latter company was paying five per cent dividends on 
 its $17,500,000 of capital stock. The above bonds are secured by 
 a First Mortgage, either directly or by ownership of all their secur- 
 ities, upon 193 miles, and also a mortgage upon the rest of the mile- 
 age, subject to a limited issue of $15,200,000 First Mortgage 4's, 
 due 1939, for the redemption of which, at maturity, bonds of this 
 issue are reserved. In addition, the bonds will be secured by a 
 First Mortgage upon any new mileage at the rate of not exceeding 
 $20,000 per mile. This issue is further secured by a First Mortgage 
 upon, and by deposit with the Trustee of, the entire issue of $10,- 
 000,000 Capital Stock of the Utah Fuel Company, acquired at a 
 cost of between $5,000,000 and $6,000,000. The latter company 
 owns and operates valuable coal mines in Utah and Colorado, 
 covering about 36,000 acres, and estimated to contain over 200,000,- 
 000 tons of available coal. It has several hundred coke ovens 
 in operation, and the market for this coal and coke includes the 
 territory from Colorado to the Pacific coast." 
 
 The property covered therefore may be that of auxil- 
 iary or subsidiary roads, that of a cognate enterprise such 
 as the fuel company referred to, as well as any new 
 mileage acquired and constructed. The property and the 
 credit of these different concerns are all pledged as 
 security for an output of bonds. 
 
 The conditions affecting the class of securities under 
 discussion may be said to apply to all public utility or 
 service enterprises, and the merits they should possess have
 
 64 CREDIT AND ITS USES 
 
 been set forth with particularity for that reason. The same 
 general principles would affect the securities of street-car 
 lines, telegraph and telephone companies, gas and electric- 
 light companies, and others. 
 
 There is another class of investments which during 
 the past generation has assumed a leading place in capital 
 credit, commonly referred to as industrials. Industrials 
 represent productive enterprises, manufacturing and com- 
 mercial, and hold an important place in the investment 
 market. There is probably no class of investment attended 
 with so much danger and at the same time one under 
 which a better percentage of steady interest may be 
 realized under proper capitalization and management. 
 One of the demerits of the industrial school is illustrated 
 by the fact that (incorporation being so easy and com- 
 paratively inexpensive) prosperous times induce many 
 to undertake the formation of so-called combinations and 
 individual corporations, and to simply flood the market 
 with their securities. The one-day panic in the stock 
 market in April, 1899, was due to an unwillingness on 
 the part of the banks to accord full recognition to such 
 securities, and this wise movement so early in the indus- 
 trial propaganda has had a healthful effect. It is un- 
 necessary to refer by name to the numerous and prominent 
 failures to exploit certain industrial propositions during 
 the period 1897-1902, for the volume of undigested se- 
 curities which figured during that period is sufficiently 
 suggestive. 
 
 An industrial security is one that may be said to be 
 nearer the people than railroad and other securities. One 
 of the inducements offered to the small investor is to hold 
 an interest in the company for which he may be work-
 
 CAPITAL CREDIT 65 
 
 ing. This temptation appeals alike to all classes, officers 
 as well as employees of a corporation, and is one with 
 considerable force to it. The thing to guard against on 
 the part of small investors (as many employees of such 
 a company would necessarily be), and general investors 
 as well, is the danger of making an investment where the 
 returns are not permanent or are likely to be unduly 
 affected by untoward trade conditions. 
 
 The basis of capitalization is a vital one with any 
 character of corporation. The industrial corporation is 
 one in which overcapitalization is most generally prac- 
 ticed, and it is hard to determine just how much is or 
 how much is not water. In fact, the mania for large and 
 high-sounding figures is such that actual values as a basis 
 of capitalization seem to many a financial anachronism. 
 The question of the proper basis of capitalization is one 
 that cannot be hastily decided, and one also dependent 
 on many conditions ; each concern must be judged by the 
 circumstances surrounding it. Professor Jenks, in " The 
 Trust Problem," has given this subject a very impartial 
 judgment, and says: 
 
 "It is generally assumed that the actual cash value will repre- 
 sent fairly well the cost of the reproduction of the properties in 
 present condition together with needed running capital in the form 
 of cash on hand. Such an issuance of stock in an ordinary manu- 
 facturing business, under conditions of fair competition, will give 
 dividends in the long run probably not materially different from, 
 but perhaps somewhat higher than the usual rate of interest in the 
 community." 
 
 "On the other hand, most business men are of the opinion that 
 the value of any property depends upon its earning capacity, its 
 value as ' a going concern,' and that it is wise and just to issue stock 
 of a corporation on that basis."
 
 66 CREDIT AND ITS USES 
 
 " Attention is frequently called to the case of a newspaper with 
 a tangible property of, say, $100,000. Such a newspaper, ably ed- 
 ited, with a strong constituency of subscribers and a large adver- 
 tising patronage, might readily pay good dividends on $1,000,000 
 or more. Why should not the capitalization not be placed at 
 $1,000,000 regardless of what the plant might cost? The earning 
 capacity may be due largely to the skill of the editor, or to the fact 
 of connection with some political party, or to the peculiar business 
 skill of its advertising manager, or to the good will gained through 
 many years of skillful catering to the public taste. Why, it is 
 asked, should not the capitalization be made upon its earning 
 capacity rather than on the reference to the cost of the plant? . . . 
 
 "Even capitalization at the reproduction value of the plants 
 may be as misleading in many ways as capitalization on supposed 
 earning capacity, because unskillful management or a changing 
 state of the market may either double the value of the plant or 
 halve it within a year or two, if we are to take as the basis of value 
 what it might actually bring in the market, which depends again, 
 ... on its earning capacity." 
 
 There are strong arguments on both sides of the ques- 
 tion, and it is not proposed to make any extended investi- 
 gation into this branch of the question. It should not be 
 difficult to decide as to whether the bonds of an industrial 
 corporation are reasonably protected and therefore reason- 
 ably safe, but the greatest sin committed in the name of 
 industrial finance is the issuance of a mass of preferred 
 and common stocks which have little if anything of col- 
 lateral strength behind them. These stocks can be said 
 to be without a " credit basis," and such being their char- 
 acter, they should have no standing as investments. On 
 this point Mr. D. R. Forgan expresses this opinion : 
 
 "Common stocks composed entirely of water and given away 
 as a bonus to help sell the preferred cannot be classed as investments, 
 and many of the preferred stocks represent so extravagant capital- 
 ization that they also should be avoided."
 
 CAPITAL CREDIT 67 
 
 The elements of safety to be studied in capital credit 
 are: (1) the subjective nature of the enterprise; (2) its 
 character for permanency of demand; (3) the actual value 
 of its holdings; (4) the comparative value or merits of 
 its franchises, patents, etc. ; (5) its ability to earn a 
 reasonable and steady interest on the investment; and 
 (6) the character of its management.
 
 CHAPTER V 
 PUBLIC credit: national, statp;, and municipal 
 
 CREDIT 
 
 The different races of the earth are represented by 
 many diverse forms of nationhood. Where the advance- 
 ment in business economy, in the arts, the sciences, and 
 other indications of a progressive civilization are of a 
 marked character, the nations so distinguished must look 
 to credit as one of the great enabling influences in their 
 efforts to achieve commercial supremacy and, its con- 
 comitant, national glory. This applies especially to the 
 requirements of modern times, for it is an incontrovertible 
 fact that to-day any nation which is not in high credit and 
 therefore able to command prompt financial aid for such 
 undertakings as may seem necessary or advisable — viz., 
 v^^ar, great internal improvements, acquisition of foreign 
 territory, or any of the numerous sources of activity 
 which are part of the life of every great country, will 
 find her course to progress blocked, and national retro- 
 gression a result. 
 
 Attention has been called to the power of the banking 
 community in directing as well as almost regulating the 
 affairs of the world ; and the nation which has incurred the 
 displeasure of that great power labors under tremendous 
 difficulties. The moral aspect of any people will be re- 
 68
 
 PUBLIC CREDIT 69 
 
 fleeted in the character of their credit as a nation. The 
 basis of public or national credit is relatively the same as 
 that of individuals or small-sized collective bodies or the 
 largest corporations. 
 
 High credit is indispensable in modern society, not 
 only on the part of individuals but nations, for without it 
 the intensely exacting demands and necessities of this age 
 of specialized endeavor cannot be satisfied. 
 
 Wherever there is credit there is debt. If it were not 
 for the latter there would be no necessity for the former. 
 It is the duty of commanding the use of certain things 
 that brings credit into play, and it is also this duty that 
 is the genesis of a debt. The word duty is used in order 
 to distinguish the desires which find their source in legit- 
 imate necessity from those which are the offspring of 
 mere caprice, v;liim, or pleasure. When the use of credit 
 is invoked because of the latter, and sustains the slightest 
 overstraining in order to gratify them, there an abuse of 
 credit has taken place, with a corresponding loss to the 
 productive functions of capital. 
 
 National debts are not of great age, for generations 
 themselves are but milestones in the life of a people, and 
 the debts of the foremost nations of the earth are the 
 product of the past two centuries. That of England dates 
 from the last decade of the seventeenth century, or from 
 the period when there were firmly laid the foundations 
 of that national supremacy which she has since so effect- 
 ively maintained. 
 
 The causes leading to the creation of public debts are 
 
 "war expenditures," "public works," and "funded debts." 
 
 Expenditures for war purposes have always been the 
 
 most burdensome that a nation has to meet. The capital 
 6
 
 70 CREDIT AND ITS USES 
 
 ^vbich is utilized in the prosecution of a war (especially 
 one of the modern character, where the outlays run 
 " into a million a day ") is capital the use of which yields 
 nothing in behalf of the productive welfare of the people. 
 Let us consider what a blessing it would be if the funds 
 which have been consumed in conducting the Russo- 
 Japanese war had been used by these nations in the 
 productive arts. Think of the vast new acreage which 
 could be opened, the splendid results which the applica- 
 tion of modern agricultural tools would produce, the great 
 factories that could be constructed, the new industries in- 
 troduced, the incalculable knowledge imparted to the peo- 
 ple so that they might be competent to proceed with the 
 vocations which this new capital would provide, the new 
 schoolhouses that could be erected and the instruction 
 diffused. 
 
 The causes leading to public expenditure are more 
 pressing in the modern than they were in the ancient or 
 mediaeval eras. The cost of war is greater, notwithstand- 
 ing the greater ease of communication by land and sea. 
 The efforts to promote national enterprise, comfort, and 
 health lead to more exacting demands in the nature of 
 public improvements or public works, and the constant 
 accretion of expenditures which overlap the provisions of 
 budgets and legislative appropriations creates a floating 
 debt which in time must be " funded " or made part of 
 the " permanent " debt of the nation. 
 
 The greatest care must be observed in the appropria- 
 tions of money for public purposes, because of the possi- 
 bility that there may be a fluctuation in the revenues col- 
 lected. This fluctuation may represent the collection of a 
 larger amount than was anticipated, or a much smaller
 
 PUBLIC CREDIT 71 
 
 one. If a larger amount be collected, it means that a 
 surplus will be created, with all the danger that this sur- 
 plus will lead to prodigality and reckless legislation. If, 
 however, there should be a deficit, it means that unless 
 the government has ample funds in its treasury to cover 
 it, money must be borrowed for that purpose; and when 
 a government has to borrow money for normal expendi- 
 tures, it indicates that it is living beyond its means, and an 
 impairment of its credit is the consequence. At the close 
 of the fiscal year, ending June 30, 1905, our Government 
 had a deficit of $24,000,000 ; but this amount was easily 
 replaceable from its general fund, and the fact that the 
 deficit had been anticipated for almost a year, discounted 
 any unfavorable comment its appearance would possibly 
 suggest. 
 
 The theory has been advanced that great public debts 
 are a healthy sign and denote that the nations owing 
 them must be very active forces in the world's affairs, and 
 further, that they must be in high credit; to be able to 
 create large debts presupposes good credit. This theory 
 has been very determinedly attacked from some influen- 
 tial sources that have not hesitated to apply to it severe 
 criticisms. A large public debt means a correspondingly 
 large interest payment, which must be derived from 
 taxation. 
 
 There is not the slightest doubt that the ability to 
 create large public debts leads a nation into extravagance. 
 If the people are uncomplaining, and money can be bor- 
 rowed easily, those who have charge of the question of 
 appropriations will not exercise the same prudence as 
 they would if held to strict accountability. Economists 
 also demur at the creation of great public debts, for the
 
 72 CREDIT AND ITS USES 
 
 plausible reaaon that funda which a govermnent absorbs 
 for its own purposes are withdrawn from other fields 
 where they might be utilized in promoting the productive 
 arts. The damage incident to this condition is apparent in 
 the repression of productive capacity. The interest of the 
 people is withdrawn from this essentially necessary course 
 of human action, and indifference to the strict require- 
 ments of economic design makes itself felt It is obvious 
 that a people schooled in the methods of productive capac- 
 ity will be more industrious and saving, and become more 
 independent of foreign help than a people that does not 
 possess these traits. Hence every influence that tends to 
 unduly divert capital from the commercial betterment and 
 progress of the nation is to be deplored ; to minimize this 
 evil is the duty, and should be the special pride, of ad- 
 vanced statesmanship. 
 
 Having considered some of the shadows of the picture, 
 it is in order to contemplate its lights. The necessity of 
 maintaining a high credit, which every great nation must 
 regard as one of its cardinal obligations, has the effect 
 of imbuing the people with a deep sense of the responsi- 
 bility imposed upon them both individually and collect- 
 ively. A people that has the proper respect for its own 
 position among the family of nations will endeavor in 
 every possible way to assist the ruling powers in so dis- 
 posing the capacities and wealth of the nation as to make 
 them coimt to the greatest advantage in establishing and 
 maintaining the nation's credit. The consequence of these 
 sentiments is a spirit of pride in the national growth and 
 position which cannot fail to produce an exaltation of 
 national feeling and patriotism, all of which — providing 
 it does not descend to Chauvinism — ^makes for national
 
 PUBLIC CREDIT 73 
 
 progress. Again, it may be claimed, and with excellent 
 warrant, that a people so imbued will accommodate itself 
 to the necessities of the government, and, if necessary, will 
 practice such economy and self-restraint, even in personal 
 affairs, as will leave the largest possible measure of 
 material and financial substance to be devoted to the pur- 
 poses of the government, particularly in times of great 
 national peril and trial. A splendid example of this 
 phase of national life has been shown in the attitude of 
 the Japanese people, who have not only established, but 
 succeeded in maintaining, under conditions which most 
 authorities were at first inclined to regard as discourag- 
 ing, a public credit which is one of the marvels of latter- 
 day history. 
 
 There are two methods by which a nation can exercise 
 its credit: one by the sale of its bonds and the other by 
 the issuance of its paper, redeemable and irredeemable. 
 The bonds of certain governments have come to be re- 
 garded as one of the highest and safest forms of invest- 
 ment. They may or may not have any security behind 
 them. Bonds which sell at advantageous rates, unpro- 
 tected by any collateral agreements, indicate the advanced 
 state of public credit the disposing nation enjoys. A 
 favorite method of guaranteeing government bonds is by 
 pledging certain revenues, such as imports and other 
 taxes, as security for their liquidation. As an example 
 of this character of bond may be mentioned an issue of 
 the Japanese Government (July 8, 1905) of which the 
 following is an abbreviated description:
 
 74 CREDIT AND ITS USES 
 
 £30,000,000 
 
 IMPERIAL JAPANESE GOVERNMENT FOUR-AND- 
 
 A-HALF-PER-CENT STERLING LOAN, 
 
 (Second Series) 
 Due July 10, 1925. 
 With Option To The Imperial Japanese Government To Redeem 
 All or Any Part On or After July 10, 1910, Upon Giving Six 
 Months' Notice. 
 
 Secured by a Charge on the Tobacco Monopoly Revenues 
 OF the Empire, as Stated Below. 
 
 Created Under the Authority of Imperial Ordinances Numbers 
 194 and 195 of His Majesty the Emperor, Both Promul- 
 gated July 8, 1905. 
 
 Coupon-Bearer Bonds in the Denominations op £20, £100, 
 
 AND £200. 
 
 Semiannual Interest Payable January 10th and July 10th, at 
 the Office of the Yokohama Specie Bank, Ltd., in London, at its 
 Agency in New York, and Through the Deutsch-Asiatische Bank, 
 Berlin. 
 
 Principal and Interest Payable in London in Sterling, in New 
 York in United States Gold Dollars at the Fixed Exchange of $4.87 
 per Pound Sterling, and in Germany in Reichsmarks at the Fixed 
 Exchange of Mks. 20.45 per Pound Sterling. 
 
 The London Issuing Banks Make the Following Statements in 
 Their Prospectus Which Has Been Approved by Korekiyo Taka- 
 hashi, Esq., Vice-Go vernor of the Bank of Japan, the Duly Author- 
 ized Special Financial Commissioner of the Imperial Japanese 
 Government : 
 
 "This loan is repayable at par, July 10, 1925, but the Imperial 
 Japanese Government reserves the right to redeem at par all or 
 any of the bonds on or at any time after July 10, 1910, on giving
 
 PUBLIC CREDIT 75 
 
 six months' previous notice. Partial redemption to be effected 
 by drawings, in the usual manner, at the office of the Yokohama 
 Specie Bank, Ltd., London, and the New York Agency of the same 
 bank, and in Germany at such agency or agencies as the Yokohama 
 Specie Bank, Ltd., shall determine under the instructions of the 
 Imperial Japanese Government. The loan is secured both as to 
 principal and interest by a charge, hmited to £30,000,000 and the 
 interest thereon, upon the annual net revenues of the Imperial 
 Japanese Government Tobacco Monopoly and subject only to the 
 charge in favor of the prior Loan of £30,000,000. The Imperial 
 Japanese Government has the exclusive right to control the cultiva- 
 tion and production of the leaf, and to purchase, import, manu- 
 facture, and sell tobacco. It thus possesses the entire monopoly 
 of the tobacco trade within the limits of the Japanese Empire. 
 The estimated net revenue for the fiscal year 1905-06 from 
 this source is 32,011,072 yen, which at the exchange of two 
 shillings and half-penny per yen is equal to £3,267,796. 18s. 
 8d. The actual receipts for the first quarter have proved 
 
 VERY satisfactory." 
 
 The notice of which the foregoing is an excerpt was 
 advertised in the l^ew York papers under date of July 
 11, 1905. Two days afterwards a news item in one of the 
 leading metropolitan papers announced that the loan had 
 been largely oversubscribed. This shows the value of good 
 credit. 
 
 While it is the custom among certain nations to in- 
 dicate a payable date for bonds issued by them, it is 
 generally understood that such securities will run in- 
 definitely. This is not a disadvantage but an advantage 
 to investors, for it enables them to make investments with 
 a reasonable certainty that they will not feel called upon 
 to disturb them ; they can look forward to a continuous 
 and steady income, and they also have the advantage that 
 will come to them from any advancement in the value of
 
 76 CREDIT AND ITS USES 
 
 the securities. As long as the credit of the issuing nation 
 remains sound, all the attributes mentioned are brought 
 into play. 
 
 The second method to which reference was made was 
 the issuance of paper, or the recourse to paper credit. 
 The acceptance of the paper issues of a government with 
 freedom and confidence indicates also a state of high 
 credit, but it must be regretfully acknowledged that in 
 no other form has " credit " been more persistently or 
 violently abused than in the paper issues of different 
 national and state governments. In this treatise it is 
 possible to give this question only passing attention, but 
 enough may be said to indicate the evils that have crept 
 into and out of the system. 
 
 The difference must be noted between paper money 
 secured by coin deposits, government bonds, or otherwise, 
 and paper money which is simply put forward with either 
 no promise as to its future payment, no interest-bearing 
 covenant, or with such a character of promise as contains 
 no substantial prospect of fulfillment. There is, or has 
 been, quite a numerous body of our own citizenship who 
 have held to the theory that anything in the form of paper 
 issued by the Government is money, and good money. 
 The basis of their belief (or heresy) is that the fiat, the 
 dictum, the declaration of the Government gives to either 
 paper or coin the value represented in the special denomi- 
 nation this paper or coin bears; and not even the try- 
 ing and instructive experiences of 1893-96, when the im- 
 possibility of maintaining the credit of the Government 
 and the credit of silver without recourse to humiliating 
 expedients was fully demonstrated, has convinced them 
 of the errors of their views.
 
 PUBLIC CREDIT 77 
 
 Fiat money is described as: 
 
 "Inconvertible pai>er money, not even containing a promise to 
 pay, but issued by the state with the bare assertion of its identity 
 with true money, although no provision is made for its exchange 
 for specie. . . . When a government is forced to this measure, the 
 state of its finances is virtually bankruptcy. The name ' fiat money ' 
 was first given to irredeemable paper currency during the so-called 
 Greenback agitation in the United States after the Civil War, 
 from the claim of the Greenback party that the fiat of the Govern- 
 ment could itself give value to a circulating medium." 
 
 Public credit can never be effectively maintained or 
 promoted by any such system of paper currency. The in- 
 terests of such credit require that every output of the 
 Government should be so protected as to insure its liquida- 
 tion, or that the quantity of such issues should be in pro- 
 portion to the possibilities of honorable liquidation. The 
 greenbacks issued by the Union at the time of the Civi^ 
 War have for years been a source of great solicitude to 
 those who have the credit of the nation at heart, and they 
 were one of the causes of the financial troubles of the Gov- 
 ernment during the panic of 1893. That public credit 
 depends on confidence to an unlimited extent may be 
 illustrated by one of the phases of that panic, which for- 
 mer President Grover Cleveland has referred to in his 
 essay on " The Bond Issues " in the " Presidential Prob- 
 lems." It is this: 
 
 " Another most important condition of mind among the people, 
 however, grew out of, or at least accompanied, their acceptance of 
 the redemptive sufficiency of the gold reserve as constituted. The 
 popular belief became deep-seated and apparently immovable that 
 the reduction of the gold reserve to an amount less than $100,000,000 
 would, in some way, cause a disastrous situation, and perhaps justify 
 an apprehension concerning our nation's financial soimdness. Tlius
 
 78 CREDIT AND ITS USES 
 
 a gold reserve containing at all times $100,000,000 came to be re- 
 garded by the people with a sort of sentimental solicitude, which, 
 whatever else may be said of it, was certainly something to be 
 reckoned with in making our national financial calculations." 
 
 Reference has been frequently made to the sensitive- 
 ness of credit, and the foregoing passage from the pen 
 of My. Cleveland exemplifies the great delicacy of the 
 credit system. As he shows, the fear and distrust of the 
 people was due not so much to their understanding of 
 the exact amount that would be requisite to protect the 
 credit of the Government, as to the fact that the arbitrary 
 and probably unscientific figure established by Congress 
 had been subject to an impairment. That this figure of 
 $100,000,000 did not set any absolute mark of safety is 
 shown by the fact that subsequent legislation by Congress 
 placed the figure below which the reserve should not be 
 permitted to go, hereafter, at $150,000,000. 
 
 Public credit necessarily refers to the credit used by 
 all political divisions and therefore covers the credit of 
 States and their subdivisions, such as counties, cities, 
 townships, villages, etc. Professor Bryce introduces bis 
 remarks on " State Finance," in the " American Common- 
 W'Calth," with these words: 
 
 "The financial systems in force in the several States furnish 
 one of the widest and most instructive fields of study that the 
 whole range of American institutions presents to a practical states- 
 man, as well as to a student of comparative politics." 
 
 The diversity of interests, agricultural, mining, manu- 
 facturing, and commercial, represented in the States im- 
 poses just as iraportant considerations for the judgment 
 of the statesman as do those of the federal Government.
 
 PUBLIC CREDIT 79 
 
 The fact that in all matters of strictly local concern the 
 State has a free hand under the federal compact, makes 
 the duty of each in advancing its own interests and main- 
 taining its credit just as primal a necessity as if each 
 State were an entirely independent principality and ac- 
 countable to no one. The credit of the States has been 
 subject to the same curses that have crept into other polit- 
 ical organisms, and in some cases these abuses have taken 
 the form of outright repudiation of obligations, from 
 which the creditor is without relief. The national Gov- 
 ernment is a sovereign one ; and in all matters where the 
 Constitution does not define certain rights and duties as 
 belonging exclusively to the federal Government the sov- 
 ereignty of the States has not been impaired. This role 
 of sovereignty carries with it an element of danger to those 
 who purchase the obligations of a nation or state so con- 
 ditioned, for it means that they may be at any time 
 repudiated. Venezuela has obligated itself to pay certain 
 sums to England, France, Germany, and Italy, and the 
 customs receipts have been mortgaged as security for the 
 payment of the amounts awarded by the Hague Tribunal. 
 But a war between many nations might bring about a 
 condition of affairs whereby the effects of this decision 
 would be entirely upset. Treaties between nations are 
 binding until they are broken. Where a nation forces an- 
 other to do certain things, it is usually because of her 
 superior strength, or because she has made it to the inter- 
 est of the country with whom she is treating to do these 
 things. It is either force or cupidity, and very seldom 
 moral suasion, by which agTeements between nations are 
 effected. It is not a sense of legal obligation that impels 
 such agTeements. A sovereign state or nation is the sole
 
 80 CREDIT AND ITS USES 
 
 judge of -vvhat she will do or will not do. Enough has there- 
 fore been said to show the desirability of high credit on the 
 part of nations and states, and one leading element of 
 that credit will be the faith that the community reposes 
 in the fulfillment of obligations. A state which has re- 
 pudiated her guarantees at any period will hardly have as 
 good credit as one that has always respected those into 
 which she has entered. 
 
 The recital of the foregoing danger signals may be 
 regarded as superfluous, but they are fundamental ques- 
 tions for consideration under the head of public credit. 
 What would apply, however, to State securities in the 
 matter of possible repudiation could not affect municipal 
 obligations; for municipalities can be proceeded against 
 in the same sense that individuals may, and compelled to 
 respect their obligations. The propensity to extravagance 
 on the part of municipalities has also been so pronounced 
 that they are in many cases prohibited from incurring 
 obligations in the shape of funded indebtedness in excess 
 of a certain percentage of the gross valuation of all the 
 taxable property of the corporation. This percentage 
 varies, in some cases being ten per cent, in others two and 
 a half per cent or two per cent, and in some States the 
 cities are required to secure the sanction of the Legislature 
 for any expenditure outside of regular rimning expenses. 
 The need for such a requirement hardly invites explana- 
 tion. Without such limitation those in control of munici- 
 palities and other subdivisions of the State would enter 
 upon a reign of prodigality from the consequences of 
 which the local government could not escape. This would 
 prove not only a great burden to the people, but ruinous 
 to the credit of the city. Debts which were the result of
 
 PUBLIC CREDIT 81 
 
 waste and extravagance might stand for many years in the 
 way of the institution of reforms and improvements which 
 the best interests of the people would sorely demand. 
 Many State and municipal securities are rated among the 
 best possible investments, and the low rate of interest at 
 which they can be marketed is proof of the excellent credit 
 of the issuers.
 
 CHAPTER VI 
 
 INDIVIDUAI. OE PEKSONAL CREDIT 
 
 The most popular form of credit, popular in the ex- 
 tent of its practice, is individual or personal credit. The 
 title " individual " has been' applied to this branch of 
 credit to distinguish it from the credit utilized by those 
 who act as distributors of merchandise. The latter are 
 undoubtedly fulfilling a public or quasi-public function, 
 although the motives leading them to follow their differ- 
 ent vocations or trades are purely selfish or personal. 
 They are endeavoring to acquire a sufficient profit from 
 the handling of the goods in which they deal to support 
 themselves and their families, and if possible to accumu- 
 late a competence for use in old age. In the case of the 
 individual or consumer the credit he secures is solely for 
 personal reasons and uses. It brings to him those things 
 he finds it necessary to possess for the purpose of sustain- 
 ing life, clothing himself, and equipping his home with 
 suitable comforts and adormnents, of cultivating useful 
 knowledge, and providing for his pleasures. All this has 
 an exclusively personal function, or one for individual 
 activities only, and thus it is alluded to and understood 
 as " individual or personal credit." 
 
 Mr. Macleod defines " personal credit " as " a per- 
 son's purchasing power over and above his money: hence, 
 82
 
 INDIVIDUAL OR PERSONAL CREDIT 83 
 
 credit is a resource and wealth cumulative to money." 
 This refers more generally to the broad use of the indi- 
 vidual's power and ability to exercise his credit in bank- 
 ing and commercial circles than in the direction to which 
 a discussion of " individual or personal " credit tends, 
 in its commonly accepted interpretation. 
 
 In order to further differentiate " individual credit " 
 from the exercise of personal power or ability to control 
 " credit " on the broader lines indicated, it is sometimes 
 entitled " Consumptive Credit," on the theory that indi- 
 vidual, strictly personal, or consumptive credit covers 
 those phases of credit which spend themselves in the con- 
 sumption or annihilation of necessities and articles of 
 luxury as opposed to those utilities of credit which assume 
 a productive or distributive character. 
 
 Individual or personal credit can be said to be the 
 basest form of credit, in that it depends less upon a 
 capitalistic or collateral basis than any other branch of 
 credit. At the same time, as the earliest form of credit, 
 it was the foundation of all the other divisions of credit. 
 The theory of credit, and following that the system of 
 credit, rose from the institution of personal credit. The 
 latter is therefore of the most primitive origin, and is a 
 product of certain natural influences, which, in turn, gen- 
 erated trust among the people as to the honest perform- 
 ance of engagements entered into, and the safe return of 
 any property lent, either in its original or equivalent form 
 as the contract might provide. 
 
 One of the best practical treatises on individual credit 
 which has been written is that entitled " Individual Cred- 
 its," by James G. Cannon, vice-president of the Fourth 
 National Bank of New York. In it he has explained
 
 84 CREDIT AND ITS USES 
 
 in a most lucid way the basis, practice, and evils of this 
 division of the credit family. Mr. Cannon claims that 
 " the credit structure has been reared upon faith and 
 supposition rather than upon tangible property and finan- 
 cial strength," As a criticism of the looseness with which 
 the question of credit has been treated, the opinion is jus- 
 tified. It should not, however, be interpreted as a vindi- 
 cation of the idea that goods, and goods only, can be 
 scientifically considered the basis of credit; for no writer 
 among either professionals or laymen has done more to 
 give to character and capacity, as personal elements, a 
 more commanding place in the " dynamics of credit " than 
 the able authority referred to. It is a timely warning that 
 individual, and all other branches of credit, should be 
 reduced to a systematic basis ; and that the better defined 
 the system, the safer will be the credit dispensed, especially 
 in its influence upon the business morals of the people. 
 The duty, therefore, which imposes itself upon business 
 men is to " build a better basis for individual credits," 
 in order that " the whole commercial edifice ... be 
 strengthened with benefit to all concerned." 
 Mr. Cannon says further: 
 
 "The evils from which the mercantile community suffers seem 
 ... to be due, not so much to lack of money or capital, as to the 
 lack of an intelligent and proper use of credit. If we can inspire 
 a healthy public sentiment in regard to all forms of credit, it will 
 serve greatly to facilitate needed reforms." 
 
 The elements of individual credit cannot be said to 
 differ materially from those of the other divisions of 
 credit. While the elements should be and in some cases 
 are the same as in commercial credit, the fact is that in
 
 INDIVIDUAL OR PERSONAL CREDIT 85 
 
 a great mass of the individual credit practiced, some of 
 these elements are wholly lacking. The nature of the 
 economic and social position of the person is such that 
 he cannot be expected to develop all these elements. In 
 individual credit there is less system followed than in the 
 other branches. The stronger the character, the earning 
 power, and wealth of the applicant for credit, the safer 
 the risk and the greater the freedom with which credit 
 may be extended. 
 
 This credit is extended to a vast number of people. 
 The task of classifying them is a most onerous one. Their 
 earning power is a question of the widest possible variance, 
 as is also the nature of their family responsibilities and 
 demands. The mercantile agencies can with reasonable 
 correctness classify all dealers, manufacturers, wholesalers, 
 jobbers, commission men, and retailers under a brief 
 table of cleverly devised classifications or ratings, indi- 
 cating character, worth, and paying qualities; but the 
 attempt to accomplish such a result in connection with the 
 armies of labor and professional life would be an under- 
 taking requiring long years of patient and unrequited 
 service, leaving aside the tremendous financial outlay it 
 would involve. Further, there is the almost insurmount- 
 able difficulty of holding those who dispense this credit 
 to any code or set of rules ; and this difficulty arises from 
 the economic status of the credit seekers as well as from 
 the number concerned. Here you have a great aggrega- 
 tion of credit dispensers, treating with all sorts and con- 
 ditions of men, subject to all known phases of social and 
 political advantage and disadvantage — the first demanding 
 on their merits; the second commanding, from the very 
 fact of their poverty and misery, such a share of the
 
 86 CREDIT AND ITS USES 
 
 materials for sustaining and improving life as their spe- 
 cial wants and desires will suggest. Mr. Cannon, in the 
 paper mentioned, inclined to the opinion, from which 
 there will be no dissent, that one of the evils of the credit 
 system, and particularly in individual credits, is the " too 
 great liberality " in extending credit. This liberality is 
 not due to any spirit of generosity or philanthropy, but is 
 the outcome of failure on the part of those who extend 
 credit to properly investigate and satisfy themselves as 
 to the credit standing and desirability of the applicant. 
 Very great advances have been made in the methods em- 
 ployed for making investigations and the means thereto 
 have been greatly extended. This refers to all branches 
 of credit; and while the omission to engage in such in- 
 vestigations may have been noticeably frequent in indi- 
 vidual credits, there is no division in w^hich it is more 
 manifest than in banking credit. The credit department 
 in the bank is the work of the past ten years, barring the 
 days of those who blazed the way for its institution, and 
 even to-day it is not as pronounced a feature in banking 
 as it is in commercial circles. There is certainly no good 
 reason why this should be so, for the volume of bank 
 credits would seem to demand every care that could reason- 
 ably be extended to it. 
 
 The failure to make proper investigations in individ- 
 ual credits may be traced to a few underlying causes. 
 (1) The cupidity of dealers in extending credit indis- 
 criminately in order to do a larger business than their 
 competitors. (2) The fear of offending patrons by ask- 
 ing entirely legitimate questions in regard to their means 
 and prospects, and thus driving trade away. (3) The 
 absence of sound knowledge on the part of dealers in re*
 
 INDIVIDUAL OR PERSONAL CREDIT 87 
 
 gard to the necessity of trusting their goods to those only 
 who are so circumstanced as to relatively insure payment 
 being made for them. (4) The lack of facilities among 
 the great mass of dealers for making such investigations 
 as are necessary. 
 
 A brief discussion of the foregoing reasons is in order. 
 (1) The desire to overreach one's neighbor is not always 
 due to abnormally selfish or unworthy motives. At the 
 same time in the struggles of competition it should be 
 borne in mind that unless the business done be a safe 
 business, the results are bound to prove disastrous. A 
 small business, with good collections and fair profits, is 
 always safer in the end than a big business built upon 
 unwise credits ; for the latter not only invites commercial 
 failure, but the mental and physical strain upon the 
 dealer is a detriment to him both in a personal and 
 business sense. (2) It is well known that consumers take 
 advantage of the dealer's fear of the effect upon a cus- 
 tomer's attitude because of questions regarding ability 
 to make payment, and there are many who trade upon 
 this very fear and defraud their creditors accordingly. 
 A good presence, a bold manner, and an assertive method 
 of expression have a powerful effect upon the mind of 
 the local tradesman, and he gives credit without reliable 
 knowledge as to whether or not his bills will ever be paid. 
 Even when tardiness in payment may cause misgivings, 
 he hesitates to offend that important personage, his cus- 
 tomer, for fear his competitor will take the trade away. 
 (3) The absence of knowledge on the part of dealers of 
 the duty they owe themselves in making investigations 
 of their customers' standing. This is a general condition 
 and one attributable to lack of educational methods on the
 
 88 CREDIT AND ITS USES 
 
 part of those who dispense banking and commercial credit 
 The latter should make it plain to the retailer that he 
 ought, for his own safety (and his safety means the safety 
 of the banker and wholesaler), to satisfy himself that 
 those to whom he is giving credit are worthy of it. The 
 retailer's ability to pay the wholesaler or jobber, or to 
 pay' his banker for a loan, depends on whether he can col- 
 lect his own accounts promptly and fully. If he cannot 
 pay his creditor, the latter in turn cannot pay his, whether 
 he be banker or manufacturer; and the falsity and un- 
 soundness of individual credit and the losses attending 
 it are reflected through the whole commercial structure 
 with results that make for financial disaster. (4) The 
 department stores and large retail establishments usually 
 have employees whose duty it is to make necessary credit 
 investigations. In addition to their own independent in- 
 quiries, they can avail themselves of the services of the 
 mercantile agencies and other sources of credit informa- 
 tion, such as retail mercantile agencies and cooperative 
 agencies which they themselves maintain, and to which 
 they in turn contribute such information as they may 
 possess in regard to a customer when called upon to do so. 
 The majority of dealers are without these facilities. They 
 cannot afford to employ people for this purpose; nor to 
 subscribe to the mercantile agencies, neither can they 
 afford to belong to the cooperative bureaus. While the 
 owner of the business might appreciate the necessity of 
 making proper investigations, he cannot afford to give 
 such work the necessary time. In a small business the 
 element of time is a very important one, and has to be 
 figured in dollars more frequently than in a large estab- 
 lishment where the volume of profits justifies a more
 
 INDIVIDUAL OR PERSONAL CREDIT 89 
 
 painstaking care for every business detail. Undoubtedly 
 the dealer would save money by giving the question of 
 credit standing more attention, even if to do so meant 
 the omission of other duties. 
 
 That many people are given credit when they have 
 little basis for it, or by their failure to make prompt pay- 
 ment have sacrificed their right to it, is a matter of 
 common knowledge. That it is not an easy matter to 
 obtain satisfactory information in regard to people who 
 seek individual credit is a fact known to all who have 
 had practical experience in credits. This difficulty should 
 lead to the development of every honorable means for safe- 
 guarding credit extension in this form, and, if necessary, 
 to the withholding of credit until satisfactory advices are 
 secured. On the other hand, there are many people 
 respecting whom it is possible to learn very little. A 
 man on a plain salary offers little opportunity for ex- 
 tended investigation, and the opportunities of judging of 
 the " moral " risk involved is difiicult from the fact that 
 little Is known of him ; as Mr. Cannon says : 
 
 " You would be surprised to learn that some of the richest and 
 most substantial houses in the larger cities will seek for data through 
 the instrumentality of janitors of apartments, butchers, and trades- 
 people generally." 
 
 Closely related to the subject of individual credit is 
 the question of the effect of credit on prices. The latter 
 determine the cost of living, a question of vital importance 
 to those who depend upon their earning power, as it is 
 upon the consumer that the final and full effect of price 
 changes manifests itself. 
 
 In a reference to credit as a creator of purchasing
 
 90 CREDIT AND ITS USES 
 
 power, attention was called to the view of Mr. Mill that 
 " credit, in short, has exactly the same purchasing power 
 with money, and as money tells upon prices not simply 
 in proportion to its amount, but to its amount multiplied 
 by the number of times it changes hands, so does also 
 credit," thus having an effect (and an appreciable one) 
 on prices. 
 
 Where, as in our country, credit is resorted to by the 
 humblest, and is in universal practice by the smallest 
 dealers, there must be some compensatory element for 
 the interest on the capital represented in the amounts 
 trusted out by them and which they thus forfeit, and for 
 the losses from uncollectible accounts. This loss must be 
 an enormous one when viewed in the aggregate. As ex- 
 pressed by Mr. Daniel B. Murphy, of Rochester, IsT. Y., 
 in his paper on " The Objects and Possibilities of Credit 
 Men's Associations " (April 17, 1900) : 
 
 "The entire story is not yet told. These stupendous figures (an 
 average reported loss of $178,871,026.70 for ten years, 1890-1899) 
 - — 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 crossroad, 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 sustained by those engaged in the learned 
 professions — notably by the physicians of the country — nor do the)' 
 include the enormous losses of a personal and confidential nature, 
 that are not submitted to the gaze and scrutiny of the public." 
 
 The consumer must recompense the dealer for the loss 
 to him of interest on capital and from spurious accounts; 
 and this recompense is made to the merchant in the form 
 of an advance in the selling price. Further, the very
 
 INDIVIDUAL OR PERSONAL CREDIT 91 
 
 nature of credit involving a deferrence in the time of pay- 
 ment, creates in ihe consumer an inclination to gratify 
 liis wants with a freedom that would be entirely lacking 
 if cash were the basis of his dealing. In this way an 
 extra, and it might be said an excessive, demand for 
 goods is created; and this demand, not being at all times 
 and in all lines or articles easily met or satisfied, produces 
 an advance in prices. This advance the consumer must 
 pay, and in most instances is perfectly willing to pay, 
 for the reason that his credit enables him to prepare for 
 the due date of payment, and he will discount the possi- 
 bilities of the future in his desire to possess the things 
 of the present. 
 
 Credit is sought for almost every want and desire of 
 man. The range of credit functions begins with the 
 actual necessaries of life and ends with the rarest forms 
 of luxury. It is a debatable question whether those who 
 seek credit for the necessaries of life, by which are meant 
 food and other things absolutely required to preserve 
 health and a minimum of comfort, are not more harmed 
 than benefited by the credit they secure. In this class may 
 be considered laborers, tradesmen, and mechanics who are 
 working for wages payable weekly, semimonthly, or 
 monthly. With the amount of a month's wages in hand 
 at the beginning of a month, a well-behaved husband and 
 prudent wife, held to cash payments, will accommodate 
 themselves to their known means ; they will not pay a 
 larger sum for house rent than their income warrants; 
 they will not indulge in luxuries that their means will 
 not justify, but will endeavor to save something, be it 
 ever so little, to form the nucleus of a fund for the time 
 when the man, the provider, may be out of employment,
 
 92 CREDIT AND ITS USES 
 
 or sickness come upon them. Reverse the picture and 
 put them on a credit basis and the gratification of their 
 wants not being restrained by the necessity of parting 
 with the cash in hand, but rather stimulated by the 
 thought that Mr. So and So will wait for his money until 
 pay day, the desire to secure some other boon which 
 reqilires the outlay of spot cash prevails, and the thing is 
 done. Mr. So and So does not get his money on time and 
 the people are in debt. This is a viBry simple word pic- 
 ture of an everyday experience. Can it be avoided ? 
 Possibly not under our present economic system ; but any 
 measures of restraint which will curtail the evils of credit 
 among this class of people, evils to them morally and 
 financially, as well as evils to the dealer, should be in- 
 voked. One effective method would be to restrict the 
 amount of credit to be allowed in a week, to insist upon 
 payment when due on pain of a withdrawal of credit, and 
 an agreement among the dealers that they will not extend 
 credit to anyone who has been rejected on the grounds men- 
 tioned until a settlement is made. The so-called black list 
 of the beef trust, as far as it referred to the withdrawal 
 of credit from dealers whose imdesirability was based on 
 their failure to pay for goods, involved a necessary busi- 
 ness policy. 
 
 There is one form of organized credit extension to 
 workmen that should be mentioned, and that is the credit 
 given through the so-called company stores conducted by 
 large industrial and mining corporations. These stores 
 are conducted with the idea that they will yield a profit, 
 and the system employed as to charges has had the effect 
 of causing great dissatisfaction among the employees. It 
 is not an unusual experience that with the small wages
 
 INDIVIDUAL OR PERSONAL CREDIl 93 
 
 paid in many callings, at the end of the month or at the 
 time when the wages are due it is discovered that the 
 workman has nothing coming to him, as the credit he has 
 " enjoyed " at the company stores has represented all and 
 more than is due him. In this way workmen are kept 
 continually in debt to the company, and a man becomes 
 more like a serf than an independent workman. The 
 prices charged workmen at the company store have not 
 infrequently been the cause of disturbances between labor 
 and capital, and the relation of individual credit, thus 
 granted, to the great labor problem becomes an interesting 
 study. 
 
 There is another very numerous class which is con- 
 stantly in the market for individual credit. This class is 
 composed of public officials, lawyers, doctors, clergymen, 
 educators, teachers, architects, civil engineers, real-estate 
 agents, insurance agents, bank clerks, salesmen, account- 
 ants, bookkeepers, etc. With these, other elements enter 
 into the constitution of the credit than with the class 
 recently discussed. These elements are mainly character 
 and earning power and means represented in personal and 
 real property. 
 
 Character has an important place in individual credit 
 as well as in the other primary divisions. A man of good 
 character can be depended upon to liquidate his indebted- 
 ness if it be possible for him to do so, although continued 
 sickness or the loss of his position may frequently prevent 
 his living up to his engagements as to time; but in such 
 a case, when the debtor finds himself in a position to pay, 
 be will do so. Further, a man of sound character can be 
 depended upon not to live beyond his means nor to engage 
 in dissolute and profligate devices. A salesman, in the
 
 94 CREDIT AND ITS USES 
 
 receipt of a good steady salary and possessing the element 
 of chanicter as it Las been defined, will make a better 
 credit risk than a person who is depending upon a small 
 income from real estate, for the failure of a mortgagee to 
 pay his interest promptly may retard the payments of 
 such a person. Many lawyers, doctors, and others of those 
 enumerated above are, as far as their earning capacity is 
 concerned, better credit risks than small merchants ; for 
 their incomes are large and the very nature of their pro- 
 fessions, being of a semipublic character, is an incentive 
 to them to stand well in the community, and by this is 
 meant to be in good credit. A thing to be remembered, 
 however, in connection with professional men, insurance 
 agents, and others of similar callings is the propensity 
 to extravagance. Insurance men and salesmen, those of 
 the higher grades, are compelled to do considerable " en- 
 tertaining " as a means of acquiring and holding " busi- 
 ness " ; and this undoubtedly leads men into extravagant 
 methods and high living. A man's taste for dress, pleas- 
 ure, and his associations are all questions which have a 
 very decided bearing upon his credit acceptability, and 
 they should be carefully examined and passed upon before 
 an account is accepted, and also looked into periodically 
 during the continuance of such an account. Another point 
 to be considered is the propriety of a purchase. Is there 
 ■warrant for it? Is the person likely to require the char- 
 acter and quantity of goods selected ? As Mr. Cannon 
 has said : 
 
 "For instance, where a customer might, without criticism, buy 
 a $500 house-furnishing goods bill, he might very properly be 
 refused a credit of $300 for purchases made in the dress-goods 
 department."
 
 INDIVIDUAL OR PERSONAL CREDIT 95 
 
 From all that has been said, it is apparent that the 
 evils that have affected individual credit are chargeable, 
 quite as much to dealers themselves as to the remissness 
 of those to whom the credit is extended. Enough has al- 
 ready been adduced to show the general defects of the sys- 
 tem ; but there is one custom which has tended to generate 
 abuses on all sides, and that is the failure of both large 
 and small dealers to insist upon prompt settlements, or, 
 as a penalty, the withdrawal of credit favors. That a 
 great improvement has taken place in this respect during 
 the past ten years is to be admitted and applauded. As 
 far as the New York market is concerned, the credit for 
 this improvement must be accorded to a man who, some 
 ten years ago, accepted the position of credit man in a 
 leading retail establishment. He came to the conclusion 
 that one of the principal reasons for the backwardness of 
 people in the settlement of their accounts was the long 
 time to which customers felt they were entitled. This 
 man, who had thoroughly educated himself in all the in- 
 tricacies of commercial credit in its widest sense, proposed 
 to his firm that an innovation should be introduced in 
 the form of bills mailed promptly on the first of every 
 month, and that it be specified upon the invoices that 
 monthly settlements were expected. His suggestion was 
 received, as might have been expected, with diffidence, but 
 by urgent advocacy of his plan he finally induced his prin- 
 cipal to permit him to make the change. This permission 
 was granted, but with manifest pessimism as to the re- 
 sult. The outcome has been a revolution in the systems 
 followed previous to that time. 
 
 " We will give jou credit." This is the burden, and, 
 in some cases, the exact wording of signs that challenge
 
 96 CREDIT AND ITS USES 
 
 the attention of occupants of street cars, and pedestrians, 
 and which are found in attractive, well- worded advertise- 
 ments in the newspapers. Credit for everything — house- 
 hold goods, furniture, etc. — at prices which fully admit 
 of the long credit extended under chattel mortgage protec- 
 tion. To avail themselves of this credit and its so-called 
 advantages, people place themselves under burdensome ob- 
 ligations, and — ^what is the worst feature of the transaction 
 — buy more than they have any use for, more than they 
 have a right to purchase, their means considered, and are 
 led into expensive habits which are far more difficult to 
 overcome than to acquire. Clothing is another item which 
 retail houses are selling on credit, and the unfortunate 
 part of it all is that those least qualified to afford such 
 expenditures are led into making them. 
 
 Agents for jewelry, books, etc., go from business house 
 to business house importuning the employees to purchase 
 their wares, the favorite argument being, " You only have 
 to pay one dollar or two dollars per month," as the case 
 may be. Equally alluring is the advice of many adver- 
 tisements, of one of which the following is a literal tran- 
 scription : 
 
 " To achieve success you must look successful. Use your credit. 
 Wear a diamond. Diamonds win hearts. Diamonds increase in 
 value twenty per cent per year." 
 
 What a person does not need or require, in the actual 
 acceptance of these words, is not cheap, and should not be 
 purchased, no matter how favorable the terras. The evil 
 of all this consists not solely in the fact that those han- 
 dling the classes of goods enumerated realize an abnormally 
 high price for them, but that a large number who buy do
 
 INDIVIDUAL OR PERSONAL CREDIT 97 
 
 SO in the exercise of extravagance, "which leads to other 
 things more reprehensible. Unable to pay, they leave 
 their old surroundings, and strive to hold unjustly the 
 property they have agreed to surrender in the event of 
 their failure to pay for it. In arranging the price at 
 which these goods are placed upon the market, due pro- 
 vision is unquestionably made for losses from various 
 causes, and a faint idea may be gained of the percentage 
 of profit figured in order to cover it. 
 
 The willingness of mercantile houses to extend credit 
 manifests itself not only in liberal treatment to those who 
 seek such credit, but it has become the practice actually to 
 solicit patronage, offering the inducement of credit favors 
 as a leading argument. This practice is not part of the 
 general scheme to which reference has been made of the 
 " We will give you credit " class, but representative con- 
 cerns write nicely worded letters to a large number of 
 people, stating that they were ready to open accounts with 
 the recipients, or " we have placed your name upon our 
 list for a running account, and will be pleased to have 
 you avail yourself of it." It must happen that in this 
 way a great many undesirable people are solicited, and 
 their business accepted. The lists from which these names 
 are taken are usually those found in " elite directories," 
 than which no more unreliable basis could be thought of. 
 These directories contain the names of people who reside 
 in certain fashionable sections of cities, and it is pre- 
 sumed, evidently, that the mere fact of residence in such 
 a section presupposes means and good paying qualities. 
 To those who have looked into the subject and discovered 
 the scrimping that is practiced in order to support the 
 flaunting extravagance of many of these people, and usu-
 
 98 CREDIT AND ITS USES 
 
 ally at the expense of the grocer, butcher, milkman, etc., 
 the folly of such general solicitation of credit accounts 
 seems deplorable. It will not answer to say that even in 
 the event of people taking advantage of these offers to 
 open accounts, that when they are investigated and found 
 not entirely desirable they can be refused. That is not 
 the way the thing is done. A call is made in answer 
 to the note of invitation: a few goods selected, charged, 
 sent home ; a little later another call is made, more goods 
 purchased. Possibly, in the meantime, unfavorable in- 
 formation has been secured. The owner or manager or 
 credit clerk of the house, with profound apologies, makes 
 known the fact that the demon of doubt has entered his 
 mind in regard to the desirability of the account. Then 
 behold the virtuous indignation — the family honor im- 
 pugned — the explanations, clever to a degree, especially 
 if conveyed with the convincing subtlety of a bright- 
 minded woman. Then Mr. Owner or Mr. Manager or 
 Mr. Credit Man very often comes to the conclusion that 
 his information may have been slightly biased — that it 
 may have been unfavorably colored by a jealous com- 
 petitor, then Milady gets the goods. It would be useless 
 to maintain that the offer to give the credit in the first 
 place has not had an embarrassing effect upon the house, 
 for such an effect is undeniable. 
 
 " The age of luxury " is but another name for " the 
 age of extravagance." To the extent that individual or 
 personal credit is responsible for these conditions, reme- 
 dial methods and principles, containing nothing of harsh- 
 ness or drasticity, should be developed and inculcated.
 
 CHAPTER VII 
 
 COMMEKCIAL CEEDIT 
 
 The field of commercial credit is represented by the 
 demands and possibilities of trade interchange. Its scope 
 is therefore an expansive one, extending in area as the 
 influence of civilization becomes wider, and increasing 
 in its activities as the volume of trade grows larger. 
 Through the operations of commercial credit vast stores 
 of goods pass from hand to hand, and finally reach their 
 destined goal — consumption, in the natural course, or an- 
 nihilation, as in the case, for instance, of the munitions 
 of war. It is not necessary to recur to the vital infiuence 
 of credit in the promotion of trade and the expansion of 
 commerce, although in no respect are the forces of credit 
 more thoroughly exemplified than in the commercial world. 
 In commerce the credit system manifests its tremendous 
 power in a manner that appeals more strongly to the 
 understanding and appreciation of the individual than it 
 does in other branches of business activity. This is due 
 to the fact that commercial transactions are on a much 
 larger scale than transactions in individual credit, and 
 there is a greater degree of responsibility exacted by those 
 who extend the credit; for this reason the means at their 
 disposal for educating the people as to the proper require- 
 ments of credit are infinitely better. This condition makes 
 
 99
 
 100 CREDIT AND ITS USES 
 
 for a much safer basis of credit dispensation than would 
 be possible if the necessities of commercial life did not 
 impose upon those who partake of it a respect for the 
 obligations of tlie credit system. 
 
 The channels through which commercial credit oper- 
 ates are various: (1) There is the raw material, largely 
 direct from the bed of nature. This raw material must 
 be conveyed to those who will weave it, or otherwise de- 
 velop it, into fabrics or articles answering every known 
 demand of the human family. (2) The finished or manu- 
 factured article is then to be turned over to those who 
 have a market for it, or who have the ability and means 
 to create a market for it. (3) The men of the market, 
 in turn, dispose of this article in quantities according to 
 the demands of the retailers. (4) The latter are those 
 who cater to the multitude, the unit of which is the con- 
 sumer, who typifies the last station or stopping place on 
 the road of commerce. 
 
 Goods are moved through the different channels of 
 commercial intercourse by the medium of credit. Sup- 
 pose that the producer is not equipped with the capital 
 necessary to conduct his operations, and is compelled to 
 seek accommodation from his bank. Tliis he obtains either 
 on the score of the confidence entertained in his living 
 up to his promises, or by providing the bank wnth security 
 upon certain of his belongings or upon the finished product 
 he is about to market. The manufacturer to whom he 
 sells may be required to give his note to the producer. In 
 this note the producer has one of the best bases of credit, 
 viz., a negotiable instrument "which the bank will pur- 
 chase or discount, assuming that the credit strength of 
 those whose names appear upon the note is of a satisfac-
 
 COMMERCIAL CREDIT 101 
 
 torj character. This operation is continued through the 
 entire commercial family, each succeeding recipient of the 
 goods furnishing to the seller a means of carrying his 
 account ; and if the seller has not the availahle capital, he 
 uses these means for the pilrpose of securing further credit 
 without which he would be unable to continue his busi- 
 ness. All trades require the use of considerable cash for 
 the payment of employees and for other purposes; and 
 this requirement imposes upon business men the necessity 
 of making constant use of their credit. This is also 
 required to effect the purchase of new supplies, to dis- 
 charge maturing obligations, and to institute repairs and 
 betterments in the business plant. It is the fact that few, 
 if any, business establishments are so circumstanced, in 
 respect to the necessary volume of available cash, as to be 
 able to dispense with credit, that makes credit so indis- 
 pensable a factor in commercial life. The limit of the 
 volume of currency disproves such a possibility, and leaves 
 the commercial public under the dominion of the credtt-i 
 system. It is apparent what a boon credit represents to 
 business men, and how its absence would dwarf all at-| 
 tempts at extended business enterprises. Mr. Macleod 
 says that the credit of which the producer, the manufac-, 
 turer, the middleman, and the retailer avail themselves! 
 " is capital to these classes, and that it stands for use or\ 
 enjoyment to the last class — ^the individuals and consum-l 
 ers." The latter have less recourse to credit than those 
 who are actively engaged in business, for the reason that 
 their wants are fewer and simpler. The currency of the 
 country circulates among the consumers to a greater ex- 
 tent than among others, as wages and other small debts 
 are paid in cash and not in instruments of credit. The
 
 102 CREDIT AND ITS USES 
 
 consumers are therefore in a position to give casK or 
 currency in exchange for goods purchased. 
 
 Commercial credit is the great pillar of the credit 
 structure, for from commerce flows the ever-strengthening 
 tide of wealth that finds its way into the different reposi- 
 tories for funds — cither to banks for safe-keeping or into 
 corporate or public credit for safe investment and income- 
 producing purposes. If it were not for the life that credit 
 gives to commercial transactions, and the constant inter- 
 change of goods it induces, there would be little necessity 
 for banks and other financial enterprises. It is commer- 
 cial credit that brings into being the vast quantity of 
 instruments of credit, especially bills of exchange and 
 promissory notes, which represent the great bulk of the 
 business of banks. An example of the operations 
 through which men find it necessary to depend upon 
 their credit is admirably expressed in the following hy 
 Mr. Bagehot: 
 
 "The new trader has obviously an immense advantage in thft 
 struggle of trade. If a merchant have £50,000, all his own, to 
 gain ten per cent on it he must make £5,000 a year, and must charge 
 for his goods accordingly; but if another has only £10,000, and bor- 
 rows £40,000 by discounts (no extreme instance in our modern 
 trade), he has the same capital of £50,000 to use, and can sell much 
 cheaper. If the rate at which he borrows be five per cent, he will 
 have to pay £2,000 a year; and if, like the old trader, he make 
 £5,000 a year, he will still, after paying his interest, obtain £3,000 
 a year, or thirty per cent on his own £10,000. As most merchants 
 are content with much less than thirty per cent, he will be able, if 
 he wishes, to forego some of that profit, lower the price of the com- 
 modity, and drive the old-fashioned trader — the man who trades 
 on his own capital — out of the market. In modern English business, 
 owing to the certainty of obtaining loans on discount of bills or 
 otherwise at a moderate rate of interest, there is a steady bounty
 
 COMMERCIAL CREDIT 103 
 
 on trading with borrowed capital, and a constant discouragement 
 to confine yourself solely or mainly to your own capital." 
 
 When it is stated (as in the foregoing) that there is 
 " a constant discouragement to confine yourself solely or 
 mainly to- your own capital," it is evident that the trend 
 of business is toward a credit basis, for nothing but such 
 a condition would warrant this pronouncement. This con- 
 dition, which indicates a marked axpansion of the credit 
 system, carries with it a danger which must not be lost 
 sight of nor underestimated, viz., many im worthy per- 
 sons have sought and secured credit to which they were 
 not entitled, and which they have persistently abused. 
 On the other hand, the advantages and blessings of this 
 expansion have been of incalculable value, and have 
 wrought universal good in the opportunities afforded to 
 deserving and competent persons to enter and remain in 
 business life. The economic influence of " our own times " 
 has been to create such opportunities and preserve them 
 to those who are worthy, thus augmenting the general 
 wealth, and adding to the store of personal accomplish- 
 ment and human happiness. 
 
 The example cited by Mr. Bagehot is not an extreme 
 one, but an everyday practice. It must be remembered, 
 however, that the ability to borrow £40,000, as suggested, 
 on a capital of £10,000 is a privilege not given to every 
 man. The one who succeeds in doing it must have the 
 necessary qualifications of character, business reputation, 
 and general ability ; otherwise he would not be regarded 
 as a suitable credit risk by the banker or broker from whom 
 ho sought the amount mentioned. So that, added to his 
 capital of £10,000, he has his personal qualities upon
 
 104 CREDIT AND ITS USES 
 
 which to depend, and they represent a species of wealth 
 when utilized in the quest of credit; or, as Mr. Macleod 
 expresses it: 
 
 "A merchant's Wealth, or Purchasing Power, consists of his 
 Money, his Rights to demand Money, i. e., the Bank Notes, Cheques, 
 Bills of Exchange, or other Securities he may possess : and his Credit, 
 i. e., his Right to the future products of his industry." 
 
 Out of commercial transactions, or the operation of 
 commercial credit, there arises a mass of instruments of 
 credit which have a function entirely apart from the mere 
 evidencing of a debt due from one person to another. 
 The motive in requiring the tender of a bill of exchange 
 or a promissory note as a precedent to the delivery of a 
 bill of goods is invariably to enable the holder of the bill 
 of exchange to utilize it for his own advantage in creating 
 or maintaining his credit. The consequence is that a 
 bill so used passes from one person to another until it has 
 acted as a medium of help to a large number of people, 
 either in canceling some old indebtedness or in starting 
 a new credit. Mr. Mill says: 
 
 "It has become one of the chief functions of bills of exchange 
 to serve as a means by which a debt due from one person can thus 
 be made available for obtaining credit from another." 
 
 Mr. Macleod has also explained this phase of com- 
 mercial credit as follows: 
 
 "Suppose that the merchant has confidence in the wholesale 
 dealer's character and integrity, he sells the goods to the wholesale 
 dealer on credit : that is, he sells him the goods, and instead of the 
 actual money, he takes his promise to pay three months after date. 
 That is, he sells the goods for a Credit, or Debt, or a Right of 
 Action instead of for Money."
 
 COMMERCIAL CREDIT 105 
 
 "Credit in this sense causes the same circulation as money." 
 "Hence Credit is circulating medium exactly as money is." 
 
 Attempts to read into the dispensation of commercial 
 credit any hard and fast rule of the " goods to goods " 
 order is a fatuous one in view of the general interpreta- 
 tion of that question, as well as the economic necessities 
 it represents. In England it has not been an unusual 
 thing for bills of exchange which were the outgTOwth of 
 commercial credit to form a considerable portion of the 
 circulating medium. This character of currency, which 
 is nothing more than a symbol of credit, has been quite as 
 efficacious in the financial and commercial life of the na- 
 tion as gold, silver, or bank notes. It is true that a liberal 
 supply of gold in the market assists the use of bills 
 of exchange as circulating medium ; for, while the 
 public is entirely satisfied with the state of the gold 
 supply, it is content to utilize other and cJieaper forms 
 of circulating medium. While this condition exists, the 
 opportunities afforded to extend one's credit through 
 the use of bills of exchange or promissory notes are 
 amplified, and it is then that the temptation to specu- 
 late arises, with results which have already been indi- 
 cated. 
 
 To appreciate the great advantage of the credit system, 
 it would be well to consider the effects upon our commer- 
 cial life if transactions were regulated by the use of cash 
 only, or, to use a favorite business expression, " if we 
 were on a cash basis," the word cash being used in the 
 sense of actual currency. 
 
 (1) The relatively small quantity of cash available 
 would prejudice its use in the settlement or adjustment of
 
 106 CREDIT AND ITS USES 
 
 commercial transactions, and, in fact, render such trans- 
 actions, in the gross, impossible. 
 
 (2) The cost of its transportation, always a consid- 
 erable item, would be found onerous. 
 
 (3) The loss of interest due to holding large amounts 
 of currency, and the inutility of the commodity itself. 
 
 (4) It would be impossible to extend the operations 
 of trade, as modern usage has done, and this modern 
 usage is simply credit. Men would not, in fact they 
 could not, lend their cash to others who desired it for 
 the purposes of capital — no matter how worthy they 
 might be — for the holders would need it for their o"\vn 
 requirements. The opportunity for embarking in busi- 
 ness, and continuing in it, would be closed to the great 
 mass of those who would otherwise be actively engaged 
 in commercial life. These ideas have been explained at 
 length in the description of the credit system, but recur- 
 rence has been made to them here because of their great 
 pertinency to the subject now under discussion. 
 
 It was the very fact that commercial credit was not 
 possible if people were supposed to operate on a cash 
 basis that induced the use of credit instruments. The 
 scarcity of the precious metals brought about the use of 
 bank notes (a form of credit), which in some instances 
 represent credit in its unbridled capacity. 
 
 Commercial credit merges itself into banking credit 
 by purely natural processes, the former becoming the great 
 feeder to the latter, which in turn assumes the control of 
 the commercial market in a universal sense. 
 
 Commercial credit has another well-known form, viz., 
 book credits. !N"owadays, in nearly all cases when mer- 
 chants buy from each other, the only evidences of the sale
 
 COMMERCIAL CREDIT 107 
 
 expressed are the entry of the charge in the ledger of 
 the seller, and the delivery to and acceptance by the pur- 
 chaser of an invoice for the amount of the goods sold. 
 When the due date arrives, the purchaser is supposed to 
 send to the seller the amount due (usually tendered, in 
 the form of a check on a bank), and the seller enters the 
 evidence of the payment against the accoimt, and the 
 transaction is closed. It will be evident that this charac- 
 ter of credit (book) has not performed the same useful 
 function in the commercial or financial world as the credit 
 in consideration of which a bill of exchange or promissory 
 note was passed. In the latter case the seller could avail 
 himself almost immediately of the bill, and with it either 
 pay an outstanding account or bill against himself or use 
 it for the purchase of new supplies or in creating addi- 
 tional necessary credit. It is true that book credits may 
 be used for the purpose of securing funds, and a method 
 which will be referred to at greater length in this chap- 
 ter is often resorted to. There is one very important 
 respect in which a book credit is not as safe and satis- 
 factory a form of security as a bill of exchange or other 
 credit instruments employed, and that is, that while the 
 holder or o-^Tier of a book account or credit may be able 
 to dispose of it, or raise funds upon it, the purchaser or 
 discounter of such an account or credit must necessarily 
 look for its validity in the good character and representa- 
 tions of the one offering the account. It has behind it 
 nothing but the evidence of his books, his statement as 
 to the ownership of it, and the correctness of the amount 
 claimed. People have been known to dispose of accounts 
 that were entirely spurious. In the case of a bill of ex- 
 change or promissory note, the evidence of the debt is
 
 108 CREDIT AND ITS USES 
 
 verified by the signature of the maker of the paper. At- 
 tention has been called to " fictitious " or purely accom- 
 modation paper, but the conditions entering into this char- 
 acter of credit instrument do not affect the point under 
 discussion. 
 
 Commercial credit exerts a greater influence upon the 
 tendencies of the people than almost any other phase of 
 human activity. This influence manifests itself in the 
 social as well as the economic departments of life. Mr. 
 Aldrich writes: 
 
 "Money economy gave liberty, credit gave opportunity. By 
 credit the competitive system has developed so as to be able to 
 replace the primitive group system, and even surpass its accom- 
 plishments. Without credit, individuals could not extend their 
 operations so as to supersede the collective system which subsisted 
 as some form of natural or involuntary cooperation until the rise 
 of credit in Europe." 
 
 The liberty which was the product of " money econ- 
 omy " would have failed in its beneficent effects upon 
 the masses of the people if credit had not come forward 
 as a powerful auxiliary and made clear the opportunities 
 which the new dispensation had created. One of the prin- 
 cipal elements of the '' competitive system " is opportu- 
 nity. The doors of that system are always open " to those 
 who are disposed to hazard their fortunes and future." 
 For many who bid for a place of honor in the competitive 
 system are risking all they possess. Their failure to 
 achieve results means impoverishment and disappointment 
 to such an extent that they never again summon the cour- 
 age to battle for advancement. The competitive system 
 does not display all its power in the fierce struggles for 
 commercial supremacy in thickly settled and wealthy
 
 COMMERCIAL CREDIT 109 
 
 communities. It shows some of its best results in the 
 energy with whicli new localities establish themselves and 
 compete with the older and better known markets. In 
 these new localities the excellent effects of commercial 
 credit are particularly sho^vn. True to the real spirit of 
 commercial advancement, the pioneers of progress seek to 
 open new fields of agricultural and industrial activity. 
 In all new settlements the great want is money, and the 
 only element that prevents such settlements from being 
 utter failures is credit. AVith any reasonable prospect of 
 success before them, the merchants of a new settlement 
 have little difficulty in securing from those of the older 
 and wealthier communities a fair degree of credit. The 
 credit which they enjoy enables them, in turn, to extend 
 credit to nontraders, who, especially in a new settlement, 
 require this credit in equal measure with those engaged 
 in mercantile pursuits. In new countries or districts 
 there must be a great deal of prospecting, and the inhabi- 
 tants must avail themselves of credit in the meantime. 
 Without credit it would be impossible to upbuild new 
 territories with tlie celerity and success that the presence 
 of credit insures. It has been stated that " in colonies 
 and all rude countries there is no large sum of transfer- 
 able money; there is no fund from wdiich you can bor- 
 row." In order, therefore, that those who cast their for- 
 tunes in rude countries may possess themselves of tlie 
 necessary capital, they are compelled to draw upon the 
 funds of long-established localities and nations. The 
 freedom with which they are permitted to do so indicates 
 the state of the credit extended to them. It is very im- 
 portant, however, that they should not be given too much 
 latitude, for this is the cause of booms and speculations;
 
 110 CREDIT AND ITS USES 
 
 all of which again enforces the thought that credit to be 
 safe must be restricted within legitimate boundaries. 
 
 The methods of commercial credit have undergone 
 many changes, growing out of a greater store of wealth 
 and the expansion of the credit system. The old plan 
 upon which credit was dispensed involved the intermis- 
 sion of a long term before payment would become due, 
 and the necessity of a liberal " time limit " Avas due to 
 conditions which were, at that period, of an uncontrol- 
 lable character. Long time was the custom, and unless 
 it could be secured, the merchant was better without the 
 credit. To accept it on any other basis probably meant 
 failure to meet his engagements, with the consequent sac- 
 rifice of his business reputation, upon which his capacity 
 to command credit principally depended. There were 
 many excellent reasons why transactions should be based 
 upon extended terms of credit, to some of which reference 
 will be made. 
 
 (a) The means of communication were in a compara- 
 tively archaic state, and it therefore required considerable 
 time to reach the different markets. This great loss of 
 time could not be endured except at certain seasons, when 
 it was absolutely necessary for the merchant to visit the 
 market. 
 
 (b) The foregoing reason also operated to prevent the 
 general use of traveling salesmen, for the time lost in 
 travel meant that they could not meet a sufiicient number 
 of their customers in a given period to make trips pay. 
 
 (c) The consequence of these conditions was that when 
 the merchant visited the market he bought a large stock, 
 and had to select many goods that would not prove as 
 salable as others.
 
 COMMERCIAL CREDIT 111 
 
 (d) The practice of buying large stocks carried with 
 it the danger of overbuying, and the latter was, under 
 such circumstances, an almost pardonable error. It was 
 a difficult matter to measure the probable sales of a season, 
 especially if the community was a rapidly growing one. 
 
 In order, however, that the privilege of the long time 
 and liberal amount of credit accorded to the merchant 
 should not react to the detriment of the wholesaler or 
 jobber, he required that the merchant should give a prom- 
 issory note at the time of sale, so that he could utilize 
 this note in raising funds with which to operate his own 
 business. To do an extended credit business on long 
 terms involves the use of a large amount of very flexible 
 capital, with which few concerns have been provided at 
 any period of our history. 
 
 Notes given by merchants in the manner described 
 have always been considered one of the best forms of 
 bankable paper, and their negotiation into loans was a 
 matter of ordinary financing, and one to which constant 
 resort was made. The existence of this mass of commer- 
 cial paper (credit) brought into existence a class of men 
 who made it, and who still make it, their special business 
 to market this paper, and who are known as note brokers. 
 The latter represent, however, several different classes, 
 from those who are in reality bankers to those who con- 
 stitute a middle and very substantial class, who sell to 
 banks and other financial institutions, and, lastly, those 
 who are known, for excellent reasons (which it is not 
 necessary to discuss), as "note shavers." This feature 
 of the credit system made the note broker a necessary and 
 powerful entity in commercial and banking credit. It 
 might be asked why banks themselves could not have per-
 
 112 CREDIT AND ITS USES 
 
 formed all the functions of the note broker, and thereby 
 dispense with his services. A few reasons may be given 
 why this was not done: (1) Note brokers made the ac- 
 ceptability of the paper offered a special study, and were 
 therefore better advised as to its character. (2) To do 
 this would have required the exclusive attention of one 
 or more men for every bank, and this in itself would 
 entail a large and disqualifying item of expense. (3) 
 The fact of not being called upon to exercise this super- 
 vision meant a saving of energy on the part of the 
 bank's officers which could be utilized to advantage in 
 other directions. (4) Custom warranting a dependence 
 upon the representations of the note broker, the bank was 
 in a position to act quickly in reference to a discount or 
 purchase of a quantity of paper — a very important con- 
 sideration in case the bank had a large sum of money 
 lying idle which should be earning an income. (5) In 
 certain cases where the bank might not, for excellent 
 reasons, be prepared to accept the single-name paper of 
 merchants, the note broker could, if so disposed, act as 
 an indorser, thus making the offering entirely acceptable 
 to the bank, and it was an advantageous thing to be able 
 to enlist, if necessary, a responsible indorser. 
 
 It is pertinent at this time to say that the standing 
 of the merchant continues to determine the rate of in- 
 terest charged, which is the barometer of the credit of the 
 maker of a note. Modern methods of communication in 
 railway, mail service, telegTaph, and telephone have 
 wrought the changes to which reference has been made, 
 and occasioned the disuse of note settlements in the form 
 and to the extent they were formerly employed. The 
 ability to reach the markets quickly, to order goods by
 
 COMMERCIAL CREDIT 113 
 
 mail, telegraph, and telephone, has enabled the merchant 
 of almost any section of the country to supply his wants 
 as they manifest themselves. This has had the effect of 
 cutting down the time limit, for the conditions previously 
 stated no longer obtain. When to this is added the fact 
 that the banking accommodation is more liberal and rami- 
 fied than ever before, it is not strange that the merchant 
 should see the advantage of utilizing his credit at the 
 bank, securing the funds which enable him to pay in 
 much quicker time, and obviating the necessity of taking 
 advantage of the long time formerly sought, and for ivhich 
 he had to pay in advanced price and interest charges. 
 He now utilizes his bank credit and discounts his bills, 
 i. e., he takes advantage of the largest discount offered 
 for a quick settlement. 
 
 Prompt settlement (especially of note obligations) is 
 indispensable to the maintenance of good credit. In re- 
 ferring to the desire of merchants to fulfill their contracts 
 in a timely manner, Mr. Bagehot says, " what is necessary 
 to meet their acceptances they will borrow, pay for it 
 what they may — they had better pay any price than per- 
 mit those acceptances to be dishonored." It is a fact that 
 the failure to meet a note promptly is counted as a black 
 mark against a merchant, while in the case of a book 
 credit, a delay to pay promptly (three or four days and 
 more, sometimes) causes no particular unrest. This dif- 
 ference it is hard to satisfactorily explain, but probably 
 consists in the more exacting nature of a written as against 
 an unwritten agreement. 
 
 The discontinuance of " long time," such as four, six, 
 and eight months, has had the effect of introducing the 
 feature of " dating " into commercial transactions and
 
 114 CREDIT AND ITS USES 
 
 credit. A " dating " of thirty daj3 or sixty days indi- 
 cates that the term of the 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, two per cent 
 ten days and net thirty days — is not due until April Ist, 
 as the dating does not expire until March Ist, and the 
 terms being thirty days carry it to April Ist. The pur- 
 chaser has the option of paying it whenever he chooses, 
 but payment cannot be insisted upon until April 1st. A 
 merchant purchasing a bill under the foregoing terms 
 would, if he were in a position to do so, pay the bill at 
 the end of ten days (January 10th), deduct two-per-cent 
 discount, and also deduct interest at the rate of six per 
 cent per annum for the unexpired term of sixty days (the 
 dating), of which time he has not availed himself. With 
 the general shortening of terms, dating was given to cover 
 the period during which the goods would be in transit, or 
 in process of unpacking and marking. It was also used 
 as an inducement to merchants to make purchases before 
 the seasons opened, or in other words to anticipate their 
 wants. From a concession on the part of the wholesaler 
 and jobber, the idea of dating seems to have become a 
 right demanded by the merchant, and a settled principle 
 in commercial practice or credit. It has led to an undue 
 anticipation of wants on the part of those engaged in all 
 divisions of trade, from the manufacturer to the retailer ; 
 and in lines where the element of fashion is a leading 
 one, and subject to sudden changes, it has been the cause 
 of considerable loss to many. 
 
 Reference has been made to a method by which " book 
 credits " are utilized for the pui-pose of raising funds and
 
 COMMERCIAL CREDIT 115 
 
 supplying needed capital. It is probable that this method 
 found its inception in a practice introduced some years 
 ago, whereby a house having no other form of collateral 
 to offer its bank, and being much in need of money, in- 
 duced its bank to accept an assignment of certain accounts. 
 Advances were made by the bank to an agreed percentage 
 of the gross amount of the accounts assigned. This was 
 an entirely private arrangement between the bank and its 
 customer. When the bank had confidence in the integrity 
 of the assignor and in the prospects of the business, it 
 would permit the assignor to use the funds collected from 
 the accounts assigned, and in place of these collected ac- 
 counts, other and supposedly desirable accounts were as- 
 signed to the bank, thus preserving the required ratio 
 of margin. It will be evident that a bank lending under 
 such conditions must have a good deal of confidence in 
 the character and good intentions of the borrower, for an 
 imscrupulous person could deceive and defraud his banker. 
 In the event of the failure of the borrower, or of any 
 suspense in the relations between the bank and him, the 
 bank would naturally enter upon the exercise of its rights 
 under the assignment, and the persons owing the accounts 
 which had been assigned would be notified to make pay- 
 ment to the bank. In some instances the notice of the 
 assignment would be sent at the time of its execution, and 
 the debtors called upon to make payment to the bank. 
 This method is resorted to by commission houses which 
 are handling the output of manufacturers to whom ad- 
 vances have to be made, and has contributed to establish- 
 ing a new method of invoking commercial credit. The 
 consequence is that banking houses have opened regular 
 departments for this character of business, and many lead-
 
 116 CREDIT AND ITS USES 
 
 ing commission concerns have practically become bankers, 
 to such an extent are they advancing upon and discount- 
 ing accounts. There are concerns which make this their 
 sole business, and some are reported to be doing a large 
 volume of business. Such concerns have behind them 
 banks or trust companies which furnish the funds to pur- 
 chase or discount accounts, and find in this a very lucra- 
 tive method of lending money. The terms under which 
 this business is done vary. In some cases the accounts 
 are assigned only in the manner already discussed, and a 
 margin preserved, the borrower being charged a good rate 
 of interest for the accommaodation. In others the ac- 
 counts are bought outright, the purchaser assuming all 
 the risk, and charging not only a round rate of interest, 
 but a bonus for the risk involved. In still others the 
 accounts are assigned, and withdrawals permitted to an 
 agreed percentage (seventy, eighty, or ninety per cent, as 
 the case may be), and a heavy rate of interest, as well 
 as a bonus, charged for the accommodation. If the per- 
 centage of profit obtainable in the business will justify the 
 payment of the high rate of interest and bonus demanded, 
 it may not be in order to criticise this method of commer- 
 cial credit. It has yet to be determined how successful 
 for all parties concerned the practice involved is likely 
 to prove. This fact should be borne in mind, that when- 
 ever a house is paying an extravagant rate of interest for 
 the accommodation it requires, the difference between 
 normal and abnormal interest is the difference between 
 normal and abnormal credit, and the strain upon the credit 
 of an enterprise is bound to leave undesirable effects. 
 The same general rules should apply to all the divisions 
 of credit. The same monitors should stand guard over
 
 COMMERCIAL CREDIT 117 
 
 the respective members of the great credit family. These 
 rules and monitors are the same in banking, capital, pub- 
 lic, individual, and commercial credit — their names are 
 integrity (character), ability, prudence, economy, and 
 conservatism.
 
 PART THREE 
 
 THE CREDIT DEPARTMENT AND 
 SOURCES OF CREDIT INFORMATION
 
 CHAPTER VIII 
 
 THE CEEDIT DEPAETMENT IN BANKING CREDIT 
 
 System in credits is exemplified in the methods of 
 credit departments. A credit department is now regarded 
 as an essential adjunct to every well-regulated business. 
 The banking community, however, has not recognized the 
 necessity of a distinct credit department in the same sense 
 as have commercial institutions. 
 
 l!Tot many years ago there were comparatively few 
 banks possessing a credit department; tq-day there are 
 more, but there is still an unexplainable absence of this 
 systematic method of treating credit transactions. At- 
 tempts are made to answer this criticism by saying that 
 a credit department is unnecessary, for the reason that 
 the duties appertaining to it in a commercial establish- 
 ment are discharged by certain officers or employees of a 
 bank in connection with their other work; consequently, 
 no necessity exists for an elaborate equipment or system 
 covering the relations of a bank with its borrowers, and 
 a complete tabulation of the standing, antecedents, and 
 responsibility of such borrowers. 
 
 The real objection of banks to a credit department here- 
 tofore, and to some extent even in this day, may be found 
 in the fact that it has always been customary for bank- 
 ing officials to possess great power — in fact, an arbitrary 
 
 121
 
 122 CREDIT AND ITS USES 
 
 power — in the matter of loans and other banking business. 
 All important questions are supposed to be passed upon 
 by boards of directors, but it is well known that in many 
 institutions, both in large centers and in rural communi- 
 ties, the ipse dixit of the president or cashier (whichever 
 may be the dominant official of the bank) has been the 
 determining voice in most important matters. These offi- 
 cials, therefore, have not only been possessed of the power 
 to which reference is made, but they have carried within 
 their own minds the data in regard to loans and the gen- 
 eral relations of the customers with the bank. The pos- 
 session of this information has made them even more 
 powerful than they otherwise would have been, and made 
 their continued association with the bank in some cases 
 imperative. 
 
 In the measure that a bank's investments are sound will 
 be determined the profits or dividends of the bank to its 
 stockholders and the general prosperity of the institution. 
 The small percentage of profit pertaining to banking trans- 
 actions makes the responsibility that rests upon a bank's 
 officers a delicate and onerous one. Unwise credits (un- 
 wise loans) reflect a degree of loss upon the bank in the 
 same sense that actual peculation does, and proper means 
 should be devised for the correct gaiidance of the officials 
 of the bank in determining to whom its funds should be 
 lent. A failure to observe the duty imposed upon the 
 officials of a bank in this respect is an absolute breach 
 of the faith that is reposed in them by the stockholders 
 and depositors of the bank. This faith consists not alone 
 in confidence in their honesty in the handling of funds, 
 but in their ability to so manipulate them that only a 
 minimum of loss will result.
 
 THE CREDIT DEPARTMENT IN BANKING CREDIT 123 
 
 Many large banks act as an investing medium for 
 their correspondent country banks. The latter are, in 
 many cases, large purchasers of commercial paper, and 
 make their purchases mainly upon the representations of 
 the bank with whom they are doing business. How can 
 they be properly advised as to the desirability of the 
 paper they intend to purchase unless the inquiries into the 
 standing and responsibility of the makers and indorsers 
 of that paper be of the most rigid character ? Is it reason- 
 able to suppose that an officer of the advising bank, if he 
 be depending solely upon his personal impressions, or in- 
 formation that he is carrying in his mind (a mind over- 
 charged in these busy days with other details and mat- 
 ters), can give as wholesome advice to those who are 
 seeking it as if he had before him thoroughly prepared 
 and extensive reports drawn from reliable and useful chan- 
 nels of information ? It is freely conceded that no amount 
 of system and no amount of investigation will act as a 
 complete bar to losses. There is no question, however, 
 that in these days of widely diversified interests, the more 
 thorough and perfect the system the less liability there 
 will be to losses and misadventures. 
 
 A credit department should represent the simplest and 
 most effective methods for acquiring information, all rea- 
 sonable utilities for making the range of information as 
 broad as possible, the compilation in presentable form of 
 the information gathered, an entry into the records of 
 that department of every iota of information it is possible 
 to glean, and also a citation of such personal impressions 
 as the officials of the bank may from time to time enter- 
 tain in regard to the desirdbiliiy of an account. An inci- 
 dent may occur in the relations of a bank with a borrower
 
 124 CREDIT AND ITS USES 
 
 to -which no importance may be ascribed at the time, but 
 if promptly noted upon the records of the credit depart- 
 ment may in after years, if considered in connection with 
 some new development, have a very decided bearing upon 
 the judgment which the officer will then form as to the 
 standing of an applicant for credit. 
 
 The title " credit man " is applied to him who is in 
 charge of a credit department. There have been many 
 word pictures painted of this individual; the disposition 
 has generally been to idealize him — a not uncommendable 
 motive, but one which should not be tortured into im- 
 posing upon the credit man the possession of too many 
 virtues or an extravagant order of abilities. The best 
 credit man is the practical man ; the man of sufficient 
 general knowledge to be able to quickly appreciate the 
 cogency of any statement or situation that may be pre- 
 sented to him ; a man of executive capacity ; a man who 
 understands the necessity of and does not shrink from 
 hard work; a man with sympathy for his fellow beings, 
 but not of so impressionable a nature as to permit his 
 sympathies to unduly influence his reason. In addition 
 to a knowledge of commercial affairs and methods, it is 
 desirable that the credit man of a bank should be one 
 who is familiar with the different departments of banking 
 business. 
 
 The most practical manner in which to study the opera- 
 tions of a credit department in a bank is to follow the 
 treatment and course of an account through its different 
 stages. The system necessary to such a department in- 
 volves the use of forms without which it would be impos- 
 sible to correctly carry into effect the theory of this branch 
 of the bank's work. In the present discussion the use of
 
 THE CREDIT DEPARTMENT IN BANKING CREDIT 125 
 
 these forms will aid in the illustration of many questions 
 which must be referred to. 
 
 It is assumed that a person presents himself at a bank 
 and expresses a desire to open an account and maintain 
 regular relations with it as a depositor and borrower. The 
 officer of the bank who interviews him, in order to secure 
 an orderly statement of certain essential information, uses 
 a form (Form 1) upon which he notes the answers to the 
 questions. 
 
 This form is entitled " Account Opened," and marks 
 the foundation of the data which goes into the records 
 of the credit department. The first line contains spaces 
 in which the fact of the account being opened is noted by 
 the different departments. The other items on the form 
 are all of a basic nature, involving nothing of a technical 
 character. When this form is being used by the bank 
 officer in the presence of the person who is opening the 
 account, it is folded inward at the last line extending 
 across the page. The reason is that the printed matter 
 below refers entirely to questions which the bank does not 
 deem it necessary to display before the customer. The 
 latter must be aware, if he be a well-informed person, 
 that sooner or later he will be asked for a statement of 
 his affairs, that letters of inquiry will be issued regarding 
 him, and that reports will be asked from tlie agencies in 
 order to ascertain what his standing may be. It is pre- 
 sumed that the account is to be a continuous and active 
 one. The bank should secure, as early as possible, a thor- 
 ough statement from the customer, showing all essential 
 details of his business, that there may be such knowledge 
 in hand regarding him as will enable the bank to deal 
 justly with him as well as with its own interests. A
 
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 THE CREDIT DEPARTMENT IN BANKING CREDIT 127 
 
 man's first offering of collateral may be an excellent one, 
 precluding (some may imagine) the necessity of anything 
 more than the most general knowledge of his standing. 
 The next time he asks permission to borrow he may not 
 be able to furnish as favorable security, yet expects, as 
 many do, and succeed in doing, to trade upon the good 
 impressions created by his first borrowing transaction. 
 The effective way to guard against the subtle influences 
 of these impressions is to have a thorough understanding 
 in the very beginning, and secure at that time the informa- 
 tion which will guide aright at any stage of the account. 
 Some banks ask for a statement of affairs before accepting 
 an account. It is entirely proper to do this, for it is not 
 to the credit of any bank to have undesirable names upon 
 its books. The avidity with which accounts are sought 
 and accepted in these days need not be regarded as ira 
 pairing the practical soundness of this opinion. 
 
 The policy of asking for and insisting upon statement, 
 being furnished is only of comparatively recent origin.. 
 Some banks have followed such a policy for many years 
 but it was not until the American Bankers' Association 
 and the associations of State bankers gave to the subjocv 
 their indorsement, and many of the State organizations 
 adopted forms of statements, that individual banks would 
 admit the wisdom of such a policy. It is a fact that 
 banks have in the past refrained from asking their cus- 
 tomers for statements, hoping to create in the minds of 
 those customers the impression that this particular bank 
 ■was a very liberal one, and did not intend to fetter itself 
 or bother its customers w'ith technicalities. It will be 
 asked how such a bank could properly fortify itself with 
 information upon which to make its loans. It would se-
 
 128 CREDIT AND ITS USES 
 
 cure such information as it could, in the shape of written 
 references and agency reports, depending upon the state- 
 ment given by the customer to the agencies. This state- 
 ment was in most cases months old, and also, in m^st 
 cases, unsigned, so that it will be evident that a bank 
 conducting its credit business in this manner was standing 
 upon unsafe ground. At one period of our commercial 
 and banking history many traders regarded it as an un- 
 warrantable infringement of their private rights to be 
 asked to make out a statement on the forms prescribed 
 by banks and business houses, but numerous causes have 
 contributed to dissipate this feeling. 
 
 In an address on " Business Education and Commer- 
 cial Banking Methods," by Mr. Henry Clews, of New 
 York, read before the Sixteenth Annual Convention of the 
 Minnesota Bankers' Association (June 20-21, 1905), he 
 says: 
 
 "The man who would get credit must fill out forms which fur- 
 nish in more or less detail, according to the circumstances, the data 
 which will enable the bank to judge of his business. In the modern 
 financial institution the ' credit department ' has become the regu- 
 ator of the whole mechanism. Some consider the present require- 
 ments of full statements and appraisement unreasonable. There 
 has probably never been a change or forward step in business 
 practice that was not so considered by some of the persons affected 
 by it. Yet no change in our banking methods can be more con- 
 spicuously justified than this. It has long been in vogue in for- 
 eign countries where banking is more nearly a profession than a 
 business." 
 
 The bank asks the customer for a statement of his affairs, 
 and furnishes a form (Form 2) for him to fill out and 
 sign.
 
 THE CREDIT DEPARTMENT IN BANKING CREDIT 129 
 
 It being assumed that the relations upon which the 
 customer is entering with the bank are to be of long 
 duration (at least that is the business supposition in ref- 
 erence to most accounts), the bank is justified in asking 
 at the outset for all the information it believes it should 
 possess. A statement such as that submitted in Form 2 
 would have been regarded some thirty years ago as calling 
 for details that were essentially the private affairs of the 
 customer, and into which no one had the right to inquire. 
 The questions set forth in this statement, however, cover 
 such facts as it is necessary the bank should examine into, 
 and an omission so to do is attributable to poor business 
 methods. 
 
 Notes receivable and accounts receivable are only to 
 be enumerated so far as they are in the actual possession 
 and are the property of the person making the statement. 
 This qualification is necessary, for there are people who, 
 even after they have transferred notes receivable or ac- 
 counts receivable as collateral, believe that these notes and 
 accounts are still their exclusive property, and in esti- 
 mating their worth are at perfect liberty to compute these 
 items as full assets. 
 
 The item of merchandise is also divided into three 
 classes — " finished," " unfinished," and " raw material " 
 — and the means employed for determining its value must 
 be stated. It is essential that this differentiation should 
 be made, as the relative amounts of the respective classes ' 
 of merchandise may have a vital bearing upon the general 
 results of a statement. A concern with a large amount 
 of unmarketable raw material on hand may, because of 
 this fact, be at a considerable disadvantage. Unless, there- 
 fore, the different classes of merchandise are explained in
 
 130 CREDIT AND ITS USES 
 
 detail, the credit man might, and probably would, contract 
 an erroneous opinion as to the value of the merchandise 
 held. It is required in this statement that it be specified 
 whether the items of land, buildings, and machinery are 
 owned by the firm and used for the business. This is a 
 wise provision, for very often people will list property, in 
 which they may have a party or family interest, in a 
 statement of their firm's assets. 
 
 In the liabilities column there are three classes of 
 notes payable — those " given for merchandise," " negoti- 
 ated to banks," or " otherwise disposed of." A division 
 of this character, instead of a single entry of notes pay- 
 able, enables the credit man to get a much clearer idea 
 as to the nature of a firm's liabilities and also its credit 
 standing in financial and commercial circles. This sub- 
 division also assists in determining whether a firm is un- 
 duly " spreading " its credit. 
 
 In the list of general questions, that of insurance occu- 
 pies a prominent place. In every large business in these 
 days, insurance to an adequate extent is usually carried. 
 With small concerns this is not the case. It would be 
 well if, in dealing with small firms or corporations, bank- 
 ers would insist upon the question of insurance being 
 fully respected. 
 
 The items of " business and results," " annual sales," 
 " gross profits on sales," " expense of conducting busi- 
 ness," " net profit," " other income," and " combined 
 profit " are all of the most important character, and the 
 entries shown against these items will indicate in a special 
 way the exact trend of the business — whether toward 
 progress or whether it be losing ground. 
 
 Withdrawals by partners is a matter that should be
 
 To THE FIRST NATIONAL BANK OF CHICAGO. 
 
 Firm Name - - — Location 
 
 Business - Branches. II any.— 
 
 For the purpose of procuring credit, from time to time, with the above bank lor our negotiable paper. < 
 otherwise, we furnish the following as being a lair and accurate statement of our llnancial condition ( 
 
 ^^T5. 
 
 LIABILITIES 
 
 
 
 
 
 
 — 
 
 BUU Payable for Borrowed Money | 
 Deposlla ol Moneye with Ul 
 
 
 
 
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 Sl.=k,..d 8.nd,. LBW 1 
 
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 THE CREDIT DEPARTMENT IN BANKING CREDIT 131 
 
 carefully studied in analyzing a statement. The witk- 
 drawals will indicate whether the partners are living 
 within the means of the business or whether they are 
 going beyond what is reasonable for their individual 
 purposes. 
 
 It is necessary, in examining a statement, especially 
 one made by a concern that does a large credit business, 
 to understand exactly what its loss through bad debts 
 has been for a stated period. This will show whether 
 the firm be careful or imprudent in the extension of its 
 credits; if the latter, it is an undoubted danger signal, 
 and failure to respect it will result in trouble, both for 
 the concern itself and those who do business with it, 
 whether in the form of financial or merchandise accom- 
 modation. 
 
 It is also advisable that a bank should know with what 
 other banks its customers are doing business. It might 
 develop that a house was carrying a large indebtedness 
 with several different banks and securing accommodation 
 beyond its deserts. An investigation of its accounts with 
 other banks will reveal the safety or unreliability of the 
 account, and such investigations are the outgrowth of the 
 questions asked as in statement form, Form 2. Thorough 
 attention to this character of investigation will in the 
 end result in minimizing to a very great extent the losses 
 incurred by banks. 
 
 The terms on which the bank's customer sells his goods, 
 the terms on which he buys, the time of year when his 
 receivables are maximum and minimum, when his mer- 
 chandise is maximum and minimum, and liabilities are 
 maximimi and minimum, all indicate at what periods the 
 concern will be most likely to require help from its banks.
 
 132 CREDIT AND ITS USES 
 
 Knowledge on these points will enable the bank to decide 
 as to the propriety of an application for a loan. As an 
 example: if a customer were to ask for a large loan at 
 a time of the year when, according to his own admission in 
 a statement which he had given the bank, his ready re- 
 sources should be the largest, it would indicate a condition 
 requiring prompt attention on the part of the bank if he 
 were already a creditor; or otherwise, as to the wisdom 
 of making the loan requested. 
 
 The last question on this statement to which reference 
 will be made has only recently come to be regarded as 
 a living issue in credit economy, viz., verification as to 
 whether the books have been audited by a certified public 
 accountant. The failure to have a concern's books exam- 
 ined at stated periods has frequently permitted the 
 growth of unwise practices. The fact of no examination 
 of the books being made by an outside and thoroughly 
 impartial person has left them absolutely under the con- 
 trol of those who may be either not entirely competent 
 or inclined to dishonesty. It is a matter of frequent 
 occurrence that a firm will discover after many years that 
 a trusted employee has been defrauding it through pecu- 
 lation. The latter condition would undoubtedly have been 
 revealed if the books had been examined at regular inter- 
 vals by competent accountants. It is a healthy sign that 
 banks have determined to ask and insist upon such ex- 
 aminations. This policy will have the effect of eradi- 
 cating irregular methods and greater evils. Another bene- 
 ficial effect will be the education of the business public 
 as to the necessity for these examinations, which should 
 be a matter of frequent and orderly procedure. 
 
 As a specimen of a simpler form of statement than
 
 \y
 
 Form 4, — Property Statement Furm fhr osi 
 
 c
 
 THE CREDIT DEPARTMENT IN BANKING CREDIT 133 
 
 that just described, references should be made to 
 Form 3. 
 
 The foregoing statement forms are those for use by 
 firms. The corporation has become a commercial entity, 
 and forms adaptable to corporation organization and 
 mechanism also have to be used. Different types of these 
 forms are shown in Forms 4 and 5. 
 
 Considerable credit information is obtained by banks 
 through means of correspondence. The very nature of a 
 bank's business and its standing in the community en- 
 able it to request sucli information with the assurance 
 that it will receive prompt, courteous, and thorough at- 
 tention. With this in view letters, very often of a gen- 
 eral character, unless there be some special question it is 
 necessary to ask, are addressed to business houses, and 
 also to banks. A type of letter which is used for securing 
 information from business houses is here given (Form 6), 
 and another type used for correspondence with banks is 
 shown in Form 7. 
 
 These letters do not call for any extended analysis or 
 criticism, as they are simply statements of what is desired. 
 
 Banking credit departments also avail themselves of 
 other well-known opportunities for acquiring credit infor- 
 mation, but as the latter will be made the subject of a 
 special study as this work proceeds, it is not necessary 
 to make further reference to them at this time. 
 
 Having secured such information as it was possible 
 
 to obtain, the credit department must express its opinion 
 
 as to the propriety of making the loan applied for. While 
 
 only one character of loan has so far been referred to, 
 
 the same methods of investigation would be applied to 
 
 any other class of loan, whether one represented by single- 
 10
 
 134 CREDIT AND ITS USES 
 
 name paper without collateral or paper carrying an in- 
 dorser or indorsers and with or without collateral. There 
 are certain loans, particularly call loans, which are covered 
 by what is supposed to be the liveliest kind of collateral. 
 These are sometimes handled in a loan department, and 
 do not come before the credit department, the reason being 
 that loans of this character are covered by collateral of 
 such well-known market value that the loan is made really 
 upon the collateral, with little respect to the person or 
 persons making the note. 
 
 The businesslike character of a statement of a per- 
 son's affairs when placed in the hands of the credit man 
 or a bank official cannot fail to make a favorable impres- 
 sion upon him. A statement prepared with a great deal 
 of care and in which every effort seems to have been 
 made to answer all questions fully, will create a better 
 impression than one prepared in a slovenly manner, par- 
 ticularly where any disposition, even the slightest, has been 
 shown to withhold information. It has been remarked 
 on this point that 
 
 "Failure or inability to make out a statement form correctly 
 indicates poor business capacity or careless methods of book- 
 keeping." 
 
 Writers on banking credits agree that the character 
 and ability of the person or persons making the statement, 
 or the character and ability of those who are directing 
 the organization, as of a corporation, have a vital and, 
 some hold, a determining influence upon the acceptability 
 of an account for loan purposes. It is intended to discuss 
 these characteristics in detail as we proceed. 
 
 It is a matter of general supposition that people doing
 
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 To THE FIRST NATIONAL BANK OF CHICAGO; 
 
 Name {Corporate style under charter) 
 
 Business ~. 
 
 Location .- _ Branches -^■. -.. . 
 
 For the purpose of procuring credit, from time to time, with the above bank for < 
 or otherwise, we furnish the following as being a fair and accurate statement of ou 
 on the - day of„_^ „ 190 _ 
 
 jr negotiable paper, 
 financial condition 
 
 ASSETS 
 
 LIABILITIES 
 
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 FcLM 5. — PiioPEiiTv Statement Form i 
 
 n
 
 saox3HUia 
 
 SU33IddO
 
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 Pi 
 
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 m
 
 We are seeking as close information as possible 
 relative to the character, credit standing, and financial 
 responsibility of 
 
 and presuming that you are in a position to advise us as 
 to the manner in which they meet their business engage- 
 ments — whether they avail themselves of the best dis- 
 counts offered, etc. — we write to ask if you will have the 
 kindness to render us such service in the premises as 
 may be within your reach. We shall appreciate any 
 details you may be able to give us, respecting their affairs 
 and methods, that will be of value in guiding us to a 
 correct conclusion as to their desirability as a credit risk. 
 Tendering you our best thanks in advance for your 
 courtesy, and assuring you that whatever you may 
 say to us in this connection will be treated as confiden- 
 tial, we are, 
 
 Very respectfully yours, 
 
 Form 6. — General form of inquiry letter.
 
 We are desirous of securing as close information 
 as possible relative to the character, credit standing, 
 and financial responsibility of 
 
 and understanding that they have an account with you, 
 we beg to ask if their business is handled in a correct 
 and satisfactory manner. Is your confidence in them 
 such that you are willing to extend them a liberal line 
 of accommodation? We shall appreciate any informa- 
 tion you may be able to give us that will prove of assist- 
 ance in guiding us to a correct conclusion as to their 
 desirability as a credit risk. 
 
 Tendering you our best thanks in advance for the 
 courtesy of a reply at your convenience, and assuring 
 you that we shall be only too happy to reciprocate in a 
 pimilflr way at any time, we are. 
 
 Very respectfully yours, 
 
 Form 7.— ^ener.vl form of inquiry letter addressed to banks.
 
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 I 3^ § i s-S 
 
 J :■« 2 s. 
 
 
 
 O 8 
 
 -< i 
 
 33 I 
 
 r IS - : § '-I 
 
 o
 
 In consideration of the making, at the request of the undersigned, of 
 the loan evidenced by the within note upon the terms thereof, and of the 
 sum of one dollar, the undersigned hereby guarantee to The Fourth 
 National Bank of the City ok New York, its successors, indorsees 
 or assigns, the prompt payment of the said loan when due, and hereby 
 consent that the securities for the said loan may be exchanged or sur- 
 rendered from time to time, or the time of payment of the said loan or of 
 any of the securities therefor extended, without notice to or further assent 
 from the undersigned, and that the undersigned will remain bound upon 
 this guarantee notwithstanding such changes, surrender or extension. The 
 undersigned waive demand of payment from the maker of said note, and 
 also waive notice of non-payment of the said loan or note, and also waive 
 notice of any sale of the collateral securities held for the said note.
 
 THE CREDIT DEPARTMENT IN BANKING CREDIT 137 
 
 business with banks are entitled to a certain defined limit 
 of accommodation based upon their average balances; and 
 that failure to accord them such accommodation arises 
 from lack of friendship on the part of the bank or a 
 system of favoritism toward other customers which preju- 
 dices the bank's ability to lend its money among all its 
 customers in ratable proportion. Opinions expressed by 
 bank officials on this point are on the order of the fol- 
 lowing : 
 
 "Bank credits should be granted to the customers of a bank 
 according to their balances and responsibility." 
 
 "The value of a bank account is largely determined by the 
 net average balance which it carries." 
 
 "The average balance should be a determining factor as to 
 credit extended." 
 
 The foregoing are in accordance with what would be 
 regarded as a safe and just policy for a bank to pursue 
 toward its customers, and undoubtedly these are the ideas 
 upon which most bank officials believe that loans should 
 be regulated. It is evident that this policy is respected 
 as much in the breach as in the observance. In an in- 
 vestigation made by an officer of a prominent New York 
 bank some years ago as to the plan or basis upon which 
 discount lines were determined, it developed that there 
 was no uniform system, the larger number of banks re- 
 porting that they had no definite method for basing dis- 
 count lines as proportioned to balances. Some ,men man- 
 age, by what exact means it is impossible to determine, 
 to ingratiate themselves into the favor of banks and se- 
 cure accommodation entirely out of proportion to their 
 responsibility. It is not necessary to quote any living
 
 138 CREDIT AND ITS USES 
 
 examples of this practice. The liabilities due to banks 
 in failures occurring daily, prove the absolute verity of 
 the statement. This condition should be the subject 
 of corrective measures. Where favoritism is shown 
 
 We are making the customary revision of our files 
 on 
 
 and would appreciate your present opinion of their 
 financial responsibility, management, etc. Has there 
 been any change in your estimate of their credit stand- 
 ing since your former letter to us, dated, 
 
 Thanking you in advance for a reply at your con- 
 venience, and assuring you of our desire to render you 
 reciprocal services, we are, 
 
 Very respectfully yours. 
 
 Form 9. — Form of letter xtsed by baxks when making eevisions 
 
 OF CREDIT information.
 
 c 
 
 c 
 
 B 
 B 
 
 A 
 A 
 M 
 M
 
 FIRMS 
 
 THE FOURTH NATIONAL BANK 
 
 OF THE CITY OF NEW VORK 
 
 COMPARISON OF STATE3IENTS 
 
 s KeceivAblc. all good 
 
 BUh and AtiOHiiti RKtlxabtt dut from ParlHtrt..^. 
 Accounts Receivable, all good, due from Customers.., 
 
 Atcounli and Sills RuehahU, deubtful..;. 
 
 McTctundise (at actual present cash value) 
 
 BitU PayabU for Merehandt 
 Bills Payable negotiated to ov 
 Bills Payable olherM-ise dispos 
 
 Open Accounts, not due 
 
 OptnA«eunt>.pa,t,<.. 
 Deposits of .Money ^ ■ 
 
 TOTAL QUICK ASSETS... 
 LIABILITIES _.„. 
 
 EXCESS— QUICK... 
 
 w 
 
 SALES „ 
 
 Form 10.— Comparative St i 
 
 :> 
 
 c
 
 THE CREDIT DEPARTMENT IN BANKING CREDIT 139 
 
 in the dispensation of bank credits, it is invariably a 
 deserving element of the public that is discriminated 
 against. 
 
 When it is determined to make a loan on collateral, 
 it is usually desired that the customer shall use one of 
 the bank's forms of notes in executing the evidence of 
 indebtedness about to be contracted. The general form 
 of these notes is as shown in Form 8, 
 
 These notes are of different forms, time or demand. 
 The body of the notes must be drawn with a great deal 
 of care in order that the interests of the bank in making 
 the loan may be fully safeguarded and that its right to 
 demand additional margin and proceed to recover under 
 the note and dispose of the collateral deposited on account 
 of the loan will be entirely clear and in accordance with 
 the statutes of each particular State. 
 
 The work of a credit department carries with it the 
 responsibility of making revisions of the bank's credit 
 reports at stated periods. The great advantage of these 
 revisions lies in the fact that the credit department 
 making them is enabled to keep abreast of any changes 
 which may develop in a concern's standing, and when a 
 question arises in regard to an account, the information is 
 in hand, and it is not necessary to delay matters while 
 a new investigation is entered upon. In Form 9 is given 
 a form of letter employed when making revisions of re- 
 ports, which sets forth briefly the idea that it is for pur- 
 poses of revision that the information is being requested. 
 It also calls attention to the last report issued hj the corre- 
 spondent, thus suggesting a checking of his own files, and 
 prompting him to give the account such notice as might 
 not otherwise be extended to it.
 
 140 CREDIT AND ITS USES 
 
 Banking credit departments, a3 also credit departments 
 of large business establishments, make it a practice to 
 request from those with whom they are doing an active 
 business a statement of the concern's affairs at least once 
 a year, and, if necessity should arise, a statement showing 
 the results of the business every six months. In order 
 that the gist of these statements may be kept before the 
 credit man in epitomized form, it is customary to include 
 among the records of each person a comparative statement, 
 as shown in Form 10. 
 
 The figures appearing in this comparative statement, 
 or " comparison of statements," are transcribed from the 
 original statements by a clerk in the credit department. 
 The questions entered in the comparative statement con- 
 stitute the essential items of a statement form. It will 
 be observed that the comparative-statement form is so 
 arranged that there may be entered upon it the figures 
 covering the standing of a concern as shown in its state- 
 ments for a number of years. There may be as many 
 columns (indicating years) as the person using the form 
 chooses to employ. The figures entered are subject to 
 ready consideration, and will show, as the eye glances 
 across the page, whether the firm has been making or los- 
 ing money. Comparative-statement forms are also used 
 for corporations, the only changes necessary being to in- 
 clude questions that do not affect copartnerskips, but enter 
 into corporate organization. 
 
 The customers of a bank consist of those in commercial, 
 professional, and private life, and banks as well. 
 
 " The same reasons which make it desirable for a private person 
 to keep a banker, make it also desirable for every banker, as 
 respects his reserve, to bank with another banker, if he safely
 
 TO THE FOURTH NATIONAL BANK OF THE CITY OF NEW YORK. 
 
 For the purpose of procuring credit from linu to time from you/or our negaliabU paper or otherwise, 
 ■toith the following statement and information wbicb fully and tndy set forth our fimmial condition on the 
 dayof , ■ . '9 ■ 
 
 In consideration of fi'f "'^■•''-' ■'•''•'''• ^''■'1'' '"■' ■''■•■■■•• "'■ 
 commit an act of bankrup/y 
 our obligations iteld by you 
 against the balance of any .'..- 
 account from time to tim£ t.v;...,.^ ■'- — -..'..., ' .. 
 
 any time stop payment or become insolvent, or 
 •e to be untrue, then and in either such case all 
 demand or notice, and the same may be charged 
 ga continuing Hen upon such balance of deposit 
 
 ASS^ 
 
 l«B,UT,t.^ 
 
 BU.D.>c.»,e. 
 
 
 
 ' 
 
 
 c,irii4i si.^ck 
 
 
 
 
 
 ^r^^nr^'r""'::::: 
 
 
 
 O rd fl Sec d 
 
 Dividends Unpiid 
 
 Due to Approved Reserve Aeetiis 
 
 In J. Deposits Subject to Check 
 
 Time Certificates of Deposit .... 
 
 Demuid Certifiatei of Dcposii 
 
 
 Overdrilts, Unsecured - 
 
 {(Hrviluel, P'll'c"!? ■/ " 
 
 
 
 
 
 
 
 -'•*^"-'' 
 
 
 
 
 
 
 
 ITuI^'b!!^.'!!^^..^.^,-. . . 1' ... 
 
 
 »::':::l ».,».».,„:: 
 
 
 
 
 
 E;(Chinges (or dealing House—,. , 
 
 
 Certilicates of Deposit representing i 
 
 Money Borrowed I. 1) i ' 
 
 
 
 - 
 
 
 
 
 
 

 
 THE CREDIT DEPARTMENT IN BANKING CREDIT 141 
 
 can. The custody of very large sums in solid cash entails much 
 care, and some cost; everyone \\dshes to shift these upon others 
 if he can do so without suffering." 
 
 There are times when banks must secure loans in the 
 same sense as others find it necessary to do so, and in 
 extending accommodation a bank's standing and re- 
 sponsibility must be considered just as rigorously as the 
 application for accommodation from a private person. 
 Statements from such banks are insisted upon, and general 
 investigations are also made where banks may be acting as 
 a collecting medium. A form of statement so used is 
 shown in Form 11. 
 
 The items of this statement vary from the items shoMTi 
 on a statement which has to be given by a commercial 
 house, as the general character of banking business differs 
 from commercial business. The principles involved in the 
 statements are exactly the same, the purpose being to secure 
 complete data affecting every branch of a bank's business. 
 In Form 12 v ill be found a form of statement for banks 
 which is also used, and it will be noticed that it is an abbre- 
 viation of the form shown in Form 11. 
 
 The difference in these two forms of statement illus- 
 trates the difference in the methods of certain institutions. 
 In some the policy is to exact all the information that from 
 the most technical standpoint would be demanded, while 
 in others the desire seems to be to simply secure informa- 
 tion regarding the most important features of a bank's 
 assets and liabilities. When a bank desires to secure a 
 loan, it submits as security for such loan a list of notes 
 it holds made by its customers, which list is copied upon 
 a form (Form 13).
 
 142 CREDIT AND ITS USES 
 
 This form is a very simple one. It contains the name 
 of the proposed borrower and the address; in the column 
 " Makers and Indorsers," the names of the people appear- 
 ing upon the notes to be furnished as collateral, their ad- 
 dresses, the due dates of the notes, and the amounts of 
 them. On the left-hand margin there is a very important 
 column ; in it the clerks in the credit department enter the 
 ratings (from the Mercantile Agency records) of the people 
 whose notes are offered as collateral ; a glance at these rat- 
 ings will satisfy the credit man as to the approximate 
 standing of these persons, the desirability of the collateral, 
 and the class of traders with whom the bank's customer 
 is doing business. In the chapter on commercial credit 
 the nature of such collateral and its relative acceptability 
 were discussed at length, and it is unnecessary to repeat 
 the very favorable opinion expressed in regard to such 
 bankable paper. 
 
 Revision of the information regarding banks is nec- 
 essarily resorted to, and a form of letter used is shown in 
 Form 14. 
 
 Comparative statements are also utilized in compiling 
 information in regard to banks, the ideas involved being 
 those explained in the comparative statement already 
 described. 
 
 It develops from time to time that where a concern may 
 be carrying a loan with its bank, it will find it necessary 
 to ask for further accommodation. In order that the offi- 
 cial who will pass upon the application may have before 
 him the facts in regard to the standing of the account, a 
 form such as shown in Form 15 (or others very similar 
 thereto) is used.
 
 C13 
 
 To The 
 
 FIRST NATIONAL BANK 
 
 OF CHICAGO. 
 
 OFFICE OF 
 
 tT'CNtnu o( Buk or Firm). 
 
 Below please find statement of financial condition as slwwn by books on 
 
 18 This is furnished in confidence for your 
 
 :tse alone, and as a guide should tJie questioyi of^ 
 itself in tJie course of our affairs with your bank. 
 
 ^standing and responsibility present 
 
 Respectfully, 
 
 ASSETS. 
 
 Loans and DiEConnts, 
 
 U. S. Bonds. 
 
 Other '• 
 
 Cash on Hand, 
 
 Due from Banks and Bankers, 
 
 Real Estate, 
 
 Other Assets, 
 
 LIABILITIES. 
 
 Capital, 
 
 Undivided Profits. 
 Deposits Demand. 
 Time Certificates, 
 Bills Payable 
 Other Liabilities. 
 
 In cases of unincorporated institutions, please give below amounts of assets and liabilities 
 Of individual members of the firm, in addition to above. 
 
 Form 12. — A briefer form used by a bank in making a statement of its affairs.
 
 BILLS RECEIVABLE 
 
 Rating 
 
 Makers and Indorskrs 
 
 Location 
 
 Due 
 Date 
 
 Amount 
 
 Form 13. — Form used by a banking crkdit dkpartment for 
 listing bills receivable offered as collateital.
 
 In making the customary revision of the informa- 
 tion on our files relative to the banks to which we send 
 our collections, we have observed that your institution 
 is reported as having the account of the 
 
 and we are, therefore, prompted to ask if you will 
 kindly favor us with your opinion of the standing, con- 
 dition, and management of the bank in question, as 
 well as furnish us with such details as may be con- 
 sistent, touching their desirability and safety as collec- 
 tion agents. 
 
 Assuring you that whatever you may say to us 
 in relation to the institution inquired about will be 
 treated as confidential and that we shall be happy to 
 render you a reciprocal service whenever it may be 
 your pleasure to call upon us, we are, 
 
 Very respectfully yours, 
 
 Form 14. — Form of letter used when revising credit informa- 
 tion IN RECORD to banks.
 
 THE CREDIT DEPARTMENT IN BANKING CREDIT 145 
 
 Offered hy . . , , 
 
 
 
 Date 
 
 
 
 
 1 
 
 
 SiKGLE 
 
 Bills 
 Rec 
 
 1 
 Collat. 
 
 
 
 Under Discount 
 
 Purchased 
 
 Loan Department 
 
 Total now held 
 Due 
 
 
 
 
 Gross Profit Last Six Months 
 Av'ge Balance " " 
 Present Balance 
 Amount of Offering 
 Time " 
 Total, if accepted 
 
 
 Resolution 
 
 Last 
 
 Statement 
 
 Letters of 
 Inquiry 
 
 Reports 
 
 Approved 
 
 Disapproved 
 
 
 
 
 
 
 
 Form 15. — Form used in a bank to show thk general state of a 
 borrower's account when a loan is under consideration. 
 
 This form sets forth the name of the applicant, the 
 date, the amounts of any loans that may be in the bank at 
 the time and their nature, and the total so held. It is nec- 
 essary that not only the responsibility of a person should 
 be of a satisfactory character, but it is also important that 
 the account kept by him in the bank be a profitable one; 
 if the showing of the latter be in his favor, the probability 
 of his new application being granted will be augmented. 
 There is set forth in the form the gross profits of the
 
 146 CREDIT AND ITS USES 
 
 account for the preceding six months, the average balance 
 during that period, the present balance, the amount of the 
 latest offering, the time it is desired to run, and the total 
 amount that would be owing if the new offering be ac- 
 cepted. There are also spaces in this form for entries in- 
 dicating that resolutions have been adopted authorizing 
 the borrower to contract with the bank for the loan, the 
 date of the last statement in hand, information as to letters 
 of inquiry that have been received, also as to reports se- 
 cured, and notations as to whether the application is 
 approved or disapproved by the authorities of the insti- 
 tution. 
 
 In a credit department in a bank there is often em- 
 ployed a card-index system, which serves two purposes, as 
 shown, for example, in Form 16, as given on the page 
 opposite. 
 
 The first purpose is the preservation of an accurate 
 list of the bank's customers and others, and the second a 
 notation yearly, in the spaces indicated, of the ratings of 
 Messrs. R. G. Dun & Co. and the Bradstreet Agency, the 
 two universally recognized standards of mercantile-agency 
 service. 
 
 While the institution of the credit department in bank- 
 ing business has been a matter of slow and unsteady 
 growth, it has received during the past few years the spon- 
 sorship of many prominent and powerful banks, thus 
 giving it a permanence in banking economy. This is 
 strongly evidenced by the great broadening process that 
 has developed in the work of credit departments in certain 
 banks. One notable departure in the management of 
 credits is worthy of mention. Professions, trades, and 
 callings have been assembled and classified; each classifi-
 
 
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 148 CREDIT AND ITS USES 
 
 cation is assigned to a separate division of the credit de- 
 partment, as explained in the following list : 
 
 Division "A" 
 
 CJollateral Stocks and Bonds 
 
 Grain, Flour, and Feed 
 
 Meat Products, Live Stock Commission 
 
 Coal Doctors and Lawyers 
 
 Division "B" 
 
 Drygoods, Millinery Woolens, Clothing, Cloaks 
 
 Furnishing Goods, Hats, and Caps 
 
 Jewelry and Merchandising Sundries 
 
 Transportation Ladies 
 
 Division "C" 
 
 Agricultural Implements, Buggies, Automobiles and Other Vehicles 
 
 Iron and Steel Products 
 
 Lumber, Furniture, etc. Manufacturing Sundries 
 
 Division "D" 
 
 Stone, Brick, Cement, Contractors, Wall Paper, Paints, Oils, 
 
 Glass, etc. 
 
 Boots, Shoes, Leather, Hides, and Wool 
 
 , Real Estate and Insurance 
 
 PubUshing, Printing, Engraving, and Paper Miscellaneous 
 
 Division "E" 
 
 Wholesale and Retail Liquors, Brewers and Brewers' Supplies 
 
 Tobacco 
 
 Produce Commission and Cold Storage 
 
 Groceries, Drugs, Restaurants 
 
 Bakers and Hotels 
 
 Division "F" 
 Banks and Bankers
 
 THE CREDIT DEPARTMENT IN BANKING CREDIT 149 
 
 This plan is said to be resulting satisfactorily. Under 
 it the officers (credit men) have been enabled to give a 
 much closer attention to the interests of the bank's cus- 
 tomers and familiarize themselves more thoroughly with 
 the various lines, thus anticipating their requirements. It 
 is asserted that this policy has also enabled those in charge 
 to extend credit more intelligently, and protect the bank 
 against losses which might in some cases have been sus- 
 tained under the old method; that it has also provided 
 the means for weeding out undesirable accounts, and that 
 the wider acquaintance and closer attention arising from 
 this specialization has assisted in procuring new accounts. 
 
 The members of the banking profession who have 
 been advocating the recognition of the credit department 
 by their own calling, have the satisfaction of realizing 
 that good results have followed their efforts, and that sub- 
 stantial progress may be looked for in the near future. 
 While it is only in this day that some of the banks in 
 our great metropolitan city are considering the advisability 
 or expediency of establishing credit departments, and this 
 concession to progress in many cases is being grudgingly 
 granted, the impact of modern methods is producing a 
 wholesome effect. 
 
 11
 
 CHAPTEK IX 
 
 SOURCES OF CREDIT INFOEMATION 
 
 (A) Salesmen's, Attorneys', and Bank Reports 
 
 The outline of the work of a credit department in the 
 banking business will indicate the scope of credit-giving 
 both in banking and in commercial affairs. Such work 
 involves responsibilities of a grave and burdensome char- 
 acter. Every credit means a risk ; the circumstances that 
 enter into the credit are attended with the element of risk, 
 and the safest credit is that in which the hazard is mini- 
 mized to the smallest possible degree. The risk involved 
 will be determined by the sufficiency and accuracy of the 
 information gathered. It follows that the dispensation of 
 credit is affected by two leading considerations: first, the 
 character of information secured ; and second, the wisdom 
 shown in deciding whether the risk should be accepted or 
 declined. The credit man is a lay judge; he has to pass 
 upon the financial and personal acceptability of the people 
 who seek business accommodations. He is required to 
 study the evidence submitted to him ; to consider that which 
 is material, and discard that which is irrelevant. After 
 he may have decided that the case is one of merit, he must 
 go further and determine to what extent he is justified in 
 granting credit. 
 
 The means of acquiring credit information are almost 
 150
 
 SOURCES OF CREDIT INFORMATION 151 
 
 entirely the outgrowth of the systems suggested and put 
 into practice by those engaged in commercial credit. The 
 fact that the systemization of credit-giving was undertaken 
 by commercial houses at an earlier period than by banks 
 accounts for this condition. To a great extent the same 
 methods must be utilized by banks and commercial houses. 
 The fact that the larger volume of credit information 
 arises from the necessities of commercial intercourse justi- 
 fies confining this description of the methods employed in 
 securing credit information to those followed in commercial 
 credit. One writer says : 
 
 "The relative credit of different merchants is a great tradition, 
 a large mass of most valuable knowledge which has never been 
 described in books and is probably incapable of being so described." 
 
 It would be an impossibility to attempt a description 
 of the relative credit of merchants. The nearest approach 
 to such an attempt is the work of the mercantile agencies 
 in the rating books published by them, and as will be seen 
 when this branch of the subject of credit information is 
 discussed, the large number of changes developing every 
 year renders these books approximate guides only of the 
 reputed standing of the merchant. The changes occurring 
 daily in the financial status of merchants makes credit- 
 giving an extremely delicate task ; this changing character 
 necessitates constant vigilance on the part of those charged 
 with the dispensation of credit, in order that too much de- 
 pendence may not be placed upon old information when 
 the acceptability of an account is being considered. 
 
 A credit man who conducts a well-regulated credit 
 office will not be satisfied with merely drawing from one 
 or two sources of information, but will tap every spring
 
 152 CREDIT AND ITS USES 
 
 •whence he has reason to believe there may flow such data 
 as will be of use to him in deciding as to the merits or 
 demerits of an account. Some credit men act upon the 
 theory that if they obtain reports from two or three sources 
 and find nothing derogatory in them, they are entirely 
 safe in deciding that credit should be extended; on the 
 other hand, if they were to have a definite policy as to 
 employing information from every reliable known source 
 from which credit information is obtained, and adhere to 
 the policy of consulting such sources, the danger of making 
 mistakes would be largely avoided. It will be contended 
 that the employment of many different sources of infor- 
 mation involves a great deal of labor, the loss of time, 
 and unnecessary expense, but this is not a reasonable 
 objection, for imless this character of work be done, 
 the credit man has failed to meet the necessities of his 
 position. 
 
 The general principles of credit, viz., confidence, trust, 
 faith, good opinion, business reputation, borrowing ca- 
 pacity, and the time required (the element of futurity) 
 apply with equal force to all branches of credit. If the 
 application of these principles to each particular case be 
 studied by the credit man, and considered as guides in 
 arriving at his decision, he will avoid many mistakes. The 
 prominence of the element of risk in credit work pre- 
 vents the adoption of what might be called hard and fast 
 rules. 
 
 In seeking information, preparatory to opening an ac- 
 count, it is important to take note of every class of views 
 it is possible to obtain. It is often supposed that when 
 houses express an unfriendly opinion of a man who is 
 seeking credit they may be doing so to prevent his open-
 
 SOURCES OF CREDIT INFORMATION 153 
 
 ing new lines of credit, or because of some petty dispute 
 they har3 had with him, in which he may have been 
 entirely right and they altogether wrong. In order to 
 provide against overlooking this class of information, in- 
 vestigations should be as diversified as possible. 
 
 CREDIT INFORMATION OBTAINED THROUGH SALESMEN 
 
 One of the oldest sources of credit information con- 
 sists of the advices and general reports made by salesmen 
 to the credit departments of their houses in regard to 
 people from whom they accept new orders and also those 
 who may have been customers for a long period. The idea 
 of utilizing a salesman's abilities and time for this pur- 
 pose is a natural one, especially in reference to people who 
 are not in the habit of visiting the market, and who, there- 
 fore, are known only by name and reputation to the firms 
 from whom they purchase goods. The salesman is the 
 only representative of the selling house the customer has 
 ever met. He does not know tlie principals of the firms 
 from which he purchases, and he has never met the credit 
 man or the person who passes upon his desirability as a 
 customer. The general nature of the salesman's duties 
 imposes upon him the necessity of being friendly with 
 customers, and he is anxious that this friendship should 
 be reciprocated in order that his ability to sell goods 
 may be helped by the esteem in which the customer may 
 hold him. He has opportunities, therefore, of asking ques- 
 tions that do not come within the province of even the 
 credit man, for the latter, if unable to meet the cus- 
 tomer, must depend upon correspondence to draw forth 
 such information as he may desire. It would seem almost
 
 154 CREDIT AND ITS USES 
 
 unnecessary to call attention to the palpable fact that cor- 
 respondence, no matter how diplomatic, will not produce 
 the same excellent effects upon the customer's mind as 
 will follow an oral interview, assuming that the latt<?r 
 is conducted with evidences of friendly regard and dig- 
 nity. 
 
 Proper consideration of the place the salesman should 
 occupy in business economy is a subject to which sufficient 
 attention has not been given in the past. ISTo element of 
 business requires a higher order of intelligence than that 
 of salesmanship, and where a combination of intelligence 
 and good education is found the results will be correspond- 
 ingly greater, A good salesman is essentially a student of 
 markets. He can only bring to the study of economic 
 conditions that refinement of judgment which the subject 
 requires when he has at least a rudimentary knowledge of 
 the facts of commerce and a mind trained to apply those 
 facts of commerce to everyday questions. As the friend 
 and in many cases the business adviser of his customer, 
 he has opportunities for observing the habits, the tem- 
 perament, and the environments of the man in trade, and 
 these opportunities and the knowledge acquired through 
 them should make him a useful ally of the credit man. 
 
 In order to have the information obtained through 
 salesmen submitted in systematic form it is customary 
 to use blanks upon which the salesman is supposed to 
 submit his reports. In Form 17 is presented a blank for 
 this purpose which is a form published with the approval 
 of the National Association of Credit Men, the adoption 
 of this form having been decided upon only after a very 
 large number of forms used by individual houses, mem- 
 bers of that association, had been thoroughly examined.
 
 <v. 
 
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 I ^
 
 SOURCES OF CREDIT INFORMATION 157 
 
 The printed matter of this form appears on two sides, 
 and if a salesman were to comply with its requirements 
 in every case he would have to ask many questions of the 
 present or prospective customer. It must be understood 
 that this would require considerable of the salesman's 
 time. Also, a person who was giving the salesman a first 
 order might resent being asked so many questions ; again, 
 it is doubtful if a salesman could be depended upon to 
 ask these questions with the intelligence that will disarm 
 criticism and at the same time produce proper answers. 
 These are questions regarding which there seems to be no 
 definite policy followed in credit-giving. A salesman, par- 
 ticularly one who has not had long experience, should not 
 be expected to understand the full import of all the ques- 
 tions noted on the form, or display much familiarity with 
 them. Unless a report submitted by him be marked by 
 intelligence and completeness, such a report is wholly lack- 
 ing in value, and dependence upon it is attended with 
 danger to the interests of the house. The questions that 
 the salesman must ask the customer, if a report such as the 
 foregoing is to be fully made out, would be, the name of 
 the firm, the names of the partners, their nationalities, 
 ages, whether married or single, how long the firm had 
 been in business, whether it does a cash or credit busi- 
 ness, whether insurance is carried, figures as to real estate 
 owned, any other assets owned, and the names of parties 
 from whom the trader is purchasing his goods. To do all 
 this in a manner taat will prove agreeable to the purchaser 
 can only be expecTed of a man who has had a long and suc- 
 cessful experience in salesmanship and who has been 
 thoroughly coached in the credit duties required of a sales- 
 man. There are other questions which he will be able
 
 158 CREDIT AND ITS USES 
 
 to answer satisfactorily if his powers of observation be 
 developed and acute, viz., of what the stock consists, its 
 condition, how many clerks are employed, the desirability 
 of the business location, his estimate of the value of the 
 stock, his opinion of the value of the real estate, and the 
 value of other assets. He is also expected to consult local 
 authorities as to the habits, ability, and personal expenses 
 of the customer, and also whether he is thought to be 
 making money. ISTo salesman can or will answer these 
 questions vrith that degree of thoroughness which is essen- 
 tial to a good report unless " he has at least a rudimentary 
 knowledge of the facts of commerce and a mind trained 
 in the application of those facts of commerce to everyday 
 questions." 
 
 It is true that these forms are used by many credit 
 departments in the hope that the salesman will, through 
 the fact of his being expected to send some information, 
 make a report, if only a desultory one ; but unless this 
 feature of credit information be given thorough attention, 
 a slurring or ignorant treatment of it will mislead the 
 credit man in considering the information. 
 
 Form 18 represents a form which is of a much briefer 
 character than the one described, it being a part of the order 
 blank upon which the salesman sends in the full details 
 of the order taken by him, the data in reference to the 
 order appearing on the face of the form, and the infor- 
 mation for the use of the credit department on its 
 reverse side. 
 
 The questions asked correspond very closely to those 
 heretofore mentioned. The questions as to the amount of 
 annual license and its expiration are included because this 
 particular form (Form 18) is used by a wholesale liquor
 
 SOURCES OF CREDIT INFORMATION 159 
 
 concern, and the question as to the amount of license, etc., 
 is a \'ery important item in that business. 
 
 Some credit men express themselves as unwilling to be 
 influenced, either favorably or otherwise, by reports re- 
 ceived from salesmen, on the ground that the salesman is 
 in nearly every case actuated by selfish motives, his dispo- 
 sition being to give only such information as will be help- 
 ful in effecting a sale, and that he will withhold informa- 
 
 PLEASE ANSWER FOLLOWING QUESTIONS WHEN YOU SEND ORDER 
 
 What line of business ?_ 
 
 W. o compose the firm?. 
 Ag« — and if married ? 
 
 Business capacity (fair, good, or excellent)?. 
 
 Prospects for success? 
 
 Habits ? 
 
 How long in business?. 
 If prompt pay? 
 
 If ever failed, when and where ?. 
 
 Capital invested in business? 
 
 Average amount of stock ? 
 
 Amount of annual license ? 
 
 When does same expire? 
 
 Remarks ? 
 
 Form 18. — Brief form for use of salesmen in furnishing credit 
 information.
 
 160 CREDIT AND ITS USES 
 
 tion of an unfavorable character for fear that he may lose a 
 customer. This opinion, entertained by certain credit men 
 consulted, is not a universal one, those in charge of the 
 credit departments of some very large institutions holding 
 that information received from salesmen, especially those 
 who have followed the calling for a number of years, is 
 of a most valuable character. In discussing " the sales- 
 man " a short time ago a writer said that his considerations 
 were the following : 
 
 " First, himself ; second, his customer ; third, his house ; and 
 fourth, the credit man." 
 
 If this be correct, little dependence should be placed 
 upon credit information from salesmen. The character- 
 ization is overdrawn, although with a certain class of sales- 
 men their first consideration is usually themselves, and 
 next to their own interests they desire to subserve those 
 of the customer, forgetting that it is not the customer who 
 employs them, and that their first duty is to those by whom 
 they are employed. 
 
 The chief difficulty in developing this source of credit 
 information is that the method involved requires a combi- 
 nation of credit man and salesman in one personality; 
 while this combination exists among some men to a very 
 marked degree, it is only infrequently discovered. The 
 character of information obtained through a salesman de- 
 pends almost entirely upon his personality. If he be a 
 careful, conservative man he will exercise discretion in 
 procuring his information, and endeavor to the best of his 
 ability to safeguard his firm when it is extending credit. 
 If he be a person who feels that this branch of his work 
 is one not requiring a great deal of attention, or if he be
 
 SOURCES OF CREDIT INFORMATION 161 
 
 by nature disqualified from giving it the necessary atten- 
 tion, the results can very quickly be discerned in the re- 
 ports submitted by him. One credit man has said on this 
 point : 
 
 "It is my custom to exact of the agent a report of his own 
 observation and impressions of the customer. I do not always 
 get this and many times when I do it is of no value. I am to-day 
 working with men who are as different as men possibly could be, 
 one with a mind that is capable of analysis, careful observation, 
 quick to be suspicious of little things that tend to affect a man's 
 credit, and another who sees nothing, apparently knows nothing, 
 but is always ready to venture the statement that the party is 
 perfectly good, and 'don't owe a dollar in the world.' These 
 reports, like all other information, have to be considered with their 
 origin in mind, and in connection with other information which 
 you have." 
 
 On the salesman's behalf it should be said that he is 
 expected to sell goods and not to make credits, or rather, 
 the selling of the goods is the primal motive of his occupa- 
 tion. Unless he is able to cover the territory assigned to 
 him in a reasonable period and dispose of as large an 
 amount of goods as the firm considers should be sold within 
 that period, he will be looked upon with disfavor. An 
 undue desire to make sales, irrespective of the probability 
 of payment being secured, is very harmful to the interests 
 of a house, but the following opinion expressed by a promi- 
 nent credit man proves that such a policy does obtain 
 among salesmen. 
 
 " It would be an assistance to the credit department if salesmen 
 could be induced to use a Uttle more judgment and not be too 
 anxious to make a sale, but it is very difficult to get the information 
 you absolutely require from salesmen. My experience has been
 
 162 CREDIT AND ITS USES 
 
 that there are very few of them who can size up a man in making a 
 sale ; in fact, I find that they are very apt to report favorably on 
 a concern when it is not deserved." 
 
 The failure of the salesman to take a broad view of 
 questions involved in the credit responsibility of his cus- 
 tomers may be due to the failure of the credit man to incul- 
 cate among salesmen a proper respect for the responsibility 
 imposed upon them as sources of credit information. If 
 salesmen are not instructed in regard to this feature of 
 their work they cannot be expected to discharge it with 
 the satisfaction that would otherwise be secured. Some 
 credit offices make it a practice to see that salesmen are 
 thoroughly informed in regard to the condition of their 
 customers' accounts, and are thus enabled to form a much 
 clearer conception of the treatment that should be accorded 
 the customer than if they were not in possession of this 
 information. A credit man in a leading line has given 
 the following description of this method : 
 
 " Each traveler when he starts out has in his pocket a book of 
 convenient size showing the names of every man in every tovm 
 he is to visit upon whom we desire he shaU call. Opposite each 
 man's name is a figure showing the limit of credit we are wilUng to 
 give that man. We send to each traveler, so that he may know 
 from ten to twelve days ahead of the date he is to visit the town, a 
 paper which we call a 'statement of accounts.' It is ruled, showing 
 notes, total open account, amount of open account due, and a line 
 for remarks. The traveler looks over this paper and sees just 
 how much a man on whom he is to call owes and what amount is 
 overdue on a basis of four months, which are our terms of sale. 
 On the line for remarks I am in the habit of saying something about 
 each customer, so that the history of each man's account is given 
 to a traveler before he reaches the town in which the customers on 
 whom he is to call live."
 
 SOURCES OF CREDIT INFORMATION 163 
 
 If the credit man expects to secure througli the sales- 
 man the information which will be of practical value to 
 him in dispensing credits, it is his duty to cultivate close 
 relations with the salesman and make the latter feel that 
 his best work in obtaining reliable credit data will be ap- 
 preciated by the credit office; that the more reliable the 
 information he imparts, the less liability there will be to 
 either crediting unworthy customers or dismissing appli- 
 cations for credit which really deserve favorable considera- 
 tion. The effective treatment of these phases of credit will 
 inure to the great advantage of the salesman, in that a de- 
 sirable class of customers will be secured and their patron- 
 age retained for a long time, thus insuring him a steady 
 and fruitful source of income. 
 
 There should be mutuality between salesmen and 
 credit men. One of the important phases of this should 
 be the education of the salesman as to his exact duties in 
 regard to obtaining credit information, and helpful sug- 
 gestions as to the best means for obtaining it. In this way, 
 if he have that aptitude which is a distinctive character- 
 istic of many of those with whom salesmanship is a voca- 
 tion, a better means for obtaining reliable credit data will 
 be afforded and a source of credit information developed 
 which will possess many advantages. 
 
 ATTORNEYS-AT-LAW AS A MEDIUM OF CREDIT 
 INFORMATION 
 
 The second species of credit information to be dis- 
 cussed is that secured through the services of attorneys. 
 There are many reasons why an attorney is an excellent 
 medium for the procurement of credit information: first,
 
 164 CREDIT AND ITS USES 
 
 the organization of his office makes it convenient for hira 
 to act as a collector and distributor of such information; 
 second, a lawyer invariably has a large circle of acquaint- 
 ances, both of a business and social character, and this 
 acquaintance enables him to secure information 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 percentage of which in- 
 formation he is at perfect liberty to utilize as credit ma- 
 terial 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 pur- 
 poses; fifth, he is frequently called upon to act as a col- 
 lector of claims against people or in behalf of clients in 
 cases where 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. There are entirely 
 honorable ways in which this information can be conveyed 
 to those who extend credit, ^vithout impairing the pro- 
 fessional honor of the attorney. It is therefore natural 
 that those who give credit should turn to attorneys as 
 a medium of credit information. The utilization of the 
 services of attorneys in this respect has been in the main 
 satisfactory, although it has at the same time developed 
 certain abuses which should not be overlooked. In their 
 desire to secure collection and litigated business some at-
 
 SOURCES OF CREDIT INFORMATION 165 
 
 torneys, a number of years ago, proffered their services 
 practically without charge in respect to credit information, 
 in consideration of collections and other business being 
 sent to them. Efforts were made to systematize this work 
 by the preparation of lists of attorneys. Subscriptions 
 were sought and accepted from mercantile houses and 
 banks, the lists being placed at their disposal, with forms 
 for use in asking for credit information and forwarding 
 claims. Business houses and others, having paid a sub- 
 scription price for the use of this book, seemed to feel that 
 they should secure the latest and fullest information ob- 
 tainable in respect to credit risks from the attorneys 
 whose names appeared in the list. This scheme worked 
 satisfactorily for a time, but it quickly developed that the 
 attorneys were giving everything and getting nothing; 
 for while a house might make inquiries on a large number 
 of people, it was only in rare instances that it would feel 
 called upon to enlist the services of the attorney. It was 
 supposed that the policy of reciprocity would obtain under 
 this system, but the advantages were not of an entirely 
 reciprocal character, the balance being too much in favor 
 of one side — the merchant's. As a result of this condi- 
 tion attorneys became indifferent as to the service ren- 
 dered imless they were paid for such service. This has 
 given rise to dissatisfaction among business men in regard 
 to the attorneys' reports, a dissatisfaction which is freely 
 expressed by many of the writer's correspondents, some 
 of whom do not hesitate to belittle them. Credit depart- 
 ments that are availing themselves of attorneys' services 
 for credit reports, assert at the same time that they do not 
 place a great deal of value on them and that the service 
 13
 
 166 CREDIT AND ITS USES 
 
 is not satisfactory. It is charged that reports are not 
 promptly made; that attorneys fail to go into the details 
 of a case and depend too much on their memories and gen- 
 eral knowledge of the standing of people in making re- 
 ports; that these reports lack explicitness, and that meager- 
 ness of information is one of their principal shortcomings. 
 On' the other hand, there are credit men who rely upon 
 attorneys' reports and say that it is their invariable cus- 
 tom to send a small fee with the inquiry, and that the re- 
 sults secured from this channel of credit information they 
 consider valuable. The whole question resolves itself 
 into this: that while there are cases in which certain 
 attorneys may be inefficient or inattentive in the matter 
 of credit reporting, these represent no larger a percentage 
 of the profession at large than is represented by the ineffi- 
 cient and indifferent persons of any calling. "When an 
 attorney is found inefficient it is useless to continue to 
 ask him for information, but if reliable and timely infor- 
 mation is wanted, the only effective way to secure it (in 
 justice to the credit office and the attorney) is to pay for 
 it. That which a man gives for nothing is usually worth 
 nothing. The theory of reciprocity, as it relates to credit 
 reporting, has been worked to the uttermost, and its re- 
 sults are disappointing to those from whom the informa- 
 tion is sought. 
 
 An effort was made some years ago by a committee 
 of the National Association of Credit Men to have credit 
 offices keep a card-indexed list of attorneys for purposes 
 of credit reporting as well as making collections. Investi- 
 gation indicates that these card lists are not in general use, 
 and that in many cases where they were installed, they
 
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 SOUECES OF CREDIT INFORMATION 169 
 
 have been discarded. The principal reason for the elimi- 
 nation of the card lists of attorneys as a feature of credit- 
 office work is that during the past few years there has been 
 developed a large number of excellent law lists which are 
 in use by credit men. These law lists are prepared under 
 the auspices of responsible concerns and published in at- 
 tractive form. Revisions are made with due regularity 
 and a list of this kind obviates the necessity of the credit 
 man keeping a card list of his own, the proper attention 
 to the preservation of which would require constant 
 thought and care. Another advantage of the lists pub- 
 lished in book form is that in nearly all cases the 
 names of attorneys appearing in the list are under con- 
 tract with the publishing company to furnish credit in- 
 formation. 
 
 In Form 19 is submitted a form of attorneys' report 
 blank which has received the indorsement of the ISTational 
 Association of Credit Men. 
 
 One of the first things set forth in this form is that the 
 sum of $1.00 is inclosed to pay for the report asked for. 
 This amount would be recognized as a fair compensation 
 for an average report. If, however, the preparation of 
 a report involved considerable research of county and 
 other records and much interviewing of local authorities 
 by the law^^er or his representatives, the fee would not 
 adequately cover such services. It is presumed that con- 
 siderable of the information could be entered upon the 
 blank without loss of time or references to papers or 
 people. At the same time, in a case where the attorney 
 had prepared a report as asked for, and received a second 
 request for a report upon the same person within a short
 
 170 CREDIT AND ITS USES 
 
 time, the task of bringing the information down to date 
 would be simple and the compensation mentioned a very 
 fair one. Many of the questions in this form are the 
 same as in the salesman's blank and therefore do not re- 
 quire further explanation. The form embodies many of 
 the essential elements of the blanks furnished by the law- 
 list companies. When detailed information is required, 
 in respect to real estate holdings and liens upon them, 
 the services of an attorney are necessary. He and his 
 clerks are qualified to search for and impart such informa- 
 tion intelligently, although his assistants may not be en- 
 tirely fitted to act as investigators on general credit mat- 
 ters. While no attempt is made to disguise the fact that 
 the services of attorneys on the question of credit report- 
 ing is not held in universal esteem, in justice to them, and 
 especially to those members of the profession who have 
 made a determined effort to acquit themselves creditably 
 in this work, it is proper to quote a few opinions of prom- 
 inent credit men which are highly favorable to attorneys 
 as gatherers of credit data, and also set forth reasons why 
 their services are desirable. For example, this from a 
 Chicago credit man: 
 
 "I consider attorneys' reports as among the most valuable of 
 our sources of information : 
 
 "First: Because they are from men right on the ground. Col- 
 lection attorneys, for the most part, give honest information. 
 
 "Second: Because the information so obtained is compara- 
 tively inexpensive, being paid for almost wholly by an exchange 
 of business, 
 
 "Third: Because a good idea can be formed of the attorney's 
 collection ability from the nature of the report he makes, and his 
 care in making it."
 
 SOURCES OP CREDIT INFORMATION 171 
 
 The following from a leading representative of the 
 credit profession in Baltimore: 
 
 "My experience seems to warrant the opinion that the attor- 
 ney's assistance in the investigation of credits was frequently more 
 valuable than his direct assistance in making collections. The at- 
 torneys used were generally recommended by some reputable com- 
 pany or those I had met in the com-se of my credit experience." 
 
 The last opinion cited is that of a credit man of a 
 representative Boston concern: 
 
 "The local attorney in many instances is thoroughly familiar 
 with the habits of the party to be investigated, also his manner of 
 living, amount of business done, and how he stands socially and 
 financially in the community. He is also in a position to know 
 of any real estate recorded, also mortgages, and in many instances 
 knows when accounts are in attorneys' hands for collection. At- 
 torneys report promptly ; in most instances by return mail. Blanks 
 are furnished by companies supplying the law lists, and it has been 
 the writer's experience that printed forms containing regular ques- 
 tions to be answered are more satisfactory than a blank form, as 
 attorneys will simply reply in a general way." 
 
 In certain cities of the first and second class, law firms 
 doing a large commercial business have found that the 
 services they have rendered in credit matters have been 
 of great benefit to them in the acquirement of a large 
 number of clients whose commercial business is of a very 
 profitable character. These law firms have installed com- 
 mercial departments, one of the principal duties of which 
 is to gather credit data. The consequence is that the 
 work is done in a systematic and thorough manner; those 
 charged with its prosecution become, by association with
 
 172 CREDIT AND ITS USES 
 
 it, experienced and proficient; and another very great 
 advantage is that after a number of years the constant 
 accumulation of credit information provides a set of files 
 equal, and in many cases superior, in value and material 
 to those held by the mercantile agencies. 
 
 BANK REFERENCES 
 
 Some credit departments consider it a good practice to 
 address letters of inquiry to banks soliciting their opinions 
 of applicants for credit. It cannot be said that the infor- 
 mation acquired in this way is of a great deal of value, 
 for the reason that the bank should not be expected to, 
 and neither w'ill it, tell in plain words just what line of 
 accommodation it accords a man or the exact state of its 
 account with him. While it is hoped that the day may 
 come when a bank's relations with its customers will be 
 looked upon as disclosable facts (in the same sense that 
 business houses freely open their books to one another), 
 it cannot be denied that for banks to explain in detail the 
 nature of their relations with customers would in a good 
 many instances result in trouble for all concerned. Some 
 houses might be so timorous as to feel that they were not 
 safe in extending reasonable credit lines for merchandise, 
 because a man was owing his bank a considerable amount 
 of money, obtained through the ordinary channels of 
 bank accommodation. The contraction of his credit due 
 to such fear would prove harmful to his business reputa- 
 tion. 
 
 This leads to the thought that a closer relationship be- 
 tween mercantile interests and banks is desirable on the
 
 SOURCES OF CREDIT INFORMATION 173 
 
 subject of credit intercliange, as the influence of both 
 would be widened and many severe losses obviated. 
 Credit interchange consists not merely in stating whether 
 a man is prompt or slow, but in the diffusion of the great 
 mass of information assembled from all quarters and dis- 
 tributed for the benefit of all interested. When ques- 
 tioned on this subject bankers have replied, " Banks have 
 no information to give, they cannot be expected to tell 
 the private business of their customers." To do so might 
 have the effect of driving some customers away from 
 the banks with which they were doing business. It is 
 true that the relations of a bank with its customers 
 are of a more private character than the relations of 
 these same customers with houses from which they 
 purchase merchandise. There are certain reasons for 
 this: 
 
 1. A merchant is usually debtor to his bank in a much 
 larger amount than to any individual house with which he 
 is dealing. 
 
 2. In order to secure the accommodation he desires 
 he may have induced some relative or friend to guarantee 
 his account Avith the bank, and if the latter is expected to 
 give out such information as this when called upon by a 
 merchandise creditor (who may have only a trifling order 
 at stake) it would have to disclose the fact of the account 
 being guaranteed. 
 
 3. Such information might be misinterpreted and lead 
 to rumors that the merchant must be weak, as his bank 
 required a guarantee for his account, and such rumors 
 would do incalculable harm. 
 
 Conditions such as those referred to are probably
 
 174 CREDIT AND ITS USES 
 
 accountable for some of the opinions expressed by one of 
 the writer's correspondents: 
 
 " The banker and jobber do not get along in the way of commer- 
 cial reports. It is well known to credit men that very little reliance 
 can be placed upon a report given by a bank upon the country 
 merchant. If the merchant is not doing business with the banker, 
 the latter simply returns the inquiry saying that he is not doing 
 business with him, or gives information which is not of much value. 
 We had a customer in a town in which there were three banks. 
 We knew the customer to be slow pay and were in doubt as to the 
 continuance of the account. I sent an inquir}' to each of the three 
 banks regarding this merchant. One bank stated that he was 
 slow pay and they frequently had drafts on him, very few of which 
 were paid. (This information coincided exactly with our own 
 experience.) The second bank said that they did not believe that 
 the party was good for the credit named, as he was too slow, and 
 they could not recommend him for the acconunodation. The third 
 bank stated that he was prompt pay, a responsible party, and good 
 for his needs, and that they would not hesitate to recommend him 
 for the amount of the order in question. It is easy to see where this 
 man kept his bank account, and also that he had had some trouble 
 with one of the banks. If our inquiry had been directed only to 
 the third bank, you can see what misleading information we would 
 have had." 
 
 The statements contained in the foregoing are typical 
 of the views frequently expressed by credit men in respect 
 to bank-credit information. They are not complimentary 
 to what is recognized as the most powerful agency in onr 
 whole commercial structure (the banking business) and it 
 is probable that a good deal of the displeasure entertained 
 by merchants and credit men on this question is due to: 
 first, a misconception of the information the bank should 
 be expected to impart; second, the nature of its relations 
 with its customers; and third, the danger of an indis-
 
 SOURCES OF CREDIT INFORMATION 175 
 
 criminate diffusion of the inner facts relating to bank 
 accounts. 
 
 In justice to the banker something should be said of 
 the criticisms in the excerpts quoted. 
 
 1. As to his returning an inquiry upon a person with 
 whom he is not doing business, and giving information 
 which is not of much value, the point is, should he be ex- 
 pected to give out information as to why the man inquired 
 about may have been compelled to close his account at the 
 bank, or, on the other hand, if the bank has never done 
 business with him, should the banker be expected to act 
 as an advising medium at the expense of his time and with 
 no recompense for his labor or information? 
 
 2. The information of the first bank cited was, accord- 
 ing to my correspondent's OAvn statement, a truthful one, 
 and one that confirmed his own experience. The same 
 thing may be said of the information of the second bank. 
 
 3. The third bank was certainly at fault, probably 
 through ignorance of the merchant's real reputation as 
 a business man, although some might say a harsher judg- 
 ment was warranted. Dismissing the bank's culpability 
 in this particular case, the incident cited shows that in- 
 formation sought in this way, or among merchants as well, 
 is not always reliable and that all information must be 
 weighed in connection with the general aspect of the case, 
 otherwise such information will mislead and do harm that 
 cannot be satisfactorily repaired. Information sought by 
 merchants from banks through correspondence is not 
 meted out in a measure that proves agreeable to the mer- 
 chants. Some of the reasons for this have been explained, 
 and there will be no appreciable change in this condition
 
 176 CREDIT AND ITS USES 
 
 until sucli time as credit interchange is liberally prac- 
 ticed among the bankers themselves; when that state of 
 affairs obtains, the next step will be the recognition of the 
 interdependence of bankers and merchants in the matter 
 of credit interchange, with results that will be eminently 
 gratifying to the commercial interests of the country.
 
 CHAPTER X 
 
 SOURCES OF CKEDIT INFOEMATION Continv^ 
 
 (B) Written References and Inquiry Forms — Written 
 and Signed Statements — Oral Investigations — Trav- 
 eling Credit Representatives and Special Reports 
 
 WRITTEN REFERENCES AND INQUIRY FORMS 
 
 One of the common practices of all trades is to ask a 
 person for his references when he is making his first pur- 
 chase. It is proper to considt the references that the 
 applicant for credit may give, but the credit man must not 
 stop there. It is not probable that the applicant for credit 
 would tender the names of people other than those with 
 whom he stood well, and it is not to be supposed that he 
 would recommend the men from whom he expected a 
 credit favor to go among those who did not entertain 
 a good opinion of him. The tremendous increase in the 
 number of those engaged in trade during the last twenty- 
 five years has necessitated a great volume of correspond- 
 ence on the subject of references, and in order to system- 
 atize and minimize the labor imposed upon credit offices, 
 reference forms are used. In their earlier use these forms 
 simply requested information as to whether a man was 
 prompt or behind in his payments, and a general estimate 
 of his character. Either below this printed matter or on 
 
 177
 
 178 CREDIT AND ITS USES 
 
 the opposite page there were lines for the reply, and it 
 followed that the information in response to such an in- 
 quiry would be general and evasive in its terms. In order 
 to obviate this difficulty and to still further minimize the 
 work of the credit department, forms were prepared con- 
 taining certain questions opposite which the recipient waa 
 supposed to note his replies. If answers were given to 
 an inquiry of this nature there was little possibility of 
 evasion or double dealing, for the character of the ques- 
 tions would prevent it. In Form 20 is given a form of 
 inquiry or reference blank. 
 
 This blank is also one adopted and recommended by 
 the ISTational Association of Credit Men. It is the latest 
 development of a series of inquiry forms prepared by the 
 committees on Credit Department Methods of that or- 
 ganization, and in its present shape represents probably as 
 succinct an inquiry blank as there is in use among credit 
 interests. 
 
 This form is prepared in the manner shown in the 
 diagram : the same printed matter which appears here ap- 
 pears also on a duplicate sheet attached to the form given, 
 with the exception that instead of the words " Our Expe- 
 rience. Keep this for your files " there are the words 
 " Return this to us." When an inquiry is to be made the 
 stenographer or other clerk enters the date, the name of 
 the party to whom the inquiry is addressed, a notation 
 as to whether it is a house sale or an order, the amount, 
 the name of the party inquired about, and the latter's 
 post-office address. Below the double lines are entered 
 the answers showing the experience of the inquiring 
 concern; in sending to its correspondent this informa- 
 tion the inquirer is giving quite as much as he expects to
 
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 180 CREDIT AND ITS USES 
 
 receive; and when the recipient returns the form with his 
 information, he has reaUy given no more than he has 
 received. 
 
 These forms are in great demand and are also largely 
 copied either in their original form or with certain modi- 
 fications, made necessary by the exigencies of special 
 trades. It is the general testimony of credit men that 
 these applications for credit information bring prompt 
 and satisfactory replies. This is due to the fact that reci- 
 procity plays a prominent part in the transfer of informa- 
 tion, and the labor required is in no sense an imposition. 
 
 In certain contingencies, however, the nature of the 
 inquiry may be such as to render the use of a printed 
 form inexpedient. In its place should be sent a letter 
 setting forth the exact nature of the inquiry and the in- 
 formation desired. If the extension of credit is to be con- 
 ducted so as to subserve the best interests of those en- 
 gaged in giving credit, it is essential that there should be 
 perfect freedom in the interchange of credit information. 
 
 Although the principle of credit interchange is recog- 
 nized as one that should be followed by business houses, 
 there are credit men who feel that the work of answering 
 a large number of inquiries is an imposition. Some dis- 
 approve of this system to such an extent that they will 
 neither make nor answer inquiries. This policy may be 
 followed in a business where the article dealt in is of a 
 patented or standard character, enabling the firm to con- 
 fine its trade to only those who enjoy the highest ratings; 
 but in a business where competition is general it is evident 
 that such a policy would be attended with disastrous 
 results. 
 
 The information received on an approved inquiry form
 
 SOURCES OF CREDIT INFORMATION 181 
 
 must not be always accepted at its face value but should 
 be studied with the same care extended to a detailed 
 statement of affairs received direct from a customer. 
 Houses ultra-liberal in extending credit are not as reliable 
 guides as those known to be conservative. In other words, 
 the character of the house giving the information must 
 be considered as affecting the information and any omis- 
 sion to follow this course is a mistake. When inquiry 
 forms are of a general instead of a detailed character, the 
 answers may be very misleading. 
 
 WRITTEN AND SIGNED STATEMENTS 
 
 There are certain facts which can be obtained with 
 better success from the applicant for credit himself than 
 from any other source. The details as to the value of his 
 stock and other items of assets, and also his business 
 liabilities and private indebtedness constitute information 
 of which he is the exclusive custodian. It is essential that 
 he be asked for this information, and the safest method 
 of securing it is through the medium of a carefully pre- 
 pared printed form, containing such questions as the 
 creditor has a right to ask, signed in person by the appli- 
 cant for credit. The latter suggestion should be empha- 
 sized for the reason that in some States it is impossible 
 to proceed in a criminal action against a man on a signed 
 statement unless he has personally signed it. In many 
 cases merchants see fit to have these statements signed by 
 confidential clerks or buyers, but in some States such a 
 signature would not bind the principal. The great merit 
 of securing a statement upon a prescribed form is that 
 there are set before the applicant for credit or debtor the 
 13
 
 182 CREDIT AND ITS USES 
 
 questions to be answered, and his failure to respond to any 
 of them is ground for prompt inquiry as to the omission, 
 very often disclosing conditions of an unfavorable char- 
 acter. If the purchaser prepares his own statement he 
 may, by clever manipulation, effectually veil unsatisfac- 
 tory details that should be unfolded. 
 
 Personal statements are regarded as one of the most 
 effectual methods for securing reliable data in regard to 
 accounts. 
 
 It is well to consider whether a very large number of 
 questions such as appears on Form 21 does not confuse 
 the person who is to make the statement and also in- 
 spire an unwillingness on his part to submit to what may 
 be regarded as an inquisitorial proceeding. This point 
 has been studied by many credit departments, with 
 the result that they have deemed it expedient to 
 employ a simpler form, a type of which is shown in 
 Form 23. 
 
 A question appearing in statement form, Form 21, to 
 which attention should be given, refers to whether or not 
 books of account are kept by the applicant for credit. 
 This is a question which has been overlooked to a great 
 extent in the past, although its relation to the bankruptcy 
 law is one of such intense interest that it is somewhat 
 remarkable that the omission was not discovered earlier. 
 This question, however, has been rendered absolutely essen- 
 tial, if these forms are to be used in the State of Xew 
 York, as certain legislation adopted by that State provides 
 that it shall be prima facie evidence of fraud if a merchant 
 has obtained credit on the strength of a signed property 
 statement, in which he claims to keep books of account, 
 and no^ making payment when due, he fails to submit
 
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 SOURCES OF CREDIT INFORMATION 183 
 
 his books of account within ten days on the requisition 
 of a creditor on whose account he has defaulted. 
 
 There appears to be no uniform policy followed by 
 credit departments of commercial houses or banks in re- 
 gard to asking for property statements. Some believe 
 that they are safe in depending upon the information 
 secured through other channels if such data as comes to 
 them is of a satisfactory character, and recourse to a de- 
 mand for signed statements is made onl}- when tlie credit 
 man considers that the general information he has secured 
 is not adequate. As explained in the following opinion: 
 
 "In case of any discrepancy between the reports of the two 
 mercantile agencies, or where the reports have been vague and 
 unsatisfactory; as for instance when the report reads, 'It is re-ported 
 that this party owns a certain amount of real estate in his own 
 name,' we have usually required the customer to furnish us a state- 
 ment which we have verified by records." 
 
 Some credit men are not in the habit of asking for 
 property statements except in the case of an entirely new 
 account, while others do not request property statements 
 at all if they feel that they can get along without them. 
 The situation in commercial circles on this point is exactly 
 the same as in the banking community, viz., as a rule men 
 are not inclined to give statements of their affairs if they 
 can avoid doing so. The lack of uniform procedure on 
 this as on many other points shows that there is still 
 considerable work to be done in credit organizations if the 
 business of the country is to be reduced to the safe basis 
 upon which it should rest. Another advantage in using 
 property statements is as shown in the following opinion, 
 which is from a credit man of excellent training and long 
 experience :
 
 184 CREDIT AND ITS USES 
 
 " We insist on signed statements from the majority of our cus- 
 tomers at least once a year, and iu many cases twice, or at least we 
 require to know at the half year as to their indebtedness. This is a 
 good thing for the customer as well as ourselves. The oftener he 
 can look the facts as to his condition in the face, the better. The 
 country merchant generally is not very systematic in his accounting. 
 A large number of the statements we get are taken on the ground by 
 a representative from our office, who can at the time discuss and 
 advise regarding the various features." 
 
 In analyzing statements it should be borne in mind 
 that, under scrutiny and the liberal use of the blue pencil, 
 often items which seem most roseate at first sight dis- 
 appear as factors when subjected to a process of analytical 
 reduction. The quick or realizable assets must be sep- 
 arated from those which are slow and unproductive ; for 
 upon the former depend the receipts to sustain the business. 
 When making a statement a man will naturally place the 
 largest possible valuation upon his belongings. He does 
 this believing that the merchandise and accounts are worth 
 " that much " to him, but when these items of assets are 
 weighed in the scales of impartial judgment they shrink 
 appreciably. In addition, there are items appearing in 
 nearly all statements made by firms and individuals which 
 must be considered at only a certain value. For instance, 
 every State has its exemption laws, and the citizen is 
 entitled to his exemptions. It not infrequently happens 
 that a house and lot entered in a statement as an asset, 
 presumably at the risk of the business, are claimed as an 
 exemption when a failure occurs, and in localities where 
 there is a personal property exemption, if the debtor elects 
 to claim his exemption he can take a portion of his stock, 
 and invariably gets the best portion.
 
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 SOURCES OP CREDIT INFORMATION 185 
 
 ORAL INVESTIGATIONS 
 
 In no field of credit information are better results se- 
 cured than through the instrumentality of oral investiga- 
 tions. The latter are necessarily confined to inquiries and 
 researches among concerns residing in the same city as 
 the house pursuing the investigation. In large cities this 
 character of credit information is industriously sought 
 and secured in a volume which represents probably a 
 larger return for the time, labor, and expense involved 
 than any other method of investigation followed by credit 
 departments. 
 
 Such investigations are conducted by clerks represent- 
 ing the credit department of a house, who carry a list of 
 the persons that are subjects of inquiry, and who visit all 
 business concerns to whom the person inquired about may 
 have referred. Quite as important, they must visit houses 
 in the same trade and every other house that might by 
 any possibility be possessed of information which would 
 affect the standing and responsibility of the concern under 
 investigation. It is well to consult personal as well as 
 business friends of the man seeking credit, for from the 
 former may be gleaned information concerning his personal 
 habits and mode of living, which will be of gi'eat assistance 
 to the credit man. Prominent credit men have admitted 
 that they have been saved from serious losses by insist- 
 ing upon the settlement of accounts when information 
 showing personal deficiencies came to their attention. The 
 clerks to whom this work is intrusted usually represent the 
 minor help in the credit departments; and investigating 
 work is the apprentice period of those employed in credit 
 offices.
 
 186 CREDIT AND ITS USES 
 
 The investigator is expected to frame his own ques' 
 tions, and the character of those questions will determine 
 the nature of the information he will elicit. The inter- 
 ested and watchful investigator will very quicldy discern 
 whether the credit man, to whom his questions are ad- 
 dressed, is answering them in a straightforward manner, 
 or whether he is endeavoring to conceal anything. 
 
 The credit investigator is to commerce what the re- 
 porter is to journalism. They discharge similar duties in 
 their respective fields of labor. The expense involved in 
 retaining in the service trained and competent investi- 
 gators disparages the possibility of using them generally 
 outside the cities in which their employers do business, 
 as there would be added to the salary list the expense of 
 traveling. The merit of this mode of investigation has 
 led to the employment of credit men, who travel in quest 
 of credit information throughout the territories in which 
 their houses principally operate. This will be explained 
 in the next section. 
 
 TRAVELING CREDIT REPRESENTATIVES AND SPECIAL 
 
 REPORTS 
 
 Credit reporting, through traveling representatives of 
 credit departments, is an advanced form of credit work 
 made necessary by the large number of accounts appearing 
 upon the books of wholesale and jobbing houses, and the 
 further necessity of exercising a careful supervision of 
 certain accounts that may show a tendency to lag in pay- 
 ments or display other symptoms of commercial weakness. 
 It has become the custom, however, on the part of houses 
 extending liberal lines of credit, to utilize the services of 
 traveling credit men in visiting all classes of trade, and
 
 SOURCES OF CREDIT INFORMATION 187 
 
 in fact making a thorough investigation of every concern 
 within their territory. 
 
 The traveling representative fulfills in a much more 
 important capacity, and to a greater degree, the functions 
 described in the foregoing section as belonging to credit 
 investigators. The principle upon which he works is 
 exactly the same, although the detailed results of his efforts 
 must represent a great deal more to his firm than is ex- 
 pected from the local investigator. A man is not qualified 
 to act in the capacity of traveling credit representative 
 unless he has had a thorough schooling in credit work in 
 all its branches, for the reason that the work he is called 
 upon to do covers nearly every phase of credit economy. 
 His judgment is required by his employer as to every 
 question that enters into the life of an account or credit, 
 and unless he has had the requisite experience he cannot 
 meet the requirements of his position. When a traveling 
 credit representative leaves on a trip he carries with him 
 a record of some description providing him with the essen- 
 tial facts in relation to the people he intends to call upon. 
 Quite as important, he must have a general knowledge of 
 the different accounts kept with his house by the people 
 he purposes to investigate and interview. He must also 
 have a reasonable understanding of the characteristics of 
 the customers of his concern, otherwise he cannot approach 
 or " handle " them with the tact which is extremely neces- 
 sary in his field of labor. His work consists not simply in 
 visiting the customer, having a talk with him in regard to 
 his business, and asking for a statement of his affairs. It 
 extends to making an examination of the customer's books 
 if the necessity for so doing should develop, and also look- 
 ing through the stock of merchandise in order to determine
 
 188 CREDIT AND ITS USES 
 
 in what condition it may be. Having made a critical an- 
 alysis of the books and merchandise, he must then make 
 such further investigations among the banks, mercantile 
 agencies, and other authorities as he deems advisable. One 
 of the duties to v^^hich reference has been made would ap- 
 pear to call for special attention, and that is the question 
 of the credit man making an examination of the customer's 
 books. This would presuppose an expert knowledge of 
 bookkeeping, or, as it is called, " accounting." Some credit 
 men and writers on credit topics have gone so far as to con- 
 tend that a credit man's professional equipment is not com- 
 plete unless he be an accountant. Many of the ablest 
 credit men in the country are not accountants, expert or 
 otherwise, and this fact does not detract from their great 
 ability as credit men and successful administrators of the 
 credit office. There is no disposition to scoff at or dis- 
 courage a thorough knowledge of bookkeeping on the part 
 of credit men ; on the contrary, it is a study that could be 
 undertaken with profit by all interested in credit work. 
 
 Among the advantages accruing to a house through the 
 employment of traveling credit representatives is its ability 
 to secure from him an opinion as to the local conditions 
 surrounding people whom they are trusting. At times de- 
 pressions will affect localities that have formerly been quite 
 prosperous. Untoward local conditions can sometimes be 
 foreseen through investigation in the locality, and this is 
 one of the respects in which the work of a traveling credit 
 representative is most efficacious. 
 
 In some cases, especially when the amount involved 
 is a large one and the information obtained is not of a 
 decisive character either favorable or otherwise, it is advis- 
 able to procure a special report. This can be done through
 
 SOURCES OF CREDIT INFORMATION 189 
 
 the mercantile agencies, good law firms, or both, the credit 
 man explaining, when making the request for the special 
 report, the exact details he would like to have covered, 
 and the points in which he is most interested. Where a 
 house can afford to do so, however, these are the cases 
 which should be intrusted to traveling credit representa- 
 tives, for the latter are better informed as to the nature 
 of the difficulty in each case, and their knowledge of credit 
 work enables them to reach and act upon the vital points 
 involved in a manner in which an outsider could not con- 
 duct the required investigation.
 
 CHAPTER XI 
 
 SOURCES or CREDIT INFORMATION — Continued 
 
 (C) The Mercantile Agency 
 
 The best known and in some respects the most im- 
 portant fountain of credit information is the mercantile 
 agency. The two institutions that contribute the bulk 
 of mercantile-agency service are often referred to as in- 
 dispensable elements in the determination of the extension 
 of credits. Fifteen or twenty years ago the assertion 
 as to their indispensability would have passed unques- 
 tioned, but such is not the case to-day. The fact that the 
 mercantile agencies diffuse a great mass of credit informa- 
 tion leads people to believe that it would be impossible to 
 dispense with the services of these companies. Those in 
 the mercantile-agency business make a special point of 
 this, and press it at every opportunity. Among credit men, 
 however, there is a distinct feeling that while mercantile- 
 agency service is valuable, it is not indispensable. In fact, 
 credit representatives of important establishments incline 
 to the opinion that, compared with other classes of credit 
 information, it is of a secondary character. There are 
 special agencies organized to report certain trades, the 
 work of which is so thorough, especially in regard to ledger 
 information, that it is looked upon as superior to the aver- 
 age mercantile-agency service. The following opinion of 
 190
 
 SOURCES OF CREDIT INFORMATION 191 
 
 a leading credit man of New York City reflects this 
 sentiment : 
 
 "My personal opinion with regard to credit matters as a whole 
 is that while such concerns as Dun and Bradstreet may, perhaps, 
 always be, to a certain extent, of value, I am convinced that their 
 value is daily becoming less and less in proportion to the increase 
 in population and therefore the increase in business houses. I 
 believe that credit bureaus are the most desirable means of acquiring 
 credit information, not only because one can get (if these bureaus 
 are properly managed) practically the same information that Dun 
 and Bradstreet do — by means of communicating with local attorneys 
 — but because they give from day to day the exact indebtedness 
 in each trade of the person or house seeking credit, barring, of 
 course, banking indebtedness." 
 
 This criticism will be regarded as having its inspira- 
 tion in the failure of mercantile agencies to extend their 
 system of acquiring trade information to the limits desired 
 by credit men, but it is obvious that other and quite as 
 compelling motives have aroused unfavorable views of 
 agency service. 
 
 In estimating the value of mercantile-agency informa- 
 tion, credit men often labor under the error that the mer- 
 cantile agency should provide information that will in 
 itself determine whether or not an account should be 
 opened or continued. To place upon agency reports the 
 dependence involved in this idea would be relinquishing 
 the deciding voice to outside institutions, which, although 
 well organized, are subject to the same fallibility as any 
 other human individual or institution. The agency traces 
 the business experience and antecedents of a person in 
 trade; acquaints itself with the facts in regard to his 
 character ; learns from others his general reputation, both 
 in a personal and business sense j investigates his means
 
 192 CREDIT AND ITS USES 
 
 and the extent of his business; and should also direct its 
 energies to determining the standing of the man with 
 those who sell to him ; the latter duty referring to trade 
 information or ledger experience, which has become a 
 special branch of credit reporting. 
 
 One of the great advantages of agency information is 
 its use in corroborating other information at the disposal 
 of the credit department. It serves to verify entries con- 
 tained in a personally signed statement. It is useful in 
 affording the credit man an idea as to the character of 
 the applicant for credit; and a well-tJiougld-out agency 
 report should aid him materially in forming his own judg- 
 ment as to the risk to be undertaken. Credit-givers com- 
 plain that in some cases they have been misled by agency 
 information, and while this may be true, it will very often 
 be found that the trouble arose from reposing too much 
 faith in generalities without resorting to such methods of 
 confirming the reports as are at hand in every well- 
 equipped credit office. 
 
 The mercantile agency movement had its origin in the 
 organization of Messrs. E. G. Dun & Co., although in its 
 first years the name by which it is now known throughout 
 the world was not connected with it. A reliable authority, 
 in speaking of the mercantile agency, says that " It orig- 
 inated in the United States during the period of depres- 
 sion following the panic of 1837, and its avowed object 
 was to uphold, extend, and render safe and profitable to 
 all concerned, the great credit system which had gro\m 
 up with the increase of commerce. The first mercantile 
 agency was established in Xew York, during the year 1841, 
 by Lewis Tappan." In his work on " Giving and Getting 
 Credit," Mr. Fred. B. Goddard says:
 
 SOURCES OF CREDIT INFORMATION 193 
 
 "The business of the agency was at 6rst limited; but in 1846, 
 Mr. Benjamin Douglass was admitted to a partnership with Lewis 
 Tappan, under the style of Tappan & Douglass, and he at once 
 assumed the chief management and extended its operations. In 
 1854, Mr. Douglass succeeded to the business, and the style of B. 
 Douglass & Co. was adopted, with the admission of Mr. Robert 
 Graliam Dun. ' The Mercantile Agency ' now made rapid and sub- 
 stantial progress, and soon gained a recognized and assured position 
 among the useful and necessary mercantile institutions of the 
 country. In 1860 Mr. Douglass withdrew, and ever since that 
 time Mr. Dun's name remained at the head of the agency." 
 
 The foundation of The Bradstreet Co. took place some 
 years subsequent to that of ]\Iessi's. R. G. Dun & Co. In 
 a paper on " Credit — Its Meaning and Moment," written 
 by ]\Ir. Clarlc W. Bryan, editor and proprietor of the 
 Paper World and Manufacturer, and published in 1883 
 (Bradstreet Press), he gives some facts in regard to the 
 earliest history of this institution. It appears that in 
 1848 Mr. John M. Bradstreet, a lawyer of Cincinnati, 
 had charge of a certain insolvent estate. His work in 
 connection with it was evidently an extensive one, during 
 which he became familiar with the standing of bankers 
 and others in and around Cincinnati. He was also brought 
 into close relations with prominent New York interests, 
 and this combination of circumstances suggested to him 
 the advisability of making arrangements with his New 
 York connections to furnish them with information re- 
 lating to their "Western customers. He was successful in 
 carrying out his plans, and in 1849 " Bradstreet's Inv 
 proved Mercantile Agency " was opened. Henry Brad- 
 street, a son of John M. Bradstreet, afterwards became 
 associated with the business, and the style was changed to 
 J. M. Bradstreet & Co. J. M. Bradstreet died in 1863,
 
 194 CREDIT AND ITS USES 
 
 and in 1876 the concern was incorporated as " The Brad- 
 street Co." Mr. Charles Finney Clark, who, until his 
 death in 1904, had been for many years the president of 
 this company, became connected with it in its early days 
 and to his genius and untiring energy are due the influ- 
 ence and prominence of the concern. Following closely 
 upon the organization of the business started by Lewis 
 Tappan, were several similar enterprises, none of which, 
 however, has survived. The fact of the failure of other 
 attempts to successfully develop mercantile agencies has 
 given to the Dun and Bradstreet companies a reputation 
 for solidity and superiority that accounts to a great extent 
 for the fame and prestige they have enjoyed for so many 
 years. 
 
 The scope and influence of mercantile-agency work 
 advanced very rapidly, and the disposition of the leading 
 companies to extend the field of their operations in accord- 
 ance with the requirements of the mercantile community 
 created a strong sentiment in their favor and proved a 
 profitable policy to the agencieg. The development of these 
 organizations is worthy of much praise, and has proved 
 a boon to the business man, enabling him to obtain in- 
 formation in almost any part of the world within a short 
 space of time. They have traversed every section of our 
 own territory, and established either branches of their 
 own or adequate connections with other avenues of in- 
 formation in the Old World. The part that the mercantile 
 agencies have played in the upbuilding of the commercial 
 structure should not be overlooked. As explained in the 
 discussion of commercial credit, in a new and crude com^ 
 munity, there is a great demand for credit, and the will- 
 ingness of the merchants of the older localities to extend
 
 SOURCES OP CREDIT INFORMATION 195 
 
 credit to pioneers has been regulated and assisted by 
 the operations of the mercantile agencies. Even if the 
 information acquired by them was meager, they had the 
 prescience to either send to or secure representatives in 
 new sections, who advised them with a fair degree of in- 
 telligence and integrity as to the character and capacity 
 of credit seekers. This information, when sent through- 
 out the business world with the name of either of these 
 great companies as a quasi guarantee of its correctness, has 
 exercised an influence of incalculable value in developing 
 the commercial progress of the last fifty years. 
 
 Another feature of the work of these companies which 
 has helped to establish their names, as well as the assumed 
 reliability of anything which proceeded from them, was 
 the review of trade conditions and market information 
 they have distributed weekly for many years. This infor- 
 mation continues to be accepted by the press of the country 
 as probably the best authenticated index of financial and 
 industrial conditions that could be consulted. The ac- 
 quirement of this information, from the many different 
 points of trade activity, has imposed upon the agencies 
 considerable expense and labor. That they recognize in 
 the transmission of this information a powerful help to 
 their own advancement does not detract from the merit 
 of the service they have rendered. The transfusion of gen- 
 eral information and data showing the condition of affairs 
 in different markets has also been of great assistance to 
 business men in shaping their own plans, and especially 
 in measuring credit conditions. 
 
 Credit men frequently express opinions to the effect 
 that the service of the agencies is not as prompt as it should 
 be ; that they find it necessary to check the regular agencies
 
 196 CREDIT AND ITS USES 
 
 by attorneys' reports; that where quick service is required 
 they avail themselves of the facilities furnished by special 
 and trade agencies; that neither of the agencies comes up 
 to requirements ; and that special agencies are much more 
 efficacious. Mr. James II. Eckels, president of the Com- 
 mercial National Bank of Chicago, said in his lecture on 
 " The Methods of Banking," before the University of 
 Chicago : 
 
 "At present the banks must rely to some extent at least, on the 
 mercantile agencies for information on the status of men engaged 
 in business; but these reports have been found deficient in that 
 they are so general in character and so limited in giving the informa- 
 tion which is essential to forming a judgment as to the extension of 
 credit." 
 
 Those who have been associated with the organized 
 credit movements as they have existed are cognizant tlat 
 there is a demand for a greater discrimination in ratings, 
 and that additional characters to those already used should 
 be employed to designate not only the credit standing and 
 approximate means of the person rated, but liis paying 
 qualities as well. The most important element of dis- 
 approval of present agency methods is the failure to re- 
 spond to the ever-increasing demand for ledger informa- 
 tion or trade information. It should not be presumed that 
 because one calls attention to certain palpable and undeni- 
 able facts, that he is necessarily an unfriendly critic. It 
 is required when stating a case to state it all ; some of the 
 charges against agency service are sound and some are 
 not; at least, this is the judgment of the writer. 
 
 (1) In respect to delays in service: These delays are 
 in many cases due to a desire on the part of the agency 
 representative to furnish a report that will be one re-
 
 SOURCES OF CREDIT INFORMATION 197 
 
 fleeting that " greater accuracy " that the credit men are 
 looking for. In a recent publication on credit, it was 
 stated that one day was all the time required in which to 
 prepare a good agency report. There are some reports that 
 can be prepared in one day and others that cannot. There 
 can be no arbitrary time limit established or successfully 
 defended for the preparation of an agency report. 
 
 Agency work is prompt if it be executed with that 
 reasonable expedition that admits of full attention to all 
 the necessities of each individual case ; delay, so called, 
 is sometimes in the direct interest of the credit-giver, as 
 it may provide him with data that fictitious promptness 
 Would not have supplied. 
 
 (2) Regarding the express necessity of checking 
 agency reports by attorneys' reports: Corroboration of 
 every kind is an element of good credit office management, 
 and the method suggested could be resorted to with profit, 
 even if there existed no doubt as to the correctness of 
 agency information; while a resort to generalization on 
 the part of the agencies is not commended, it must be 
 conceded that in the preparation and editing of the volumi- 
 nous matter that proceeds from the agency offices, there 
 must of necessity be a condensation of the data on which 
 the report is based. On the other hand some la^vyers give 
 very satisfactory information^ and set out all the features 
 of their reports in more detailed form than would appear 
 in the average agency report. This exhibition of detail 
 might lead to the belief that the attorney's report in such 
 a case was of more value than the agency report, although 
 the sum of the information might be exactly the same. 
 It often occurs that the attorney who acts directly for the 
 credit department is also the representative of a certain 
 U
 
 198 CREDIT AND ITS USES 
 
 large agency, and in this case there would be no real 
 corroboration. 
 
 (3) As to the claimed superiority in promptitude and 
 general service of special agencies over the mercantile 
 agencies; it is well known that many of these special 
 agencies are organized by trades or business communities 
 for their own protection, and even when not organized 
 by the business men themselves, they are in the control 
 of people who are conceded special advantages in the pro- 
 curement of information by the different trades. Other 
 special agencies are conducted on cooperative lines, and 
 are enabled to get information in more detailed form than 
 it is extended to the regular agencies. 
 
 (4) Criticisms have been leveled at the agencies for 
 their lack of detail, and especially in respect to statements 
 (signed or otherwise). The influence of the mercantile 
 agencies is recognized by all classes as being a most im- 
 portant one. Among the intelligent of those who seek 
 credit there is reasonable appreciation of the necessity of 
 complying with the requests of the agencies, and thereby 
 assuring a rating and report that will be an honest reflec- 
 tion of the standing of the merchant. There are at the 
 same time a very large number of people who regard the 
 work of the agencies as being a spying process to which 
 they should not be subjected, and among this class there is 
 a distinct unwillingness to comply with such requests as 
 the agencies may make. It is sometimes difficult for an 
 agency man to induce a merchant to talk even in a general 
 way in regard to his affairs, and in such a case it is much 
 harder to induce the merchant to give to the agency a de- 
 tailed written and signed statement of his affairs. He does 
 not regard this as a necessity, and very often replies that
 
 SOURCES OF CREDIT INFORMATION 199 
 
 he can get all the credit he wants without the help of the 
 agency and cares nothing for its rating. How far the 
 agency should be criticised for its failure to secure state- 
 ments from people of this class (a very numerous one) is a 
 question to which patrons of the agencies probably do not 
 give sufficient consideration. If a man is seeking credit 
 he is likely to comply with a demand from a creditor for 
 a statement, rather than from the agency, whose desire 
 to give him a rating he ascribes more to its wish to make 
 money than from any relation the agency bears to com- 
 mercial life. 
 
 An investigation made in the year 1902 showed that 
 about 374 per cent of the reports submitted by the agencies 
 contained statements secured from people in trade. There 
 are a great many from whom it would be a waste of time 
 to solicit statements, and idle to consider them if obtained, 
 such as people of small means, saloon keepers, newsdealers, 
 milliners, and others, whose unfamiliarity with business 
 methods is self-evident. These small dealers constitute 
 quite a percentage of the aggregate of those in business 
 and must be eliminated from the number of those from 
 whom statements should be secured. Therefore the dif- 
 ference between the 37| per cent mentioned and the maxi- 
 mum of 100 per cent does not represent a deficiency in 
 agency work, as some might be led to suppose. The prac- 
 tice of giving statements of one's affairs is more general 
 than it used to be, and the agencies are getting the benefit 
 of this progress and show it in the class of reports they 
 are issuing. This argument, however, does not account 
 entirely for the alleged deficiencies in reports and absence 
 of accuracy. The latter conditions are traceable to the 
 fact that many agency representatives and reporters have
 
 200 CREDIT AND ITS USES 
 
 had little if any commercial training, and really do not 
 understand the scope of latter-day credit information. 
 
 (5) The demand for additional significations as to the 
 capital and credit standing and paying qualities of business 
 people: This refers to the ratings appearing in the ref- 
 erence books of the agencies, and is a question which has 
 been agitated for some years by certain credit men. This 
 idea has been approved by the credit organizations, and 
 the agencies have been urged to incorporate this change 
 in their reference books. 
 
 The object sought is to have the agencies designate in 
 the rating column, in addition to the approximate capital 
 of the trader and his credit standing, the nature of his 
 paying qualities; a man may be in good credit, that is, he 
 may be able to command such credit as he requires, but 
 at the same time may be backward and unsatisfactory in 
 his payments. In order, therefore, that the subscriber may 
 know by glancing at the rating column just what a man's 
 capital, credit standing, and paying qualities are, the agen- 
 cies are expected to designate the relative degree of all 
 of them. 
 
 The motive of this demand is that the reference books 
 alone should give sufficient information upon which to 
 stake a credit. The agencies should not be expected to 
 undertake the labor and expense of securing the material 
 for their reports solely to furnish ratings; the latter are 
 guides only, and when expected to fulfill any more im- 
 portant function, a wase dependence on credit information 
 has been abandoned. 
 
 The refusal of the agencies to comply with the views 
 of credit men in this particular impelled two recently 
 formed (but now extinct) agencies to adopt this feature
 
 SOURCES OF CREDIT INFORMATION 201 
 
 in tlie liope of profiting by any displeasure tlie old agencies 
 may have incurred. But unless it can be shown that " pay 
 ratings " are based upon a thorough preliminary investi- 
 gation and frequent re-investigations, pay-rating designa- 
 tions are not to be relied upon. A man's methods of pay- 
 ment are, as has been said, of a varying nature; what 
 is considered prompt pay in one trade is not quick pay- 
 ment in another, for the terms of settlement widely differ. 
 A man may discount his bills one season when money to 
 move the crops has flowed easily, and the next year be 
 compelled to take full time, and it may be long time. 
 His capital and credit standing may not be affected, but 
 his habit of payment has changed; this would require a 
 change in his pay rating; a lowering of that rating would 
 provoke unnecessary alarm and probably do him a great 
 deal of harm. Further, the ratings must be based on re- 
 visions that have been made several months prior to the 
 time the books go to press. It will be said that the re^ 
 ports are just as old; true, but the reports can be revised 
 quickly and changes noted, whereas an entirely neiu hook 
 cannot be printed every month. 
 
 Further, the wisdom of pay ratings is open to serious 
 question. It is well known that a man may discount his 
 bills with a certain class of houses, take full time with 
 others, and be slow with others. It is often difficult to 
 draw a medium or average impression as to this man's 
 paying qualities. 
 
 The two principal features in which improvement in 
 mercantile-agency service is sought are a closer attention 
 to the essential elements of reports and the institution of 
 a bureau for the acquirement and dissemination of trade
 
 202 CREDIT AND ITS USES 
 
 information; and they are subjects challenging the efforts 
 of the best talent in the agency business. The respects 
 in which reports are susceptible to improvement are con- 
 tained in the idea of a wider comprehension of the present 
 demands of the credit department. The reporter should 
 be schooled in the present accepted ideas of commercial 
 credit, and the character of the reports desired is that 
 which a competent traveling credit representative would 
 prepare after a careful study of a case. When reports 
 do not reach this standard the agencies suffer, and one of 
 their principal duties is to educate their representatives 
 in respect to current requirements. 
 
 The agencies have been urged time and again to insti- 
 tute a thorough system for the interchange of trade or 
 ledger information. The fact that they have not done so 
 may be due to the fear that the business would not prove 
 a profitable one. The facilities possessed by the agencies 
 for doing this work give them a marked advantage over 
 other concerns who undertake to do it, and their services 
 would be the more desirable on that account and would 
 assure them of undoubted support. 
 
 One of the principles upon w^hich credit interchange 
 is based is that of reciprocity; in other words, if a man 
 contributes to the fund of information upon a credit risk 
 he should be entitled to receive some information in return 
 for that which he has given. 
 
 There is no reason why the agencies, if they should 
 undertake to secure trade information in the same effect- 
 ive way that others have, should not " make it an object 
 to credit departments to freely confer with them and give 
 them full facts and figures."
 
 CHAPTER XII 
 
 SOURCES OF CEEDIT INFORMATION — Concluded 
 
 (D) Credit Cooperative Methods 
 
 Credit interchange is the latest significant develop- 
 ment of credit economy. Credit interchange means the 
 exchange between merchants of trade information and 
 ledger experience. A large proportion of all credit infor- 
 mation is acquired from people in business, but this par- 
 ticular division embraces the actual experiences of credit- 
 ors with debtors in relation to the amount of purchases, 
 the character of payments, and the creditor's estimate of 
 the debtor, based upon actual credit transactions. This 
 information represents the creditor's opinion of the trader 
 based upon the character of his account and does not re- 
 late generally to the questions of antecedents, past experi- 
 ence in business, environment, and other matters of a local 
 nature, as mercantile-agency information largely does. 
 
 The utilization of ledger experience has had the effect 
 of creating a strong cooperative spirit among merchants. 
 This has been explained in the discussion of the inability 
 of the mercantile agencies to secure trade information 
 with the same thoroughness and facility as cooperative 
 agencies. There is no information more eagerly sought by 
 credit departments nor in which credit men take a more 
 
 203
 
 204 CREDIT AND ITS USES 
 
 intense interest than ledger experience. As an auxiliary 
 to the branches of information already discussed, there 
 must be such thorough corroboration as will satisfy the 
 credit man that he has exhausted every available means 
 for the procurement of facts affecting an application for 
 credit. 
 
 While the great benefits of this system are freely con- 
 ceded, many refrain from doing their part toward perfect- 
 ing it, although no one questions that the best interests of 
 all would be served by cordial cooperation. Through it 
 the weeding out of undesirable customers in banking and 
 commercial circles would be effected. The dishonest man 
 is often detected in the perpetration of his schemes by 
 conference among those with whom he is doing business. 
 In banking, the ability of men to borrow beyond their 
 proper limits would be negatived by the operations of a 
 frequent interchange among banks and others of the facts 
 respecting the condition of accounts. The tendency on the 
 part of people who have objects to achieve, to organize in 
 associations or other forms of assemblies and unions, has 
 brought forcibly to light the dependence which each must 
 place upon the other, and the splendid results of such de- 
 pendence. It has had another and equally felicitous effect, 
 and that is to make men in business, no matter in what 
 trade or calling they may be engaged, entertain closer and 
 friendlier relations with each other, thus inducing expres- 
 sions of that complete confidence essential to thoroughly 
 developed and elevated business standards and morals. 
 
 The difficulty of determining accurately the reliance 
 to be placed upon general-credit information has called 
 credit interchange into being. It is a credit-clearance
 
 SOURCES OF CREDIT INFORMATION 205 
 
 system. Its aim is to locate the firms with which a cus- 
 tomer is dealing; and having found them, to institute 
 an investigation as to the standing wpon their hooJcs of the 
 applicant for credit. Such an investigation can be very ex- 
 tensive, thereby affording a mass of reliable information. 
 It is the opinion of those engaged in credit work that there 
 should be some substantial accessory to the mercantile- 
 agency information. There is no better field for the estab- 
 lishment of such an accessory than among mercantile 
 houses and banks. The latter are in a position to provide 
 information of a vital character in regard to the standing 
 of people with whom they deal. They can tell whether a 
 man is prompt or slow in his payments, whether he shows 
 a disposition to overbuy or to be prudent, whether his gen- 
 eral methods indicate that he has a fair understanding of 
 good business methods; or, on the other hand, whether he 
 shows a tendency to sharp practice and is an unsatisfactory 
 and troublesome customer. There is more information of 
 this character exchanged to-day than ever before, but the 
 volume is still relatively limited. 
 
 There is another strong reason why the interchange of 
 credit information on the cooperative basis is necessary. 
 The favorite method adopted by those who desire to de- 
 fraud their creditors is to purchase large stocks prepara- 
 tory to failing. There are other cases in which men are 
 tempted, through ambition or a desire to recoup themselves 
 from the losses of a poor season's business, to purchase be- 
 yond the amount that their responsibility would justify. 
 
 Overbuying, no matter what the reason behind it may 
 be, is a great business evil. In order to avert the ad- 
 verse results of overbuying there should be thorough 
 conference regarding accounts owing or orders awaiting
 
 206 CREDIT AND ITS USES 
 
 shipment, as this will determine whether there has been 
 overbuying on the part of a debtor or prospective customer. 
 
 The present cooperative methods are the outgrowth of 
 a system of credit interchange which has existed for many 
 years. The expression of opinions between men in regard 
 to the commercial standing of a person constituted credit 
 cooperation. The system of asking and exchanging ref- 
 erences is an early feature of credit cooperation. Oral in- 
 vestigations by representatives of credit departments is 
 a third feature of credit cooperation, but none of these 
 methods is sufficiently effective imsupported by ample 
 credit interchange. A further development of the credit 
 cooperative theory was the organization of trade agencies 
 from which there has developed a demand that means 
 should be adopted for bringing into closer communication 
 men engaged in different lines of trade under the auspices 
 of trade bureaus governed by the merchants themselves. 
 
 There are a large number of organizations acting as 
 mediums for the clearance of credit information; in fact, 
 there are too many such organizations. The number con- 
 cerned has naturally produced a great variety of systems. 
 This lack of uniformity is the inevitable result of the fact 
 that the system has had to depend for its development 
 Upon the sporadic attempts of its followers to cultivate its 
 popularity among credit men. 
 
 A consideration of the methods of credit cooperation 
 employed by the organizations interested in this work in- 
 dicates this lack of uniformity, although the basic idea 
 involved in all is practically the same. The work of these 
 credit-interchange bureaus seems to be held in high es- 
 teem, and it would appear that the most satisfactory results 
 are obtained where the work of credit interchange is car-
 
 SOURCES OF CREDIT INFORMATION 207 
 
 ried on in a certain trade. These organizations consist of 
 credit-clearance agencies, trade bureaus organized by the 
 people interested in the different trades, and a number of 
 affiliated branches of the National Association of Credit 
 Men. 
 
 The methods employed in the clearance of credit infor- 
 mation are two : the first, a method by which ledger facts 
 and other information are obtained through the represent- 
 atives of credit departments ; and the second, a method of 
 entering information upon forms provided for that pur- 
 pose, these forms being afterwards assembled and a com- 
 pilation made of all the information acquired. 
 
 (1) The details of the first method are substantially as 
 follows, this being the policy of certain credit associations : 
 An office is established in charge of a secretary or clerk. 
 The names of the business concerns desiring to participate 
 are listed and a number assigned to each concern. Printed 
 copies of this list are distributed so that each member will 
 know his own number and also be able to identify any 
 other concern by its number whenever the latter shall 
 appear upon communications sent to him. The members 
 are supposed to submit to the office a list of all their cus- 
 tomers. A card is made out bearing the name of each 
 customer; upon this card is also entered the numbers 
 representing the concerns who are selling to this particular 
 customer. As an example : 
 
 No. 1 is John Brown & Co. 
 No. 2 is Frank Smith & Co. 
 No. 3 is Richard Fox & Co. 
 
 They may all be selling Albert Stead & Co. ; conse- 
 quently, on Albert Stead & Co.'s card will be entered the
 
 208 CREDIT AND ITS USES 
 
 numbers 1, 2, 3. This indicates that John Brown & Co., 
 Frank Smith & Co., and Richard Fox & Co. are all in- 
 terested in, or selling, Albert Stead & Co. It will be as- 
 sumed that Frank Smith & Co. has received an order for 
 $500 worth of goods from Albert Stead & Co. and the 
 latter is already owing the firm $1,000. The credit man 
 of Frank Smith & Co. decides to investigate the general 
 indebtedness of Albert Stead & Co. before shipping the 
 goods. He therefore sends to the oflBce of the credit bureau 
 an inquiry ticket (Form 23) upon which he enters the 
 name of Albert Stead & Co. 
 
 Wlien this inquiry ticket is received at the office of 
 the credit bureau the secretary or clerk refers to Albert 
 Stead & Co.'s card and finds that Nos. 1, 2, and 3 are 
 all interested. He therefore notifies Messrs. Frank Smith 
 & Co. that Nos. 1 and 3 are interested. The credit de- 
 partment of Frank Smith & Co. has its representative 
 call upon the firms designated as Nos. 1 and 3 to learn 
 from them the state of their accounts with Albert Stead 
 & Co. The investigations, therefore, whether conducted 
 through representatives of the credit department or by 
 telephone, are oral investigations. Investigations under 
 this system are rarely made by correspondence unless 
 members of the bureau are located in different cities. 
 
 It may be contended that this system has an advantage 
 over others in that, when making investigations, many 
 questions could be asked other than the amount owing, the 
 method of payment, and the general opinion of the ac- 
 count. At the same time it should not be overlooked that 
 if the interview be a general one there may be an absence 
 of that entire candor that is essential to correct credit 
 interchange.
 
 INQUIRY TICKET 
 
 Memphis Credit Men's Association 
 
 II North Main Street 
 
 INFORMATION BUREAU 
 
 Please furnish us with local references on name below 
 
 Name 
 
 P.O. 
 
 Date 190 No. 
 
 Form 23. — ^Type of inquiry ticket used in credit coopebativb- 
 burkau wore.
 
 210 CREDIT AND ITS USES 
 
 (2) The second method of credit interchange requires 
 that the information furnished to the bureau must be sub- 
 mitted in writing. This very fact is a measure of protec- 
 tion to those availing themselves of the information and 
 emphasizes its reliability. The system is as follows: An 
 office is established with a secretary or clerk in charge. 
 The names of those who are members of the bureau are 
 listed and numl^ered in very much the same manner as in 
 the other method described. When a house desires to make 
 an inquiry, it uses a form prepared for that purpose. A 
 card index is used containing the names of those who have 
 been inquired for from time to time, and on each card is 
 entered the numbers of the houses who have made inquiries. 
 In this way, providing that in the course of a few years 
 every member of the bureau made inquiries on all his cus- 
 tomers, there would be gathered by natural process ex- 
 actly the same list of customers and houses interested as 
 called for in method No. 1. It is not probable, however, 
 that every house would, even within the time mentioned, 
 make inquiries regarding every concern upon its books, as 
 there are some men who preserve so unquestioned a stand- 
 ing that inquiries upon them are of infrequent occurrence. 
 
 Every morning the inquiry slips are assembled and 
 the names of all the persons inquired for are entered upon 
 report sheets; a sheet is made out for each member and 
 delivered to him by a messenger. During the course of 
 the day the member is supposed to enter opposite the names 
 appearing upon the sheet statements of his experiences. 
 A typical form used by reporting bureaus in this work is 
 shown in Form 24. The information asked is the amount 
 owing, the amount overdue, the manner of payment, also 
 remarks, if the houses reporting consider it is necessary to
 
 2 
 C 
 
 < 
 
 c 
 
 c 
 
 < 
 
 2 
 a 
 
 c 
 a 
 
 Q 
 
 o 
 
 u 
 u 
 
 (2^
 
 THE DENVER CREDIT MEN'S ASSOCIATION. 
 
 REPORTINQ BUREAU. 
 
 M2^ 
 
 'Phone 2SM. ^'?j7„"^|g^^''*' 
 
 Oct. ICth 1905. 
 
 NAME ADDRESS 
 
 •=' 
 
 r.tr. 
 
 u.*,'?,l 
 
 REMARKS 
 
 WILL MEMBERS PLEASE REPORT CHAMOES OF NAMI 
 
 H. A. Cooper S29 Santa Fe 
 
 Canon Fuel 4 Feed Co. 528 Temple Court 
 
 S AND 
 
 P 
 C_3 
 
 HTIEE 
 
 S 
 3S 
 
 ILD 
 
 3UI. 
 
 M. K. SchwartskY 1027 16th 
 W. L. Gladwell Longmont 
 
 20X. 
 
 5S 
 
 ISS. 
 
 
 
 Chas. Parson Idaho Sorlnps 
 
 
 
 
 
 
 
 M., P. Clartson 4 Co. Basalt 
 
 -30 
 
 f3 
 
 o 
 
 
 S 
 
 
 Fred Rauth Greeley 
 
 0. Lavfldson Gold Hill 
 HORR Lumber 4 Mere. Co. Dolores 
 
 c 
 
 
 o 
 
 - 
 
 
 
 
 Fye 4 Grates La Junta 
 
 
 
 
 
 Greenleaf 4 Pearce Sidney, Neb. 
 C. T. A. Roons Eureka 
 
 __o_ 
 
 - 
 
 2. 
 
 
 Si? 
 
 
 Z. Hust, Bon.Ton Rest. La Junta 
 
 
 
 
 
 
 
 E. M. Steffens Paonia 
 
 /S 
 
 
 /S 
 
 
 n 
 
 
 Western Cro. 4 Sup. Co. Cripple Creek 
 
 
 
 
 
 
 
 miltey 4 Look Boulder 
 
 ^r 
 
 6f> 
 
 /« 
 
 1&. 
 
 a 
 
 lot 
 
 . 3 
 {1 
 
 
 Bill of Sale- Edward Schafer to J. A. 
 JlSOO 
 
 Chat. Mtges.- Robt. A. Newman to J. A 
 IBOO Curtis, 1500 
 
 A. 4 L. Wllzlr.skl to I. J. Oreen, fixt 
 
 Stea 
 . Hyn 
 i, 15 
 
 ilo 
 Ima 
 6 
 
 1, fl 
 
 Larlm 
 
 127 Curtis 
 
 S 
 
 ■ Experience Fhr: 
 
 ■ Credit Co-operative Bdheao. 
 
 c
 
 SOURCES OF CREDIT INFORMATION 211 
 
 make any. The maimer of payment is to be indicated by 
 the symbols of a key, which appears at the upper right- 
 hand corner of Form 24. 
 
 A question which might arise in regard to this form 
 is whether the key representing the manner of payment is 
 sufficiently explanatory without the addition of remarks. 
 A key should be employed the symbols of which indicate 
 the manner of payment and also embrace general opinions, 
 "^vhich otherwise would have to be written at an expense 
 of time and labor. 
 
 The " system of remarks " (Form 25) used by the 
 Merchants' Credit Association, of San Francisco, repre- 
 sents a more amplified key. A messenger calls for the 
 sheets late in the day, conveys them to the office of the 
 credit bureau, and the information appearing upon them is 
 compiled in the form of separate reports upon each person 
 regarding whom an inquiry has been made. These com- 
 pilations are then distributed to the inquiring houses and 
 all other houses that have given any information. In this 
 way reciprocity is practiced. It is also customary with 
 some credit bureaus to send these compilations to every 
 member on its rolls, irrespective of whether he has or has 
 not made inquiries or given any information in regard 
 to an inquiry. 
 
 Some houses object to belonging to credit bureaus on 
 the ground that membership renders it obligatory for them 
 to give information in answer to every inquiry. There are 
 times when the relations of a firm with a customer are of 
 such a character that to give the information affecting the 
 account, exactly as it should be expressed (under the co- 
 operative system) would reveal the existence of a very 
 large indebtedness, with the result that the customer's
 
 212 CREDIT AND ITS USES 
 
 credit would be curtailed in other quarters, and the firm 
 carrying the indebtedness deprived of its opportunities of 
 collecting the account. The bane of " carried " or " car- 
 rying " customers has stood in the way of a more perfect 
 development of the credit-interchange theory. Some prog- 
 ress has been made toward removing the objection of 
 manufacturers, wholesalers, and jobbers to assisting in the 
 work of the credit bureaus. In the key shown in Form 24 
 the letter " X " indicates " see us personally." This is a 
 sign that the information the member has to impart is of 
 such a character that he deems it inadvisable to place it 
 upon the report sheet. The unwillingness of houses to 
 freely give information in regard to accounts they are 
 " carrying " has been overcome (through the work of the 
 credit bureaus) by permitting them to convey the infor- 
 mation in regard to such accounts to the person in charge 
 of the bureau to be transmitted by him in a confidential 
 manner (not on a general form) to the house that has made 
 the inquiry. 
 
 Tlie systems explained are those conducted upon a 
 strictly cooperative basis, although they do not comprise 
 by any means all the efforts directed to the prosecution of 
 the credit-interchange theory. There are concerns whose 
 special business it is to acquire trade information and 
 disseminate it among their subscribers. Their work has 
 been of material help in spreading the credit-interchange 
 doctrine, and the services rendered by them have given 
 satisfaction to many credit men. A barrier in the way of 
 the pronounced success of an independent company doing 
 a business in trade information is its inability to induce 
 the acceptance of its service by a sufficiently large number 
 of business houses to make the interchange as general as
 
 < 
 
 a 
 c 
 
 b 
 > 
 
 i2 
 
 Z 
 
 < 
 
 c 
 o 
 u 
 
 u
 
 SYSTEA4 OR REMARKS. 
 
 ASSOCIATION 
 
 S.— Slow 
 
 VS.— Very Slow.. 
 C— Good 
 
 CO.— Cash Only ; Means— Will 
 
 
 it will lie interpreted as "Cash Only," 
 
 
 " Pays when due. 
 
 
 •• Prompt usually but sometimes takes over tin 
 
 e. 
 
 " Neither prompt nor slow— Varying. 
 
 
 " Generally behind time in payments. 
 
 
 " Always behind time and amounts due accum 
 
 ulate. 
 
 " Satisfactory— (Do not use if possible, is too 
 
 udegnit< 
 
 Does not imply financial worth.) 
 
 
 " Account just opened. 
 
 
 COD.— Cash on Delivery... 
 
 SS.— Becoming Slower , . 
 SF.— Slow but Improving. 
 
 B/D— One Bill Due .. 
 BID.— Bill in Dispute.. 
 
 (Note — Care should be takea 
 discounts in this meaning.") 
 
 Our terms of sale to 
 
 Indicating slower tendency in payments. 
 
 Indicating improvement in manner of payments. 
 
 Must pay one bill before another is shipped. 
 
 In explanation of overdue amount on Inquiry Sheet to 
 
 distinguish from account overdue. 
 (Do not use stronger terms for misunderstanding or 
 
 disputes, for it misleads ) 
 Note held forf 
 
 Cflg,— Chattel Hortgage 
 
 RHg.— Real Estate nortgage... 
 CS.— Hold Collateral Security., 
 BT.— Board of Trade 
 
 Arrangement 
 
 (Tor. 
 
 jlndt 
 
 ubersof the Board of Trade to refer t 
 
 Unusual, conditions, such as consign: 
 to large indebtedness. (Subject ti 
 
 —Special Information. . 
 
 (Pa. 
 
 if desired.) 
 
 aents, explaining 
 ' overdue amount 
 furtherexplana- 
 
 it office.) 
 
 ADVERSE REHARKS. 
 
 ^ady f- 
 
 TS.— Too Slow \ 
 
 Und.—Undesirable ' 
 
 Uns.— Unsatisfactory ( ' 
 
 RC— Refused Credit 1 
 
 RfC— Refused further credit 
 DC— Difficult to collect 
 
 S/D—B/L.— Sight Draft with Bill of Lading 
 HC— In hands ol Attorney or Collector 
 CDr.— Compelled to collect by Draft 
 CAT.— Collected b> Attorney 
 UC— Unable to c jlkct 
 
 ExP Execution Proof 
 
 P&L.— Old Account charged to Profit and 
 
 NQ.— No Good ... 
 
 s of collection by force. 
 
 Implying past experience. 
 
 Reported on Black List. 
 
 Resorts to (luestionable methods t 
 
 ' Credit Association. 
 
 c
 
 SOURCES OF CREDIT INFORMATION 213 
 
 it should be. If the clients of a credit-clearance concern 
 are few, it follows that the trade experiences it acquires are 
 too meager to possess any great value. The success of the 
 credit-interchange idea depends ultimately upon the in- 
 formation secured and distributed being representative of 
 an entire trade, or, in any event, of the most important 
 houses in that trade. Only in this way will there be dis- 
 covered the firms with whom the largest number of people 
 are dealing and the character of their accounts. 
 
 The most successful work in the field of credit co- 
 operative methods as they relate to trade information has 
 been done by organizations instituted not for the purpose 
 of money making, but rather to foster credit interchange. 
 These associations are composed of business men who enter 
 into agreements with each other to live up to the coopera- 
 tive ideas upon which the organizations are based. The 
 expense of conducting these bureaus is small, especially 
 when compared with the fees charged by independent con- 
 cerns. Men cannot be induced with any great degree of 
 success to bind themselves by the rules of independent 
 companies, especially when these rules provide for their 
 giving private information into the hands of those who will 
 market it for money-making purposes. The number of 
 the subscribers of the largest independent credit-clearance 
 bureau, compared with the number of those who would be 
 expected to cooperate in such a scheme, proves the verity 
 of the foregoing statement. It may be asked why, in the 
 face of this opinion, so much stress has been laid upon the 
 desirability of the old-line mercantile agencies establishing 
 credit cooperative bureaus? In addition to the reasons 
 already advanced it may be said that the agencies have 
 become so intimately associated with business life that an 
 15
 
 214 CREDIT AND ITS USES 
 
 effort on their part to introduce the credit-intercliange idea 
 would not be regarded in the same speculative manner as 
 the efforts of concerns which have not succeeded in making 
 themselves a part of our business economy. 
 
 When business men organize their own credit bureaus 
 there is no necessity for anything more than nominal, and 
 in most cases no, capitalization. The service being volun- 
 tary does not require the supervision of more than one or 
 two competent men to perform such executive duties as 
 may fall to them. The question of expense is therefore a 
 very important one and has a vital bearing upon the prog- 
 ress of the credit-interchange principle, for the simple 
 reason that if the introduction of this principle of secur- 
 ing credit information is to be attended with a minimum 
 cost, the willingness of commercial concerns and bankers 
 to avail themselves of the service will be more pronounced 
 than if the expense entailed be an onerous one. While 
 the word " onerous " would not apply to bankers or the 
 larger commercial institutions, it has a very decided bear- 
 ing upon the ability of a large number of business houses 
 to use this service, and the success of the system depends 
 not upon the good will of the larger commercial institu- 
 tions or bankers, but upon the universality of the support 
 that is extended to it. 
 
 The credit-interchange system is in its infancy, and the 
 extent to which it will grow in usefulness is dependent en- 
 tirely upon the faith that is reposed in the system by busi- 
 ness men. The trade bureaus already organized and in 
 many cases rendering service of an eminently satisfactory 
 character, and the many credit bureaus being formed by 
 branches of the National Association of Credit Men, form 
 the nucleus of a national credit-interchange bureau the
 
 SOURCES OF CREDIT INFORMATION 215 
 
 institution of which the requirements of credit reporting 
 demand. This national bureau must be the outcome of 
 efficient groundwork on the part of trade and local report- 
 ing bureaus. To accomplish this it is necessary that credit- 
 reporting bureaus be established throughout the country, 
 so that when a national organization is affected its facili- 
 ties will be so thorough and its service so complete that 
 the permanency of the system will not be a debatable 
 question.
 
 PART FOUR 
 CREDIT-OFFICE ADMINISTRATION
 
 CHAPTER XIII 
 
 THE ANALYSIS OF CREDITS 
 
 (A) The Elements of Credit. (B) Quick and Fixed 
 
 Assets 
 
 THE ELEMENTS OF CREDIT 
 
 In his " Introduction to the Study of Economies/' Pro- 
 fessor Bullock expresses this opinion : " It can be truthfully 
 said . . . that the basis of modern business is confidence." 
 It is interesting to determine on what this confidence is 
 based. Unless it is founded upon substantial elements it 
 is misplaced, and the exercise of misplaced confidence leads 
 to unfortunate results. Confidence, in being the basis of 
 modern business, also becomes the basis of credit, for mod- 
 ern business could not exist without credit 
 
 Having exhausted every means for acquiring facts and 
 figures in relation to the applicant for credit, the credit 
 man must analyze this information in order to intelligently 
 determine whether he is justified in showing his confidence 
 in the risk. This confidence is based upon three different 
 elements, viz., the reliability, the capability, and the re- 
 sources of the man seeking credit or " character," '' capac- 
 ity," and " capital." 
 
 The task imposed upon the credit man is to determine 
 in what degree the three elements of credit are represented 
 
 219
 
 220 CREDIT AND ITS USES 
 
 in the information before him. Credit information, if it 
 possess that thoroughness which should characterize it, 
 divides itself into these three elements, which comprise 
 everything essential to the make-up of a credit risk. A 
 man's moral principles, habits, antecedents, manners, and 
 the estimate in which he is held by his neighbors, consti- 
 tute his character; his abilities, the record of his business 
 experience, and the special aptitude he has shown to mas- 
 ter business difficulties, indicate his capacity; his material 
 means or resources represent his capital. People often 
 say, " his skill is his only capital." This use of the word 
 " capital " is a perfectly proper one, although in the analy- 
 zation of credit information " capital " denotes the re- 
 sources of the business. 
 
 While there are three elements of credit — character, 
 capacity, and capital — it does not follow that every man 
 either does or need possess all three. When this combina- 
 tion is found in a satisfactory state, the burden of the 
 credit man is lightened and there is little hesitation on his 
 part in granting credit. The fact that the whole combi- 
 nation rarely exists in a satisfactory state, makes the an- 
 alysis of credit information a serious task, and demands 
 the exercise of that skill in gauging conditions that demon- 
 strates the ability of the credit man. 
 
 The possession of all the elements of credit is not abso- 
 lutely essential to the ability of a person to secure credit. 
 Some are granted credit on the belief in their good char- 
 acter and exceptional capability, although they may have 
 little or no means. A writer has said on this point : 
 
 " A man with character and ability and no money is an anomaly 
 in the commercial world, hence hardly worthy of our attention."
 
 THE ANALYSIS OF CREDITS 221 
 
 The writer referred to is not a credit man, and this no 
 doubt accounts for the utterance of an opinion which is 
 at variance with the everyday experience of the credit 
 market. The fact is that nearly all the great fortunes of 
 this country have been builded by men whose only assets 
 when they started in life were good character and ability: 
 the possession of these elements enabled them to secure 
 credit favors, and thus accumulate a surplus or capital 
 which marked the foundation of fortunes, the very mag- 
 nitude of which astonishes the senses. The preaching of 
 the doctrine contained in this quotation would be harmful 
 in its effects upon the young if they were so ill advised 
 as to digest any such pabulum. The acceptance of this 
 idea would mean that there was no opportunity for anyone 
 in this day, unless he were the possessor of sufficient means, 
 to secure such credit as he might desire. To set up any 
 such dictum would be to close the doors of opportunity 
 to the poor and capable. No worse fate could possibly 
 overtake the commercial world, for it would be left to 
 the management of the rich only, and deprived of the 
 influence which the character and genius of those without 
 means would impart to it. The writer has not depended 
 entirely upon his own views or experiences, but has sought 
 the opinions of other credit men on the question of the 
 relative importance of character, capacity, and capital in 
 credit economy; and the burden of opinion strongly favors 
 the first two as the most important elements of credit. 
 
 There are occasions when a house, having confidence 
 in a man's character and capacity, will give him credit to 
 start a business of his own — he has a thorough knowledge 
 of his surroundings, the good will of the neighborhood, 
 industry and mercantile ability, and in a large number of
 
 222 CREDIT AND ITS USES 
 
 instances becomes a prosperous merchant; start another 
 man alongside of him who has plenty of capital and even 
 good character, but little or no capacity or ability, and the 
 chances are he will be a failure. 
 
 In discussing the different elements of credit, it should 
 be borne in mind that a great deal depends upon the char- 
 acter of the business. Some lines of trade are more 
 exacting than others, but there is no evidence that in any 
 the man of good character and ability is barred from the 
 benefits of credit. 
 
 Many believe that character is the foremost element of 
 credit. This does not imply that character alone gives a 
 man a claim to credit, but the wi-iter does mean to say 
 that unless a man is of good character he has no right to 
 credit, no matter what his capital or capacity may be. 
 
 In these days, when property statements are eagerly 
 sought, the element of character plays an intensely impor- 
 tant part in the spirit behind the statement. The state- 
 ment of a man of good character can be depended upon, 
 but the statement of a man of bad character cannot be 
 credited, even if confirmed by his books. He will keep 
 dishonest books, and the latter have been kno"\vn to baffle 
 " expert accountants." ]\Ir. William Post has said in his 
 article on " The Loan and Credit Department " : 
 
 "Once you are sure of both integrity and ability, you will not 
 need to give the same measure of time to verifying or dissecting 
 the statement." 
 
 and further: 
 
 "If you are in a mist as to integrity, pass the note." 
 
 Capacity, or ability, is a quality which does not neces- 
 sarily accompany either character or capital, but one upon
 
 THE ANALYSIS OF CREDITS 223 
 
 which a business largely depends. Capacity gives material 
 life to an enterprise. There must be capacity, or there 
 will be no energy or strength to the organization. Com- 
 plaint is made that too much attention is paid to capital 
 and too little to character and capacity. Perhaps the dis- 
 position has been to overestimate the importance of capi- 
 tal, which, we must bear in mind, can only be utilized to 
 positive achievement w^hen it has capacity behind it. It 
 is true that in thickly populated centers competition is 
 keener than formerly, and therefore the possession of 
 capital is more necessary in such centers than was the ease 
 fifty or even twenty-five years ago. 
 
 Capacity or personality as an element of credit, occu- 
 pies a place second only to character. There are credit 
 men who dissent from the view that character is an indis- 
 pensable element of credit. It is conceded that a man 
 who has poor business capacity will not make a success 
 of business, but the combination of '' Al business capacity 
 and just a little honesty," as a Chicago credit man put it, 
 has its elements of danger. The absence of honesty or 
 good character is harmful to the interests of not only the 
 wholesaler or jobber who sells to the retail merchant, but 
 the man with " a little honesty " is a menace to his own 
 business ; for while he may feel that he had better treat his 
 creditors fairly well, on the principle that it is the best 
 policy to do so, he will take advantage of those who are 
 his patrons; sharp practice toward them will impair his 
 business through loss of patronage; and his ability to pay 
 his accounts and be a good steady customer of the whole- 
 saler irreparably injured. Mr. A. C. Bartlett, in his lec- 
 ture " At Wholesale," offers an excellent groundwork for 
 a good credit, in which the elements of character and
 
 224 CREDIT AND ITS USES 
 
 capacity are given what appear to the writer to be their 
 merited places. 
 
 " A successful merchant is one who grants credit with a liberality 
 which insures the loyalty of his customers, and with a conservatism 
 which guards against losses. To be a judge of credits means to 
 be a judge, not only of what constitutes a good risk based upon 
 assets and liabilities, but of human nature as well. A combination 
 of small capital, good character and habits (business and otherwise) 
 thrift, and industry is a much better groundwork for a line of credit 
 to a customer than is large capital, indifferent character and habits, 
 and loose, unbusinesslike methods. It goes without saying that 
 adequate capital, unimpeachable integrity, and strict business 
 methods constitute the ideal risk." 
 
 Capital represents the money or means employed in the 
 business. In the case of a man beginning business in an 
 humble way, within the means at his disposal, and reen- 
 forced by character and capacity, capital is not, and should 
 not be, a determining factor. 
 
 When, however, a house which is organized on a pre- 
 tentious basis, with a large staff of employees and a big 
 expense account, seeks extensive lines of credit, then it 
 is certain that unless that concern has within itself the 
 required capital or moans of accommodation adequate 
 to carry it successfully until such time as it can increase 
 its capital, the omission to give to the capital element a 
 primal place in the consideration of the credit would prob- 
 ably result in a loss to the creditor. 
 
 Some credit men (although a minority) are of the opin- 
 ion that the leading elements of credit are capacity and 
 capital. In support of this contention the advocates of this 
 combination hold that the statistics of failures prove that 
 the greatest number of failures come from " lack of cap-
 
 THE ANALYSIS OF CREDITS 225 
 
 ital " and the next largest number arise from " incom- 
 petency " or " incapacity." This opinion has been ex- 
 pressed by different credit men, and was also set forth in 
 a recent work on credit. The figures published by The 
 Bradstreet Company for 1904 show that in the United 
 States the percentage of failures due to " lack of capital " 
 was 32.2 and to "incompetence" 23.1, making 55.3 of 
 the entire number of failures attributable to these causes. 
 In Canada, during 1904, the percentage from these two 
 causes amounted to 76.4. This would seem to be a strong 
 argument in favor of the " capacity and capital " plat- 
 form, but the evidence of the figures is not conclusive 
 without an exhibit of the lines of business in which these 
 failures due to " lack of capital " and " incompetence " 
 arose. The tables of The Bradstreet Company also show 
 that the great mass of all the failures in the United States 
 and Canada were among those who had less than $5,000 
 liabilities; also that over ninety per cent of those failing 
 were rated at $5,000 or less. This indicates that the largest 
 percentage of failures takes place among those who have 
 little if any capital, or the small dealers. 
 
 That so large a percentage of failures takes place 
 among those of very small means does not indicate that it 
 is necessarily " lack of capital ! " The small trader is in a 
 good many cases one who is willing to put a little money 
 into a business venture, trusting that it may be a success, 
 and then when he is not able to acquire as good a living 
 as he expects, abandons the business entirely. These small 
 people cannot be judged by the same standards of com- 
 petency as the larger traders, and it is rather difficult to 
 decide just how far he is affected by " lack of capital " or 
 "incompetence"; as already stated, the figures are not
 
 226 CREDIT AND ITS USES 
 
 conclusive in establishing the soundness of the premises 
 as to the place of capacity and capital in credit, without 
 certain knowledge as to the lines of trade in which the 
 failures under discussion occur. For instance, it is rather 
 difficult to decide where a saloon keeper's competence or 
 incompetence begins or ends; his lack of capital may be, 
 and in a good many cases is, the lack of willingness on the 
 part of his brewer to run the enterprise any longer, for 
 the actual capital put into such a business by the man who 
 runs it is very, very small. 
 
 Another question which arises here : Although so 
 large a percentage of the failures occurs in the classes 
 rated $5,000 or less, it would be interesting to know just 
 what percentage this bears to the whole number of people 
 who are rated $5,000 or less; remember that the total 
 number of people in business in 1904 in the United States 
 and Canada, according to The Bradstreet Company, was 
 1,418,361, and the number failing rated $5,000 or less, 
 10,488. As 55.3 per cent of all the failures were due to 
 " lack of capital " and " incompetence," the number of 
 those rated below $5,000 whose failure is to be attributed 
 to these causes is 5,799. The writer ventures the opinion 
 that this number (5,799) represents an infinitesimal frac- 
 tion of the whole number of people in business during 
 1904 who were rated $5,000 or less, and it is a comparison 
 of this whole number with the number of those who failed 
 because of these reasons (5,799) which would indicate 
 how far the principle of trusting in men because of their 
 character and capacity and with little respect to their 
 capital, has proved a salutary one. 
 
 The ideal credit risk, ideal in the sense that all ordi- 
 nary dangers are eliminated, is that in which the three
 
 THE ANALYSIS OF CREDITS 227 
 
 blements of credit — character, capacity, and capital — are 
 all represented. A good risk is one in which character 
 and capacity may alone be represented, for good character 
 furnishes a moral guarantee that the interests of the cred- 
 itor will be respected ; and the capacity or ability will in- 
 sure good management and its result a paying and suc- 
 cessful business. A doubtful risk is one in which character 
 and capital only are found, as the absence of capacity nega- 
 tives the probability of success. Another doubtful risk 
 is one in which capacity and capital alone appear, as the 
 moral safeguard is missing and the creditor is left entirely 
 at the mercy of the debtor. In risks where character, 
 capacity, or capital figure singly, there is little basis for 
 credit; as either one, unsupported, offers no groundwork 
 for a sustained business career. This opinion may be ques- 
 tioned in the belief that if a man starts a business with 
 ample capital, but with neither good character nor ability, 
 he would be able to pay for his goods because he would have 
 the capital or funds with which to do it. He would for a 
 time, so long as his money held out. After that he would 
 be reduced to measures which would undoubtedly prove 
 prejudicial to those crediting him. Therefore, wise credits 
 depend upon a proper recognition in their respective places 
 of character, capacity, and capital. 
 
 QUICK AND FIXED ASSETS 
 
 In order that credit be wisely dispensed, it is necessary 
 that the assets be accurately appraised and computed, and 
 their composition be clearly understood by the credit man. 
 It is not sufficient that a man submit a property statement 
 showing the possession of a large amount of stock, and
 
 228 CREDIT AND ITS USES 
 
 other assets, but that those assets should be of a nature 
 that will make them a real help to the business and not a 
 drawback to it. The effect of the composition of a man's 
 assets upon his paying qualities is one of the most impor- 
 tant questions demanding the consideration of the credit 
 man. If a man be overstocked he will be slow in his pay- 
 ments — a fact to which the credit man should give due 
 weight before either opening an account or continuing 
 one in which he may be interested. Further, where traders 
 turn their capital which should all be employed in the 
 business into different channels, such as outside invest- 
 ments, real estate, and unproductive accessories to their 
 regular business, such assets as would be represented under 
 these heads must be very carefully analyzed and their 
 actual value only computed in estimating a man's credit 
 desirability. 
 
 It is e\adent to all who have taken a deep interest in 
 the progress of credit economy that the question of the 
 nature of assets has not been given due prominence in the 
 discussions of credit problems. Both creditors and debtors 
 have erred in this regard, neither having given to the sub- 
 ject that thoughtful attention which would probably have 
 saved many serious losses in times past. The debtor's pro- 
 pensity is to estimate at full value everything of which 
 he is possessed, and creditors have been too much inclined 
 to accept at their face offering the items of property state- 
 ments. 
 
 The assets of a business are of two classes: Live or 
 Quick Assets and Slow or Fixed Assets. The first class 
 consists of that character of property for which there is 
 a steady demand, or for w^hich under all ordinary circum- 
 stances there is a ready market; or property which can
 
 THE ANALYSIS OF CREDITS 229 
 
 be converted into money or utilized for credit purposes 
 on short notice. Such assets are represented by cash, mar- 
 ketable merchandise, good book accounts, securities, and 
 any other character of personal property subject to expe- 
 ditious 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 the business. They 
 consist of furniture and store fixtures, buildings, real es- 
 tate, and machinery, and investments which are of a devel- 
 opmental or speculative nature. 
 
 In analyzing a property statement the credit man must 
 make a division between quick and slow assets. A con- 
 servative estimate should then be placed ujjon these two 
 classes of property, in order to determine approximately 
 upon how much active capital the business can depend. 
 
 The question which now presents itself is: To what 
 extent, if any, should slow assets be considered in esti- 
 mating a man's credit responsibility? Are they entitled 
 to any consideration or not, or are they only to be relied 
 upon as giving a modified measure of support to the busi- 
 ness? There does not appear to be a unanimity of senti- 
 ment on this subject among credit men ; in fact, the same 
 differences of opinion have arisen that seem to appear in 
 respect to almost every matter concerning the dispensation 
 of credit. It is necessary, therefore, to understand how 
 this question appeals to credit men, before entering upon 
 the expression of any positive opinions in regard to it. 
 
 The views of credit men on this question may be sum- 
 marized as follows: 
 
 1. Some believe that slow or fixed assets should be 
 entirely eliminated from all calculations in estimating a 
 man's credit worth. 
 16
 
 230 CREDIT AND ITS USES 
 
 2. Certain credit men bold that a separation of all 
 assets should be made into the two classes, and the slow 
 or fixed assets scaled fifty per cent and then regarded as 
 a matter of security only for the other elements of the 
 business. 
 
 3. It is also held that slow or fixed assets must be con- 
 sidered in deciding on a man's responsibility, as they are 
 an undoubted help and sometimes a real salvation if a 
 business has to be liquidated. 
 
 4. If slow or fixed assets are not of sufficient volume 
 to impair a man's ability to secure a proper and easy revo- 
 lution of his capital, they are a positive help, especially 
 with liquidation in view. 
 
 5. If the slow assets represent only a moderate percent- 
 age of the entire capital, they are in no sense a detriment, 
 but are an element of strength. 
 
 It will be observed that as to views numbered two, 
 three, four, and five, the sentiment differs in form but not 
 in principle. The opinion numbered one, however, draws 
 the line of cleavage very sharply and does indicate a 
 decided difterence in principle from the other opinions 
 quoted. It is questionable whether the idea of eliminating 
 all fixed assets from the consideration of a man's credit 
 responsibility could be rigidly followed without making 
 a radical reduction in a firm's sales; and the great merit 
 of credit-giving is to employ care and conservatism, at 
 the same time making a constant and judicioiis increase in 
 the yearly sales. The plan of elimination suggested could 
 be and no doubt is employed by banks, or when the con- 
 cern applying for the credit is a large one and the amount 
 of credit sought relatively large. It is probable that this 
 plan is intended to apply to such cases. Used in respect,
 
 THE ANALYSIS OP CREDITS 231 
 
 to the smaller class of traders, it might have a tendency 
 to unduly restrict credit, and this is something that all 
 farseeing credit men desire to avoid. It is probable that 
 in ninety per cent of the cases in which credit is granted, 
 credit men look to slow or fixed assets as a mainstay of 
 the business, or, as one credit man has expressed it : 
 
 "The fixed assets of a concern (such as real estate, buildings, 
 store property on long lease at low rental if of sufficient volume and 
 properly protected by insurance) we look upon very favorably or 
 as the sheet anchor of the risk, because it is largely this on the 
 final wind up that prevents ultimate loss." 
 
 In the event of backward trade or a business depression, 
 a man who has transferred his ready capital into real estate 
 or outside ventures finds himself at a great disadvantage. 
 In good times, in certain localities, a piece of real estate 
 can be disposed of as quickly almost as any other character 
 of property, but this is the exception and not the rule, 
 unless sacrificed. Very often a merchant will go to a large 
 outlay improving his premises, putting in costly fixtures, 
 and to do so has to use capital which should not be with- 
 drawn from the business. In addition, improvements of 
 this nature, while they may be helpful in some lines of 
 business for advertising purposes, shrink in value with 
 time and are of no assistance whatever as a means of 
 securing credit accommodation, especially at a time when 
 it is most sorely needed. 
 
 The tendency to turn one's capital from live to slow 
 assets is attended with more danger in some lines of trade 
 than in others. In a business where goods must be bought 
 on short time and prompt payments exacted, the mer- 
 chant must have all available capital constantly at his
 
 232 CREDIT AND ITS USES 
 
 command; in such a business an undue proportion of slow 
 to live assets is an unerring warning to the credit man. 
 In lines of trade where goods are sold on long time, 
 the presence of slow assets is not as decided a disadvan- 
 tage, but one to which proper significance should be at- 
 tached. Credit men have found from experience that 
 certain slow or fixed assets have been the means of avert- 
 ing serious losses from bad debts when a concern is in- 
 solvent or forced for other reasons to liquidate. It would 
 have been much better, however, if the merchant who has 
 been unfortunate had kept all his capital in such a form 
 that he could have continually utilized it in his business, 
 and in this way no doubt avoided a failure. The loss to 
 business by a man's failure is twofold: that which he 
 and his creditors sustain and the loss which commerce 
 and trade suffer by the elimination of the merchant as 
 a business factor.
 
 CHAPTER XIV 
 
 METHODS FOB SAFEGIJARDING CREDITS 
 
 (A) General Expenses with Special Reference to Rent. 
 (B) " Credit Lines and Limitations/' (C) Fire In- 
 surance and Its Relation to Credit. (D) Compara- 
 tive Statement Forms 
 
 GENERAL EXPENSES WITH SPECIAL REFERENCE TO 
 
 RENT 
 
 Among the questions which must be studied in the con- 
 sideration of a man's credit responsibility is his method 
 of management, especially as it affects the expense of con- 
 ducting the business. 
 
 Economy in management is quite as essential to the 
 success of a business as general efficiency; in fact, economy 
 is a feature of efficient control. Extravagance or loose 
 management is destructive to the successful conduct of 
 a business. The general expenses of a business are usu- 
 ally rent, light, heat, clerk hire, advertising, insurance, 
 and many smaller items of outlay or " sundry expenses." 
 These are the fixed charges of a business without which 
 it cannot be prosecuted. It is customary to insert in 
 property-statement forms the question : " What are your 
 annual expenses? " or a better question and one also 
 largely used, " State amount of expenses last year." 
 
 233
 
 234 CREDIT AND ITS USES 
 
 Some credit men consider that where a large amount of 
 credit is at stake they should have an itemized list of 
 the expenses a merchant has incurred during the pre- 
 ceding year. There are excellent reasons why this should 
 be done, although to exact such a list in a great many 
 cases might have a tendency to irritate the man giving 
 the statement. 
 
 The danger of exciting the resentment of the trader 
 by asking him to give a statement of his affairs, and the 
 desire to cater to his prejudices, has resulted in the use 
 of statement forms that are altogether too brief to form 
 " an adequate foundation for a liberal credit," and the 
 doubt created by a general statement of the gi'oss amount 
 of annual expenses should be avoided by demanding an 
 itemized list of expenses. Where the amount of credit 
 sought is trifling, the necessity for such detail does not 
 exist; but when the credit man feels that the amount 
 involved justifies his insisting upon an itemized list of 
 yearly expenses, he is remiss if he does not demand it. 
 
 Although most property statements do not call for 
 an itemized list of annual expenses, some ask, " What 
 amount of rental is paid?" 
 
 Unquestionably, rent is looked upon as a matter of 
 more than ordinary importance, otherwise questions in 
 regard to it would not appear in property statements. 
 Kotwithstanding the prominence given to this question 
 in statement forms, it is one respecting which there has 
 been little public discussion as related to the problem 
 of credits. There is general agreement on this point: 
 viz., that the question of rental is not affected or should 
 not be affected by the capital employed or the vol- 
 ume of business transacted, but that it is more generally
 
 METHODS FOR SAFEGUARDING CREDITS 235 
 
 based upon the profits which may be derived from the 
 business. 
 
 Mr. Samuel J. Kline, of Chicago, shows that the basis 
 of rental depends very largely upon the nature of the 
 business, as follows: 
 
 " It will therefore be seen that the signing of a lease for a term 
 of years is a matter which should receive most careful consideration. 
 Naturally, like any other form of expense, the rental should bear 
 a well-defined relation to the sales, or, to be more exact, to the 
 gross profits. We make this distinction between sales and gross 
 profits because some lines yield a very much greater percentage 
 of profit than others; for instance, a drug store located on some 
 prominent corner might with perfect safety pay a very much larger 
 percentage of its sales as rental than could be paid by almost any 
 other branch of business, but the relation of the rent to the gross 
 profits should in every line be approximately the same." 
 
 The foregoing expresses the general trend of opinion in 
 regard to this subject. 
 
 It is obvious that one of the most important elements 
 affecting the question of rental is that of location. Dif- 
 ferent lines of business require different characters of 
 location; for instance, a jobbing or wholesale establish- 
 ment in certain lines need not be located on the best busi- 
 ness street, for the reason that the rental in such a location 
 would be higher than the purposes of the business neces- 
 sitate. A large percentage of the business transacted by 
 wholesale and jobbing concerns is done by their traveling 
 representatives, and patrons do not find it absolutely neces- 
 sary to visit houses from whom they make purchases ; 
 neither is it necessary to display goods as in the retail 
 business; consequently, the importance of the location is 
 minimized. It is necessary that a house in any trade be
 
 236 CREDIT AND ITS USES 
 
 located where it will he convenient for its patrons and the 
 general transaction of its business. 
 
 There is a radical variation of opinion as to the ratio 
 which rental should bear to the gross expenses, estimates 
 running all the way from one per cent to seven per cent 
 of the business done. How far these percentages accu- 
 rately reflect conditions as shown in property statements 
 it is impossible to say. Mr. F. H. McAdow, of the Staver 
 Carriage Co., Chicago, has made an analysis of certain 
 statements in his credit flies, which he has placed at the 
 disposal of the writer, and the results of this examination 
 are as follows : 
 
 "Judging from the answers given on the statements I have 
 been looking over, a rental of $300 per annum seems to be the 
 average for sales running from $6,000 to $15,000. It is rather 
 surprising to note the variation. One firm in a small town pays 
 $15 per month, or $180 per annum, on a business of $7,000 annually. 
 Another man in a still smaller town pays $180 per annum and does 
 $13,000 worth of business a year. In another case a dealer pays 
 $1,200 per annum rental and is doing a business of from $20,000 to 
 $25,000 per annum. This man, however, is not very successful, as 
 his indebtedness indicates, although he has been in business for a 
 long time. As an indication of what it costs a firm when they own 
 their own property, I note in one case where the store building and 
 lot are valued at $4,500, while the dealer does a business amounting 
 to $6,000 annually. He would have to figure interest, indebtedness, 
 taxes and betterments on his property at about eight per cent, 
 so he is paying $360 per annum, or six per cent of his gross sales, 
 which is considerably higher than the average. So when we con- 
 sider the fact that in these times dealers cannot figure a gross profit 
 of more than fifteen per cent or twenty per cent on their gross 
 sales, if they are to make a reasonable net profit on their capital 
 invested they must keep their expenses down and leave a safe 
 percentage. A conservative percentage to allow for rent would 
 be from three per cent to five per cent of the aimual business, or
 
 METHODS FOR SAFEGUARDING CREDITS 237 
 
 gross sales. By the time other necessary expenses are added to 
 this as a starting point, the profit will l)e small enough. From the 
 property statements I have looked over in our files, I believe the 
 average would be about four per cent." 
 
 One of the interesting facts to be derived from the 
 foregoing is tliat two men engaged in the same business 
 are paying the same amount of annual rental, although 
 one is doing twice as much business as the other. This 
 may be, however, no reflection upon the judgment of the 
 man who is doing the smaller business, for the town in 
 which he lives may be one in which general real estate 
 valuations are much higher than in the other, and it may 
 be impossible for him to secure any lower rental than that 
 which he is paying. The only conclusion deducible from 
 this condition, however, is that the man who is doing the 
 larger business is in the enjoyment of a great advantage, 
 for which local conditions are entirely responsible. 
 
 Mr. McAdow says the average would be about four 
 per cent, and the only method of determining whether this 
 average is a justifiable one would be to submit the ques- 
 tion to the test proposed by Mr. Charles Biggs, of New 
 York, viz., " to ascertain the usual rental for a given 
 amount of space and which is essential to the successful 
 prosecution of the business." 
 
 It is e\ident from opinions expressed that some credit 
 men do not regard the question of rental or any other 
 item that enters into the general expense of a business as 
 being of a nature to warrant any special analysis; some 
 inclining to the idea that the matter of rental is one which 
 must of necessity be left to the judgment of the merchant; 
 or, on the other hand, that a man should not hamper him- 
 self by paying small rent in an undesirable location if
 
 238 CREDIT AND ITS USES 
 
 he considers that the prospects of doing a successful busi- 
 ness will be enhanced by remo^Hing to a location where 
 the rental may be much higher; this being in harmony 
 with the general consensus of opinion on this question. 
 
 Certain States have laws which give a landlord a pref- 
 erence covering the amount of rental due him, or the 
 amount which would become due during the full term of 
 a lease, and cases could be cited where the operation of 
 such laws have consumed the entire estate. Under the 
 National Bankruptcy Act, preferences of this character 
 cannot be enforced ; but if at any time that act should be 
 repealed and the country return to the State system, the 
 question of rental would become a more important one 
 than it is ordinarily supposed to be, and more attention 
 would have to be given to it than in the past. 
 
 The amount which a man is paying for rental, if it be 
 of sufEcient importance to be made a matter of special 
 inquiry in a property-statement blank, should also be a 
 matter of careful investigation on the part of credit men. 
 No good purpose can be served by asking the question, 
 unless, after it is answered, the credit man satisfies himself 
 that the rental being paid is proper. The guide to a cor- 
 rect determination of this question, as indicated by Mr. 
 Biggs and explained in the other opinions cited, can be 
 used with profit by credit men in order that tendencies 
 on the part of those applying for credit to indulge in un- 
 necessary expenses may be checked. 
 
 "CREDIT LINES AND LIMITATIONS" 
 
 In the consideration of the methods of banking credit 
 departments, attention was called to the question of dis- 
 count lines or stated amounts that a bank would be will-
 
 METHODS FOR SAFEGUARDING CREDITS 239 
 
 ing to lend to a customer from time to time, and which a 
 customer could relj upon receiving whenever he found 
 it necessary to ask accommodation. It was also shown 
 that there is no definite rule for determining what a cus- 
 tomer's credit limit shall be. In commercial credit there 
 is supposed to be some definite " line " or amount of credit 
 that a house is willing to accord to a customer. The 
 method of deciding as to what such lines shall be, or ad- 
 hering to them, seems to be a matter of as much random 
 reasoning and practice as the assignment of discount lines 
 in banking. There always has been a sentiment among 
 credit men in favor of according to each customer (and 
 marking on his account in some way) a certain figure 
 representing the limit of credit which they believe should 
 be granted to him. 
 
 The credit line or limit of credit was probably insti- 
 tuted as a danger signal for credit men, and if this be the 
 only purpose it has served, it has fulfilled its mission. The 
 difficulty with the idea is that in selecting the lines or 
 limits there has been no explicit rule followed. Even in 
 the same trade two credit men, when according a line to 
 the same customer, will assign entirely different amounts 
 to him. The variation in these limits may reflect the dis- 
 parity in temperament of the respective credit men, but 
 if their views be radically dissimilar it shows that there 
 is not that general agreement as to credit usages that 
 should exist. 
 
 Consultation with credit men reveals this situation: 
 It is the rule of certain concerns to fix limits on all ac- 
 counts, but no pretense is made to adhering to them. 
 Others consider that credit lines are useful only in the 
 cases of financially weak customers, so that if accounts
 
 240 CREDIT AND ITS USES 
 
 are not paid promptly, a halt may be called and further 
 credit denied. Others claim to use credit lines as a pre- 
 cautionary measure, so that the bookkeeper may call at- 
 tention to an account when the line of credit has been 
 reached. Still others think that credit lines are necessary 
 in the case of first purchases only, and that any subsequent 
 accounts should be judged on their merits. In some credit 
 departments credit lines are used only on small accounts. 
 It is also found that many credit men do not use credit 
 lines at all, and consider them of no value; the belief of 
 this class being that every purchase should be considered 
 in order that credit be safely extended, for only through 
 this method will the changing conditions in the circum- 
 stances of debtors be given the attention that each develop- 
 ment deserves, whether it be for good or ill. 
 
 In some trades credit men say they find it inadvisable 
 to assign credit lines, for the reason that if a man's respon- 
 sibility is not such that they can afford to sell him all he 
 will require during a season, they can hardly afford to deal 
 with him at all. In such cases a man's limit of credit is 
 measured by his requirements, although it is well under- 
 stood that such requirements will be predicated upon his 
 resources and general credit standing, whatever they may 
 be. After all has been said, the fact remains that the 
 utility of credit lines is not universally recognized, and 
 there is apparently no scientific basis of calculation for the 
 determination of such lines. 
 
 The most effective method of reaching an understand- 
 ing as to the ^"iews of those who believe in and those who 
 are opposed to the use of limits of credit, would be to take 
 the opinions of practical credit men representing the affir- 
 mative and negative of this subject. The opinions quoted
 
 METHODS FOR SAFEGUARDING CREDITS 241 
 
 are thorough in their analysis of the different phases of this 
 question and exhibit ideas prevailing in two of the staple 
 lines, viz., the grocery and dry goods trades. The first 
 opinion is that of a credit man of one of the largest 
 grocery concerns in the Middle "West, and is as follows : 
 
 "For convenience and office reference, a nominal line of credit 
 is assigned to customers on credit index cards but not closely 
 adhered to. This line of credit is generally figured at about ten 
 or fifteen per cent of the net trade assets of our customers which 
 represents their reasonable requirements; in other words, a dealer 
 in our line, with a $2,000 investment ordinarily requires a S200 to 
 $300 line of credit. He might have $10,000 outside property, 
 making him safe for much larger amounts, but our index record is 
 noted for his reasonable requirements only on amount of stock 
 carried and business done. On the other hand, a customer, iu 
 whom we have impHcit reliance as to honesty, ability and prospects, 
 with a net worth of $1,000 to $2,000, giving us his entire business, 
 will often receive a line of $1,000 to $2,000 credit, or as much as he 
 is actually worth and this may not represent more than thirty 
 days' purchases, as an active retail grocer will often tiu-n his stock 
 in from three to five weeks and in selhng for cash, or with careful 
 credit in connection with other favorable conditions, will be reason- 
 ably safe for liberal Unes. I always avoid giving a customer or sales- 
 man to understand that a certain line of credit will be extended as 
 with changing conditions, a line that is safe to-day in a few months 
 may be dangerous, and, therefore, being handicapped by promises 
 salesmen frequently make to customers, that the house will carry 
 them for such and such amounts. Customers will often abuse such 
 privileges and understanding that we will grant them certain lines, 
 will lean more heavily upon our good will than they should or relax 
 necessary care in their credits and collections. Again, a customer 
 from all mformation may be entitled to a $1,000 line of credit and 
 owing only $200 or $300, but this several weeks or months overdue. 
 Notwithstanding the supposed safety of the risk, I would not in- 
 crease the account until delinquent matters had been adjusted or 
 satisfactorily explained. You will, therefore, notice that the line
 
 242 CREDIT AND ITS USES 
 
 of credit I assign is by no means absolute nor closely adhered to, 
 but simply used as a convenient reference for assistants or other 
 employees to whom, in emergencies, it may be necessary to refer 
 orders. I understand some jobbers enter a line of credit on the 
 ledger page of each customer which is adhered to closely and book- 
 keepers allowed to pass orders as long as the account does not 
 exceed the stated line, or is badly in arrears. In that way a small 
 percentage only of orders is actually passed upon by the Credit 
 Manager or his Assistants, but handled by bookkeepers. I do not 
 believe such practice is general, though some prominent houses 
 adopt it, but I am confident no credit man can successfully keep in 
 touch with his accounts without, in a general way, watching the 
 individual orders and remittances from customers as well, in con- 
 nection with examining daily or weekly statements of maturing 
 bills, or semimonthly or monthly delinquent statements. In our 
 office the credits are classified to a large extent by territories, four 
 or five of my assistants handling the details and passing on a large 
 percentage of orders, referring to me only those that are doubtful, 
 but, by a system of cards, drawTi once, twice or three times a month 
 from accounts that are watched closely, and also a cursory glance of 
 statements mailed and remittances received, I can, as a rule, easily 
 keep informed of the condition of dangerous accounts which, as 
 you understand, are the ones that require attention, the safe 
 credits generally taking care of themselves. Our bookkeepers also 
 become familiar with requirements and call my special attention 
 to accounts that are dragging imreasonably." 
 
 The foregoing opinion, while mainly favorable to the 
 use of credit lines, also shows the difficulties encountered 
 in depending on them; in fact, while it upholds this 
 method in credit work, its opening statement is an admis- 
 sion that the lines are not respected. The basis for the 
 establishment of these lines, viz., ten to fifteen per cent 
 of the quick assets of a business, is a conservative one. 
 At the same time, it will be noticed how radically the 
 yiews of the credit man change when he has an oppor-
 
 METHODS FOR SAFEGUARDING CREDITS 243 
 
 tunitj to secure what lie considers the entire trade of the 
 purchaser. This disposition to extend so large a line of 
 credit is justified by the fact that the goods are sold on 
 short terms and purchases are frequently made, both of 
 which conditions enable a house to maintain closer and 
 better relations with a customer than when goods are 
 sold on long time and purchases are made only occa- 
 sionally. 
 
 Even where lines of credit are supposed to be a guiding 
 rule of the credit department, the point is excellently 
 taken by the credit man quoted, that he is not in the 
 habit of giving the customer to understand that a definite 
 amount of credit will be allowed, for everyone who has 
 had experience with people who buy on credit can appre- 
 ciate the argument made by him. The propensity of 
 credit seekers is usually to take advantage of almost every 
 condition that suggests itself, if encouraged or permitted 
 by the creditor to do so. The wisdom of using a credit 
 line is approved by the policy of the credit man whose work 
 is under discussion, when he says that where an account 
 is overdue he would not consent to increasing it in any 
 way until the tardiness has been overcome. 
 
 The danger is also suggested of according to book- 
 keepers and subordinates in the credit office the privilege 
 of passing on accounts with lines of credit as their guides. 
 A custom of this character is apt to divorce the credit 
 man's close attention and interest from a large proportion 
 of the accounts, and this will surely be attended by a slack- 
 ening of that studious application to the duties of his posi- 
 tion that is essential to wise credit giving. There should 
 be no disposition to alienate the bookkeeper's interest 
 from credit matters, for he can be of great help to the
 
 244 CREDIT AND ITS USES 
 
 credit man; but to assign to bookkeepers the duty of 
 checking a large number of orders that must be passed 
 upon in a business is really creating a division not only 
 of the labor, but also of the responsibility that attaches 
 to the credit office. The inevitable result is that " an 
 interest divided is an interest lessened," so far as the 
 efficiency of the credit department itself is concerned. 
 
 The other opinion to which reference has been made, 
 and which will now be quoted, comes from a representa- 
 tive dry goods house of the Middle West: 
 
 " I have been trying for over twenty years to learn how to assign 
 a line of credit to an account and adhere to it, but have been unable 
 to do so for the reason that the conditions surrounding each account 
 are continually changing. For instance, a man might come in our 
 office to-day and make a statement of his financial condition which 
 we would find to be correct. We would convince ourselves he was 
 honest and a man of ability and that he would be careful in the 
 conduct of his business. He might start out with the idea of doing 
 a cash business, as the location was in a prosperous country. In six 
 months he might with good reason decide to do a credit business. 
 Crop conditions which were perfect at the time the business was 
 started change to the contrary, as is often the case in the territory 
 in which we do a large portion of our business. The number of 
 stores in the town in which he started may have been just sufficient 
 or not quite as many as the town could stand, while in the interval 
 of six months others might open, and business be overdone. Origi- 
 nally competition might be clean and legitimate while dming the 
 interval mentioned some competitors might have contracted the 
 scheme of 'kiteing,' or, in other words, use questionable methods to 
 obtain business which temporarily might cripple him. He might 
 start in a locality where there was no other trading point within 
 ten or fifteen miles, while in six months there might be new towns 
 started which would di^^de the trade. We have just gone through 
 an experience where hail has caused a great deal of havoc in a very 
 small scope of territory and practically puts our customers out of
 
 METHODS FOR SAFEGUARDING CREDITS 245 
 
 business or at least forces them into an extensive credit business 
 for the time being." 
 
 The credit man "who wrote this opinion is unquestion- 
 ably right when he says that the changing conditions that 
 are constantly entering into the life of an account dis- 
 parage the possibility of establishing any hard and fast 
 lines or limitations. The reasons he offers for doubting 
 the expediency of using these lines are all worthy of 
 careful consideration. The fact of a customer changing 
 his business from a cash to a credit basis, unfavorable 
 crop conditions, unfair competition, and damage from the 
 elements, all constitute good reasons for holding that ab- 
 solute adherence to credit lines is impossible. 
 
 The point to be debated, and one which readily sug- 
 gests itself from the large number of varying opinions, 
 is whether credit lines or limitations do not answer a use- 
 ful purpose and are not of considerable value to the credit 
 man in the prosecution of his work. It is undoubtedly 
 true that no matter whether a credit man marks a line 
 of credit upon the ledger account or keeps it upon a credit 
 reference card or uses it in connection with any other 
 office records, he always has in his own mind an idea as 
 to the amount of credit he would be willing to grant to 
 every person with whom he is doing business. It is in- 
 dubitable that after a credit man has considered the infor- 
 mation he has acquired in regard to an account, if he 
 will sell to the person at all, there immediately springs 
 into his mind a thought as to about the amount he would 
 be willing that person should owe to his concern. It is 
 this mental record or reservation which is the inherent 
 guide of the credit man in his treatment of accounts. 
 
 But even while he* carries within his own mind an idea 
 17
 
 246 CREDIT AND ITS USES 
 
 as to the amount the customer should owe at any one 
 time, it is of benefit to him to make a record of the amount 
 beyond which he believes the account should not go. 
 Again, where a credit man is compelled for different rea- 
 sons to absent himself, whether through illness or any 
 other reason, it is not a good idea that there should be 
 no record left by him as to how the different accounts 
 should be handled. Where he has placed a line of credit 
 against accounts, it is reasonable to suppose that these 
 lines are within the safety mark. During his absence 
 there is little danger of an imsatisfactory account being 
 added to, providing his credit information is recorded with 
 promptitude and is subject to ready reference. While 
 conceding the impracticability of credit lines being invio- 
 lably respected, it will not be denied that in many instances 
 they are of great advantage ; and until some better method 
 of governing this question can be devised they will un- 
 doubtedly continue to be an element of credit office 
 administration. 
 
 FIRE INSURANCE AND ITS RELATION TO CREDIT 
 
 In addition to desiring that a customer shall be a per- 
 son of good character, with sufficient capacity to conduct 
 the business, and also the reasonable capital required for 
 its prosecution, the credit man finds it necessary to assure 
 himself against the possibility of losses arising through 
 causes that may be wholly beyond the control of the 
 customer. A man may be doing a successful business, 
 but in the event of his property being destroyed by fire, 
 his failure to carry a sufficient amount of fire insurance 
 might render it impossible for him to discharge his in- 
 debtedness in full.
 
 METHODS FOR SAFEGUARDING CREDITS 247 
 
 It is customary when a man is applying for credit to 
 ask him orally whether he is insured and what amount of 
 insurance he carries, or if the opportunity to consult with 
 him directly is not afforded, to insist upon his answering 
 this question in some form, and preferably when he is 
 making a statement of his affairs. For this reason, in 
 every well-prepared property statement there is an inquiry 
 as to whether or not the person making the statement 
 carries fire insurance and to what extent. When the credit 
 man learns how much insurance is being carried by the 
 customer, or prospective customer, he is not in doubt as 
 to whether, in the event of fire, that person should be in 
 a position to discharge his indebtedness without injury 
 to his creditors, always providing that the statement as 
 to the insurance being carried is an honest one, and fur- 
 ther, that the insurance has been obtained from com- 
 panies that are solvent and will be able to pay losses when 
 called upon to do so. 
 
 Xo business man could undertake a risk more fraught 
 with danger than to dispense credit among those who are 
 carrying no fire insurance, for the elements of good char- 
 acter and business capacity would be of no avail in pre- 
 venting a loss under such conditions, and it would only be 
 the existence of ample capital that would prove efficacious 
 in preventing a loss under such circumstances. In the 
 great mass of business enterprises the capital invested rep- 
 resents the merchant's all, and it is rarely that a merchant 
 uninsured, who suffers a fire loss, is able to discharge his 
 indebtedness in full. 
 
 It is necessary that a merchant should be insured and 
 for a sufficient amount. Where he overlooks his inter- 
 ests by failing to carry insurance, it is the credit man's
 
 248 CREDIT AND ITS USES 
 
 duty to his house as well as to his patrons to express a 
 kindly word of advice upon this point. In a series of 
 articles published by the ISTational Association of Credit 
 Men on the question of " Fire Insurance an Essential to 
 Credit," several cases from actual experience are quoted, 
 showing that the thoughtfulness of credit men in this re- 
 8pe<;t has prompted the merchant to increase his insurance, 
 and thus saved his creditors and himself from a serious 
 loss. In the series of articles mentioned is one by Mr. 
 George K. Barclay, Vice President of the Simmons Hard- 
 ware Co. of St. Louis, in which he says : 
 
 "The Simmons Hardware Co. has for several years past issued 
 to its traveling men instructions about the close of the year to 
 interview their trade regarding the matter of insurance, ascertain 
 the amount carried, etc. This information is placed on record in 
 our Credit Department, and where we find our customers are without 
 msurance, we bring the matter to their attention in a way to cause 
 no offense, and feel sure we have influenced a great many retail 
 merchants to avail themselves of the protection offered by insurance 
 companies." 
 
 The plan followed by the concern mentioned affords an 
 excellent example to all other houses, and where a concern 
 is not in a position to communicate with its customers 
 through the medium of traveling salesmen, methods can 
 be devised to accomplish the same result through corre- 
 spondence. 
 
 COMPARATIVE-STATEMENT FORMS 
 
 The purposes and advantages of comparative state- 
 ments in banking credit have been explained; and the 
 same reasons that would recommend the use of compara- 
 tive-statement forms in banking-credit departments should
 
 METHODS FOR SAFEGUARDING CREDITS ^4^ 
 
 also promote their use in commercial credit oflSces. The 
 use of the comparative-statement form is a banking custom 
 more than a commercial one. Credit men of commercial 
 establishments who have had banking experience and 
 through it acquired the habit of using a comparative-state- 
 ment form, employ it and are of the opinion that the results 
 of its use fully justify the extra labor entailed. 
 
 Some credit men have expressed the opinion that when 
 they receive a new statement from a customer and compare 
 it with the last statement received from him, and consider 
 the results of the comparison, this method satisfies all re- 
 quirements. This plan, however, involves what would be 
 called a mental comparison and cannot be as effectual as 
 the method by which figures are properly tabulated, and 
 can be referred to at any time during a year without the 
 necessity of turning over a great many papers and making 
 a computation to decide exactly what the results of the com- 
 parison may be. 
 
 The principal reason that has operated against the use 
 of comparative-statement forms in commercial credit is that 
 merchants are not in the habit of demanding statements 
 from customers with the same regularity that banks follow 
 the practice. Further, in many cases a customer will re- 
 fuse to fill out a statement form sent him by a wholesaler 
 or jobber, but is perfectly willing to send a statement pre- 
 pared in his own way (very often on a letter head), and the 
 recipient feels that this is the best he can get. Ho accepts 
 it in that spirit and hardly thinks it worth while to make 
 any tabulation of the facts contained in such a statement, 
 although such conditions do not disparage the use of a com- 
 parative-statement form. Another reason, and probably 
 the strongest one, that has prevented the use of comparative
 
 250 CREDIT AND ITS USES 
 
 statements by cominercial credit men is that they would 
 have to be filled out by some one in the credit office, and 
 the fact is that the time of the credit man and his assistants 
 is usually preoccupied with what might be called the 
 regular work. As the comparative statement has not up to 
 this time taken a very prominent place in credit office work, 
 the avoidance of this and any other duty that does not seem 
 to be absolutely pressing, readily approves itself to the 
 credit man. Although the preparation of a comparative 
 statement means a little extra work at the time each prop- 
 erty statement is received, the advantage of having on one 
 form all the essential details of every statement a man has 
 submitted to his creditor for a number of years is one that 
 credit men can hardly afford to overlook.
 
 CHAPTER XV 
 
 THE CREDIT MAN : DUTIES, METHODS, AND CHAEACTERISTICS 
 
 The duties of the credit man pertain to the acquire- 
 ment of information respecting the credit standing of 
 people, the consideration of the questions that determine 
 a person's credit desirability, credit office management, the 
 collection of accounts, and the adjustment of doubtful and 
 failed accounts. 
 
 In some large establishments the credit man takes 
 charge of credits only, the collection of accounts being 
 supervised by others. This division of labor is at times 
 necessary, for the reason that the credit man, having so 
 many accounts upon which to pass, would not have the 
 requisite time to give to the questions of collections and 
 adjustments. In other concerns the credit man is supposed 
 to discharge all the duties enumerated and also to take 
 charge of the accounting department. If this does not 
 conflict with his giving the necessary attention to his dis- 
 tinctively credit duties, it is in no sense a detriment but 
 greatly to his advantage, as it broadens his experience. 
 The greater familiarity a credit man cultivates with all 
 branches of a business the better for him. This experience 
 is something that he will have reason to prize in after life. 
 
 The labors of the credit man which postdate the open- 
 ing of an account call for a high order of ability. He must 
 
 251
 
 252 CREDIT AND ITS USES 
 
 exhibit that power of observation enabling him to review 
 accounts with the knowledge and foresight so essential to 
 the conduct of well-regulated credits. His hardest work 
 has then begun. The means that he adopts depend to a 
 great extent upon his own originality and industry. He 
 should never miss an opportunity to consult with the sales- 
 men to learn from them whether their customers are pro- 
 gressing or retrogressing. The credit man may also secure 
 information by discussing his customers with other credit 
 men or private persons. Such discussion should be con- 
 ducted in a diplomatic manner and never initiated in what 
 would appear to be a spirit of anxiety. He should also 
 make prompt and regular examinations of the change lists 
 issued by the mercantile agencies or reporting concerns. 
 Very often important developments in credit work have the 
 merest rumors or scraps of information as their founda- 
 tion, and the credit man who can utilize this character of 
 information, no matter how trivial it may be, is the one 
 who possesses the instinctive capacity for credit work. 
 
 System is one of the most important factors in business 
 management, and there is no department of business life 
 where it is more necessary than in credit work. There arc 
 so many details in credit work that the credit man is liable 
 to stand in his own light unless he arranges and dispatches 
 his duties with systematic precision. 
 
 The credit man's habits should be steady, which is a 
 concession to system ; it would be well for him to have 
 regular hours during which he would consider certain 
 branches of his work; for instance, to give the first part 
 of his day to consulting the morning mail, then to consider 
 orders and applications for credit — this business demands 
 prompt attention and cannot be side-tracked — he may then
 
 THE CREDIT MAN 253 
 
 turn to his correspondence, after this take up the question 
 of collections, and so on, so that he would not only become 
 accustomed to the routine, but that others may know the 
 best times to approach him without unduly interfering 
 ■with his duties. This progTamme is a mere suggestion, but 
 its application, either in modified or amplified form, 
 would be of assistance to the credit man in establishing a 
 reputation for systematic management that every good 
 business man desires to possess. 
 
 CREDIT OFFICE MECHANICS 
 
 The duties of the credit office include the arrangement 
 and preservation of credit information. It is important 
 that the records be promptly filed in order that they may 
 be in convenient form for reference. It would be useless 
 to attempt to prescribe any single plan for the filing of 
 credit information, as the ideas of credit men on this sub- 
 ject are extremely varying. No particular principle is 
 involved and consequently the credit man avails himself 
 of the devices that are most pleasing to his fancy. The end 
 desired is to provide a system demanding the least possible 
 labor and at the same time conducing to quick action when- 
 ever it is necessary to refer to these papers. 
 
 CREDIT REFERENCE CARDS 
 
 The crux of good credit work lies in the ability of the 
 credit man to handle a larger amount of sales each year 
 and reduce the average of losses from bad debts. Any man 
 can avoid making bad debts if he desires to do so ; in other 
 words, he can attain this result by arbitrarily eliminating 
 every account excepting those of undoubted standing. 
 This policy, if followed, would mean that the sales of a
 
 254 CREDIT AND ITS USES 
 
 house might be reduced to such an extent as to impair the 
 })ossibility of profit-making. There is a very large per- 
 centage of trade that must be done with people whose 
 responsibility is not the highest, and the great percentage 
 of them are safe debtors ; there is still another class looked 
 upon as of doubtful responsibility, and even many of them 
 manage to pay their accounts within a reasonable time, 
 although it is in these two classes that the element of risk 
 largely prevails. Mr. Cannon, in his paper on " Credit, 
 Credit Man, and Creditor," says on this point : 
 
 " It is not a question of how many goods can be sold, but what 
 volume of business can be transacted with only minimum losses 
 from bad debts, and how sales can be increased each year, with a 
 decrease in the percentage of losses." 
 
 The number of accounts handled by the larger concerns 
 
 in the staple lines has become so great that it is an impossi- 
 bility for a credit man to remember all the essential facts 
 relating to each account. If his memory be good, he may 
 be able to retain a general idea as to the status of each ac* 
 count ; still, there are so many details involved that if he 
 attempts to treat them all from memory, he will overtax 
 himself. In order to obviate this difiiculty the card-index 
 system has been employed to provide the credit man on 
 short notice with the status of each account. He can use 
 these cards either in interviews or in handling collections 
 or general correspondence. The credit man of one of the 
 largest industrial corporations has given the writer the fol- 
 lowing description of his method. It is a very interesting 
 illustration of the method and its utility: 
 
 "We use a large filing case containing folders, placed vertically, 
 and nimabered from 1 upward, each representing some customer, 
 or prospective customer. An index book gives the mmaber of the
 
 THE CREDIT MAN 255 
 
 folder opposite the customer's name. Each folder contains all 
 the information that we have been able to secure concerning the 
 credit status of the customer, including correspondence appertaining 
 to the account, which might in future shed some Ught upon our busi- 
 ness relations. 
 
 "In conjunction with tliis, we have a card system for the pur- 
 pose of ready reference, which, aside from being very convenient, 
 we have found almost a necessity. There is a card for each cus- 
 tomer, bearing on its face a number to correspond with that of the 
 folder, and also the name, address, business, ratings, terms, and 
 expiration and tonnage of the contract. On the reverse of the 
 card is a digest of the information at our command in regard to the 
 customer. This illustration shows a specimen card, picked out at 
 random, a fictitious name being substituted. 
 
 No. 305. 
 
 Name — John Doe Publishing Co. 
 Address — Doeville, B. J. 
 Business — Pubs. 'Morning Screecher.' 
 Ratings — Terms! Net 30 days. 
 
 B. 35M-50— Mist July, 1905. 
 D. 35M-50M— Good. 
 Contract: 1,600 tons. Jan. 1, 1906. 
 
 Incorporated 1888, under laws B. J., auth. cap. 
 50M; 25M paid in. Statement Aug. '02: Assets 126M; 
 surplus 72M. Well regarded, reported prompt pay 
 and sold requirements without hesitation. 
 
 Estimated worth 40^1 net. 
 
 D.— 2-25-04. 
 
 Mar. '04: Gave mtge. 30M covering propertj% 
 
 Jan. '05: In view of mtge. capital rating withdrawn. 
 
 "This card is kept up to date, any change in the affairs of a 
 customer worthy of note being added. Thus I can hold the history
 
 256 CREDIT AND ITS USES 
 
 of a customer in the palm of my hand while conversing with him. 
 AVhere the credit man has to manage hundreds of accounts, he is 
 very likely not to remember important details about a customer 
 at the proper moment, and this card, I think, will obviate such a 
 possibility. For instance, I can hear somebody in the outer office 
 inquiring for me, the clerk will ask his name, which is 'Mr. John 
 Doe.' I then recall that 'Mr. John Doe' was to call this week in 
 reference to some accommodation. While he is being admitted, 
 I secure the customer's card, read it quickly, and know without 
 hemming and hawing just what to do. Also in approving a large 
 number of orders, these cards bring pertinent facts to mind." 
 
 Credit reference cards are not used to any gi'eat ex- 
 tent. Some credit men prefer to look over the credit in- 
 formation upon a man and also consult the ledger before 
 discussing with him the question of his slowness, an 
 extension of credit, or an extension of time on an account 
 that may be owing. If the material that should be incor- 
 j)orated in the credit reference cards is tabulated promptly, 
 as it should he, the credit man is saved many steps, and 
 there is given him in a brief space, just as explained in the 
 quotation, the data he should have before him. 
 
 Some years ago the ^STational Association of Credit 
 Men issued a credit reference card in connection with other 
 forms for credit-office use. This card was an extremely 
 simple form, 4| X 21 inches, and could be so arranged as 
 to contain entries referring to the amounts of the sales, 
 method of payment, and agency ratings for a period of 
 eight years ; in addition to this, leaving a small space for 
 notes that it might be necessary to make upon the card. 
 It requires considerable labor to keep these cards up to 
 date, but the benefits to be realized, especially in the credit 
 office of a large house, certainly justifies the expense of 
 making the tabulations with promptitude.
 
 THE CREDIT MAN 257 
 
 THE TACTFUL CREDIT MAN 
 
 A credit man of experience realizes to what an extent 
 he is dependent upon the good will of others for credit 
 information and other assistance which can be rendered 
 by his associates. It is necessary that he should be tact- 
 ful in his bearing toward those associated with him, but 
 just as essential that he should exhibit these qualities in 
 his relations with customers. When a customer is in dif- 
 ficulties he will be more willing to make known the ex- 
 act condition of his affairs, and at an earlier and therefore 
 safer time, to a credit man he looks upon as a friend than 
 to one he does not hold in that regard. If every case of 
 financial embarrassment were taken in hand at the proper 
 time, which means when the first acute state of embarrass- 
 ment develops, an amazingly large percentage of the losses 
 from bad debts could be saved and the retirement of many 
 men from business obviated. 
 
 CREDIT-OFFICE CORRESPONDENCE " 
 
 While the credit man may meet many of the customers 
 of his house, there are a large number of them he never 
 has an opportunity to meet, for the reason that they rarely 
 visit the market. When they do, it may not be convenient 
 for them to call at the credit office, although the practice of 
 liaving the credit man meet every customer Avho visits a 
 business house is one that should be followed. If it be 
 only to exchange the most formal gi*eeting, it is well that 
 he should have an opportunity to see the man to whom he 
 gives credit, and have the customer see the person with 
 whom he must necessarily conduct considerable correspond- 
 ence during the year.
 
 258 CREDIT AND ITS USES 
 
 The commonest faults appearing in business corre- 
 spondence are two : undue brevity and verbosity. A letter 
 that is too brief gives the recipient the impression that 
 the one writing it was pressed for time or did not consider 
 the subject of sufficient importance to give it more than 
 fleeting attention. Letters that deal with too much detail 
 or are unnecessarily long rarely possess any force and are 
 annoying to business people, for they have not the time to 
 give to unnecessary words or phrases. That which is most 
 desired, and naturally that which it is most difficult to 
 attain, is the mean between these two extremes, and the 
 credit man should endeavor to have his correspondence 
 represent the mean and neither of these extremes. 
 
 THE FALLIBILITY OF THE CREDIT MAN 
 
 One of the many debatable questions in the administra- 
 tion of credit is whether the credit man should be clothed 
 with full authority to pass upon the credits of his con- 
 cern, or whether there should be any reversal of his judg- 
 ment. It is a common practice for salesmen to appeal 
 from the decision of the credit man in regard to accounts 
 and induce his superiors to decide upon a course contrary 
 to that which he has outlined. There is much to be said 
 on both sides of this question. The credit man has to ac- 
 quire his experience in the same way that other business 
 men have acquired theirs. The first years of his experience 
 are largely years of tutelage, and there is no good reason 
 why his judgments should pass unquestioned. A man may 
 be appointed to the position of credit man and his ideas 
 may be extremely large, especially as to the amount of 
 credit he would accord to customers. It may be that the
 
 THE CREDIT MAN 259 
 
 concern is not in a position to spread its credit, and the 
 members of the concern are justified in exercising a re- 
 straining influence upon the credit man if he displays a 
 propensity to extend credits beyond the means of the house. 
 Nothing can be lost by conference between the credit man 
 and his firm on a point such as this, and, in fact, many 
 others that come to the surface in credit work. The credit 
 man may never have had an opportunity to meet the cus- 
 tomer, either in his own office or at the customer's place of 
 business; all that he knows has come to him through re- 
 ports which may be somewhat faulty, as reports often are ; 
 and, after all, if a house be willing to trust a man, even 
 though the opinion of the members of the firm be dif- 
 ferent from that of the credit man, it does not always fol- 
 low that the house is wrong and the credit man right. 
 
 After a man occupies the position of credit man for 
 a long period of years it is very seldom that there is any 
 dissent from his views or that an appeal is taken from his 
 decisions. The house has then realized, and the salesmen 
 have come to learn from the excellent record the credit 
 man has made, that it is advisable, unless some unusual 
 circumstances should suggest otherwise, that the credit 
 man be permitted to pass on the credits without let or 
 hindrance. 
 
 PAPERS AND PERIODICALS AS SOURCES OP 
 CREDIT INFORMATION 
 
 There is another source of credit information which 
 can be utilized to advantage, and that is regular consulta- 
 tion of the trade and daily papers for items affecting finan- 
 cial news, crop reports, industrial conditions, depressions, 
 and labor difficulties, and also notices in respect to litiga-
 
 260 CREDIT AND ITS USES 
 
 tion affecting debtors. Mr. H. H. Sanger, in his article 
 on " A System for a Bank's Credit Department " in The 
 Credit Man and His Work, calls attention to this, and 
 expresses the opinion that credit men should carefully read 
 the financial pages of the morning papers. To the writer's 
 knowledge there is a certain banking credit department 
 where it is the special duty of a clerk to perform this class 
 of work every morning, and everything that would possibly 
 be of any interest to his credit department is underscored 
 and clipped so that it may be filed with the regular credit 
 information ; in addition to which the clippings are care- 
 fully looked over by the credit man and later in the day 
 referred to the officer of the bank who is in direct charge 
 of credit matters. Possibly through this information lines 
 of action are suggested and initiated long before other 
 banks that are not as careful in the acquirement of this 
 particular form of data have discovered any developments 
 that might lead them to take similar action. 
 
 THE CREDIT MAN AS A STUDENT OF LAW 
 
 In all discussions of credit w^ork and the attributes of 
 credit men there is some mention of the question as to how 
 far a credit man should familiarize himself with law. In 
 certain works on the subject of credit it has been the prac- 
 tice to insert a number of legal decisions bearing upon 
 debtor's responsibility under signed statements, and kin- 
 dred subjects. Xearly all credit men consult the legal 
 periodicals, and every encouragement should be given to 
 this practice. In addition to this, credit men are studying 
 law, feeling that it wiU be of great help to them in the 
 performance of their duties. ISTone of this, however, 
 means that the credit man should become his o\vn lawyer.
 
 THE CREDIT MAN 261 
 
 Credit work is one distinct profession and the law is an- 
 other. To attempt to merge them in practice would prob- 
 ably impair the efficiency of the duties discharged. Most 
 credit men have not the leisure to devote themselves to the 
 study of law. Those credit men who have, no doubt with 
 great sacrifice, given their time to this study have not been 
 able to acquire more than a general knowledge of its mean- 
 ings. A smattering of law is helpful in increasing a man's 
 general knowledge, but it does not mean that every man 
 who has read some law is competent to act as counsel. 
 
 Hardly any two cases arising in litigation are exactly 
 alike. While the same law may apply to them, in nearly 
 every case there is some little detail that is different from 
 that of the other. If, therefore, a credit man has a matter 
 which he considers should be passed upon by a la^vyer it 
 is essential that he should consult a man who is thoroughly 
 advised of the daily developments under court decisions. 
 A decision rendered in the month of January in a certain 
 State in regard to the liability of a debtor under a signed 
 property statement, whether it be a civil or a criminal 
 matter, may not be of the slightest value in ten months 
 from that time. A credit man may understand the laws 
 of a certain State in respect to property statements or 
 chattel mortgages, deeds of trust, etc., but this knowledge 
 may be of no value to him if he attempts to apply it to a 
 person residing in a different State. Prior to the passage 
 of the National Bankruptcy Act it was necessary that a 
 credit man should have a good deal of general information 
 respecting the State collection laws. This he gradually 
 assimilated, because of his conference and correspondence 
 with lawyers. It might be said that under the N'ational 
 Bankruptcy Act, if a credit man is well informed on 
 18
 
 262 CREDIT AND ITS USES 
 
 bankruptcy law, he does not require active counsel. This 
 is also a dangerous position to take, for new law is being 
 written in bankruptcy jurisprudence every day. Tlie 
 courts are rapidly developing a most extensive range of 
 interpretation of this law, and action taken without the 
 advice of competent counsel might lead to unfortimate 
 results. The writer's views are those of a layman and 
 one who has had considerable practical service in credit 
 work, and they are designed to indicate the line of demar- 
 cation beyond which the credit man should not attempt to 
 perform the functions of the lawyer.
 
 CHAPTER XVI 
 
 COLLECTIONS 
 
 (A) Collections: Their Nature — Systematic Methods — • 
 Unfavorable Developments: Their Effects Upon 
 Further Credit — Treatment of Tardy Accounts — 
 Collections Through Drafts: Draft Systems 
 
 COLLECTIONS: THEIR NATURE 
 
 The collection of accounts is one of the most interest- 
 ing duties of the credit man. Every good credit man is 
 not a good collector and the best collectors are sometimes 
 not the best credit men. Some men possess excellent ca- 
 pacity for analyzing credit information and selecting credit 
 risks ; but they fail to give to collections the same efficient 
 service, and in this way nullify the good effects of their 
 preparatory work. Accounts often regarded as worthy 
 may, as time goes on, develop certain weaknesses. Con- 
 ditions may develop during the term of the credit, espe- 
 cially if it be a long one, that could not have been foreseen 
 by the credit man or anyone else. 
 
 Unless accounts are collected in full a loss results 
 which, if pronounced, adversely affects the credit man's 
 administration. The functions of the credit office are de- 
 signed to prevent losses ; consequently, when losses occur, 
 it is supposed that the credit man has misjudged the char- 
 acter of the account, or has been unable to effect a satis* 
 
 263
 
 264 CREDIT a:nd its uses 
 
 factory collection. In either event the queetion of credit 
 is affected 
 
 The success of a business is determined to a large ex- 
 tent by the character of its collection service. Unless a 
 house makes its collections with promptitude it will be 
 embarrassed by lack of funds. No matter how ample its 
 facilities for credit accommodation at its bank or through 
 other friendly sources, there comes a day of liquidation, 
 when it must depend upon the funds acquired from the 
 collection of its accounts. Many houses have been forced 
 into insolvency simply because their accounts were not 
 collected promptly. This laxity affords opportunities to 
 debtors for many kinds of imposition. The longer an 
 account remains uncollected the greater the liability to 
 certain developments which make it impossible for a 
 debtor to render payment at all. A house that is in the 
 habit of making its collections with the celerity that should 
 characterize this branch of credit office work is usually a 
 house that is " in funds " and has occasion to ask for the 
 least accommodation; in addition, it commands the best 
 terms in the market for its own purchases, as people are 
 willing to extend to it better terms or discounts than they 
 would accord to those from whom they could not expect 
 either immediate or reasonably prompt payment. Some 
 houses make purchases of large amounts of goods at low 
 figures, because they are in a position to pay cash, or at 
 least comply with the shortest possible credit term that the 
 selling house may suggest. Having bought these goods on 
 advantageous terms, they are in a position to offer them 
 to the trade at prices that readily appeal to purchasers. 
 Houses without the means of prompt payment cannot make 
 such purchases and consequently are unable to compete
 
 COLLECTIONS 265 
 
 ■with their more fortunate neighbors. The importance of 
 collections in this relation to credit work cannot, therefore, 
 be overestimated. 
 
 The character of accounts has a material bearing upon 
 the possibilities of prompt collection. When a credit man 
 has selected customers of a very desirable character, little 
 if any difficulty need be looked for in the collection of the 
 accounts, providing collection is resorted to with prompti- 
 tude. When, on the other hand, the credit man realizes 
 that some of the accounts he has selected are not of the 
 first class, he must of necessity anticipate difficulty in en- 
 forcing prompt collection. Tt has already been intimated 
 that in a large business trade cannot be confined to first- 
 class accounts without seriously curtailing the sales, which 
 curtailment might be harmful. It may be accepted as a 
 truism that in most cases a man can anticipate when he 
 accepts an account just what will be the possibilities of 
 prompt collection. The prudent credit man will keep the 
 question of collections constantly before him from the time 
 he is first considering an account, and never lose sight of 
 the fact that a good credit also involves satisfactory col- 
 lections. 
 
 Too much insistence cannot be placed upon the great 
 merit of prompt action when an account becomes due. 
 No debtor should have any objection to receiving on the 
 due date a statement of his account. A man has the right 
 to ask for that which is due him at the end of the term 
 nominated in the bond, and his best interests demand that 
 he should avail himself of that right. It is remarkable to 
 ■what an extent men are inclined to pay their accounts 
 quickly if payment is demanded with promptness. On 
 the other hand, if a house is dilatory in requesting pay-
 
 266 CREDIT AND ITS USES 
 
 ment, debtors will be just as dilatory in rendering settle- 
 ments. Another thing: the question of payment is deter- 
 mined largely by existing conditions. If a man receives 
 a statement of an account due and he has had a satisfactory 
 business for a few days, he is more apt to make payment 
 promptly than if circumstances were not so propitious, so 
 that the credit man who asks for payment when it is due 
 is usually the man who receives it promptly. 
 
 SYSTEMATIC METHODS 
 
 When a credit man is supposed to direct the collection 
 of a large number of accounts, it is necessary that he em- 
 ploy some systematic method whereby he may be well in- 
 formed in regard to their status. With a view to system- 
 atizing and minimizing the labor imposed upon the credit 
 man incident to collection work, many systems of card 
 indices have been invented and are in use. These cards 
 are on the same general order as the credit reference cards 
 described, and there is no reason why one card could not 
 be made to answer the purposes of both credit and collec- 
 tion references. There are also cards known as maturity 
 slips, used to indicate the maturity of accounts. These 
 cards are kept in a tickler, so that the credit man (or 
 collector in the credit oflBce) may be reminded that such 
 accounts are either due on certain dates or that payment 
 on overdue accounts should be forthcoming upon such 
 dates. 
 
 The institution of tickler systems has undoubtedly 
 conduced to system in collections and has also influenced 
 a better attention to collections. It is an easy matter for 
 a credit man or his collector to turn to a tickler, pick out 
 the cards that stand in a certain day, and see with a very
 
 COLLECTIONS 267 
 
 few glances from whom payments should be forthcoming. 
 This is a great improvement over the old method, accord- 
 ing to which credit men depended very largely upon their 
 memories or memoranda made upon blotters or diaries, 
 for these memoranda usually referred only to extreme 
 cases and not to a large number of accounts, full informa- 
 tion in regard to which can be obtained within a few 
 minutes by consulting the tickler. The following rather 
 novel plan has been recommended by a credit man of a 
 well-kno\\Ti Xew York concern: 
 
 "All statements for accounts just matured are handed to a 
 stenographer whose duty it is to make a record of the statement; 
 gi\'ing date of bills, amount in total, name, address, and ledger folio. 
 
 "This is accomplished by the carbon system, to wit: Slips are 
 cut similar in size to an envelope, as to width, and a trifle larger as 
 to length ; thus the operator is able to address her enA'elope and make 
 the major portion of her record at one writing, and other details 
 being filled in without removing the matter from the machine. 
 
 "These slips are then placed in a daily tickler, allowing reason- 
 able maihng time for a response. 
 
 "Each day these slips are removed from the tickler by the 
 assistant credit man, whose duty it is to look them up, and dispose 
 of those paid, and hand me those remaining unsettled." 
 
 Although much more could be said in favor of suchi 
 systematic methods as have been suggested, there is no 
 evidence that they are universally popular among credit 
 men. Some men say that after experimenting with card 
 systems they have found it advisable to discard them en- 
 tirely and depend upon the old-fashioned method of look- 
 ing after collections. It is found, however, that it is usu- 
 ally among houses that do not have a large number of 
 accounts that the card and tickler systems are not popular ; 
 although a credit man who claims to have eight thousand
 
 268 CREDIT AND ITS USICS 
 
 accounts has told the writer that he prefers the old method 
 of examining his ledger at least twice a month and depend- 
 ing upon it for such information as he requires from time 
 to time in respect to accounts. It has also been the writer's 
 ex])erience that many other credit men have a strong pref- 
 erence for this method of examining ledgers. Some also 
 believe that it is a wise thing to go over the ledgers with 
 the salesmen and discuss each account in which they may 
 be interested, as this gives the salesmen an excellent idea 
 of the condition of their customers' accounts and imposes 
 upon them an added sense of responsibility in promoting 
 the practice of prompt payments among customers. 
 
 There is much that may be said as to the advantages 
 and disadvantages of these different methods for " watch- 
 ing accounts." While the labor of keeping credit reference 
 and collection cards is considerable, this work can be done 
 by subordinates, and the necessary tabulations need not 
 impose any labor upon the credit man. After this tabula- 
 tion has been made and the cards are ready for his inspec- 
 tion at all times, he can consult them with greater ease 
 than he could refer to the ledger. For instance, the tickler 
 may be kept on his desk, and he is not distracted by hav- 
 ing to leave his own office and go to the Accounting Depart- 
 ment. When we appreciate that the credit man is a very 
 busy person, the question of time and labor saving is an 
 important one. The credit man who understands how to 
 economize his time and labor can devote more atten- 
 tion to the thoughtful work pertaining to his duties and 
 the mechanical portions need not give him much concern. 
 In addition, if a credit man desires to look over the ledger 
 in the daytime, he disturbs the bookkeeper and this makes 
 for delay, probably occasioning night work, which should
 
 COLLECTIONS 269 
 
 be avoided. There are times for work and for rest, and 
 the credit man who does not find it necessary to carry his 
 labor into the time that should be devoted to rest is usually 
 the man who is in the best physical and mental condition 
 and the best able to discharge his duties. 
 
 UNFAVORABLE DEVELOPMENTS— THEIR EFFECTS UPON 
 FURTHER CREDIT 
 
 A credit man on being asked to what influence he 
 attributed the large percentage of losses from bad debts 
 replied : 
 
 "In my judgment, losses do not arise from opening the wrong 
 kind of accounts nor from the want of skill in closing them, but 
 principally in the handling of accounts while they are alive." 
 
 This opinion certainly explains the causes of many 
 losses. During the pendency of an account the credit man 
 should be on the alert to detect any unfavorable conditions 
 that may arise ; and if there be no good reasons for imme- 
 diate interference with the debtor, he should at least insist 
 upon prompt payment at maturity. Too frequently, in 
 the face of unfavorable circumstances, the credit man hesi- 
 tates to take action because the account has still some time 
 to run, and awaits the due date in the hope that payment 
 may be made and the necessity for attempting to enforce 
 it obviated. It is upon this rock that many credits are 
 shipwrecked. 
 
 Tardiness in settlements is always a danger signal. A 
 credit man may learn before an account falls due that the 
 debtor has become slow in his pa^Tuents with others. Due 
 recognition should be given to this fact the same as though 
 it were the credit man's own account which was lagging.
 
 270 CREDIT AND ITS USES 
 
 Tardiness in making payments is the most common symp- 
 tom of financial weakness, and business collapses are 
 invariably preceded by slowness in making payments. Dil- 
 atory payments arise from many causes — business depres- 
 sions, extravagance, too large expenses, overstocking, poor 
 business methods, unwise investments in outside enter- 
 prises, or sickness and death in the immediate family of 
 the merchant. These are among the principal causes. 
 When payments are tardy the credit man should imme- 
 diately investigate the causes. He may find that they have 
 arisen from conditions that were entirely beyond the con- 
 trol of the merchant; or that the merchant is directly re- 
 sponsible for them. The credit man must determine what 
 has occasioned delays in pa3Tnents, otherwise he will be 
 at a distinct disadvantage, as it is obvious he cannot ex- 
 tend intelligent management to an account unless he is 
 reliably informed in regard to the actual condition of the 
 merchant's affairs. It is at this period in the life of an 
 account that the credit man is confronted with one of the 
 most delicate and trying problems in credit economy. He 
 must decide whether to insist upon a settlement necessitat- 
 ing, in all probability, the adoption of radical measures, 
 thus attracting the attention of other creditors who will 
 in turn take similar action with the possibility of forcing 
 the debtor into insolvency, or trust to circumstances. 
 
 It is well known that many merchants have been forced 
 into insolvency or liquidation, with great loss to themselves 
 and their creditors, because certain credit men have adopted 
 strong measures, when a policy of lenity coupled with 
 prudent administration by the creditors would have main- 
 tained the estate whole. If the causes which have occa- 
 sioned the merchant's slowness are found to be entirely
 
 COLLECTIONS 271 
 
 legitimate, and his liabilities bear such relations to his 
 assets as would suggest good prospects for recovery, an ex- 
 tension of time may be conceded with a fair degree of 
 safety. It is well understood that too large a measure of 
 indulgence on the part of creditors is very often the basis 
 of imposition by debtors, who divert the graciousness of 
 their creditors into a means whereby they may make 
 preparations for failures at such times as will best serve 
 their own purposes. When a merchant finds it necessary 
 to ask the consideration of his creditors on accounts al- 
 ready owing, the corollary is that they must continue to 
 furnish him with goods in order to meet the demands of 
 his trade and maintain his stock in fresh and salable con- 
 dition. The word " must " as used may indicate something 
 of a more mandatory character than is really intended, 
 as creditors cannot be compelled to furnish a merchant 
 with goods unless they feel disposed to do so; but they 
 are under mandatory influences, for their failure to supply 
 the merchant with goods will embarrass his possibilities 
 of continuing in business under favorable conditions ; the 
 fact that he is owing so generally almost inhibiting him 
 from seeking credit in new quarters. So that, while the 
 creditors are depending upon the possibility of the mer- 
 chant's success in order to secure payment of their ac- 
 counts, he must depend upon them for the means whereby 
 he will be able to continue in business. 
 
 It is at this particular time that the elements of char- 
 acter and capacity play a momentous part in credit, for the 
 capital may be impaired or be in danger of imminent im- 
 pairment. The merchant's good character will lead him to 
 deal honestly with his creditors and safeguard their inter- 
 ests so far as he may be able to do so. The element of
 
 272 CREDIT AND ITS USES 
 
 capacity will serve him in developing the business and 
 bringing success out of what might have proved a failure. 
 Sentiment has much to do with directing the judgment 
 of the credit man in the same degree that it influences the 
 doings of men in every department of life. Although 
 many brave attempts are made to prove that in these days 
 sentiment is an immaterial quantity in business affairs, 
 the fact remains that probably nowhere does sentiment 
 prevail to a greater extent than in credit work. When 
 a merchant has patronized a house for many years, bought 
 from it a large portion of his goods, paid promptly, and 
 ostensibly held the house in high esteem, it is difficult to 
 eliminate the influence of sentiment when the house 
 finds it is called upon to bear with that merchant because 
 his business has taken a backward turn. Some men are so 
 constituted that they can disregard the favors of a life- 
 time and the obligations that are supposed to follow such 
 favors, but these men represent a very small number. 
 Except where a house controls a specialized article, busi- 
 ness is to a great extent a matter of favor which a mer- 
 chant extends according to his personal preferences, either 
 for the salesman or the proprietor of a concern. AVhcn 
 such a merchant becomes slow in his payments the credit 
 man is supposed to display that Spartan impartiality that 
 knows no friendly ties. While he may consider that from 
 a material point of view it would be better for him to 
 assume this attitude, it is still true that there are only a 
 few credit men who can bring themselves to occupy it. 
 It is a question of either bearing with the merchant or 
 cutting him entirely aloof and adopting such means for 
 the collection of his account as the most cold-blooded and 
 sordid considerations would suggest Mr. Fred. A. Smith,
 
 COLLECTIONS 273 
 
 the credit man of the well-known house of Reid, Murdoch 
 & Co., of Chicago, recently wrote a paper on this very topic, 
 entitled " When to Let Go of an Old Customer." He 
 says on this point: 
 
 "The question then naturally arises, How should such cases be 
 treated? I beUeve the simplest way is to avoid them by watching 
 all delinquent accounts more closely, renewing information more 
 frequently on old customers that are inclined to be slow, secure 
 cooperative experience of others selling the same party, either 
 direct or through a clearing-house sj^stem, and if found that other 
 creditors are having a similar experience, it is high time to demand 
 an exact showing of actual conditions, either by a ' heart to heart ' 
 personal inter\aew or securing a property statement by correspond- 
 ence, and draw your conclusions as if a new account was being 
 opened, barring all sentiment. 
 
 "If the customer cannot be shown in a kindly manner that 
 his boat is nearing the rocks, both time and money will be wasted 
 by all concerned in encouraging further extensions or increasing the 
 indebtedness. Such an account should be gi-adually closed, re- 
 taining the friendship of the customer if possible. At such times, 
 however, every conscientious credit man should rise above the sordid 
 question of dollars and cents, and realize that to a certain extent 
 the debtor's entire future is at stake and may rest entirely in his 
 hands, or depend on the advice given or action taken at such crucial 
 periods. No mistake should be made, as the future interests and 
 welfare of not only the debtor, but his family as well, are involved, 
 and a false move may result in a hfe failure or perhaps a tragedy 
 that might have been avoided by the right word or good advice 
 from a creditor. This confirms my former statement that closely 
 watching the business pulse of the customer, as shown by his ledger 
 accoimt, may prevent the disease advancing to a serious stage, and 
 by showing the man the cause of his troubles bring about a change 
 of methods — the same as a good physician will use every means to 
 effect a cure before resorting to heroic methods of surgery. Oc- 
 casionally a man shown his weakness by a stranger with whom he 
 tries to open an account will reahze that his old friends were correct 
 in giving the same advice, to which he had taken exception."
 
 274 CREDIT AND ITS USES 
 
 Mr. Smith's views are in line with the Best thought 
 among credit men on this subject, when he advises that 
 such accounts be carefully watched and information re- 
 specting them re^^sed so that the credit man may take 
 advantage of any facts brought to light in these investi- 
 gations. Personal contact and interviews with the cus- 
 toiner so circumstanced will be a great aid to the credit 
 man in determining upon the best course to pursue. In 
 addition to all this, as Mr. Smith well says, the customer's 
 entire future and the welfare of himself and his family 
 may possibly depend upon the judgment displayed by 
 credit men in their treatment of him when he has become 
 dilatory in his settlements. ISTo credit man would want 
 to feel that through undue pressure on his part he had 
 been responsible for the downfall of a merchant, espe- 
 cially if by kindliness and a greater interest in the out- 
 come of the merchant's affairs he might have assisted 
 him to escape from his embarrassment. 
 
 TREATMENT OF TARDY ACCOUNTS 
 
 When accounts are not paid at maturity, the credit 
 man must resort to certain means for inducing payment. 
 It is principally to guard against the possibility of over- 
 looking such accounts that systematic methods have been 
 instituted. There is danger, however, that a too rigid 
 application of certain collection systems may in the end 
 defeat their own good purposes. The time required to 
 exhaust the utilities of these systems may have brought 
 the debtor from the point where payment might have 
 been secured through more effectual means, to where it is 
 almost impossible for him to make payment under any cir- 
 cumstances. For instance, a credit man has explained
 
 COLLECTIONS 275 
 
 his system thus : If an account is not paid within ten days 
 from maturity, he makes a draft for the amount payable. 
 If this draft is not paid within ten days, he writes a letter ; 
 if no response is received to this letter within ten days, 
 a second letter is written; if within ten days from the 
 mailing of the second letter no attention is paid to the 
 account, he makes a threat to send it for collection, and if 
 within ten days from the making of that threat the claim 
 is not paid, it is then sent to an attorney. The writer has 
 no intention of impugning the utility of this particular sys- 
 tem as applied in certain trades. It may be entirely effica- 
 cious in some but it would not be in others, as the lapse 
 of time occurring where all the features of this plan were 
 followed might negative the possibility of making a col- 
 lection. 
 
 Unless given judicious assistance, debtors are more 
 inclined to go from bad to worse than from bad to better, 
 and while it is freely conceded that credit men, especially 
 in these days, must employ systematized methods (the 
 large number of accounts they handle necessitating this 
 if other good reasons did not), we are brought back to the 
 idea underlying all credits and all collections, viz., that 
 every account should be judged on its merits, whether at 
 the time it is opened, during the time it is running, or 
 when due. Machine methods, while they may suffice for 
 small accounts, are not adequate as a governing force for 
 accounts generally. All trades seem to differ in their 
 habit of treating collections; the habits and standing of 
 men differing so radically, uniform treatment of them is 
 out of the question. 
 
 In certain trades it is the custom to immediately make 
 a draft on a person if he does not pay his account, and
 
 276 CREDIT AND ITS USES 
 
 advices to this effect are printed on the statements of the 
 account when rendered. Some merchants care so little 
 whether or not drafts are made upon them that they pur- 
 posely delay paying their accounts, knowing that a draft 
 will he made, and they thus get the advantage of the addi- 
 tional time. Creditors attempt to overcome this practice by 
 charging interest on the account for the excess time; but 
 they are not always successful in collecting it. As a gen- 
 eral rule, the debtor gets the advantage, and this petty 
 imposition (as well as many other similar impositions on 
 creditors) will obtain until business men insist upon cer- 
 tain regulations being respected by those to whom they 
 sell. The thirst for business, however, leads houses to 
 countenance these unfair practices, and the creditors are 
 largely to blame for their prevalence. 
 
 In some trades, when an account is not paid at ma- 
 turity, the credit man writes to the customer, requesting 
 an explanation for the omission and asking that a settle- 
 ment accompany the reply. The credit man in his letter- 
 writing may either do much to induce quick payment, or 
 offend and antagonize the debtor. A credit man of long 
 experience has remarked 
 
 " , . . that dignity and businesslike methods in corre- 
 spondence are appreciated as fully by a delinquent debtor as by 
 anyone else." 
 
 If a debtor will not make a satisfactory reply to a 
 letter, especially one that merits proper attention, there 
 is little reason to suppose that he will pay a draft except 
 on the presumption that some merchants do not like to 
 have drafts made upon them. The draft system has been 
 developed to such an extent that in many trades the old
 
 COLLECTIONS 277 
 
 disinclination of debtors to have drafts made on tliem has 
 largely disappeared. The sting has been taken out of the 
 process, so that why the making of a draft should be the 
 next step per se is not entirely clear. The credit man 
 possibly thinks that the making of a draft may afford him 
 further and more satisfactory evidence of the debtor's 
 unwillingness to pay, and thereby suggest such further 
 action as may be necessary; again, there is always the 
 Jiope that the making of a draft may produce payment. 
 The system employed by one of the most representative 
 dry goods concerns of the Middle West is to mail a state- 
 ment of an account when it is due, and if within ten days 
 from the time that the statement is mailed no response 
 is received, to send a lithographed letter, which reads as 
 follows : 
 
 "Is there any misunderstanding relative to the amount now 
 due upon your account, according to the statement mailed to you 
 about ten days ago? 
 
 "Kindly let us hear from you at your earliest convenience. 
 Very truly yours." 
 
 If no reply be made to this letter and the amount be a 
 small one (less than $500), a draft is then made for it. If 
 neither payment nor a satisfactory explanation be forth- 
 coming, one of the regular adjusters from the credit office 
 calls upon the customer, although when the accounts are 
 small they are sent to an attorney. The credit man of 
 this concern has said to the writer: 
 
 "We find by having our own representative investigate the 
 case upon the ground, discoveries are often made which are most 
 valuable, and if the customer is responsible but careless, the account 
 is not lost by a procedure of this kind, considering that we only 
 employ diplomatic adjusters who do not publish their business iu 
 the town where the merchant resides." 
 Id
 
 278 CREDIT AND ITS USES 
 
 This method seems to more nearly approximate a broad 
 and judicious treatment of accounts than a recourse to 
 stereotyped letters, drafts, or collection letters, especially 
 as the system brings about an early and practical investi- 
 gation of the customer's affairs. This is not possible under 
 systems that consist solely in letters, drafts, or collection 
 forms, as the loss of time incident to the use of these 
 methods is considerable and therefore an element of 
 danger, 
 
 COLLECTIONS THROUGH DRAFTS— DRAFT SYSTEMS 
 
 The practice of making drafts upon customers for 
 overdue accounts is quite an old one. Except where it is 
 ft regular feature of collections and tacitly agreed to by 
 debtors, the sending of a draft is accepted as an indication 
 of the creditor's desire to insist upon payment forth\vith, 
 and sometimes as an unfriendly action. The limit of in- 
 dulgence permitted before a draft is made depends to a 
 great extent upon the views of the credit man as to how 
 much extra time should be allowed. Some credit depart- 
 ments are perfectly willing to wait for ten days after mail- 
 ing a statement before making a draft, while others send a 
 draft if an account is not paid by return mail; others 
 allow from three to five days, but there is no established 
 rule. For the collection of small accounts the draft sys- 
 tem undoubtedly has its advantages, and because of these 
 advantages the collection agencies some years ago devised 
 methods by which drafts could be utilized to collect claims 
 from delinquent debtors. The collection agencies pre- 
 pared these drafts, to which were attached stubs directing 
 that in the event of non-pajTnent the banks delivering 
 the drafts hand them to the attorneys named in the stubs.
 
 CX)LLECTIONS 279 
 
 The debtor could thus see that his refusal to honor the 
 draft would bring him face to face with the unpleasant 
 alternative of inviting an attorney's attention to his 
 affairs, a contingency which men prefer to avoid. 
 
 The draft system in its original form — i. e., as unre- 
 lated to the work of collection agencies — has had a very 
 thorough test, and many believe that its results are ex- 
 cellent. The making of drafts has also developed a point 
 of difference between banks and credit men. The latter 
 hold that banks should be willing to give the most careful 
 attention to the handling of drafts, irrespective of the 
 possibilities of making collections; also that the banks 
 should be satisfied with the slight collection charges they 
 deduct when drafts are collected. The recompense for 
 handling the larger nimaber of drafts that are not paid 
 has not been made clear, except by some credit men, who, 
 taking a broader view of this subject, inclose a remit- 
 tance of ten or fifteen cents with each draft, so that no 
 matter whether it be paid or not, the bank has received 
 some compensation for its trouble. Credit men who fol- 
 low this practice state that they have no difficulty in 
 making such collections through banks, and that the 
 drafts they send forward in this way are given courteous 
 and efficient attention. 
 
 The collection-agency draft system also has many ad- 
 vocates among credit men who consider that it is an effica- 
 cious method of handling dubious accounts. There are 
 others quite as positive in their condemnation of the plan, 
 asserting that systems which provide for handing an ac- 
 count to an attorney in the event that the draft is not 
 paid do more harm to the merchant than if the account 
 had been sent to an attorney in the first place. There is
 
 280 CREDIT AND ITS USES 
 
 merit in this adverse criticism. When a credit man uses 
 one of these collection-agency drafts, he is calling the 
 attention of the bank to the fact that he regards the 
 account as being in such condition that if the draft be 
 not paid it should be given to an attorney. Giving an 
 account to an attorney is the last step, and the conse- 
 quence may be an injury to the reputation of the debtor. 
 It may be contended that when a man will not pay he is 
 not entitled to any consideration, and that there is no rea- 
 son why he should be protected from such knowledge becom- 
 ing public. The creditor's ability to collect an account 
 may depend upon the knowledge of the debtor's unsatis- 
 factory condition not being a matter of publicity. The 
 moment it becomes such, the attention of all creditors is 
 invited, with consequences to which we have already called 
 attention, viz., forcing the debtor into insolvency; so that 
 for his own sake the creditor should abstain from doing 
 anything that would adversely affect the possibility of 
 payment being secured. The draft systems employed by 
 collection agencies prove attractive to credit men because 
 there is little expense attached to them. Some agencies 
 charge a regular subscription price, and as a part consid- 
 eration furnish the creditor with books or pads of drafts 
 which he can use whenever he desires. In other cases the 
 drafts are sent through the collection agency, and the 
 charge is a very moderate one.
 
 CHAPTER XVn 
 
 COLLECTIONS — Concluded 
 
 (B) Collection Letters — Attorneys-at-Law as Collectors — 
 Adjustment Bureaus or Administration by Creditors 
 — Suspended Accounts 
 
 COLLECTION LETTERS 
 
 FArLUEE to pay an account when a draft is made is 
 usually an indication that a debtor's delinquency is of 
 a pronounced character, and it is then deemed advis- 
 able to adopt some course that will prove more effective. 
 Some houses prefer to make several drafts, for the reason 
 that the expense entailed is trifling, but an unpaid ac- 
 count always reaches a stage in which the draft is in- 
 effective and some different method must be employed. 
 With many concerns this method consists of sending what 
 is called a " collection letter." This is a printed form 
 containing spaces for entries of the name and address of 
 the debtor, the amount of the claim and such other data 
 as it is not possible to include in the perfunctory printed 
 matter. The collection letter is an outgrowth of systems 
 devised by collection agencies, and is a distinct method of 
 enforcing collections, especially in cases where the debtor 
 is a confirmed delinquent. These collection letters usu- 
 ally consist of a series of communications, the first being 
 
 281
 
 282 CREDIT AND ITS USES 
 
 a temperate notification that payment is expected; if no 
 adjustment of the claim results from the sending of this 
 letter, one couched in firmer language is then forwarded. 
 If the debtor still prove recalcitrant, an even stronger 
 communication is sent, stating that it is the final attempt 
 to collect the claim in an amicable way and that recourse 
 to legal proceedings will be the next step. 
 
 A short time ago some enterprising collection concerns 
 conceived the idea of preparing series of collection letters 
 on the order described, accompanied by envelopes bearing 
 the name of the agency, and selling them in lots to those 
 engaged in giving credit, who would dispatch them to 
 delinquent debtors; the impression made upon the mind 
 of the debtor was that the communication had come to 
 him direct from the collection agency. This practice is 
 now a general one, and there are a number of concerns 
 whose principal business it is to prepare and dispose of 
 these so-called " collection letters." Prior, however, to 
 the institution of this practice, many trade organizations 
 conducted adjustment and collection bureaus, and em- 
 ployed collection letters with excellent results. The great 
 advantage of this method was the little labor and expense 
 involved. Collection letters are used at the present time 
 by many trade organizations in collecting accounts for 
 their members, and also by certain of the credit men's 
 associations which conduct collection bureaus. One sys- 
 tem followed requires the members of these organizations 
 who use the collection letters to promptly notify the col- 
 lection bureau; the bureau takes cognizance of the prog- 
 ress made in collecting the account, and if collection is 
 not effected, steps in and takes active charge of the case. 
 The plan followed in other organizations is that the mem-
 
 COLLECTIONS 283 
 
 bers shall notify the bureau (on a form provided) that an 
 account is delinquent. On receipt of this notification the 
 bureau sends the debtor a formal collection letter with 
 the request that a remittance be forwarded direct to the 
 creditor. If payment is received the creditor immediately 
 advises the bureau. If a settlement is not made within a 
 reasonable time, the bureau is notified to that effect and 
 the officer in charge forwards a second or third letter, 
 as the requirement may be. 
 
 The sale of collection letters has been carried on to 
 a large extent, and the forms are in use by many credit 
 offices. Under this system the collection concern, which 
 is very often represented by a name only, is entirely di- 
 vorced from any responsibility in the matter after it has 
 sold the forms to the creditor. The debtor who receives 
 one of these letters or an entire series of them from a credi- 
 tor, believes that the collection agency whose name ap- 
 pears has charge of the account. He infers that the 
 creditor has adopted outside means for enforcing the 
 collection, and this usually marks an entire severance 
 of business relations after the account is collected. It 
 is inconceivable that a house would continue to do busi- 
 ness with a man who had become so delinquent as .o Jail 
 for the use of a collection letter unless his business affairs 
 underwent so material an improvement as to dissipate the 
 possibility of a recurrence of the former unfavorable 
 conditions. 
 
 The propriety of this plan, however, is open to serious 
 question, and the fact that it is so regarded is proved by 
 the statements of prominent credit men that they would 
 not think of sending such letters to anyone but undesirable 
 people. Others hold that the use of collection blanks
 
 284 CREDIT AND ITS USES 
 
 is only justified when a credit man has determined to 
 close an accoimt, as he would not care to adopt such 
 means with a person whose patronage he desired to re- 
 tain. There is a sharp division of sentiment among 
 credit men as to the efficacy of collection letters under 
 any circumstances, some believing that they are very 
 effective, while others maintain that the exact contrary is 
 the case. 
 
 The practice of using these collection letters has grown 
 to such an extent that very reputable business and trade 
 organizations have adopted forms and sell them to their 
 members. The names of these organizations appear on 
 the letters, and are used to force debtors to make payments 
 of accounts, in the fear that their failure to make pay- 
 ment will bring down upon them the unfavorable action 
 of these organizations, whose memberships will be in- 
 formed of their delinquency. In cases where collection 
 letters convey this threat and the organizations using them 
 carry it into execution, the system is entirely warrantable 
 and everything may be said in its favor, providing that 
 its utilities are not exercised to wring from a debtor pay- 
 ment of an amount that he should not be called upon to 
 pay. Many trade organizations and some of the affiliated 
 branches of the l^ational Association of Credit Men pub- 
 lish monthly or semimonthly bulletins containing the 
 names of the delinquent debtors reported to them. 
 
 ATTORNEYS AS COLLECTORS 
 
 When creditors find it impossible to collect claims 
 through statements, regular correspondence, adjusters, 
 drafts, and collection letters, the next and practically only 
 recourse is to the services of an attorney. TkTiile it is
 
 COLLECTIONS 285 
 
 customary for some credit departments to act witli more 
 celerity than others in handing accounts to an attorney, 
 he is generally regarded as the very last resource in an 
 effort to collect; in fact, credit men admit that they ex- 
 haust every other known means before enlisting the serv- 
 ices of an attorney. When an attorney receives a claim 
 he must employ either one of two methods of procedure: 
 first, to collect in installments, or second, to bring suit 
 for the claim. He may in some cases secure a collection 
 immediately or upon his first demand, but in most in- 
 stances he has to collect the claim in installments, and 
 is perfectly willing to bring about a settlement in that 
 way. The creditor is agreeable to such a settlement, pro- 
 viding it involves the payment of the entire amount 
 owing, preferring to suffer the disadvantages of the delay 
 with the reasonable assurance of getting full payment, 
 rather than incur the possibility of bringing about the 
 financial collapse of the debtor through suit. ISTo matter 
 which method he follows, there is always publicity, for 
 the fact that the attorney or his representative is calling 
 frequently upon the debtor to make collections, or the 
 debtor calling upon the attorney to make his payments, 
 becomes a matter of gossip in the neighborhood, gi-eatly 
 to the injury of the debtor's credit. 
 
 Among the objections to placing claims with attorneys 
 is the expense involved. The attorney is entitled to a 
 fee for his services, and this invariably has to be paid by 
 the creditor in the form of a commission upon the amount 
 collected. This, as well as paying costs and fees incident 
 to a suit, means a loss to the creditor. Franklin says in 
 " The Way to Wealth," " It is foolish to pay out money 
 in a purchase of repentance," and many creditors believe
 
 286 CREDIT AND ITS USES 
 
 that money spent to further the collection of bad debts is 
 foolishly spent. 
 
 In the attempt to collect claims through attorneys a 
 great deal depends upon the character of the attorneys; 
 that is to say, the results that are expected will be de- 
 pendent upon the character and capacity of the attorney. 
 His capacity as a lawyer will enable him to exercise good 
 judgment in handling the claim, which is practically han- 
 dling the debtor; and his good character will be a safe- 
 guard to the interest of the creditor in assuring a prompt 
 and satisfactory accounting for any money that comes 
 into his possession. It is therefore important that credit 
 departments should be reliably informed as to the stand- 
 ing of these attorneys. It is not an easy matter to deter- 
 mine what an attorney's standing may be, although the 
 creditor class has been helped in this respect through the 
 publication of attorneys' lists, the names in which are 
 vouched for by the concerns selling the lists. As a fur- 
 ther evidence of their confidence in the attorneys, many 
 of the concerns publishing law lists offer with the sub- 
 scription a guarantee for any moneys collected by the 
 attorneys. These lists are known as " bonded lists " or 
 " bonded attorneys." In some cases a house using such 
 a list is at perfect liberty to forward claims directly to 
 the attorneys whose names are given, notifying the pub- 
 lishing company, however, as to the sending of each claim. 
 The notification to the publishing company is a necessary 
 precaution, otherwise it would never be in a position to 
 know to what extent its gitarantee was being called upon. 
 In other cases, however, concerns publishing lists do not 
 extend a guarantee on the attorneys unless the claim be 
 forwarded through the oflSce of the publishing company.
 
 COLLECTIONS 287 
 
 While conceding the representative character of cer- 
 tain law lists, some credit departments prefer to have their 
 own lists of attorneys, and this is notably the case with 
 large concerns. For instance, Mr. Fred. E. French, of 
 the Credit Department of Messrs. J. V. Farwell Co., of 
 Chicago, was asked by the writer what means he employed 
 for sending claims for collection and replied: 
 
 "For a number of years past, we have had a regular list of 
 attorneys, altogether numbering possibly 1,000, and in compiling 
 this list we make a particular effort to not only obtain ability, but 
 honesty, in consequence of which we have not lost anything in over 
 five years through dishonest representatives. We investigate the 
 standing of our attorneys the same as we do that of a customer, 
 and after being satisfied that they will fulfill our requirements, 
 we mail to them a list of the accounts which we are selling in 
 their immediate neighborhood." 
 
 Such a list as that described by Mr. French is a very valu- 
 able asset of a credit department. It is especially so 
 where a house employs a corps of adjusters, as these ad- 
 justers know to what lawyers they must go for advice, 
 and are therefore never at a loss to avail themselves of 
 legal services whenever necessary. 
 
 A great mass of the collections forwarded from dif- 
 ferent points are sent through collection agencies, and 
 opinion among credit men is divided as to whether it is 
 best to forward claims through collection agencies or 
 direct to an attorney. Much depends upon the character 
 and size of the claim. Small claims are sent either di- 
 rectly to attorneys or through collection agencies without 
 hesitation. When the claim is a large one, and the ques- 
 tions involved of a delicate character, the services of a 
 competent adjuster or the personal counsel of the house
 
 288 CREDIT AND ITS USES 
 
 will in all probability prove more acceptable; some credit 
 men of long experience assert that in the collection of 
 large claims, they prefer to send their own personal coun- 
 sel rather than to forward the claim to a local attorney. 
 This course is preferable when a house has no regular 
 correspondent at the point where the claim arises, and 
 niust depend upon a law list or other avenue of informa- 
 tion for a recommendation of the attorney to whom the 
 claim should be sent. When a house sends its own coun- 
 sel, it knows exactly to whose hands the business is in- 
 trusted, and therefore must feel safer as to the outcome, 
 although it does not follow that the ability of the per- 
 sonal counsel is any better than that of the local man who 
 might be selected. One of the supposed advantages of 
 sending claims to collection agencies is that it means a 
 great saving of labor to the credit man. The collection 
 agency is expected to follow the claim step by step, to be 
 thoroughly informed of all developments in regard to it, 
 and to see that the attorney to whom the claim is sent 
 does his full duty. It does not follow that the credit man 
 is relieved from all attention to the matter, further than 
 inquiring from time to time as to the state of the case. 
 A credit man who assumes to give the collection of bad 
 debts the attention it deserves will be anxious to know as 
 much about the progress of the claim as the collection 
 agency itself; he must be constantly informed in regard 
 to it, and also compile the data respecting the claim and 
 keep it in shape for reference. This involves considerable 
 correspondence, and if he must go through all this corre- 
 spondence with the collection agency, why could he not 
 carry on the correspondence just as effectually with the 
 lawyer to whom he might send the claim directly? It may
 
 COLLECTIONS 289 
 
 be said in answer to this that the credit man, although 
 a very competent person, may not understand the special 
 advice that should be given from time to time in order 
 to assist in the collection of the claim ; or may not be in- 
 formed as to the many methods that expert collectors would 
 employ, it being assumed that those in charge of the col- 
 lection agency have all the expert knowledge and acquire- 
 ments in a very marked degree. This may be true of 
 some collection agencies; it certainly is not true of all 
 of them. 
 
 Now, it is admitted that a collection agency is in a 
 position to give an attorney a large amount of business, 
 while an individual house may give him only a small num- 
 ber of claims every year. At the same time, if many 
 houses were to retain this same attorney, the aggregate 
 of their business would be considerable. In addition to 
 this, when a claim is sent to an attorney directly, he com- 
 mands the entire fee and is not called upon to divide with 
 a collection agency. However, it is this very question 
 of fees that affects most largely, for where a great deal 
 of business is sent to an attorney through a collection 
 agency, he makes more in the gross, although his single 
 fee is smaller than upon claims sent to him directly. It 
 must also be admitted that a collection agency, in doing 
 a large amount of business in a certain territory, as sug- 
 gested, is in a better position to judge of an attorney's 
 qualifications than a creditor who sent claims directly. 
 The creditor very rarely has the time or inclination to 
 make an extended investigation of the attorney's standing 
 unless this question be given the studious attention ad- 
 vanced in the opinion of Mr. French, The view as to the 
 agency being in a position to furnish the creditor with pro-
 
 290 CREDIT AND ITS USES 
 
 tection against defalcations of attorneys is a sound one, 
 although it has been explained that there are many reliable 
 law lists which are guaranteed in this respect, and conse- 
 quently firms that send their claims directly to these law- 
 yers are guaranteed just as fully as though they forwarded 
 the claim through a collection agency carrying a bonded 
 list. No doubt this question is very often determined by 
 the personal predilections of the credit man. Some credit 
 men prefer to handle claims through their own attorneys, 
 as they feel that they are informed more promptly as to 
 progress than if they had to wait for reports from a col- 
 lection agency. 
 
 ADJUSTMENT BUREAUS OR ADMINISTRATION BY 
 CREDITORS 
 
 Under the State system for the administration of in- 
 solvent estates every incentive was offered to creditors to 
 act independently in attempting to establish the prece- 
 dence of their claims. The National Bankruptcy Act 
 having superseded the State system, and the spirit of that 
 law making for equality, creditors are becoming educated 
 to the principle that cooperation of interests is a useful 
 force in administering the estates of insolvents. The re- 
 sult has been the establishment of adjustment bureaus by 
 business organizations, a movement which has developed 
 considerable strength among the credit men's associa- 
 tions. This is a splendid augury for the existence of better 
 relations among business men, redounding to the benefit 
 of both creditors and debtors. 
 
 When a debtor finds that he cannot continue pay- 
 ment and that the liquidation of his business would show 
 a loss, he should assure his creditors of his willingness to
 
 COLLECTIONS 291 
 
 place the business in their hands and abide by their deci- 
 sion. The debtor who approaches his creditors in this spirit 
 invariably finds that they will receive him in an open 
 and generous manner. A conference will then take place, 
 and a plan devised for conducting the business or adopting 
 any other measures which the peculiar conditions involved 
 nay suggest as being the wisest. 
 
 The bankruptcy act aims to reach this result; but it 
 is also true that creditors can accomplish the same end 
 with less expense than would be attended by the admin- 
 istration of an estate under the bankruptcy act, and vastly 
 less than under the State laws. If a debtor considers that 
 he is likely to receive liberal treatment from his creditors, 
 he will be more willing to put his affairs in their hands. 
 The greater the prevalence of this policy and this spirit, 
 the greater will be the willingness of debtors to confide in 
 their creditors and the less loss there will be from failed 
 estates. 
 
 The inevitable result of this line of action is a satis- 
 factory settlement for the creditors and a return of some- 
 thing at least to the debtor. The adjustment of crippled 
 estates under the direction of creditors is not a new de- 
 parture, although it is now receiving more attention than 
 ever before in the history of this country. There have been 
 merchants' protective associations in existence for many 
 years, some of them as old as twenty-five and thirty years, 
 and older, and they have served a good and noble purpose. 
 
 One of the special functions of the IsTational Bank- 
 ruptcy Act is the adjustment of estates through composi- 
 tions; but compositions can be effected just as admirably 
 through organizations of business men. In some cases of 
 insolvent estates the business is conducted under the direc-
 
 292 CREDIT AND ITS USES 
 
 tion of creditors or trustees appointed by them, until a 
 certain amount has been realized, and the business is then 
 transferred to the debtor. Or, if the condition of the busi- 
 ness warrants, a composition may be entered into involving 
 a deferrence of the payment of the amount stipulated over 
 a specified time, during which the business will remain, 
 at least nominally, in charge of the creditors or some one 
 acting for them. 
 
 Any system for the administration of insolvent estates 
 which involves concert rather than division of action among 
 creditors is of manifest superiority. The commercial, 
 trade and credit associations of the country can revolu- 
 tionize the influences and practices which have heretofore 
 obtained in the winding up of insolvent estates. They can 
 make the process one of great benefit to themselves, while 
 it will also have the effect of maintaining in business many 
 unfortunate men who under the old systems would have 
 been forced to retire permanently. The establishment of 
 adjustment bureaus under the auspices of the credit men's 
 associations is a healthful and pleasing development. 
 
 SUSPENDED ACCOUNTS 
 
 When a debtor has failed or his account has been given 
 to an attorney for collection, or there is any reason to 
 question its worth, its character has assumed such an 
 aspect as to require that it be placed in a class with others 
 of a similar nature. These accounts are knowTi as " sus- 
 pended accounts," deriving this name from the fact that 
 it is customary to suspend action, either as to charging 
 them to profit and loss or such other course as may be neces- 
 sary until developments warrant some definite policy being 
 pursued. When an account is sent to a lawyer for coUec-
 
 COLLECTIONS 293 
 
 tion, or other extreme measures adopted, it is evident that 
 its value as an asset has been impaired. There is no good 
 reason, therefore, why such an account should be retained 
 upon the general ledger of a concern and reckoned at its 
 face value, so that it is customary in well-conducted busi- 
 ness establishments to either charge such an account imme- 
 diately to profit and loss or place it in a suspense account. 
 The reasons for this are obvious. Xo upright firm desires 
 to deceive itself or its creditors as to the value of the ac- 
 counts due to it. The only safe way to avoid such accounts 
 being included among the good accounts and face-value 
 assets is to see that they are segregated, where their char- 
 acter will not be misunderstood and their approximate 
 value, only, computed. 
 
 Suspended accounts belong to a separate branch of 
 credit-ofiice work, and special treatment should be accorded 
 to them. In order that this treatment shall be efficient, 
 it is necessary to adopt the same systematic methods for 
 their government as in the case of live accounts. Card 
 systems may be utilized to excellent advantage in treating 
 suspended accounts. It is the practice of many credit 
 men to use card systems for tabulating data respecting 
 these accounts and directing their management in an or- 
 derly way. The correspondence incidental to suspended 
 accounts in time becomes voluminous, and a folder system 
 on the same general order as that employed for docketing 
 credit information may be used. In this way there would 
 be no appreciable danger of the credit man overlooking 
 such work as is necessary in regard to suspended accounts. 
 It is true that many firms hold it almost a waste of time to 
 pay much attention to this class of accounts, for, as a gen- 
 eral rule, there is little realized from them. It is partly 
 20
 
 294 CREDIT AND ITS USES 
 
 because of the inadequate attention given that so little has 
 been realized from them. Credit offices that give conscien- 
 tious thought and effort to the maniiDulation of suspended 
 accounts know that they have realized very much more 
 than would have been possible if the debtors had been al- 
 lowed to go their way unthought of and unmolested. 
 
 Another reason why every bad or doubtful account 
 should be investigated is that the information acquired 
 will assist the credit office in deciding upon the wisdom 
 of reopening the account if in after years the same person 
 should appl}' for credit. A man may make what can with 
 perfect propriety be called an honorable failure. If he 
 rehabilitates himself and asks for credit, the records show 
 that he emerged from the failure with an unstained char- 
 acter; also that the reasons for his failure may not have 
 been such as to cast serious doubt upon his capacity to 
 conduct a business successfully if the circumstances were 
 different from those under which he had formerly operated. 
 These facts are of the greatest value to the credit man, and 
 of benefit to the merchant. But if a man's former failure 
 or business record indicated a lack of moral stamina, this 
 is an important thing for the credit man to know. He 
 would be without this knowledge if failures and bad debts 
 were not thoroughly investigated, and the results of the 
 investigations preserved in the files of the credit office.
 
 PART FIVE 
 GENERAL QUESTIONS
 
 CHAPTER XVIII 
 
 LEGAL, EEDEESS THE BANKRUPTCY ACT 
 
 The theory upon which legal redress for unpaid or 
 failed accounts is sought, is based upon the presumption 
 that there has been a violation of contract. There is prob- 
 ably no element affecting the development and welfare of 
 the human race that has exercised a more potent influence 
 than the element of contract; it is clothed with a tradi- 
 tionary power, the import of which cannot be overesti- 
 mated. Prof. Henry Sumner Maine attests the antiquity 
 and universality of contract when he says in his work on 
 " Ancient Law " : 
 
 "Neither ancient law nor any other source of evidence discloses 
 to us society entirely destitute of the conception of contract." 
 
 A sale is one of the commonest forms of contract known 
 to the human family. When a merchant is unable to col- 
 lect the amount of a sale, he appeals to the law. Society, 
 having from time immemorial recognized the certainty of 
 mercantile disputes and misadventures, adopted laws under 
 which the rights and interests of creditors and debtors 
 would be safeguarded and protected from the predaceous 
 encroachments of members of either element upon the 
 other. But an orderly dispensation of justice required 
 that all laws be administered by those competent and 
 
 297
 
 298 CREDIT AND ITS USES 
 
 trusted, and consequently courts were instituted for the 
 solution of questions requiring the sanction of judicial in- 
 terpretation. 
 
 The merchant proceeds on the principle that he is en- 
 titled to some compensation for the damages sustained 
 througli the dehtor's violation of the contract, and this sat- 
 isfaction it is his right to attempt to secure. The character 
 of redress may be determined in many different ways, ac- 
 cording to the legal customs of the nation or state to whose 
 laws he makes appeal. During the greater part of our life 
 as a nation, legal complications between creditors and debt- 
 ors were settled by recourse to State laws, unless an ade- 
 quate compromise was offered. The creditor often pre- 
 ferred to secure a judgment against the debtor and hold it 
 until such time as the debtor might come into possession of 
 sufficient property to enable the creditor to proceed against 
 such property by virtue of his judgment; although this 
 course was impossible, so far as resident creditors were con- 
 cerned, where an estate was administered under an insol- 
 vency law. 
 
 The best-known forms of law under which the relations 
 of creditors and debtors have been adjusted in English and 
 American jurisprudence are bankrupt laws, insolvency 
 laws, and the common-law assignment. The disposition 
 of all nations, however, has been toward the adoption of 
 bankruptcy laws, under which legal redress is now gen- 
 erally sought where the interests of the creditor have been 
 damaged through the debtor's failure to make paj-ment. 
 The developments of bankruptcy legislation have wrought 
 in that system some astonishing changes. Where the first 
 bankrupt laws presupposed guilty action or fraudulent in- 
 tention on the part of insolvent debtors, the principles upon
 
 LEGAL REDRESS— THE BANKRUPTCY ACT 299 
 
 which these laws are now based do not primarily concern 
 themselves with fraudulent practices. The present laws 
 relate to an equitable distribution of the assets of an estate 
 among all the creditors, and the debtor's discharge from 
 his liabilities, provided he has not been guilty of miscon- 
 duct, so that he may again embark in business life un- 
 trammeled by a burden of debts. 
 
 Bankruptcy laws are of mediaeval origin. They were 
 first introduced in some of the Italian States, and later 
 adopted in France and England. It is now generally con- 
 ceded that bankruptcy laws are an outgrowth of the com- 
 mercial system, their development from the very earliest 
 stages being prompted by the requirements of commerce. 
 In this country they have been recognized as a necessity of 
 the commercial system. (See " Bankruptcy a Commercial 
 liegulation," by James M. Olmstead, of Boston, Harvard 
 Law Review, vol. xxv, Xo. 10.) The first English bank- 
 ruptcy law was passed in 1542 during the reign of 
 Henry VIII (34-35 Henry VIII, C 4). Since that time 
 England has had some thirty-eight bankruptcy statutes 
 (including amendatory laws), the last having been passed 
 in 1883, but undergoing material amendment in 1890. 
 In England, as in this country, bankruptcy law has had 
 its friends and always some very powerful opponents. The 
 principles of English bankruptcy law have been used as 
 the basis of similar statutes adopted by other nations, one 
 of their strongest features being the composition provision, 
 which has been also written into our present law. Bank- 
 ruptcy laws are in force in all the great nations of Europe, 
 and their adoption has been coincident with the marked 
 commercial expansion of those nations. 
 
 Bankruptcy legislation in the United States is based
 
 300 CREDIT AND ITS USES 
 
 upon the authority conferred upon Congress in the Con- 
 stitution, which says that " Congress shall have power to 
 establish . . . uniform laws on the subject of bankrupt- 
 cies throughout the United States." This power is one 
 that the Congress may exercise or disregard at its dis- 
 cretion. Its relation to the credit system is set forth in 
 no uncertain way in a report of the Judiciary Committee 
 of the House of Representatives, dated July 21, 1841, as 
 follows : 
 
 "Credits, or demands, are property in which, not infrequently, 
 the bulk of large individual estates consist. As property, they are 
 under the protection of the law as much as any other kind of prop- 
 erty. All the rights of property attach to them ; the right of pro- 
 tection and defense against all encroachment and injury, and the 
 right of recovery when wrongfully taken away or withheld. They 
 are private property, and private property is sacred. It must be 
 respected ; and the law must be vigilant and efficient in its guardian- 
 ship of it. Failure in this is failure in the highest duty of civil 
 society, and tends directly to dissolution." 
 
 On three occasions (1800, 1841, 1867) prior to the 
 passage of the present act Congress enacted bankruptcy 
 legislation. The very short life of the first two laws and 
 the limited existence of tlie third offered little basis for the 
 development of a thorough appreciation of the precepts of 
 bankruptcy legislation such as the needs of this commer- 
 cial people really required, and also gave rise to much 
 misconception as to the duty of Congress in respect to this 
 legislation. 
 
 The absence of bankruptcy laws committed the admin- 
 istration of debts to the bankruptcy and insolvency systems 
 adopted by the different States; for while such State 
 statutes are suspended by the existence of a National Bank-
 
 LEGAL REDRESS— THE BANKRUPTCY ACT 301 
 
 ruptcy Act, in the absence of a national law the State laws 
 are in full force, or, 
 
 "The States may legislate on the subject of bankruptcy if there 
 be no law of Congress which will conflict." — (Cooley, " Constitutional 
 Limitations.") 
 
 The phraseology of the Constitution on this subject has 
 given rise to much dispute as to the real intent of the 
 framers of the Constitution in conferring upon Congress 
 the power to adopt uniform laws on the subject of bank- 
 ruptcies. 
 
 "Just what the Federal Government meant by laws on the sub- 
 ject of bankruptcies, has been disputed. The commonly received 
 view is that an insolvent person, or one unable to pay his debts, is 
 a bankrupt, and that a law dividing his property proportionally 
 among his creditors and discharging him from legal obligation to 
 make further payment, is a bankrupt law." (Hinsdale, "American 
 Government.") 
 
 Some strict constructionists have held that the permis- 
 sive clause in the Constitution relating to these laws was 
 only intended to refer to hankrupts, applying the word to 
 traders, as under the old English laws. The general inter- 
 pretation and the now accepted one, however, is that it 
 was the intention of the framers of the Constitution to 
 confer upon Congress authority to legislate upon all the 
 questions of every character and description concerning 
 business collapses, and including voluntary and involuntary 
 bankruptcy. 
 
 The first bankruptcy law of the United States was 
 the Act of April 4, 1800, the operation of which was lim- 
 ited to five years. The new Federal Government had been
 
 302 CREDIT AND ITS USES 
 
 in existence eleven years before Congress availed itself of 
 its constitutional right to pass a bankruptcy law. One of 
 the reasons assigned for the enactment of this law was the 
 distress caused by the depredations inflicted by England 
 upon our merchant marine, and the feeling gained cur- 
 rency that where general business distress existed the 
 chances of adequate relief, so far as the creditor class was 
 concerned, would be best subserved through the operations 
 of a national statute. This bankruptcy act was based 
 almost entirely upon the English law of that period and 
 was limited to traders only, its benefits being withheld 
 from those not engaged in business pursuits, meaning me- 
 chanics, farmers, professional men, clerks, etc. The only 
 exemptions permitted under this act were necessary wear- 
 ing apparel, bedding for the bankrupt and his family, and 
 bread money. In order that a bankrupt might not be 
 thrown upon the world entirely penniless, with the pos- 
 sibility of himself and his family becoming public charges, 
 a provision based on the old " bread-money " principle of 
 the English law was inserted in the act. Under this, a 
 bankrupt who had complied with all the requirements of 
 the law was to be paid five per cent on the " net produce " 
 of the estate, providing that it realized a dividend of fifty 
 per cent for the creditors ; this commission of five per cent 
 not to exceed in the gToss the sum of $500. In case the 
 estate was sufficient to pay the creditors seventy-five per 
 cent, the bankrupt was allowed ten per cent, this commis- 
 sion, however, not to exceed the sum of $800. It being the 
 first attempt at bankruptcy legislation, it is not surprising 
 that the law did not prove satisfactory. The pressure 
 brought to bear upon Congress for its repeal was very 
 strong, and a repeal bill was passed December 19, 1803,
 
 LEGAL REDRESS— THE BANKRUPTCY ACT 303 
 
 so that the first bankruptcy act was not permitted to live 
 its allotted life. 
 
 Although the first bankruptcy legislation had not 
 proved satisfactory, either to its friends or to the country 
 at large, shortly after the close of the second war with 
 England there again arose a demand for the passage of 
 a national statute on bankruptcy. This sentiment, how- 
 ever, did not crystallize into any powerful form until sub- 
 sequent to the panic of 1837. The general impoverish- 
 ment of the people, largely due to speculation, created a 
 very considerable debtor class, which impressed its strength 
 upon one of the political parties of the period, so that it 
 might be said the law passed August 19, 1841, was adopted 
 in response to a demand of the debtors of the nation. As 
 might have been expected, there was introduced for the 
 first time in American bankruptcy law a provision permit- 
 ting voluntary bankruptcy, open to all persons whether 
 traders or nontraders. The law was based very largely 
 upon the Massachusetts Insolvency Law of 1838, with the 
 introduction of certain changes suggested by the devel- 
 opments of the legislation in England. Under this act, 
 the exemptions extended to personal property only to the 
 amount of $300. The law excited the disfavor of the 
 creditors of the country, one of the principal grounds 
 of objection being that opposition to a discharge, to be 
 effective, had to be made by a majority in number and 
 amount of the creditors proving debts. It should bo said, 
 however, that the law aimed to prevent frequent dis- 
 charges in bankruptcy, for there was a provision to the 
 effect that a man could not secure a second discharge un- 
 less he paid seventy-five per cent of all proved claims; 
 and in this respect, at least, the law of 1841 was decidedly
 
 304 CREDIT AND ITS USES 
 
 in advance of later legislation on this subject in the 
 United States. 
 
 Another feature of the law of 1841 was the fact that 
 appeals could not go beyond the circuit courts. This was 
 not a wise provision, especially in the incipiency of bank- 
 ruptcy legislation, for the inability to carry questions to 
 the Supreme Court of the United States would naturally 
 have a tendency to narrow the limits of interpretation to 
 be placed upon the law. 
 
 The next effort of any moment to secure bankruptcy 
 legislation in the United States commenced in 1861, but 
 this movement did not assume significance until 1864, 
 when a determined effort was made by Congressman 
 Thomas A. Jenckes, of Rhode Island, who was the special 
 champion of bankruptcy legislation in Congress, to secure 
 the passage of a law. It required, however, three years of 
 almost unremitting effort to bring about the adoption of 
 the Act of March 2, 1867. This law was a much more 
 thorough statute than either of its predecessors. The ad- 
 ministration of the law was committed to registers and 
 assignees, the relative powers and duties of whose offices 
 corresponded with those of the referees and trustees under 
 the present act. A wholesome provision of the law of 1867 
 required that a voluntary bankrupt must owe debts in ex- 
 cess of $300, thus preventing a great number of applica- 
 tions for relief in bankruptcy by those who owed small 
 amounts, representing debts incurred through purchases 
 for the necessaries of life. Under this law appeals to the 
 Supreme Court of the United States were barred unless 
 the matter in dispute exceeded $2,000. The exemptions 
 under the Act of 1867 extended to such personal property 
 as household goods and wearing apparel and equipment
 
 LEGAL REDRESS— THE BANKRUPTCY ACT 305 
 
 used In the service of the United States, a provision due to 
 the fact that the country had just passed through the great 
 Civil War. There was introduced into the law of 1867 
 (for the first time) a provision exempting property which 
 would be exempt under the laws of the State of which the 
 bankrupt was a resident, or had his domicile at the time of 
 the commencement of the proceedings in bankruptcy. 
 
 The " acts of bankruptcy " under the law of 1867 did 
 not differ in any essential respect from those of the pre- 
 vious laws, a condition of insolvency being understood to 
 apply to a person who had defaulted in his commercial 
 payments. This provision presented many complications, 
 especially during the years of panic following " Black 
 Friday," and so serious did this question become that 
 the law was amended (Act of June 22, 1874) so that 
 an involuntary petition did not lie unless made at the in- 
 stance of creditors representing one-fourth in number and 
 one-third of the aggregate of provable debts. This change, 
 designed to assist those who might be temporarily embar- 
 rassed, and also to make the law more flexible, was one 
 of the principal reasons for its undoing, for under the 
 amendment it was most difficult to have a person adjudi- 
 cated a bankrupt, and the debtor class was not slow to 
 grasp the advantages which this situation gave them. In 
 addition to this, the expenses of administration were be- 
 lieved by the creditors to be excessive, and although an 
 effort was made at some reform in this direction, through 
 the amendments of 1874, the disapproval which the law 
 had excited became so pronounced as to lead to its repeal 
 June 7, 1878. There were ten amendatory bills passed 
 changing the Act of March 2, 1867. 
 
 That bankruptcy legislation had not taken a permanent
 
 306 CREDIT AND ITS USES 
 
 hold upon the favor of the people is evidenced by the fol- 
 lowing opinion of so excellent an authority as Judge 
 Lowell, who during the pendency of the Act of 1867 made 
 this reference to it : 
 
 " Whether or not the bankrupt law will take ita place as part of 
 the settled policy of the country cannot be easily predicted. It ia 
 not likely to be displaced until the existing commercial depression 
 has been relieved. After that time much will depend upon the 
 degree of care and economy with which it is administered, and the 
 readiness of Congress to adopt modifications that shall be found to 
 be necessary, but most upon the opinion that the debtors of the 
 country may entertain of its operation." 
 
 It would now be well to consider certain reasons why, 
 up to the time of the repeal of the Act of 1867, bankruptcy 
 legislation had not come to be regarded as a necessary ele- 
 ment of our jurisprudence. From the adoption of the 
 Constitution there had existed two powerful political ele- 
 ments, known as Federalists and Anti-Federalists. Feder- 
 alism represented that type of statesmanship and its follow- 
 ing which believed in a strong centralized government, and 
 was wedded to the theory that the best interests of the 
 Union required the exercise of the Federal power in every 
 respect where it could be constitutionally applied. On the 
 other hand, anti-federalism seemed to regard the Union 
 as simply a vehicle for the dispensation of certain author- 
 ity, but was predisposed to hold within the States the larg- 
 est measure of autonomy and, where constitutional inter- 
 pretation was necessary, to limit as far as could possibly 
 be done the scope of the Federal compact. Later these ele- 
 ments came to represent the extremely divergent views 
 held by the Whigs on one side and the States' Rights peo- 
 ple on the other. The States' Rights interests had always
 
 LEGAL REDRESS— THE BANKRUPTCY ACT 307 
 
 viewed with marked jealousy the slightest curtailment of 
 the prerogatives of the States, although Senator Hayne, of 
 South Carolina, one of the most distinguished States' 
 Rights leaders of his day, believed that a national bank- 
 ruptcy law was preferable to the many State laws affecting 
 debts. 
 
 It was decided by the Supreme Court, in Sturgis vs. 
 Crowninshield (the court speaking through Chief Justice 
 John Marshall), that " since the adoption of the Consti- 
 tution of the United States, a State has authority to pass 
 a bankrupt law, provided such law does not impair the obli- 
 gation of contracts, and provided, further, that there be no 
 Act of Congress in force to establish a uniform system of 
 bankruptcy conflicting with such laws," This was the 
 strongest incentive to the States' Rights people to uphold 
 and extend the power and authority of the States in respect 
 to the administration of debts, by preventing the passage of 
 a national bankruptcy law. 
 
 The fact of State laws being in operation conferred 
 upon State courts the administration of failed estates. 
 Xo matter what might be the character of the State law, 
 there was vested in the State courts the authority to dis- 
 pense a large amount of patronage. The question of 
 official and judicial patronage has affected and always 
 will affect the popularity or unpopularity of certain meas- 
 ures of government. Where the power to dispense this 
 patronage is transferred to the United States courts 
 through the operation of a national bankruptcy law, and 
 the State courts thereby deprived of it, jealousies are 
 bound to arise, for it not infrequently happens that this 
 transfer may result in giving the patronage to an entirely 
 different political element from that which may be in con-
 
 308 CREDIT AND ITS USES 
 
 trol of the governmental and judicial power of the State. 
 This linking of the judicial power with the political power 
 is not intended as a reflection upon the uprightness or pu- 
 rity of purpose of the judiciary, but it is an undeniable fact 
 that under our political system of selecting judges, they 
 are in honor bound to dispense court patronage among the 
 members of that party to whom they owe the favor of their 
 nominations or appointments. Xot only is the political 
 power that this patronage confers involved, but there is 
 also the extremely important question of the emoluments 
 that flow. It is, therefore, evident why certain political 
 elements should very much prefer a system for the admin- 
 istration of debts that leaves all these powers and emolu- 
 ments within the control of the States and not as a part of 
 the national judicial machinery. 
 
 Further, there has always existed among the people 
 an element strongly opposed to extending the authority 
 of the United States courts, and the root of this objection 
 is one that does no dishonor to those holding it, for it is 
 the old differentiation between Federalism on one side 
 and the States' Rights cult upon the other. It may be said 
 for the latter that many of its followers honestly believe 
 that the liberties of the people will be best nurtured by 
 the States holding a strong balance of power, and by keep- 
 ing the power to govern as near to the people as possible. 
 Under our political system it is the theory that as a mu- 
 nicipal government was closer to the people than a State 
 government, so, naturally, was a State government closer 
 to the people than the national Government. 
 
 There has also existed another ground of objection to 
 bankruptcy laws. It is the theory that when a man goes 
 through bankruptcy his misfortunes are unduly exploited
 
 LEGAL REDRESS— THE BANKRUPTCY ACT 309 
 
 or made a matter of greater publicity than would be the 
 case if he were simply to make an assignment under a 
 State law. There is some reason for this. Although as- 
 signments under State laws are usually advertised at the 
 time they are made, the administration of an assignment 
 is practically a private one, whereas, under the Act of 
 July 1, 1898, a bankruptcy case must be a matter of public 
 record. Indeed, it is the publicity made necessary by the 
 provisions of the statute that constitutes a strong point in 
 its favor. The title " bankrupt " has always been used as 
 an opprobrious one, due undoubtedly to the fact, as before 
 stated, that under the first English laws, bankrupts were 
 supposed to be persons who had committed gi*ave offenses 
 against their neighbors and the state, through the very fact 
 of being unable to pay their debts; and under the Con- 
 tinental systems bankrupts were under certain conditions 
 treated with great severity ; in fact, made to wear a certain 
 garb to advertise their disgrace and add to the contumely 
 of their situation. jSlaturally much that is objectionable 
 has always surrounded the name, and this has in past 
 years accounted to some extent for the disfavor with which 
 bankruptcy laws have been regarded, although De Tocque- 
 ville remarked on the strange indulgence shown to bank- 
 rupts in the United States. 
 
 The great industrial revival subsequent to the panic of 
 1873 marked the transition from the formative to the 
 constructive period of the nation's existence, and it is be- 
 yond question that the most powerful element in this great 
 constructive process has been the spread of commerce. As 
 the trade and commerce of the nation have expanded, the 
 usages, political sentiments, and national aspirations of 
 
 the people have undergone a stupendous change, and the 
 21
 
 310 CREDIT AND ITS USES 
 
 full effect of this change is manifested in the stirring de- 
 mand for everything that will enhance the prestige of the 
 Government as a great national entity. It was indubitable 
 that State lines, State limitations, and the narrowness due 
 to certain phases of State pride should disappear or be 
 ground to nothingness under the triumphant heel of the 
 giant of nationalism. 
 
 As an accompaniment of political changes, there arose 
 a persistent demand for the adoption of a new national 
 bankruptcy law, and while it may be said that the effort 
 to secure such a law was commenced almost immediately 
 after the repeal of the law of 1867, it was not until the 
 middle of the last decade of the nineteenth century that 
 this movement had assumed such proportions as to attract 
 the earnest attention of Congress. 
 
 Behind this demand for a new bankruptcy law there 
 was marshaled the great bulk of the commercial interests 
 of the country, no longer a secondary influence, but in the 
 march of events an element that had become a controlling 
 spirit in affairs. Aiding in this work for many years was 
 the press of the country, which had always taken a favor- 
 able view of national bankruptcy legislation. As opposed 
 to the passage of a new law, there were certain powerful 
 interests represented by the bankers, a few very large mer- 
 cantile institutions, and the remnant of the States' Rights 
 contingent. This opposition was effectual for some years, 
 but it was finally borne down, through the tenacity of the 
 friends of a national law for the administration of debts, 
 by the passage of the National Bankruptcy Act of July 1, 
 1898. 
 
 The present National Bankruptcy Act was enacted 
 after a struggle prolonged for nearly twenty years. As an
 
 LEGAL REDRESS— THE BANKRUPTCY ACT 311 
 
 illustration of the doubt existing in the House of Repre- 
 sentatives as to the wisdom of this legislation, a motion 
 to limit the operations of the law to three years was only 
 defeated by a close vote. The passage of the act was hailed 
 by a majority of the creditors of the country as a progi-ess- 
 ive step in legislation affecting the relations of debtor 
 and creditor. It w^as not considered, even by its friends, 
 to even approximate a perfect measure, for in reality it 
 was a compromise between the forces favoring a compre- 
 hensive bankruptcy law and those who favored a purely 
 voluntary and discharge measure. It was hoped, however, 
 that the law would prove to be the beginning of permanent 
 bankruptcy legislation. 
 
 The act as it left Congress was certainly the best 
 thought-out bankruptcy legislation that had ever been 
 placed upon the statute books of this country. While the 
 range of its operations may not be as extensive as some 
 of the European laws, it is a well-constructed and readable 
 measure. One of its elements of superiority is the ease 
 :with which references lo its different sections may be 
 made. This is very important in a measure so close to 
 the everyday life of the people, for unless a law be well 
 phrased and its different divisions clearly indicated, it is 
 not to be wondered at if the people fail to appreciate its- 
 character and scope. 
 
 The administration of the law of 1898 was received by 
 its friends with incomplete satisfaction from the begin- 
 ning. The all-time opponents of bankruptcy legislation, 
 perceiving the manifest deficiencies of the statute, promptly 
 commenced vigorous attacks upon it. They offered as one 
 of their strongest arguments the dissatisfaction of its 
 friends, and advanced the theory that it was impossible
 
 312 CREDIT AND ITO USE8 
 
 to devise an acceptable national bankruptcy law. The ease 
 with which discharges were secured (some men securing 
 several discharges within a few years) showed that the 
 law was lamentably weak in this respect, and that unless 
 some effort were made at amendment, its repeal was cer- 
 tain; in fact, so excellent an authority and able and con- 
 stant a friend of the bankruptcy law as Mr. William II. 
 Hotchkiss, of Buffalo, said in an article published in the 
 North American Review of April, 1901, on " Two Years 
 of the Federal Bankruptcy Law " : 
 
 " The law, then, should either be repealed or amended. Already 
 8ome are clamoring for repeal. The ' jubileeist^' demand it on 
 principle ; our mighty crop of tares having been garnered, the pur- 
 pose of the law, say they, has been fulfilled. These err in under- 
 standing, not motive. The same cannot be said of a less numerous 
 but very powerful class who seek its repeal. The past two years 
 have witnessed association after association of bankers fulminating 
 against the law. Scarce a week passes but the heads of certain 
 great mercantile establishments declare publicly that it must go. 
 Even many lawyers charge a present decrease in litigation, amount- 
 ing to a quarter or a third, to the existence of this statute. The 
 three together have raised such a clatter that repeal bills are pending 
 in both houses of Congress. 
 
 "But, should the law be repealed? Not, surely, because self- 
 interest, nourished by the memory of secret preference and unfair 
 advantage, rises I'.ke a banshee to warn the one-time preferred that 
 its repeal would be profitable to them. Those who have not been 
 able to command preferences, or to support collection bureaus, or 
 to increase sales by subsidizing employees, are at last safeguarded 
 by the law. Nor should it be repealed on the ground that it is 
 wrong for the State to cancel debts. The interests of the State are 
 ever greater than those of the individual. !More, it should not be 
 repealed, because, once repealed, the nation wiU bid farewell to 
 all bankruptcy legislation until panic leaps through the land and 
 furnishes an excuse for another jubilee. Meanwhile, the business
 
 LEGAL REDRESS— THE BANKRUPTCY ACT 313 
 
 "world would be back again where it was three years ago, scrambling 
 for precedence, the strong crushing the weak." 
 
 The demand for radical amendments to the law com- 
 menced within a year from the time of its passage and was 
 maintained with great vigor. Many repeal measures and 
 amendments were introduced in Congress. The most im- 
 portant amendments were those contained in the Ray Bill, 
 which took its name from Hon. George W. Ray, chairman 
 of the Judiciary Committee of the House of Representa- 
 tives in the Fifty-seventh and Fifty-eighth Congress, after- 
 Tvards a United States district judge. After some delay 
 and some important changes in the Senate the Ray Bill 
 was passed, and went into effect February 5, 1903. 
 
 The bankruptcy act is divided into seven divisions or 
 cliapters, viz, : Chapter 1, Definitions ; Chapter 2, Creation 
 of Courts of Bankruptcy and their Jurisdiction ; Chapter 
 3, Bankrupts ; Chapter 4, Courts and Procedure Therein ; 
 Chapter 5, Officers, Their Duty and Compensation ; Chap- 
 ter 6, Creditors ; and Chapter 7, Estates. These chapters 
 are separated into many subdivisions. The act aims to 
 reach every contingency of bankruptcy administration, 
 based on tlie principles of substantive law. While many 
 telieve that it should be more rigorous, Congress undoubt- 
 edly pursued the wisest course in not adopting a too drastic 
 measure, especially as far as it might relate to the require- 
 ments of criminal or remedial law. 
 
 A marked departure in bankruptcy legislation appears 
 in Subdivision 15, Section 1, Chapter 1, viz., the defini- 
 tion of insolvency. Under the Act of 1867 and other sta- 
 tutes, and especially the Continental statutes, a failure to 
 meet one's liabilities as agreed was an act of bankruptcy.
 
 314 CREDIT AND ITS USES 
 
 It appeared, however, to the framers of the present act 
 that it would be better, especially in view of our great 
 commercial activity, to define insolvency by a much nar- 
 rower interpretation. It is provided that: 
 
 "A person shall be deemed insolvent within the provisions of 
 this act whenever the aggi-egate of his property, exclusive of any 
 property which he may have conveyed, transferred, concealed, or 
 removed, or permitted to be concealed or removed, with intent to 
 defraud, hinder or delay his creditors, shall not, at a fair valuation, 
 be sufficient in amount to pay his debts." 
 
 According to this interpretation, it is more difficult to place 
 a man in bankruptcy than under the other method. The 
 debtor is regarded as the weaker party, and it was no doubt 
 the design to protect him from radical action by his credi- 
 tors. There is no danger, under the present act, of a man 
 being declared an involuntary bankrupt unless his condi- 
 tion be such that the creditors can prove beyond doubt that 
 his estate is unable to satisfy the liabilities against it. As 
 an additional protection to the debtor, the law provides that 
 where an involuntary petition is filed the alleged bankrupt 
 shall have the right to ask for a jury trial to determine his 
 solvency. 
 
 The act provides for voluntary and involuntary bank- 
 ruptcy. 
 
 "Any person who owes debts, except a corporation, shall be 
 entitled to the benefits of the act as a volmitary bankrupt. Any 
 natural person, except a wage-earner, or a person engaged chiefly 
 in farming or the tillage of the soil, any unincorporated company, 
 and any corporation engaged principally in manufacturing, trading, 
 printing, pubUshing, mining, or mercantile pursuits, owing debts 
 to the amount of $1,000 or over, may be adjudged an involuntary 
 bankrupt."
 
 LEGAL REDRESS— THE BANKRUPTCY ACT 315 
 
 A feature which is regarded with disfavor by the credi- 
 tor interests is that which permits a debtor whose estate 
 is administered in bankruptcy to avail himself of such ex- 
 emptions as are allowed in the State wherein he has had his 
 " domicile for the six months or gi'eater portion thereof 
 immediately preceding the filing of the petition." There 
 exists as marked a diversity in State legislation on the sub- 
 ject of exemptions as on every other question, and the un- 
 fairness of this provision is manifest. The difference in 
 State exemptions has also been urged by the opponents of 
 a bankruptcy law as an argument to prove that it is not 
 a uniform measure, as it permits a diversity of exemptions. 
 As a constitutional proposition, however, this has not been 
 regarded as a tenable objection, and consequently has never 
 been construed as affecting the uniformity required by the 
 Constitution in the authority conferred upon Congress to 
 legislate on bankruptcies. 
 
 Among the best features of the act is one which per- 
 mits compositions with creditors, even after a person has 
 been adjudicated a bankrupt. The question of the com- 
 position comes directly before the court, and the power to 
 make it enforceable is discretionary with the judge. If 
 he considers that the composition offered is to the best in- 
 terests of the estate, he can order it made, irrespective of 
 the feelings of a very powerful minority of the creditors. 
 This is an essentially humane provision. The lodgment 
 of this authority in the judge protects a well-disposed 
 bankrupt from the rapacity of creditors who, taking ad- 
 vantage of his desire to continue in business, attempt to 
 force from him one hundred cents on the dollar. Compo- 
 sitions may be set aside by the judge if it can be shown that 
 fraud was practiced in their procurement.
 
 316 CREDIT AND ITS USES 
 
 One of the most important provisions of the bank- 
 ruptcy law is the discharge feature. A bankrupt who has 
 complied with all the requirements of the statute may re- 
 ceive a complete discharge from his debts. This is tlie 
 great boon sought by those unable to pay their obligations 
 in full. The grounds of opposition to a discharge are as 
 follows : 
 
 " (1) Committed an offense punishable by imprisonment as 
 herein provided; or (2) with intent to conceal his financial con- 
 dition, destroyed, concealed, or failed to keep books of account or 
 records from which such condition might be ascertained; or (3) ob- 
 tained property on credit from any person upon a materially false 
 statement in wTiting made to such person for the purpose of obtain- 
 ing such property on credit; or (4) at any time subsequent to the 
 first day of the four months immediately preceding the filing of 
 the petition transferred, removed, destroyed, or concealed, or 
 permitted to be removed, destroyed, or concealed any of his prop- 
 erty with intent to hinder, delay, or defraud his creditors; or (5) in 
 voluntary proceedings been granted a discharge in bankruptcy with- 
 in six years ; or (6) in the course of the proceedings in bankruptcy 
 refused to obey any lawful order of or to answer any material ques- 
 tion approved by the court." 
 
 There are certain classes of debts from which a bank- 
 rupt is not relieved by a discharge, and these are repre- 
 sented by: 
 
 "Such as (1) are due as a tax levied by the United States, the 
 State, county, district, or municipality in which he resides; (2) are 
 liabilities for obtaining property by false pretenses or false repre- 
 sentations, or for willful and malicious injuries to the person or 
 property of another, or for alimony due or to become due, or for 
 maintenance or support of wife or child, or for seduction of an 
 unmarried female, or for criminal conversation; (3) have not been 
 duly scheduled in time for proof and allowance, with the name of 
 the creditor if known to the bankrupt, unless such creditor had
 
 LEGAL REDRESS— THE BANKRUPTCY ACT' 317 
 
 notice or actual knowledge of the proceedings in bankruptcy; 
 or (4) were created by his fraud, embezzlement, misappropri- 
 ation, or defalcation while acting as an officer or in any fiduciary 
 capacity." 
 
 The administration of the law is reposed in two sets 
 of officers, known as referees and trustees. Referees are 
 appointed by the judges of the United States district 
 courts ; their powers are judicial, and extensively so. Trus- 
 tees are those elected by the creditors to take charge of a 
 bankrupt estate, a majority in number and amount of 
 provable claims being necessary to effect the election of 
 the trustee. Where creditors cannot agree upon a trustee, 
 the referee may appoint him, his action, however, being 
 reviewable by the district court, Eeferees are required to 
 furnish bonds in not more than $5,000 ; the amount of the 
 bond to be furnished by the trustee is fixed by the creditors. 
 If the creditors should fail to do this, the court is author- 
 ized to do so. 
 
 The strongest merit of the bankruptcy act is the au- 
 thority vested in the creditors. They are the arbiters as 
 to practically everything that shall be done in the admin- 
 istration of a bankrupt estate. They elect the trustee, fix 
 his bond, pass on almost every question that is presented, 
 and, best of all, they may examine the bankrupt. This 
 examination of the bankrupt is one of the salient points of 
 the law. It enables creditors to learn from the bankrupt 
 under oath exactly how he has managed his business. 
 "While no provision of this character, however drastic, will 
 overcome perjury, still in this way a creditor can secure 
 the information which he should have before signing a 
 composition or determining whether he should oppose the
 
 318 CREDIT AND ITS USES 
 
 discharge of the bankrupt. lu this and numberless other 
 respects is evinced the great advantage of the bankruptcy 
 act over State procedure. If creditors are watchful of 
 their interests it is an impossibility for an estate to be dis- 
 honestly administered. The law contains provisions for 
 keeping a creditor well informed, and no meeting is legal 
 for which notices have not been sent; ample time is pro- 
 vided in respect to such notices. 
 
 The greatest evil from which commercial interests suf- 
 fered in the absence of a national bankruptcy law resulted 
 from the practice of insolvent debtors preferring certain 
 creditors. The system of preferences is not only sanc- 
 tioned, but encouraged, by the laws of many of the States. 
 It may be asked why a State is not disposed to be as just 
 in its treatment of creditors as Congress would be. The 
 reason is obvious. State laws for the administration of 
 debts are enacted in the interests of home creditors, viz., 
 those residing within the State. The citizens of a State 
 consider that if it is possible to secure any advantage, 
 they are entitled to it, even though it may be an undue 
 advantage over those who reside and do business out of 
 the State. Further, a home creditor has an advantage 
 over a creditor residing in another State, as he is able to 
 watch a debtor at closer range, the element of contiguity 
 being in his favor and enabling him to quickly detect un- 
 favorable conditions in the debtor's afPairs. The ability to 
 acquire unfavorable information more promptly than could 
 an outside creditor would prove of little value unless resi- 
 dents Avere advantaged under tlie law. This recompense 
 has been given to them through laws that enable home 
 creditors to expeditiously attach the effects of the debtor, 
 secure mortgages, bills of sale, or profit by many of the
 
 LEGAL REDRESS— THE BANKRUPTCY ACT 319 
 
 devious methods that are the offspring of the preferential 
 system. Preferring home creditors is the idea underlying 
 the system of preferences, although its practice has not 
 been confined to favors extended to them, but has been per- 
 sistently invoked in behalf of creditors foreign to the State, 
 primarily those who have extended large credits. This 
 system constituted the groundwork of much injustice, and 
 its pernicious effects impelled the creditors of the country 
 to ask for a national law that would suspend the State 
 preferential laws and place all creditors, large and small, 
 influential and humble, powerful and weak, upon the same 
 basis. 
 
 In order to meet this essential question, the bankruptcy 
 act provides that if a debtor while insolvent has given a 
 preference within four months before the filing of a peti- 
 tion in bankruptcy, or after the filing of the petition and 
 before the adjudication, the effect of which was to give 
 any one of his creditors a greater percentage of his debt 
 than any other creditor of the same class, all such prefer- 
 ences shall be voidable. It is generally assumed that a 
 man's insolvency dates, not from a few days prior to his 
 application to be declared a bankrupt or the filing of an 
 involuntary petition against him, but that insolvency is a 
 matter of gradual development. Experience has shown 
 that even after a man may know that he is insolvent, he 
 makes an effort, and very often a heroic one, to overcome 
 this condition, but without success. Therefore, the law 
 presumes that a condition of insolvency has prevailed for 
 some time, and in order to reach all cases where prefer- 
 ences may have been given during the probable term of 
 such insolvency, four months has been prescribed as the 
 period during which preferences, if given, may be voided.
 
 320 CREDIT AND ITS USES 
 
 Such, in brief, is the scope of the National Bankruptcy 
 Act of 1898. 
 
 In their earlier functions bankruptcy systems were 
 creditors' laws. The broadening of their scope has con- 
 ferred their benefits upon debtors as well as creditors. 
 While the laxity of certain provisions of our present stat- 
 ute may result in dishonest debtors reaping unjust gains 
 at the expense of their creditors, these cases are exceptional. 
 The opportunities to prey upon creditors will disappear 
 as the necessity for strengthening the law makes itself evi- 
 dent, and such changes as are required will be incorporated 
 in the act. 
 
 The following have been cited as the principal advan- 
 tages resulting to the people from the administration of 
 the present bankruptcy act : 
 
 1. "The prevention of preferences." 
 
 2. "The excellent influence of the law in enforcing concert 
 of action and mutual terms of settlement without recourse to legal 
 proceedings." 
 
 3. "The expeditious adjudication of bankrupts, as distin- 
 guished from the tedious and expensive processes common to State 
 courts." 
 
 4. "The election of the trustee by the creditors." 
 
 5. "The examination of the bankrupt by creditors." 
 
 6. "The adjustment of bankruptcies through compositions 
 with the knowledge and under the direction of the court." 
 
 7. "The prompt administration of estates and an avoidance 
 of the usual vexatious delays in litigation." 
 
 8. "The use of contempt proceedings to effect the recovery 
 of property." 
 
 9. "The institution of ancillary proceedings to reach property 
 lying in different States." 
 
 10. "The sale of real estate clear of liens." 
 
 11. "The settlement of the affairs of corporations in bankruptcy 
 in the interests of creditors and stockholders."
 
 LEGAL REDRESS— THE BANKRUPTCY ACT 321 
 
 12. "The reduction in expenses incident to failed accounts; 
 notably in the case of attorneys' fees." 
 
 13. "The acquirement of increased di\'idends from insolvent 
 estates." 
 
 14. "The punishment of fraudulent bankrupts." 
 
 15. "The administration of insolvent estates wholly in charge 
 of the creditors interested." 
 
 The student who inclines to the States' Rights theory- 
 may ask if it is not possible to secure all these advantages 
 under the operations of the State system, or whether the 
 States cannot legislate quite as forcefully in the interests 
 of creditors as Congress. The answer is that the States 
 could do so if they desired, and an absolutely uniform law 
 could he adopted by all the States ; hut even assuming that 
 every State had the same insolvency law, the operation of 
 such a law in the State of Kansas would not be controlling 
 upon the actions of a creditor residing in the State of Ne- 
 braska ; for it is a settled principle that the laws of a State 
 have no extraterritorial effect. 
 
 Our experience under both the Articles of Confedera- 
 tion and the Constitution has shown that the States have 
 no disposition to frame legislation on uniform lines. The 
 habits and proclivities of the people of the several States 
 are as distinctive as those of the people of different nations. 
 That no uniformity of State statutes is probable is conclu- 
 sively proved by the existence of the present State statutes 
 on the subject of bankruptcies and insolvencies. There are 
 no two States that have exactly the same system, and the 
 time may never come when such uniformity will be fol- 
 lowed. 
 
 "It certainly cannot be claimed that any benefit arises from 
 this comparison and contradiction ; that the rights of either creditor
 
 322 CREDIT AND ITS USES 
 
 or debtor are subserved thereby. Among absolutely independent 
 and sovereign nations, there will, of course, be more or less diversity 
 of municipal laws; and persons engaged in foreign trade and com- 
 merce must necessarily be put to some inconvenience. But even 
 among independent nations the tendency of the present age is to 
 assimilate their systems of commercial and mercantile law. Among 
 the several States of the Union this diversity, and its accompany- 
 ing inconvenience, need not exist. The Constitution confers upon 
 Congress full power virtually to ordain one set of rules governing 
 the relations of debtor and creditor throughout the whole extent 
 of the country. The 'uniformity' permitted by the organic law 
 would render a discharge in one State binding in all others; would 
 establish the same acts and defaults of the debtor as occasions for 
 bankrupt proceedings in every section ; would abolish the iniquitous 
 privilege of making preferential assignments; would enable the 
 merchant in New York or Philadelphia who sells on credit to a 
 trader in Illinois or Kentucky, to feel certain that when the time for 
 payment should arrive, his debtor would not have failed, and placed 
 his assets completely beyond the reach of the deceived and ex- 
 asperated creditor." (Pomeroy, "An Introduction to the Con- 
 stitutional Law of the United States.") 
 
 It is the fundamental, inherent, unavoidable, and un- 
 controllable features of our system of State government 
 that utterly disparage the probability of the States framing 
 laws that will be equally and justly operative toward the 
 citizens of the entire country without respect to the State 
 of their residence, that renders a national law necessary. 
 This sentiment constituted the principle that moved the 
 people to ask for the enactment of the present Xational 
 Bankruptcy Act, and it is upon this same principle that 
 there is based the demand for a permanent national bank- 
 ruptcy system. Public policy', commercial security, and 
 the stability of credit are the foundation stones of this 
 demand.
 
 CHAPTER XIX 
 
 THE EFFOET TO SYSTEMATIZE PEOTECTION FROM CREDIT 
 LOSSES CREDIT INSURANCE 
 
 Credit losses are a corollary of the credit system. The 
 proposition has been submitted that if there were no credit 
 there would be no debt, and it is reco^ized that the exten- 
 sion of credit carries with it the certainty of losses from 
 uncollectible accounts. Wherever credit has been given, 
 losses have followed. The test of the premise that losses 
 are an inevitable result of giving credit, is afforded in the 
 experience of any concern for a given number of years; 
 and the averages of this experience prove that bad debts 
 baffle the prescience of the credit man and the best devel- 
 oped systems of credit-office administration. Losses may 
 be greatly minimized through efficient management, but 
 the intangible forces that enter into credit transactions 
 disparage the complete avoidance of credit losses. 
 
 The credit man's objective point is the reduction of 
 losses to a minimum. When he succeeds in holding bad 
 debts within a percentage regarded as a normal loss in 
 his trade, without unduly restricting sales, he exhibits the 
 type of ability necessary in credit work. A moderate per- 
 centage of credit losses is regarded as a certainty, to the 
 same extent as depreciation in the value of goods is ex- 
 pected. These two elements of loss are looked for in every 
 
 323
 
 324 CREDIT AND ITS USES 
 
 commercial calling, and provision made to cover them by 
 adding to the selling price of all goods the percentage of 
 loss the firm will normally sustain from these causes. 
 This method, which is a system of insurance, results in an 
 added cost to the consumer ; so that, as an economic propo- 
 sition, the entire human family is charged with the fortui- 
 tous losses of commerce. 
 
 Credit losses being regarded as a certainty, it is natu- 
 ral'that efforts should be made to protect the losers. Losses 
 from fire, marine disasters, accidents to life, and other 
 causes, occur with a regularity that enables those inter- 
 ested to compute with reasonable accuracy the average 
 losses due to them in a stated period. A commercial en- 
 terprise may suffer a loss from fire only once in a long 
 career ; it may never have such a loss ; but if it be doing 
 a credit business, there will in all probability be losses from 
 bad debts every year. The question arises. Why should 
 not the same care be taken to protect sufferers from credit 
 losses as to compensate for losses from fire and other casu- 
 alties, which are the result of the negligence, ignorance, 
 and moral delinquency of individuals, or the disturbances 
 of nature ? The means suggested for doing this are com- 
 prehended in credit insurance. 
 
 Are credits susceptible to the operations of the princi- 
 ples of insurance that apply to all other elements in which 
 there is an appreciable hazard ? The first question to 
 decide is, " What is an insurable risk ? " It is defined 
 thus: 
 
 "An insurable risk ... is, (1) any chance of loss depending 
 on the occurrence of any uncertain event . . . provided (2) 
 there are sufficient data to enable the degree of probability to be 
 estimated, and provided (3) it is of such a nature that the insured
 
 CREDIT LOSSES 325 
 
 cannot too easily make use of the insurance for his own economic 
 advantage." 
 
 (1) The chances of loss in credits depend on uncertain 
 events; that is to say, the character of the losses is not 
 always the same ; their frequency is not always the same ; 
 at times they are of slight degree, and at others are aug- 
 mented. They are uncertain events. 
 
 (2) Is there sufficient data to scientifically estimate 
 the degree of probability of loss ? There is sufficient data, 
 and it may be acquired ; but whether any positive attempt 
 has ever been made to do so is improbable. The statistics 
 of losses published by the mercantile agencies are no doubt 
 accurate statements of the losses of which the agencies have 
 cognizance; but there are losses in credits of which the 
 agencies never know anything. Therefore these statistics 
 are not conclusive as to the full import of credit losses. 
 There are accounts dragged along from year to year, in 
 the hope that something may be realized from them, until 
 the debtor quietly goes out of business, and these debts are 
 buried in the deep bosom of the profit and loss account. 
 
 Further, What of the vast losses that take place in indi- 
 vidual credit? What is known of their extent? a subject 
 to which attention was called in the chapter on " Indi- 
 vidual Credit." The element of hazard figures in all 
 branches of credit. If transactions of one division are 
 subject to insurance, so are the transactions of all. It will 
 be said that the plan upon which credit insurance is oper' 
 ated answers the first two objections, for the reason that 
 the indemnity is based on a firm's statement of all its losses 
 for a period of years, and that in this statement will be 
 
 included all losses, whether they are the result of specific 
 23
 
 326 CREDIT AND ITS USES 
 
 and publicly reported failures, or the losses due to dry rot. 
 It is true that this is the system followed, but who will 
 attempt to say that this basis is as scientific as that on 
 which fire and marine losses rest ? In the latter the aver- 
 age losses have been determined by means that are subject 
 to public knowledge. The losses are determined by expert 
 and impartial appraisement. If there is a usufruct of sal- 
 vage it is considered in the approximation of the average 
 losses. Credit insurance, up to this time, has made but the 
 barest attempt to reduce the question of the " degree of 
 probability " to the same scientific basis followed by the 
 other branches of insurance. The fact that credit-insur- 
 ance premiums have trebled since it was first instituted 
 proves that it has been an experiment solely. The tend- 
 ency of fire-insurance rates has been downward, showing 
 that the refining process which has been applied to the 
 methods controlling that branch of insurance have made 
 for a reduction in the cost to the assured, although there 
 is no doubt that well-managed fire-insurance companies 
 have been paying enterprises. 
 
 Credit insurance as practiced does not aim to indem- 
 nify a man to the full extent of his losses, but only to reim- 
 burse him on account of what is called his abnormal loss — 
 by which is meant that amount of losses which exceeds his 
 average or '' own " loss. A certain percentage of " own " 
 loss is established, based on the average losses of a firm 
 for a given number of years. As an example, we will con- 
 sider a business whose sales reach $1,000,000. The aver- 
 age loss has been one-half of one per cent for a period of 
 five years. Credit insurance requires that when a man 
 takes out an insurance policy he must first lose the aver 
 age or " own " loss of, say, one-half of one per cent befoni
 
 CREDIT LOSSES 327 
 
 he can call upon the insurance company for relief ; for in- 
 stance, his policy is $15,000 and his own loss $5,000 ; if he 
 should lose only $5,000 during the year in which the policy 
 is in force, he would have no claim upon the company; 
 if he lose $10,000, he can prove his claim to the amount 
 of $5,000. If his losses were $17,000, he could prove only 
 to the extent of $10,000, the difference between his ovni 
 loss and the face of the policy. But why this own loss at 
 all, if credits can be insured ? Reasons have been advanced 
 to justify it — some plausible, others fanciful. It is urged 
 that as a man always expects to have a certain percentage 
 of losses, he provides against them by adding a percentage 
 to the selling price of goods, and his customers thus reim- 
 burse him for the loss ; that what he loses above this figure 
 is abnormal and unprovided-for loss. If a merchant's cus- 
 tomers reimburse him for his average loss, then in effect 
 he has no loss at all, and his bad debts are simply debited 
 against his merchandise account. Assume that he has an 
 unexpected loss during a year, raising his losses from one- 
 half of one per cent to one per cent, why can he not add 
 an increased percentage to the selling price of his goods ? 
 What simpler system of insurance ? If it is scientific to 
 add the percentage of his average or " own " loss to the 
 selling price of goods, it would be equally scientific to 
 increase the rate. Ah ! but some one says, he knows what 
 the average loss is, but he does not know what the abnormal 
 will be. The average, if it be a correct average, must com- 
 prehend the abnormal, and can be computed from year to 
 year. 
 
 It may be asserted in answer to this, that where goods 
 are sold upon a close margin it would not be possible to 
 add anything to the selling price over a very moderate or
 
 328 CREDIT AND ITS USES 
 
 normal percentage, to cover losses from bad debts, without 
 unduly increasing the price, and thus inviting inability to 
 make sales. If the addition of a percentage sufficient to 
 cover such losses is not feasible, then the " own " loss the- 
 ory is a fallacious one. Take the case cited where losses 
 had been increased from one-half of one per cent to one per 
 cent; a concern is carrying credit insurance as practiced, 
 and has been assuming an " own " loss of one-half of one 
 per cent ; it charges this to the selling price of goods ; the 
 following year, however, its losses are one per cent. The 
 policy of the credit-insurance company will be to increase 
 the " own " loss, and unless the merchant submits to the 
 increase to decline to write a new policy. Assuming that 
 the merchant surrenders, how is he going to dispose of his 
 increased " own " loss ? He must add it to the selling 
 price of goods. 
 
 The failures reported by Messrs. K. G. Dun & Co. for 
 the year 1904 in commercial circles amount to $144,202,- 
 311. These figures include the "own" and abnormal 
 losses, but do not comprehend the losses occurring from 
 accounts that are not listed among the reported failures as 
 before described, or the losses occurring in " individual 
 credit." The point to be considered is this: Whether this 
 amount of $144,202,311, including as it does the " own " 
 losses, is susceptible to the operations of insurance. If it 
 is, then the " own " loss theory is an untenable one. 
 Would the cost of sustaining this amount of insurance 
 prove too great a strain upon the commercial interests of 
 the country? If it would, then credit insurance is not 
 feasible ; if it would not, then credit insurance is entirely 
 feasible, and the " own " loss theory again falls to the 
 ground.
 
 CREDIT LOSSES 329 
 
 An advocate of credit insurance says, while defending 
 the " own " loss principle : 
 
 "It would be folly to demand that the Indemnity Company 
 should underwrite the full loss in a year, as no company could 
 withstand the $160,000,000 of losses per annum which occur from 
 bad debts in this country." 
 
 This statement would move one to ask why, if credit in- 
 surance is analogous to fire insurance (and it is generally 
 claimed to be so), insurance companies should not be able 
 to withstand the loss of $160,000,000 per annum in credits 
 if they are able to stand losses of $141,000,000, the amount 
 actually paid by the fire-insurance companies in 1904. 
 The figures of $160,000,000 are evidently reported lia- 
 bilities, but there must be deducted the assets of the estates 
 represented. For instance, although the liabilities from 
 commercial failures reported for 1904 were $144,202,311, 
 there were assets reported in these failures of $84,438,076. 
 These assets are undoubtedly subject to considerable scal- 
 ing, as the figures are no doubt taken from the first reports 
 of failed estates and are not the actual amounts realized 
 from the sales of property and the collection of accounts; 
 so that the liabilities of $160,000,000 per annimi do not 
 necessarily mean that credit-insurance companies would 
 have to pay out this amount. The payments made by the 
 fire-insurance companies in the year 1904 prove that the 
 amount that must be paid is not the only important con- 
 sideration ; the economic accuracy of the plans and the uni- 
 versal distribution of the risks involved being necessary 
 elements of correct insurance. When one considers the 
 gross capital employed in business, or the gross amount of 
 business transacted, the figures $144,202,311 need cause 
 no consternation.
 
 330 CREDIT AND ITS USES 
 
 It •will be evident without any long mathematical dem- 
 onstration that the commercial interests of this country 
 are fully able to bear the ex])ense of insuring losses. If 
 a system can be devised which will insure credits within 
 reasonable limitations, then it will not be necessary to add 
 to the selling price of goods the percentage or ratio of 
 failed accounts included in the " own " loss class, and the 
 cost of goods to consumers will be reduced to that extent. 
 Even assuming that there is never any necessity for in- 
 creasing the " OUT! " loss percentage in computing the 
 price of goods, there is an item which must be added to 
 the selling price, and that is the cost of the credit insur- 
 ance. This cost is a legitimate expense, if it be proper 
 to carry credit insurance at aU. When these two items, 
 " own " loss and " cost of credit insurance " are consid- 
 ered together, as they should be, the question immediately 
 arises as to the business wisdom of the outlay, this depend- 
 ing entirely upon the economic utility of credit insurance, 
 its scientific operation, and its adaptability to the special 
 line of business. 
 
 It may be said that in the last analysis there is no dif- 
 ference between charging the " own " loss account to the 
 consumer or increasing the expenses for insurance. The 
 question upon which we are working is whether credits 
 can be insured, and if it is not feasible or proper to insure 
 what are called " own " losses, that question might just as 
 well be settled and credit insurance given its right name, 
 which would probably be, " insurance to cover extraordi- 
 nary losses in credits." You must make somebody else pay 
 your " own " losses. Further, the " own " loss theory 
 must not be confused with the principle of coinsurance. 
 
 Spreading risks among a very large number of persons
 
 CREDIT LOSSES 331 
 
 minimizes the degree of risk in each particular case, and 
 reduces the cost of insurance to each individual. 
 
 The insurance of credits must of necessity be regulated 
 so as to prevent recklessness in the extension of credits. 
 Credit givers should not be permitted to take extreme 
 chances, feeling that they would be able to recoup them- 
 selves through credit insurance, or " to easily make use of 
 the insurance for their own economic advantage." Reck- 
 lessness in giving credit with a view to such protection 
 would defeat the very idea upon which insurance as an 
 abstract proposition is grounded, and no system of insur- 
 ance could obtain for any length of time where the assured 
 was not governed by certain specific rules in his manage- 
 ment or care of property (credits are property). This 
 idea has been approached by those selling credit insurance, 
 in the restrictions imposed upon the assured as to the lim- 
 its of accounts that will be provable under the policies. 
 These limits are based upon certain percentages, either of 
 the capital ratings of those to whom goods are sold by the 
 assured, or percentages of the business done, where policies 
 are written upon the experience plan. Adherence to these 
 restrictions has made for safer credits. 
 
 The second most important consideration arising in 
 credit insurance is the accomplishment of the largest pos- 
 sible saving from doubtful and failed accounts. No sys- 
 tem of credit insurance is adequate that does not compre- 
 hend the control of all doubtful and failed accounts which 
 are provable under the policies. For the information as to 
 the exact status of these accounts, credit insurance has 
 depended upon the mere statements of the assured or attor- 
 neys representing them. There is no doubt that in a very 
 large percentage of cases reports made as to the conditions
 
 332 CREDIT AND ITS USES 
 
 of these accounts are correct, according to the belief of the 
 assured or their representatives, but the weakness of the 
 system consists in this, that these accounts have not been 
 under the direct charge of the insurance companies, who 
 have not been in a position to know whether everything that 
 could possibly have been done to save an account, or a por- 
 tion of it, has been accomplished. Sending an account to 
 an attorney, having him investigate it and report that it is 
 uncollectible, then reducing it to judgment, or seeing it 
 wiped out by the discharge of a bankrupt, is not the most 
 scientific wa^' of saving accounts. 
 
 The purpose of credit insurance should be largely pre- 
 ventive against losses. When the time arrives that the 
 very fact of an account being in a doubtful condition will 
 warrant reporting it to the credit-insurance company, and 
 the majority of those interested in the case invited to con- 
 cert of action, then a practical prevention of losses will 
 take place. Such accounts can be thoroughly treated and 
 estates administered with slight expense ; businesses saved 
 that might have been riiined through individual action on 
 the part of creditors, each suspicious of the other ; and men 
 saved from bankruptcy because intelligent action will pro- 
 tect them from this fate. All this is just as legitimate a 
 function of credit insurance as the control of damaged 
 property by fire-insurance companies or the assumption by 
 a fidelity company of a claim against an embezzler. The 
 system which will avoid failures, administer embarrassed 
 estates with a minimum of expense, and reduce the expense 
 incident to failed estates, will be a real system of credit 
 insurance, for its purpose will be not only to reimburse 
 against losses but to reduce the expenses of such insurance 
 by the avoidance of losses. Doubtful or failed accounts
 
 CREDIT LOSSES 333 
 
 should be adjusted by the adjuster of the credit-insurance 
 company. The object of such adjustment is not to provoke 
 litigation, but to avoid it ; not to act as a mere distributor 
 of collections to commercial lawyers, as the object to be 
 gained is a decrease and not an increase of expenses. It 
 is to the interests of the credit-insurance companies to see 
 that the stock of a failed business brings the highest pos- 
 sible figure, and to jDrevent if possible the wasting of its 
 value through an ordinary bankrupt sale. 
 
 The principles upon which credit insurance should rest 
 are (1) protection against all losses incurred, and (2) the 
 conservation of the assets of embarrassed estates. Credit 
 insurance has been a much discussed subject ; but it would 
 appear that too much of the discussion has hinged on the 
 interpretation of the phraseology of the policies and the 
 difficulties encountered in making satisfactory' adjustments 
 when the credit man has attempted to prove a loss. 
 
 Credit insurance, founded upon scientific bases, with 
 the degree of probability of loss worked out to a scientific 
 demonstration, providing for the conservation of estates 
 under such auspices as have been indicated, as an item 
 of expense reduced to the lowest possible figure commen- 
 surate with due protection to the assured and a fair return 
 on the investment to the insurance company, will be a safe- 
 guard to credit giving and a stimulus to commerce.
 
 CHAPTER XX 
 
 ORGANIZATION AND EDUCATIOXAL MOVEMENTS IN CREDIT 
 
 (A) ORGANIZATION FOR THE IMPROVEMENT OF CON- 
 DITIONS AFFECTING CREDIT 
 
 Organized efforts for the improvement of conditions 
 affecting credit were instituted in the year 1896. This 
 movement was the outgrowth of discussions which took 
 place at the World's Mercantile Congress (June 19-2G, 
 1893), held under the auspices of the management of the 
 great Chicago Exposition. The announcement of this con- 
 gress contained the following statement : " It is hoped that 
 this congress may be the means of laying the foundation 
 for permanently organized effort for the better regulation 
 of mercantile credits in the future." Among the questions 
 which it was proposed to discuss were the following : 
 
 "How can we raise the standard of credit, reduce its dangers 
 and losses, and at the same time extend and increase its usefulness 
 to ourselves and others? " 
 
 "How can the quality of information concerning debtors and 
 the present facilities for obtaining it be improved?" 
 
 "Would it be practicable, through cooperation, to establish 
 a standard of requirements for credit basis?" 
 
 Toward the close of this congress a resolution was 
 adopted for the appointment of a committee to organize a 
 national association; but nothing was done through this 
 334
 
 ORGANIZATION AND EDUCATIONAL MOVEMENTS 335 
 
 channel. Three years after the Mercantile Congress had 
 met, the National Association of Credit Men was organized 
 at Toledo, Ohio. Prior to this, credit associations were 
 formed in a few cities, and these so-called local organiza- 
 tions were the nucleus of the national movement. There 
 had been credit companies, or bureaus for the exchange of 
 credit information and the collection and adjustment of ac- 
 counts, in existence for a number of years ; but the National 
 Association of Credit Men was the first body that ever 
 successfully attempted to accomplish an improvement in 
 the conditions surrounding credit based upon ethical and 
 educational purposes. Its objects are as follows: 
 
 "The objects of tliis association shall be the organization of 
 iridi\'idual credit men and of associations of credit men throughout 
 the United States, in one central body, for the purpose of rendering 
 more uniform, and establishing more firmly, the basis uj^on which 
 credits in every branch of commercial enterprise may be founded, 
 which shall include a demand for a reform of the laws unfavorable 
 to honest debtors and creditors, and the enactment of laws beneficial 
 to commerce throughout the several States; the improvement of 
 existing methotls for the diffusion of information, the gathering 
 and dissemination of data in relation to the subject of credits; 
 the amendment of business customs, whereby all commercial in- 
 terests may be benefited and the welfare of all may be advanced; 
 the provision of a fund for the protection of members against 
 injustice and fraud, and such other objects as the members of this 
 association may determine upon." 
 
 It will be observed that the aims of this organization 
 conform very closely to the statement of purposes issued 
 in behalf of the World's Mercantile Congress. 
 
 The credit-association movement has been a progressive 
 one, judged by the constant accessions to its membership 
 and the activity displaj'cd in developing its intents. Its
 
 336 CREDIT AND ITS USES 
 
 greatest success has been in the establishment of friendlier 
 ties between business men of all sections, accompanied by 
 a more pronounced and satisfactory diffusion of credit in- 
 formation. Through its efforts there has also been a grati- 
 fying advance in the procurement of legislation, making 
 for more equitable relations between debtors and creditors, 
 and restricting the possibilities of frauds upon creditors. 
 The question of " rendering more uniform and establish- 
 ing more firmly the basis upon which credits in every 
 branch of commercial enterprise may be founded " is gen- 
 erally recognized as hardly being susceptible to any definite 
 regulation, and the best that the credit associations can do 
 is to cultivate among business men a higher appreciation of 
 the rudimentary obligations which attach to the dispensa- 
 tion of credit, and promote adherence thereto. 
 
 As an educational center for credit men, the credit asso- 
 ciation has been a very important factor. The members 
 have been encouraged to express their views upon credit and 
 business problems through the mediimi of its publications, 
 and in this way a fruitful source of credit literature has 
 been developed. This is represented by articles, addresses, 
 and pamphlets published through the Business Literature 
 Department of the ISTational Association of Credit Men. 
 These writings are in almost all cases the work of business 
 men. As Irving has said : " The inventions of paper and 
 the press have put an end to all . . . restraints. They 
 have made everyone a writer, and enabled every mind to 
 pour itself into print and diffuse itself over the whole intel- 
 lectual world." There is included in this collection certain 
 addresses made at meetings of the credit associations by 
 judges, lawyers, and public officials on questions perti- 
 nent to some phase of the credit problem. These writings
 
 ORGANIZATION AND EDUCATIONAL MOVEMENTS 337 
 
 cover a wide field and relate to the following general 
 questions : 
 
 Accounting and Bookkeeping. 
 
 Banks, Bank Credits, and Related Questions. 
 
 Bankruptcy Law. 
 
 Business Abuses. 
 
 Business Principles and Customs. 
 
 Credit. 
 
 Credit Men and Credit Associations. 
 
 Credit Insurance. 
 
 Credit Lines and Limitations. 
 
 Credit Instruments. 
 
 Collections and Their Management. 
 
 Competition. 
 
 Cooperative Credit Information. 
 
 Educational Training for Business. 
 
 Elements of Credit. 
 
 Exemption Laws. 
 
 Business Depressions, Failures, Assignments, etc. 
 
 Fire Insurance and Its Relation to Credits. 
 
 Fraudulent Practices. 
 
 Legal Aspects of Credit Transactions. 
 
 Mercantile Agencies and Ratings. 
 
 Retail Credits. 
 
 Salesmanship and Its Relation to Credits. 
 
 Statements Reflecting the Financial Condition of a Business. 
 
 Trade Conditions. 
 
 Terms, Datings, and Discounts. 
 
 Wholesaling and Jobbing. . 
 
 (B) THE STUDY OF CREDIT 
 
 The tendencies of the age being strongly directed 
 toward specialization, it is necessary that the student or 
 the practitioner should apply himself to a distinct study 
 of the particular branch of business he expects to follow
 
 338 CREDIT AND ITS USES 
 
 or is following. The universities, colleges, and schools 
 have apprehended the need of an extension of their curricu- 
 lums to meet this demand of the times. It has been notice- 
 able that since the organization of the National Associa- 
 tion of Credit Men and the interest in the study of credit 
 that it has stimulated, many institutions of learning have 
 been devoting considerable attention to the subject of 
 credit. It does not appear that credit has been made a 
 separate feature of any of the courses in commerce, finance, 
 or business administration conducted by the different uni- 
 versities and colleges, its interrelationship with money 
 and banking making it more a division of the depart- 
 ment of political economy. The treatment of credit in 
 these courses relates to a study of its principles and general 
 purposes. 
 
 An examination of the studies included in the courses 
 referred to shows that it is the judgment of the scholastics 
 that an understanding of the higher branches of business 
 activity must be accompanied by an appreciation of the 
 fundamental principles upon which a question rests, con- 
 sidered in the abstract and historically. For instance, it 
 is not presumed that all a man needs to fit him for the pro- 
 fession of banking is to first carry messages, then become 
 a bookkeeper, and finally to be promoted to an ofiicership; 
 nor for a credit man simply to pass through the routine of 
 a credit office. There is a certain training which should 
 be applied to the mind, and which can only be acquired 
 through a study of a subject from its first principles. It 
 is agreed that this training is largely " disciplinary," but it 
 makes for a much better comprehension of any question, 
 pnd assists that " accuracy of thought " and " clearness 
 of expression " so essential to a well-developed business
 
 ORGANIZATION AND EDUCATIONAL MOVEMENTS 339 
 
 experience and judgment. The student of credit must 
 therefore discipline his mind by a proper study of the eco- 
 nomic bases upon which credit stands. Economics has, up 
 to this time, played too small a part in the thoughts of the 
 business world. Credit men, by virtue of their vocation 
 and the duties it involves, should be foremost in demand- 
 ing that not alone the superficial, but the innate and funda- 
 mental character of all questions should be studied and 
 appreciated, and a halt be called on the idolatry of the prac- 
 tical to the exclusion of underlying and eternal prer-epts. 
 There is a delusion that " knowledge fetters genius," es- 
 pecially that character of knowledge obtained from books. 
 Frequently men who have had only business training scoff 
 at suggestions which may be the outgrowth of " courses in 
 commerce " and information d^ived from economic trea- 
 tises or teachings. 
 
 Credit involves an analyzation of the character of man 
 and the values of properties of all descriptions. Economics 
 covers the status of man in society ; and therefore if the 
 credit man is to measure with correct judgment the ele- 
 ments that determine man's standing in society, his char- 
 acter, his ability, his worth, his prospects, and his power of 
 accomplishment, this can only be done by a knowledge of 
 the conditions that surround him, with which he deals, and 
 by which he is largely governed. A man's ability to inter- 
 pret the true nature of these conditions will be assisted 
 immeasurably by his familiarity with those precepts of hu- 
 man action and those principles of agricultural, industrial, 
 and commercial development which have controlled the 
 destinies of mankind and promoted the progTCSs of civili- 
 zation.
 
 INDEX 
 
 26
 
 INDEX 
 
 Abnormal loss, credit insurance 
 and, 326; loss above certain per- 
 centage, 327; amount of, diffi- 
 cult to determine, 327. 
 
 Accommodation, limit of, 137; 
 opinions of bankers on, 137; out 
 of proportion, 137. 
 
 Accommodation bills, 19, 108. 
 
 Accounts, receivable, 129; carried, 
 or carrying, 212; suspended, 
 292; value of suspended, 292; 
 limits of, in credit insurance, 
 331. 
 
 Accounting, credit man and knowl- 
 edge of, 188. 
 
 Acts of bankruptcy, under law of 
 1867, 313; failure to meet one's 
 liabilities among, 313. 
 
 Adjusters, looking after past due 
 accounts, 277; useful informa- 
 tion secured by, 277; when im- 
 {jossible to collect through, 284; 
 arge claims handled by, 287; 
 of credit insurance companies, 
 333. 
 
 Adjustment Bureaus, collection 
 letters used by, 282; establish- 
 ment of, 290, 292, 335; strength 
 among credit men's associations, 
 290, 292; benefit to creditors and 
 debtors, 290. 
 
 Administration by creditors, bene- 
 fits to creditors and debtors, 
 290; debtors surrendering busi- 
 ness to creditors, 291; business 
 conducted under, 291, 292; less 
 expensive than bankruptcy act, 
 291; inevitable result of, 291; 
 not a new departure, 291; com- 
 
 positions aflfected through, 291, 
 292; in credit insurance, 332. 
 
 Advanced civilization, system of 
 credit proof of, 18. 
 
 Agency reports, dependence in- 
 volved in, 191; well-thought-out, 
 192; time limit for preparation 
 of, 197; not reaching standard, 
 201. 
 
 Agencies, special, work through, 
 190; superior to mercantile 
 agencies, 190; promptitude of, 
 198; conceded special advan- 
 tages, 198. 
 
 Agricultural, advantages of a rail- 
 road, 59; domain, 60. 
 
 Aldrich, Wilbur, 6, 10, 108. 
 
 American Bankers' Association, 
 127. 
 
 "American Commonwealth," 78. 
 
 "American Government," by B. 
 A. Hinsdale, 301. 
 
 American railroads, 60. 
 
 "An Inquiry into the Nature and 
 Effects of the Paper Credit of 
 Great Britain," 8. 
 
 "An Introduction to the Consti- 
 tutional Law of the United 
 States," by John Norton Porae- 
 roy, 321, 322. 
 
 Annual license, 158. 
 
 Anti-Federalists, political element, 
 306; predisposed to limit scope 
 of Federal compact, 306. 
 
 Appeals, under bankiiiptcy act of 
 1841, 304; under bankruptcy 
 act of 1867, 304. 
 
 Articles of Confederation, ex- 
 perience with, 321. 
 
 343
 
 }44 
 
 CREDIT AND ITS USES 
 
 Assets, must be accurately ap- 
 praised, 227; composition of, 
 understood. 227; should be a 
 real help to the business, 228; 
 effect upon paying qualities of, 
 228; actual value only com- 
 puted, 228; nature of, 228; sub- 
 ject to considerable scaling, 
 329. 
 
 Assignees in bankruptcy, under 
 act of 1867, 304. 
 
 Assigrunent, administration of an, 
 309. 
 
 Attorneys, credit information se- 
 cured through, 163; excellent 
 medium for credit information, 
 163, 164; giving credit informa- 
 tion without charge, 105; lists of 
 attorneys, 165, 166, 286; reci- 
 procity policy not beneficial to, 
 165, 166; indifferent as to serv- 
 ice, 165; dissatisfaction of busi- 
 ness men with reports of, 165; 
 not a great deal of value placed 
 on reports of, 165; criticism of 
 attorneys' reports, 166; fee 
 accompanying request for re- 
 
 {)orts, 166; elimination of card 
 ists of, 169; under contract to 
 furnish credit information, 169; 
 compensation for reports of, 
 169; preparation of reports by, 
 169; opinions of credit men on 
 reports of, 170, 171; superior 
 quality of credit data acquired 
 by some, 172; special reports by, 
 189; used to corroborate mer- 
 cantile agency reports, 197; 
 drafts handed to, 278; as col- 
 lectors, 284; methods in collect- 
 ing, 285; publicity attached to, 
 285; expense of using, 285; 
 character of, 286; capacity of, 
 286; difficulty of determining 
 standing of, 286; bonded, 286; 
 comparison with collection agen- 
 cies, 287; as personal counsel, 
 287, 288; business from collec- 
 tion agencies, 289; fees of, 289; 
 credit msurance and, 331, 332. 
 "At Wholesale," lecture by A. C. 
 Bartlett, 223. 
 
 Babylon, customs prevalent in, 6. 
 
 Bagehot, Walter, 9, 12, 13, 19, 41, 
 46, 102, 103, 113. 
 
 Balance sheet, determining ac- 
 ceptability of a bond, 62. 
 
 Bank, providing customers with 
 permanent capital, 36; must pay, 
 36; credits, 86; credit, 113; 
 should secure a statement from 
 customer, 125; standing in the 
 community, 133; balance, 137; 
 customers of, 140. 
 
 Bankers, their services in public 
 matters, 39; tnistres for funds, 
 etc. 46; responsibility of, 46; 
 insisting upon insurance, 130. 
 
 Banking, sound, 35; spirit of, 36; 
 reprehensible, 3G; early history 
 of, 38; difference between, and 
 commerce, 46; should be less 
 risk than in commerce, 46; per- 
 centage of profits smaller than 
 in commerce, 46; vitality of, 49; 
 most powerful agency in com- 
 mercial structure, 174; qualifica- 
 tions for, 338. 
 
 Banking community, power of, 
 37; regulating affairs of the 
 world, 68; has not recognized the 
 credit department, 121. 
 
 Banking credit, mercantile credit 
 and, 12; highest form of credit, 
 35; relation of, to commerce, 41; 
 quality of collateral in, 46; 
 credit investigations in, 86; lack 
 of educational methods in, 88; 
 note broker in. 111; favoritism 
 in, 138. 
 
 Bank of Amsterdam, 7. 
 
 Bank of Genoa, 39. 
 
 Bank notes, use of, 19, 38. 
 
 Bank references, not of a great 
 deal of value, 172; certain in- 
 formation not disclosable, 172; 
 credit man on, 174, 175; mis- 
 conception of, by credit men, 
 174. 
 
 Bankrupt, title an opprobrious 
 one, 309; well-disposed, 315; 
 may receive discharge, 316; dis- 
 charge of, 332; sale, 333. 
 
 Bankruptcy, men saved from, 332.
 
 INDEX 
 
 345 
 
 "Bankruptcy a Commercial Regu- 
 lation,' article on, James M. 
 Olmstead, 299. 
 
 Bankruptcy Act of 1898, The 
 National, relation of books of 
 account to, 182; preference as to 
 rent not enforceable, 238; credit 
 man's familiarity with, 261; 
 range of interpretation of, 262; 
 superseded the State system, 
 290; making for equality, 290; 
 aims to reach administration by 
 creditors, 291; expense attend- 
 ing, 291; adjustments through 
 compositions, 291; suspending 
 State statutes, 300; referees and 
 trustees under, 304, 317; case 
 under, must be of public rec- 
 ord, 309; strong point in its 
 favor, 309; passage of, 310; 
 enacted after prolonged strug- 
 gle, 310; doubt in Congress as 
 to wisdom of, 311; hailed as 
 progressive step, 311; not con- 
 sidered perfect measure, 311; 
 compromise between different 
 forces, 311; best-thought-out 
 legislation, 311; range of its 
 operations, 311; ease with which 
 references may be made, 311; 
 administration of, 311; repeal 
 measures and amendments, 313; 
 different divisions of, 313; aims 
 to reach every contingency of 
 bankruptcy administration, 313; 
 marked departure in, 313; acts 
 of, 314; insolvency defined, 314; 
 more difficult to place in bank- 
 ruptcy under, 314; who may be; 
 come banknipts under, 314; 
 compositions permitted, 3ir); 
 discharge feature explained, 316 ; 
 strongest merit of, 317; great 
 powers of creditors under, 317; 
 advantage over State procedure, 
 318; meetings of creditors, 318; 
 principal advantages of, 320,321. 
 
 Bankruptcy Law, adjustments 
 under, 298; disposition of na- 
 tions toward, 298; first English, 
 299; in England, 299; first in 
 United States, and scope of, 
 
 301, 302; repeal of first law, 
 302; American, 303; demand for, 
 310; interests demanding, 310; 
 opposed to passage of, 31(;»; com- 
 prehensive, 311; impossible to 
 devise acceptable, 312. 
 
 Bankruptcy laws, presupposed 
 guilty knowledge of, 298; prin- 
 ciples based on, 298, 299; pres- 
 ent purpose of, 299; of mediaeval 
 origin, 299; outgrowth of com- 
 mercial system, 299; necessity 
 of commercial system, 299; in 
 force in all great nations of 
 Europe, 299; adoption of, 299; 
 power of Congress to establish, 
 300; relation of, to credit sj's- 
 tem, 300; of ISOO, 1841, 1867, 
 300; short life of, 300; absence 
 of, 300; bread-money provisions 
 of, 302; Law of 1841, 303; Act of 
 1807, 304; Act of June 22, 1874, 
 305; expenses of administration 
 under Act of 1867, 30r); repeal 
 of Act of 1867, 305, 310; patron- 
 age and op(M-ation of, 307; 
 ground of objection to. 308; dis- 
 favor with which regarded, 309; 
 greatest evil, in absence of, 3KS; 
 in earlier functions were credi- 
 tors' laws, 320; broadening the 
 scope of, 320. 
 
 Bankruptcy legislation, develop- 
 ments of, 298, 303; in I'nited 
 States, 299; duty of Congress 
 in respect to, 300; exemptions 
 under, 302; first not satisfactory, 
 303; demand for, 303; efforts to 
 secure, 304; Thomas A. Jenckes 
 and, 304; had not taken a per- 
 manent hold, 305, 306; not re- 
 garded as necessarj' element, 
 306; beginning of permanent, 
 311; best throughout, 311; all- 
 time, opponents of, 311; marked 
 departure in, 313. 
 
 Bankrupts, under old English 
 laws, 301, 309; misfortunes 
 unduly exploited, 308; treated 
 with great severity, 309; wear 
 garb to advertise disgrace, 309; 
 under Act of 189S, 314.
 
 346 
 
 CREDIT AND ITS USES 
 
 Banks, definition of, 37; power of, 
 37, 38; manufacturers of, 38; 
 classes, 38; politicians and, 38, 
 39; function of, 39; serving to 
 expand credit, 40; trustees for 
 funds, etc., 46; responsibility of, 
 46; relations of, with note 
 brokers. 111; lending on book 
 credits, 115; determination of, 
 profit in, 122; acting as investing 
 medium, 123; policy of asking 
 for statements from customers, 
 127; customers of, 140; securing 
 loans, 141; have no information 
 to give, 173; private character 
 of relations with customers, 173; 
 consulting papers and periodi- 
 cals, for credit information, 260; 
 handling collection drafts, 279. 
 
 Barclay, Geo. R., article on fire 
 insurance, 248. 
 
 Bartlett, A. C, lecture on "At 
 Wholesale," 223; offers excellent 
 groundwork for good credit,.223. 
 
 Beef Trust, 92. 
 
 Biggs, Chas. test of rent value 
 proposed by, 237, 238. 
 
 Bills, instruments of credit, 43, 45. 
 
 Bills of exchange, 19, 20, 23, 42, 
 105; chief functions of, 104, 107. 
 
 Bills of lading, 42. 
 
 Bills of sale, 318. 
 
 Black Friday, 305. 
 
 Book credits, 43, 106, 107, 113, 
 114; as collateral for loans, 115; 
 concerns dealing in, 116. 
 
 Books of account, 182. 
 
 Boom-town, 56. 
 
 Bonded lists, of attorneys, 286; 
 use of, 286; guarantee of, 286. 
 
 Bonds, credit represented by, 49; 
 State, 54; municipal, 54; rail- 
 road, 54, 57, 58; municipal 
 street-car line, 54, 64; water- 
 works, 54; of certain govern- 
 ments, 73. 
 
 Bradstreet Company, The, ratings 
 of, 146; value of service, 191; 
 foundation of, 193; organized by 
 John M. Bradstreet, 193; incor- 
 porated as, 194; reputation for 
 soHdity, 194; statistics of, 225; 
 
 number of people in business re* 
 ported by, 220. 
 
 Bradstreet, John M., 193. 
 
 Bradstreet, Henrj', 193. 
 
 Bradstreet, J. M., & Co., 193. 
 
 "Bradstreet's Improved Mercan- 
 tile Agency," 193. 
 
 Bradstreet Press, 193. 
 
 Bryan, Clark W., 193. 
 
 Bryce, James, 78. 
 
 Building and loan associations, 26. 
 
 Bullock, C. J., 11, 219. 
 
 Business education and commer- 
 cial banking methods, 128. 
 
 Business literature department of 
 National Association of Credit 
 Men, 336. 
 
 Call loans, 134. 
 
 Canada, failures in, 225. 
 
 Cannon, James G., 83, 84, 86, 89, 
 94, 254. 
 
 Capability, credit granted on, 220; 
 basis of great fortune, 221. 
 
 Capacity, an element of credit, 84, 
 110, 219, 221; defined, 220; 
 quality on which business de- 
 pends, 222; gives material life, 
 223; second only to character, 
 223; place in credit, 226, 271; 
 trusting because of, 226; help in 
 developing business 272; of man 
 who has failed, 294. 
 
 Capital, hoarding of, 21, 51; credit 
 employing more productively, 
 25; concentrated, 20; desire of 
 those who seek, 27; permanent, 
 36; unemployed, 51; should be 
 invested, 51, 53; effects of non- 
 employment of, 52; used for 
 war purposes, 70; interest on, 
 90; loss of interest on, 90; avail- 
 able, 101; trading on borrowed, 
 103; confining to own, discour- 
 aged, 103; supplied through 
 book credits, 114; an element of 
 credit, 219; defined, 220; in 
 credit economy, 221-226; dis- 
 position to overestimate im- 
 portance of, 223; must have 
 capacity behind it, 223; repre- 
 sents, 224; when not a deter-
 
 INDEX 
 
 347 
 
 mining factor, 224; when neces- 
 sary, 224; lack of, 224; turning 
 into different channels, 228, 
 231; active, 229; effect of im- 
 paired, 271. 
 
 Capital credit, division of credit, 
 49; differs from banking credit, 
 49; arises from, 51. 
 
 Capitalization, basis of, 65; over, 
 65; at reproduction value, 66. 
 
 Carey, Henry C, 9, 18, 27. 
 
 Cash basis, doing business on, 105, 
 106. 
 
 Certified public accountant, veri- 
 fication of books by, 132. 
 
 Character, 84, 85, 93, 94, 103, 
 134; an element of credit, 219, 
 221, 222, 271; defined, 220; 
 credit granted on, 220, 226; 
 basis of great fortunes, 221; no 
 right to credit without, 222; 
 some claim not indispensable, 
 223; absence of, 223. 
 
 Checks, 19, 20, 23, 42, 43. 
 
 " Chicago Exposition," 332. 
 
 Circulating medium, 20. 
 
 Civilization, progressive, 68; in- 
 fluence of, 99; progress of, 339. 
 
 Civil War, 77, 305. 
 
 Clark, Charles Finney, president of 
 the Bradstreet Company, 194; 
 his work, 194. 
 
 Clearing houses, 18. 
 
 Cleveland, Frederick A., 10. 
 
 Cleveland, Grover, 77, 78. 
 
 Clews, Henry, 128. 
 
 Collections, affecting safety of 
 business, 87; interesting duty of 
 credit man, 263; unless made in 
 full, 263; success of business de- 
 termined by character of, 264; 
 advantage of prompt collec- 
 tions, 264; terms and discounts 
 determined by, 264; character 
 of accounts affecting, 265; 
 prompt action necessary, 265; 
 systematic methods in, 266, 
 267; card indices used for, 266; 
 influence of tickler systems on, 
 266; improvements in methods 
 in, 267; tickler system plan, 
 267, 268; examinmg ledgers, 
 
 268; discussing with salesmen, 
 268; methods for managing dis- 
 cussed, 268, 276, 277, 278; hesi- 
 tation by credit man, 269; 
 causes for dilatory payments, 
 270; too rigid application of 
 systems for, 274; a system of, 
 275, 277, 278; difference in 
 treatment of, 275. 
 
 Collection agencies, utilizing 
 drafts, 278, 280; work of, 279, 
 288; draft system, 279; harm to 
 merchant by drafts of, 279; col- 
 lection letters of, 281; collec- 
 tions forwarded through, 287; 
 comparison of, with attorneys, 
 287; supposed advantages of, 
 288; expert knowledge of, 289; 
 giving attorneys busmess, 289; 
 reports from, 290. 
 
 Collection bureaus, collection let- 
 ters used by, 282. 
 
 Collection letters, description of, 
 281; series of, 282; impression 
 made by, 282; concerns doing 
 business in, 282; sale and use 
 of, 283; usually mark severance 
 of business relations, 283; criti- 
 cisms of, 283, 284; when impos- 
 sible to collect by, 284. 
 
 Colwell, Stephen, 16. 
 
 Commerce, requirements of, 17, 
 18, 19; influence on civilization, 
 35; relation to banking, 42; 
 credit system in, 99; source of 
 wealth, 102; facts of, 154; effect 
 of failures upon, 232; spread of, 
 309; fortuitous losses of, 324. 
 
 Commercial credit, defined, 8; ele- 
 ments of, 84; lack of educational 
 methods in, 88; intricacies of, 
 95; field of, 99; operations of, 
 99, 104; channels of, 100; great 
 pillar of the credit structure, 
 102; brings into being instru- 
 ments of credit, 102; hard and 
 fast rule for, 105; influence upon 
 the tendencies of the people, 
 108; bankable paper arising 
 from, 142; in a new community, 
 194. 
 
 Commercial crises, 28, 29.
 
 348 
 
 CREDIT AND ITS USES 
 
 Commercial National Bank of 
 Chicago, 196. 
 
 Commercial rating, 44. 
 
 Commission houses, advancing on 
 book-credits, 115; practically 
 become bankers, 116. 
 
 Common carriers, 57. 
 
 Common-law assignment, adjust- 
 ments under, 298. 
 
 Company .stores, 92; credit given 
 by, 92; credit "enjoyed at, ' 93; 
 prices charged in, 93. 
 
 Comparative statement forms, 
 used by banks, 140, 143; form of, 
 140; advantages of, 140, 248, 
 249; a banking custom, 249; 
 opinions of credit men on, 249; 
 reason why not used in comi- 
 mcrcial credit, 249; loss of time 
 involved in using, 250. 
 
 Competition, stnigglcs of, 87. 
 
 Competitive system, 108; best re- 
 sults in new localities, 109. 
 
 Compositions, adjustments 
 
 through, 291, among best fea- 
 tures of Bankruptcy Act of 1898, 
 315; enforceable by court, 315; 
 essentially humane, 315; may be 
 set aside, 315; creditor before 
 signing, 317. 
 
 Confidence, basis of modem busi- 
 ness, 219; must be founded on 
 substantial elements, 219; basis 
 of credit, 219; based on char- 
 acter, capacity, and capital, 219. 
 
 Congress, power to establish bank- 
 ruptcy laws, 300, 301, 315; duty 
 in respect to bankruptcy legis- 
 lation, 300; treatment of cred- 
 itors by, 318, 321. 
 
 Conrad, Johannes, 22, 24, 25, 27. 
 
 Constitution, The, defining rights 
 and duties, 79; adoption of, 306; 
 provision on bankruptcy laws, 
 300; phraseology of, on bank- 
 ruptcy laws, 301; uniformity re- 
 quired by, 315; experience with, 
 321. 
 
 "Constitutional Limitations," by 
 Thomas M. Cooley, 301. 
 
 Consumer, unproductive, 30; 
 credit secured by, 82; takes ad- 
 
 vantage of dealer's fear, 87; 
 must recompense dealer, 90; 
 gratifying his wants, 91; rau.st 
 pay advance in price, 91; unit 
 of the multitude, 100; added 
 cost to, 324, 330. 
 
 Consumptive credit, 83. 
 
 Continental statutes, 313. 
 
 Contract, influence of, 297; debtors 
 violation of, 298. 
 
 Cooley, Thomas M., right of the 
 States to legislate on bank- 
 niptcies, 301. 
 
 Cooperative bureaus, 88. 
 
 Cooperative methods, outgrowth 
 of credit information system, 
 206; most successful work in, 
 213. 
 
 Corporate credit, 54. 
 
 Correspondence, not as effectual 
 as oral interview, 154; by the 
 credit man, 257; faults in, 258; 
 the end desired in, 258; in 
 making collections, 276. 
 
 Cost of living, 89. 
 
 Courses in Commerce, study of 
 credit and, 338; scoffing at, 339. 
 
 Courts, institution of, 298; cir- 
 cuit, 304; State, administration 
 of failed estates, 307; State, dis- 
 pensing patronage, 307; United 
 States, patronage transferred to, 
 307; State, deprived of patron- 
 age, 307; United States, element 
 opposed to extending power of, 
 308. 
 
 Credit, those affected by, 3; money 
 and, 3; as a science, 5; hardly an 
 exact science, 5; principles of, 
 6,7, 11, 152; world's experience 
 with, 6; defined, 6, 8, 9, 10, 11; 
 origin of, 6, 7; laws affecting, 7; 
 system of, 7; functions of, 7, 21, 
 91; theory of, 7, 14, 17, 83; 
 tangible element of, 7; intan- 
 gible element of, 8; mercantile, 8, 
 12; estimates of, 11; confidence 
 as an element of, 12, 18, 51, 152; 
 cardinal questions, 13; legal 
 environment of, 13; funda- 
 mental precepts, 17; backward 
 races do not use, 18; earliest
 
 INDEX 
 
 349 
 
 forms of, 18; as a substitute for 
 money, 19; as a creator of pur- 
 chasing power, 20, 89; means of 
 production not increased by, 20; 
 purchasing power of, 21; ad- 
 vantages of, 22; taking the place 
 of gold and silver, 24; employing 
 capital more productively, 25; 
 benefits conferred upon laborers, 
 etc., 25; inculcates saving pro- 
 pensities, 26; abuses of, 28, 69; 
 used to create a monopoly, 28, 
 30; limits of, 30; standard of, 30; 
 given to \mproductive dealers 
 a detriment, 30; highest form 
 of, 35; banks dispensers of, 35; 
 false systems of, 36; good bank- 
 ing, 36; expansion of, 40; re- 
 demption of, 40; practical phase 
 of, 47; determining factor, 48; 
 commerce and finance, depend- 
 ent on, 50; of the land, 55; stand- 
 ard of, 58; as a great enabling in- 
 fluence, 68; sensitiveness of, 78; 
 of the States, 79; most popular 
 form of, 82; basest form of, 83; 
 dynamics of, 84; lack of proper 
 use of, 84; too great liberality in 
 extending, 86; without reliable 
 knowledge, 87; withholding of, 
 89; effect of, on prices, 89, 91; re- 
 sorted to by the humblest, 90; 
 nature of, 91; evils of, 92; pro- 
 priety of purchases made on, 
 94, 95; withdrawal of, 95; offered 
 to induce business, 97; medium 
 through which goods are moved, 
 100; constant use of, 101; in- 
 dispensable in commercial life, 
 101; capital to producer, manu- 
 facturer, etc., 101; use or enjoy- 
 ment to individuals, 101; trend 
 of business toward, 103; un- 
 worthy persons securing, 103; 
 causes same circulation as 
 money, 105; circulating medium, 
 105; in new settlements, 109; 
 time Hmit in, 110. 113; prompt 
 settlement indispensable to 
 good, 113; system in, 121; 
 means a risk, 150, 152; a great 
 tradition, 131; changing char- 
 
 acter of, 151; element of futurity 
 in, 152; hard and fast rules in, 
 152; new lines of, 153; treat- 
 ment by salesmen, 163; not 
 extending reasonable lines of, 
 172; contraction of, 172; con- 
 fidence, basis of, 219; judge of, 
 224; ideal credit risk, 227; un- 
 duly restricting, 231 ; fire in- 
 surance as a protection to, 247; 
 .stabilitv of, 322; certamty of 
 lo.sses from, 323, 324; type of 
 ability necessaiy in, 323; ele- 
 ment of hazard in, 325; insur- 
 ance of, 331 ; recklessness in ex- 
 tension of, 331; organized efforts 
 for improvement of, 334; stu- 
 dent of, 339. 
 
 "Credit," 10, 11. 
 
 Credit associations, policy of, in 
 clearing information, 207; nu- 
 cleus of natural movement, 
 335; movement a progressive 
 one, 335; greatest success of, 
 336; educational center, 336; 
 credit literature developed by, 
 336; addres.ses at meetings of, 
 336; subjects of addresses at 
 meetings of, 337. 
 
 Credit bureaus, most desirable 
 means of acquiring credit in- 
 formation, 191; held in high 
 esteem, 206; houses object to be- 
 longing to, 211; distributing in- 
 formation, 211; work of, 212; ex- 
 pense of conducting, small, 213; 
 organized by business men, 214; 
 capitalization of, 214; service 
 of, voluntary, 214; formed by 
 branches of National As.socia- 
 tion of Credit Men, 214; must 
 be established throughovit the 
 country, 215; in existence num- 
 ber of years, 335. 
 
 Credit cooperation, methods con- 
 stituting, 206; employed by or- 
 ganizations, 206; lack of unifor- 
 mitv in methods of, 206; nieth- 
 ods'employed in, 207, 208, 210. 
 
 "Credit, Credit Man, and Cred- 
 itor," paper by James. G. Can- 
 non, 254.
 
 350 
 
 CREDIT AND ITS USES 
 
 Credit department, The, in the 
 bank, 86; in banking credit, 121, 
 140, 146; an essential adjunct, 
 121; objections to, in banks, 121; 
 what should represent, 123; op- 
 erations of, 124; use of forms in, 
 124; regulator of the whole 
 mechanism, 128; revision of 
 bank's credit reports, 139; 
 broadening in banking, 146; 
 division of industries and call- 
 ings in banking, 146, 148, 149; 
 outline of work of, 150; keeping 
 card-indexed list of attorneys, 
 166, 287; present demands of, 
 201; designed to prevent losses, 
 263; handing accounts to at- 
 torneys, 285; informed of stand- 
 ing of attorneys, 286. 
 
 Credit department methods, com- 
 mittee on, 178. 
 
 Credit-giving, an extremely deli- 
 cate task, 151; no definite 
 policy in, 157. 
 
 Credit information, obtained 
 through correspondence, 133; 
 sources of, 150; means of ac- 
 quiring, 150; larger volume of, 
 151; credit man must consult 
 all sources of, 152; every class of 
 views must be noted, 152; oldest 
 sources of, 153; must be given 
 thorough attention, 158; proper 
 responsibility for, among sales- 
 men, 162; secured by attorneys, 
 163; services of attorneys in the 
 main satisfactory, 164; should 
 be paid for, 166; attorneys under 
 contract to furnish, 169; when 
 services of attorney necessary, 
 170; freedom in the interchange 
 of, 180; oral investigations, 185; 
 mercantile agency and, 190; a 
 credit clearance system, 204; 
 aim of, 205; volume of, relative- 
 ly limited, 205; reason why 
 necessary, 205; organizations 
 acting as mediums for, 206, 333; 
 great variety of systems of, 2(Xj; 
 best results of, in certain trade, 
 206; methods employed in clear- 
 ance of, 207, 208, 210; com- 
 
 panies doing business in, 212; 
 analysis of, 220; elements of 
 credit and, 220; papers and 
 periodicals as sources of, 259; 
 regarding bad or doubtful ac- 
 counts, 294; credit association 
 movement and, 336. 
 
 Credit insurance, to protect suf- 
 ferers from credit losses, .324; 
 plan on which operated, 325; 
 degree of probability in," 326; 
 premiums have trebled, 326; 
 an experiment solely, 326; re- 
 imbursing an "abnonnal loss" 
 only, 326; requirement as to 
 "own" loss, 326, 327; argu- 
 ments for and against "own 
 loss theory," 327, 328; carrying, 
 as practiced, 328; policy of com- 
 pany to increase "own" loss, 
 328; feasibility of, 328; relation 
 of, to fire insurance, 329; cost of, 
 330; economic utility of, 330; 
 right name of, 330; reducing the 
 cost of, 331; recouping through, 
 331; those selling, 331; saving 
 from doubtful and failed ac- 
 counts in, 331; control of 
 accounts in, 331; weakness of 
 system, 331; purpose of, should 
 be, 332; legitimate function of, 
 332; real system of, 332; in- 
 terest of companies, 333; prin- 
 ciples on which it should rest, 
 333; a much-discussed subject, 
 333; phraseology of policies, 
 333; founded on scientific bases, 
 333; safeguard to credit-giving, 
 333; stimulus to commerce, 333. 
 
 Credit interchange, closer relation- 
 ship between mercantile in- 
 terests and banks on, 172; dif- 
 fusion of great mass of credit 
 information, 173; among bank- 
 ers, 176; principle of. 180; 
 based on reciprocity, 202; sig- 
 nificant development of, 203; 
 defined, 203; acquired from 
 people in business, 203; great 
 benefits of, 204; some fail to 
 co5perate in, 204; weeding out 
 imdesirable customers, 204;
 
 INDEX 
 
 351 
 
 means of detecting fraud, 204, 
 205; called into being by, 204; 
 candor essential to, 208; efforts 
 directed to, 212; spreading the 
 doctrine of, 212; success of idea 
 depends upon, 213; question of 
 expense affecting, 214; depends 
 upon universal support, 214; 
 system in its infancy, 214; 
 national bureau, 214, 215. 
 
 Credit instruments, 6, 12, 19, 42, 
 43; 102, 106. 
 
 Credit investigations, omission to 
 engage in, 86; lack of facilities 
 for making, 87; absence of 
 knowledge on part of dealers, 87 ; 
 proper, 88; results of, preserved, 
 294. 
 
 Credit investigator, apprentice 
 period, 185; framing own ques- 
 tions, 186; interested and watch- 
 ful, 186; relation to commerce, 
 186; relation to traveling credit 
 representative, 187. 
 
 "Credit — Its Meaning and Mo- 
 ment," 193. 
 
 "Credit Lines and Limitations," 
 method of deciding, 239; ran- 
 dom reasoning on, 239; senti- 
 ment in favor of, 239; purpose 
 of institution, 239; no explicit 
 rule for, 239; opinions on, 239, 
 240, 241, 242, 244; inadvisable 
 to assign, 240, 244; when meas- 
 ured by requirements, 240; 
 utility not recognized, 240; diffi- 
 culties in depending on, 242; 
 basis of, 242; not made known to 
 customer, 241, 243; usefulness 
 where an account is overdue, 
 243; for guidance of subordin- 
 ates, 243; changing conditions 
 affecting, 245; mental record of, 
 by credit man, 245; impracti- 
 cability of respecting, 246. 
 
 Credit man, disposition to idealize, 
 124; defined, 124; of a bank, 124; 
 a lay judge, 150; must consult 
 all sources of credit information, 
 152; unwilling to be influenced 
 by salesmen's reports, 159; com- 
 bination of, ana salesman, 160; 
 
 instructions to salesmen, 162; 
 should cultivate close relations 
 with the salesman, 163; use of 
 law lists by, 169; contention 
 that, should be an accountant, 
 188; agency information and, 
 192; must analyze information, 
 219; showing his confidence, 219; 
 task imposed upon, 219; burden 
 lightened, 220; insisting on list 
 of expenses, 234; divorcing the 
 hiterest of, 243; bookkeeper 
 helping, 243; inquiry as to fire 
 insurance carried, 247; should 
 advise customers regarding fire 
 insurance, 247, 248; duties of, 
 251, 252; broadening his ex- 
 perience, 251; consulting sales- 
 men, 252; must be systematic, 
 252; habits, 252; regulating 
 duties, 252; good work by, 253; 
 the tactful, 257; dependent on 
 good will of others, 257; should 
 meet all customers if possible, 
 257; conducting correspondence, 
 257, 258; fallibility of, 258; 
 should he have full authority, 
 258; salesmen appealing from 
 decision of, 258; acquiring ex- 
 perience, 258; large ideas of, 
 258; exercising influence upon 
 the, 259; results of experience 
 by, 259; should consult financial 
 pages of papers, 260; as a stu- 
 dent of law, 260; consulting legal 
 periodicals, 260; should not oe 
 his own lawyer, 260, 262; should 
 consult lawyers when in litiga- 
 tion, 261; published legal de- 
 cisions and, 261; assimilating 
 State collection laws, 261; in- 
 teresting duties of, 263; not al- 
 ways a good collector, 263; effect 
 of losses on, 263; misjudging 
 character of accounts, 263; 
 collections question constantly 
 before him, 265; who asks for 
 prompt payment, 260; use of 
 tickler by, 266; economizing 
 time and labor, 268; night work 
 by, condemned, 269; insisting 
 upon prompt payment, 269, 270;
 
 352 
 
 CREDIT AND ITS USES 
 
 should investigate causes for 
 slow payments, 270; affected by 
 sentiment, 272; displaying im- 
 partiality, 272; interviewing de- 
 linquent customers, 274; undue 
 pressure on delinquent cus- 
 tomers, 274; a system of collec- 
 tions used by a, 275; must em- 
 ploy systematized methods, 275; 
 collection agencies and the, 288; 
 giving attention to bad debts, 
 288, 289, 290; prescience of, 
 323; objective point of, 323; at- 
 tempting to prove loss, 333; 
 training of, 338; measuring with 
 correct judgment, 339. 
 
 "Credit Man and His Work," 260. 
 
 Credit office mechanics, arrange- 
 ment and preservation of credit 
 information, 253; no principle 
 involved, 253; least possible 
 labor desirable, 253. 
 
 Credit organizations, work to be 
 done by, 183; agitating pay 
 ratings, 200; movement out- 
 growth of, 334. 
 
 Credit reference cards, purpose of, 
 254; exposition of, 254, 255; 
 sample form of, 255; advantage 
 of, 256; not much used, 256; 
 issued by National Association 
 of Credit Men, 256; labor of 
 maintaining, 256; used for col- 
 lections, 266. 
 
 Credit standing, of applicants for 
 credit, 86; giving question of, 
 attention, 89. 
 
 Credit system, the, 16, 17, IS; 
 soundness of, 17; fundamental 
 precepts of, 17; weaknesses of, 
 28; encourages speculation, 29; 
 evils of, 86; expansion of, 103; 
 great advantage of, 105; rela- 
 tion to bankruptcy laws, 300; 
 credit losses, corollary of, 323. 
 
 Currency, limit of volume of, 101; 
 circulates among consumers, 
 101. 
 
 Dating, in conunercial transac- 
 tions, 113; defined, 114; has 
 become a right, 114; led to 
 
 undue anticipation of wants, 
 114; cause of considerable loss, 
 114. 
 
 Debts, national, 09; fimded, 69, 
 70; permanent, 70; results of 
 waste and extravagance, 80; 
 small, paid in cash, 101; loss 
 through bad, 131. 
 
 Denver & Rio Grande Railroad 
 Company, 63. 
 
 Department stores, 88. 
 
 Depreciation in the value of goods, 
 323. 
 
 Discharges in bankruptcy under 
 Act of 1841, 303; ease with 
 which secured, 312; grounds of 
 opposition to, 316; classes of 
 debts not relieved by, 316; op- 
 posing, 317. 
 
 Discount lines, no uniform system 
 of, 137; permitted in banking, 
 239; no definite rule for, 239. 
 
 Douglass, Benjamin, 193. 
 
 Douglass, B. & Co., 193. 
 
 Drafts as credit instruments, 42, 
 43. 
 
 Drafts, for collection purposes, 
 when made, 275; some mer- 
 chants care little for, 276; sys- 
 tem of, 276; may afford more 
 evidence of debtors' inability to 
 pay, 277; practice an old one, 
 278; when regular feature of 
 collections, 278; when unfriend- 
 ly action, 278; no established 
 rule regarding, 278; collection 
 of small accounts by, 278; 
 handed to attorney.s, 278; effect 
 of refusal to honor, 279, 281; 
 original system of, 279; paying 
 for collection of, 279; collection 
 agency, 280; when impo.saible 
 to collect through, 284. 
 
 Dun, Robert Graham, 193. 
 
 Dun, R. G. & Co., ratings of. 146; 
 value of service, 191; origin of 
 mercantile agency, 192, 193; 
 reputation for solidity, 194; 
 failures reported by, 328. 
 
 Earning power, 53, 55, 62, 65, 89, 
 93.
 
 INDEX 
 
 353 
 
 Eckels, James H., opinion on mer- 
 cantile agencies, 196. 
 
 Economic issues, 5. 
 
 Economic influences, 103. 
 
 Economics, played too small a 
 part, 339; covers the status of 
 man in society, 339. 
 
 Economy, in management, 233; 
 feature of efficient control, 233. 
 
 Element of futurity, 152. 
 
 Elements of credit, character, 
 capacity, and capital, 219; not 
 all needed, 220. 
 
 Elite directories, 97. 
 
 Ely, Richard T., 8, 10, 22, 25, 27, 
 37. 
 
 Embezzlement, 28, 30. 
 
 England, banking system of, 38; 
 national debt of, 69; national 
 supremacy of 69; Venezuela 
 obligated to pay, 79; bills of 
 exchange in, 105; bankniptcy 
 laws introduced in, 299; has 
 had thirty-eight bankrupt laws, 
 299; depredations on merchant 
 marine, 302; second war with, 
 303. 
 
 English bankniptcy law, first, 299; 
 friends and opponents of, 299; 
 principles of, 299; bread money, 
 302. 
 
 English schools, 13. 
 
 Equipment, effect of, on securities, 
 59; character of, 61. 
 
 Europe, credit in, 108. 
 
 Exchange, characteristic instru- 
 ment of, 8; present system of, 
 24; foreign, 24. 
 
 Exemption laws, 184. 
 
 Exemptions, under bankruptcy 
 laws, 302, 303, 304, 305, 315; 
 regarded with disfavor by cred- 
 itors, 315; diversity of, 315. 
 
 Extension of time when safely 
 conceded, 271. 
 
 Extravagance, causes of, 28 
 credit system responsible for, 28 
 exercise of, 97; flaunting, 97 
 age of, 98. 
 
 Farwell, J. V., Co., attorneys' list 
 used by, 287. 
 
 Fawcett, Mr?. Millicent Garrett, 9. 
 
 Federal Government, subject of 
 bankruptcies and, 301. 
 
 Federalism, type of statesmanship, 
 306; diff'erentiation between, 
 and States' Rights, 308. 
 
 Federalists, political element, 
 306. 
 
 Fiat money, 77. 
 
 Finance, State, 78. 
 
 Fire, losses from, 324. 
 
 Fire insurance, relation of, to 
 credit, 246; failure to carrj', 246; 
 questions by credit office, 247; 
 solvency of companies affecting 
 credit, 247; articles published 
 by National Association of 
 Credit Men on, 248; article by 
 George R. Barclay on, 248; tend- 
 ency of rates downward, 326; 
 refining process in, 326; credit 
 insurance and, 329; payments 
 by companies in 1904, 329; 
 damaged property managed by 
 companies, 332. 
 
 Foreign territory, acquisition of, 
 68. 
 
 Forgan, D. R., 52. 
 
 Forms, banking credit department, 
 "account opened," 125, 126; 
 statements, 128, 132, 133; credit 
 information letters, 133, 135, 
 136; collateral note, 139; re- 
 vision of reports, letters, 138, 
 139, 142, 144; comparative 
 statement, 140; statement for 
 use by banks, 141; listing bills 
 receivable, 141, 143; showing 
 state of customer's account, 145; 
 card for customers and ratings, 
 146, 147; mercantile credit de- 
 partment salesmen's credit in- 
 formation blank 154, 155, 156, 
 157, 158, 159, 170; attorneys' 
 report blank, 167, 168, 169; in- 
 quiry forms, 178, 179; state- 
 ments, property, 182- informa- 
 tion bureau inquiry ticket, 208, 
 209; information bureau ex- 
 perience forms, 210, 211, 212. 
 
 Fourth National Bank of New 
 York, 83.
 
 354 
 
 CREDIT AND ITS USEb 
 
 France, Venezuela obligated to 
 pay, 79; bankruptcy laws in- 
 troduced in, 299. 
 
 Franchise, value of, 62, 67. 
 
 Franklin, Benjamin, 285. 
 
 Fraud, causes of, 28, 30. 
 
 Freight, transfers of, 60. 
 
 French, F. E., describes use of 
 attorney's list, 287; opinion of, 
 289. 
 
 French schools, 13. 
 
 " Funds and Their Uses," 10. 
 
 General expenses, defined, 233; 
 itemized list of, 234. 
 
 German Cooperative Credit 
 Unions, 22, 25, 26. 
 
 German schools, 13. 
 
 Germany, Venezuela obligated to 
 pay, 79. 
 
 "Giving and Getting Credit," 11, 
 192. 
 
 Goddard, Frederick B., 11, 192. 
 
 Gold, bills of exchange and, 105; 
 supply of, 105. 
 
 Gold reserve, redemptive suffi- 
 ciency of, 77. 
 
 Government ownership, 57. 
 
 Greeks, political economy and 
 the, 3. 
 
 Greenbacks, source of great solici- 
 tude, 77. 
 
 Hague Tribunal, 79. 
 
 Hallam, Henry, 39. 
 
 Halle, 22. 
 
 Harvard Law Review, vol. xxv, No. 
 
 10, 299. 
 Hayne, Richard Young, favored 
 
 national bankruptcy law, 307. 
 Henry VIII, reign of, 299. 
 Hinsdale, B. A., on meaning of 
 
 laws on bankruptcies, 301. 
 Hotchkiss, William H., article on 
 
 "Two Years of the Federal 
 
 Bankruptcy Law," 312. 
 
 Incapacity, cause of failures, 225. 
 Incompetency, cause of failures, 
 
 225. 
 Industrials, defined, 64; character 
 
 of certain, 66. 
 
 "Individual credits," 83. 
 
 Individual or personal credit, d^ 
 fined, 82; basest form of credit, 
 83; foundation of all credit, 83; 
 
 Erimitive origin of, 83; better 
 asis for, 84; elements of, 84; 
 less system in, 85; falsity and 
 unsoundness of, 88; difficulty 
 of getting satisfactory informa- 
 tion, 89; restrict amount of, 92; 
 relation to labor problem, 93; 
 defects of, 95; vast loss in, 325. 
 
 Insurable risk defined, 324. 
 
 Insurance, in statement form, 130; 
 system of, 324; principles of, 
 324; divisions of credit subject 
 to, 325; susceptible to operations 
 of, 328; cost of sustaining, 328; 
 necessary elements of correct, 
 329; too easily making use of, 
 331; as an abstract proposition, 
 331. 
 
 Illinois, State of, 322. 
 
 Inquiry forms, description of, 178, 
 179; in great demand, 180; bring 
 prompt replies, 180; reciprocity 
 promment part in, 180; accept- 
 ance of information in, 181. 
 
 Insolvency, when due to poor 
 collection service, 264 ; mer- 
 chants forced into, 270, 280; con- 
 dition of, defined, 305; defined 
 by narrower interpretation, 314; 
 a matter of gradual develop- 
 ment, 319. 
 
 Insolvency law, estates admin- 
 istered under, 298; adjustments 
 under, 298; if same in every 
 State, 321. 
 
 Insolvent estates, administration 
 of, 290; cooperation of interests 
 in administering, 290; winding 
 up of, 292. 
 
 Interest, advance in rate of, 47; 
 injustice to poor man, 47; aver- 
 age rates of, 50; paying capac- 
 ity, 58; steady, 67; merchant's 
 standing determines rate of, 112; 
 normal and abnormal, 116; 
 charged for excess time, 276. 
 
 "Introduction to the Study of 
 Economics," 11,219.
 
 INDEX 
 
 355 
 
 Investments, 49, 51, 52, 53, 54, 56, 
 57,58,59,66,81. 
 
 Involuntary bankruptcy, petition 
 in, 305; provided for in Act of 
 1898, 314. 
 
 Irving, Washington, on inventions 
 of paper and the press, 336. 
 
 Italy, Venezuela obligated to pay, 
 79. 
 
 Italian cities, banking credit in, 7. 
 
 Italian States, bankruptcy laws in- 
 troduced in, 299. 
 
 Japanese, attitude of, during 
 Kusso-Japanese War, 73; bond 
 issue by government, 73. 
 
 Jenckes, Thomas A., champion of 
 bankruptcy legislation, 304. 
 
 Jenks, Jeremiah W., 65. 
 
 Judges, political system of select- 
 ing, 308; dispense court patron- 
 age, 308. 
 
 Judiciary Committee, of House of 
 Representatives, report of, 300; 
 of Fifty-seventh and Fifty- 
 eighth Congresses, 313. 
 
 Justinian, legislation of, 7. 
 
 Kansas, State of, 321. 
 
 Kentucky, State of, 322. 
 
 Kline, S. J., opinion on rent, 235. 
 
 "Lack of Capital," cause of fail- 
 ures, 224; percentage of failures 
 due to, 225; difficult to deter- 
 mine relation of, to all failures, 
 225. 
 
 Land, "property in," 54; mineral, 
 59. 
 
 Laughlin, J. Lawrence, 10, 11, 12. 
 
 Law, forms of, 298; substantive, 
 313; criminal or remedial, 313. 
 
 Law lists, use of, by credit men, 
 169; prepared by responsible 
 concerns, 169; obviate the neces- 
 sity of card lists, 169; attorneys 
 under contract to furnish credit 
 information, 169. 
 
 Laws, rights and interests of 
 creditors and debtors under, 
 297; to be administered by those 
 competent and honest, 297. 
 
 Ledger experience, credit inter- 
 change exchange of, 203; utiliza- 
 tion, of 203; most sought for in- 
 formation, 203. 
 
 Ledger information, work of 
 special agencies in, 190. 
 
 Legal redress, for unpaid or failed 
 accounts, 297; character of, 298; 
 sought through bankruptcy 
 laws, 298. 
 
 Legislative, sources, 57; require- 
 ment, 58; appropriations, 70. 
 
 Legislature, sanction of, 80. 
 
 "Lombard Street," 9. 
 
 Losses, system not a complete bar 
 to, 123; avoidance 9f, 257, 323; 
 due to lack of skill in managing 
 accounts, 269; attributable to 
 character of handling, 269; 
 credit, 323, 325; inevitable re- 
 sult of credit, 323; minimized 
 through efficient management, 
 323; moderate percentage a 
 certainty, 323; probability of, 
 every year, 324; sufferers from 
 credit, 324; in individual credit, 
 
 325, 328; due to dry rot, 326; 
 fire and marine, 326; average, 
 
 326, 327; from bad debts, 328; 
 "own" and abnormal, 328; com- 
 mercial interests able to insure, 
 330; credit insurance should be 
 preventive against, 332. 
 
 Lowell, John, opinion on Bank- 
 ruptcy Act of 1867, 306. 
 Luxury, age of, 98. 
 
 Macleod, Henry Dunning, 6, 9, 
 13, 14, 16, 29, 40, 54, 55, 82, 
 101, 104. 
 
 Maine, Henry Sumner, on univer- 
 sality of contract, 297. 
 
 Management, 59, 61, 67. 
 
 Manufacturing, interests and utili- 
 ties, 59, 60, 64. 
 
 Marshall, John, Chief Justice, 
 Supreme Court, 307. 
 
 Massachusetts Insolvency Law of 
 1838, 303. 
 
 Maturity slips, for collection pur« 
 poses, 266.
 
 356 
 
 CREDIT AND ITS USES 
 
 McAdow, F. H., opinion on rent, 
 236, 237; analysis of statements 
 affecting rents by, 236. 
 
 Means of production, 20. 
 
 Memphis Credit Men's Associa- 
 tion, information bureau inquiiy 
 ticket used by, 209. 
 
 Mercantile Agency, The, best 
 known fountain of credit infor- 
 mation, 190; referred to as in- 
 dispensable element, 190; not 
 indispensable to-day, 190; in- 
 formation of a secondary char- 
 acter, 190; value daily becoming 
 less, 191; work of, 191; use in 
 corroborating other informa- 
 tion, 192; credit men misled by, 
 192; origin, 192; object of, 192; 
 Lewis Tappan and first, 192; 
 description of first, 193; ex- 
 tended by Benjamin Douglass, 
 193; made rapid progress, 193; 
 scope and influence of, 194. 
 
 Mercantile agencies, classifying 
 dealers, 85; retail, 88; coopera- 
 tive, 88; ratings of, 142; work of, 
 151, 172; discrepancy in reports 
 of, 183; special reports by, 188; 
 failure to extend system of, 191; 
 estimating value of, 191; failure 
 to develop rival, 194; strong sen- 
 timent in favor of, 194; worthy 
 of much praise, 194; upbuilding 
 commercial structure, 194; will- 
 ingness to extend credit regu- 
 lated by, 195; influence of in- 
 calculable value, 195; review of 
 trade conditions by, 195; assist- 
 ance to business men, 195; 
 criticisms of, by credit men, 
 195, 196; reports of, deficient, 
 196; disapproval of, 196; de- 
 marud upon, 196; delays in ser- 
 vice, causes of, 196; "greater 
 accuracy" demanded from, 197; 
 prompt service explained, 197; 
 generalization in reports, 197; 
 condensation of data necessary, 
 197; claimed promptitude of 
 special agencies over, 198; lack 
 of detail in regard to statements, 
 198; unwillingness to comply 
 
 with requests of, 198; hard to 
 induce merchants to give state- 
 ments to, 198; relation to com- 
 mercial life, 199; percentage of 
 statements secured by. 199; re- 
 porters lack commercial training, 
 199; pay-ratings, 200, 201; ex- 
 tinct, 200; institution of bureau 
 for trade information by, 201, 
 202; closer attention to essential 
 elements of reports by, 201; 
 facilities of, 202; scope of in- 
 formation, 203; inability to 
 secure trade information, 203; 
 should have some accessory, 
 205; establishing credit coopera- 
 tive bureaus, 213; intimately 
 associated with business life, 
 213; statistics of losses pub- 
 lished by, 325. 
 
 Merchandise, finished, unfinished, 
 and raw material, 129; reasons 
 for separating into classes, 129; 
 accommodation, 131. 
 
 Merchants' Credit Association, of 
 San Francisco, 211; "System of 
 Remarks " used by, 211. 
 
 Merchants' protective associations, 
 in existence manjy years, 291. 
 
 Middle Ages, bankmg in, 7. 
 
 MiU, John Stuart, 4, 12, 13, 20, 21, 
 25, 30, 90, 104. 
 
 Minnesota Bankers* Association, 
 128. 
 
 Money, caring for, 37; stock of, 
 37; supply, 37; represents, 41; 
 fallacy of large earning capacitv, 
 50; fiat, 77; gave hberty, 108; 
 great want of, in new settle- 
 ments, 109. 
 
 "Money and Credit," 6, 10. 
 
 Montesquieu, Charles DeSecondat, 
 41. 
 
 Monopoly, cessation of, 62; tobac- 
 co, 74. 
 
 Mortgages, 49, 54, 318. 
 
 Municipal, securities, 57, 81; obli- 
 gations, 80; extravagance, 80; 
 restrictions on borrowing, 80; 
 government nearer to the peo* 
 pie, 308. 
 
 Murphy, Daniel B., 90,
 
 INDEX 
 
 357 
 
 National Association of Credit 
 Men, forms approved by, 154, 
 169, 178; card-indexed list of 
 attorneys suggested by, 166; 
 branches of, 207, 214, 284; arti- 
 cles on fire insurance published 
 by, 248; credit reference cards 
 issued by, 256; organized at To- 
 ledo, Ohio, 335; successfully 
 attempted improvements, 335; 
 objects of, 335; relation of aims 
 to World's Mercantile Congress, 
 announcement of, 335; Business 
 Literature Department of, 336; 
 stimulated interest in the study 
 of credit, 338. 
 
 Nebraska, State of, 321 . 
 
 Necessaries of life, credit functions 
 begin with, 91; under Bankrupt- 
 cy Act of 1867, 304. 
 
 New York, State of, legislation 
 affecting books of account, 182. 
 
 New York City, merchant in, 322. 
 
 North American Review, April, 
 1901, 312. 
 
 Note brokers, functions of. 111, 
 112. 
 
 Note settlements, disuse of, 1 1 2. 
 
 Note shavers, 111. 
 
 Notes, 23, 38, 43, 44, 45, 111, 112, 
 113; bank, 139. 
 
 Notes payable, 130. 
 
 Notes receivable, 129. 
 
 "Objects and Possibilities of Cred- 
 it Men's Associations, The," 90. 
 
 Oral investigations, results se- 
 cured through, 185; confined to, 
 185; methods of making, 185; 
 consulting personal friends, 185; 
 a feature of credit cooperation, 
 206. 
 
 "Outlines of Economics," 10. 
 
 Overbuying, danger of. 111; a 
 great business evil, 205; to avert 
 results of, 205. 
 
 Overtrading, 28, 29. 
 
 "Own" loss, defined, 326; must 
 first pay, 326; adding, to sell- 
 ing price, 327, 330; theory a 
 fallacious one, 328; policy of 
 company to increase, 328; how 
 24 
 
 dispose of increased, 328; de- 
 fending principle of, 329; ac- 
 counts included in, 330; cost of 
 credit insurance and, 330; feasi- 
 bility of insuring, 330; making 
 somebody else pay, 330; not to 
 be confused with coinsurance, 
 330. 
 
 Panic, causes of, 29; of 1837, 192, 
 301;of 1873, 309. 
 
 Paper, "sign of the value of 
 specie," 41; fictitious and ille- 
 gitimate, 43, 44, 108; real, 44; 
 redeemable and irredeemable, 
 73; credit, 75; single-name, 112, 
 133; commercial, 123; carrying 
 indorsers, 134. 
 
 Paper World and Manufacturer, 
 193. 
 
 Patronage, official and judicial, 
 307; power to dispense, 307. 
 
 Payment, tardiness in, 87, 269, 
 270, 274; prompt. 89, 95; due, 
 date of, 91; cash, 91; slow, how 
 lroated,273; moans for inducing, 
 274; impossible to make, 274. 
 
 Personal credit, earliest form of 
 credit, 18; defined, 82. 
 
 Personal deficiencies, 185. 
 
 Personal qualities, reckoned as 
 wealth, 21; species of wealth, 
 103. 
 
 Personality, railroad management 
 dependent on, 60. 
 
 Philadelphia, merchant in, 322. 
 
 Phoenicia, 6; customs prevalent 
 in, 6. 
 
 Political economy, money and 
 credit and, 3; defined, 3, 5; 
 changes in, 3; as a department 
 of state.sman.ship, 4; neutral 
 science, 4; influence of, 4; inex- 
 orable law of, 31. 
 
 "Political Economy for Begin- 
 ners," 9. 
 
 Pomeroy, John Norton, opinion of, 
 on diversity of State laws, 321, 
 322. 
 
 Post, William. 222. 
 
 Precious metals, stock of, 23; uae 
 of, in the arts, 24,
 
 358 
 
 CREDIT AND ITS USES 
 
 Preferences, by insolvent debtors, 
 318, 319; system of, 318, 319; 
 encouraged by State laws, 318; 
 methods offspring of, 319; idea 
 underlying, 319; groundwork of 
 much injustice, 319; within four 
 months, 319; during probable 
 term of insolvency, 319; may be 
 voided, 319; scope of, 320. 
 
 "Presidential Problems," 77. 
 
 "Principles of Political Economy," 
 25. 
 
 Probability of loss, data to esti- 
 mate scientifically, 325; degree 
 of, 333. 
 
 " Production, Consumption, and 
 Distribution of Wealth," 4; re- 
 lation of credit to, 5. 
 
 "Production, Distribution, and 
 Exchange of Wealth," 4; re- 
 lation of credit to, 5. 
 
 Production, means of, 20. 
 
 Productive arts, 72. 
 
 Productive capacity, furthering, 
 21; augmented by use of capi- 
 tal, 52; repression of, 72; meth- 
 ods of, 72. 
 
 Productive power, capital for the 
 promotion of, 56. 
 
 Productivity, 21; assistance of, 53. 
 
 Profit, in economics, 28; realizing 
 49; of the business, 50; fair, 87 
 volume of, 88; percentage of, 97 
 percentage of, justifying in- 
 terest paid, 116; net, 130; com- 
 bined, 130. 
 
 Profits, gross, 130. 
 
 Promissory notes, 19, 42, 44, 104, 
 105, 107, 111. 
 
 Property, "in land," 54; real, 59; 
 timber, 59; credits as, 300, 331; 
 care of, 331. 
 
 Public credit, basis of, 69; im- 
 pairment of, 71; advanced state 
 of, 73; paper currency and, 77; 
 refers to, 78. 
 
 Public debts, healthy sign, 71; 
 ability to create, leading to ex- 
 travagance, 71; money so used 
 withdrawn from other useful 
 purposes, 72. 
 
 Public gambling, 57. 
 
 Public-service utilities. 54, 57, 6^ 
 
 63. 
 Public works, 69, 70. 
 
 Quick assets, defined, 228; tend- 
 ency to turn from, 231. 
 
 Railroad, termini, 59; enterprises, 
 60; American, 60; connectioiLs, 
 60; balance sheet of, 60; bond, 
 62; securities, 64. 
 
 Ray Bill, amending Bankruptcy 
 Act of 1898, 313; changed by 
 Senate, 313; went into effect, 
 313. 
 
 Ray, George W., United States 
 Judge, 313. 
 
 Real estate, 54, 55; oldest form of 
 investment, 54; enhancement in, 
 55; adaptability to manufactur- 
 ing purposes, 55; boom con- 
 ditions, 56; most substantial 
 fortune in, 56. 
 
 Referees in bankruptcy, under 
 Act of 1898, 304, 317; appointed 
 by United States Judges, 317; 
 judicial powers of, 317; must 
 give bonds, 317. 
 
 References, written, common prac- 
 tice to ask for, 177; consulting 
 those given by customer, 177; 
 great volume of correspondence 
 on, 177; use of forms, 177; in- 
 formation general and evasive, 
 178; printed form inexpedient, 
 180; work of answ^ering, imposi- 
 tion, 180; character of house 
 giving, 181. 
 
 Registers in bankruptcy, under 
 Act of 1867, 304. 
 
 Reid, Murdoch & Co., 273. 
 
 Rent, question in property state- 
 ments as to, 234; little discus- 
 sion regarding, 234; not affected 
 by capital employed, 234; not 
 affected by volume of business 
 234; based upon profits, 235 
 opinions upon, 235, 236, 237 
 affected by location, 235; ratio 
 to gross expenses, 236; percent- 
 age to allow for, 236; should be 
 left to judgment of merchant,
 
 INDEX 
 
 359 
 
 237; preference covering, 238; 
 should be carefully investigated, 
 238. 
 
 Retailers, demands of, 100. 
 
 Revenues, fluctuation in, 70; dan- 
 ger of surplus, 71; deficit in, 71. 
 
 Rio Grande Western Railway, 
 63. 
 
 Romans, credit used by, 6, 7. 
 
 Russo-Japanese War, funds con- 
 sumed in, 70. 
 
 Sales, annual, 130; making re- 
 duction in, 230, 253, 265; judi- 
 cious increase in, 230; increasing 
 each year, 253, 254; commonest 
 forms of contract, 297; inability 
 to make, 328. 
 
 Salesmanship, high order of in- 
 telligence required, 154. 
 
 Salesmen, credit reports by, 153; 
 idea of utilizing, 153; general 
 nature of duties, 153; oppor- 
 tunities of, 153, 154; place in 
 business economy, 154; students 
 of markets, 154; rudimentary 
 knowledge required in, 154, 158; 
 business adviser of customer, 
 154; blanks used by, 154; ques- 
 tions must ask customer, 157; 
 powers of observation, 158; con- 
 sulting local authorities, 158; 
 credit men not influenced by 
 reports of, 159; selfish motives 
 of, 159; considerations of, 160; 
 subserving interests of customer, 
 160; opinions of credit men 
 upon, 161, 162; diff'erences in 
 temperament between, 161; 
 primal motive of occupation, 
 161; failure to take a broad 
 view of questions affecting 
 credit, 162; credit man's instruc- 
 tions to, 162; aptitude distinc- 
 tive characteristic of, 163; ap- 
 pealing from decision of credit 
 man, 258; promoting prompt 
 payment among customers, 268; 
 customer's preference for, 272. 
 
 Sanger, H. H., article on "A Sys- 
 tem for a Bank's Credit Depart- 
 ment," 260. 
 
 Savings Banks, system of, 26; in- 
 vestments by, 58. 
 
 Say, J. B., 4. 
 
 Schultze, Herr (Schultze - De ' 
 litzsch), 26. 
 
 Science, defined, 6. 
 
 Science of economics, defined, 3. 
 
 Securities, long term, 55; telegraph 
 ' company, 54, 64; telephone 
 company, 54, 64; gas company, 
 54, 64; electric lighting company, 
 54, 64; general industrial, 54, 
 64; national, 57; State, 57, 81; 
 municipal, 57, 81; marketability 
 of, 62; railroad, 63; advance- 
 ment in the value of, 75. 
 
 Security, character of, 53; prop- 
 erty pledged as, 63; revenues 
 pledged, 73; customs receipts 
 mortgaged, 79. 
 
 Service, effect upon a railroad, 62. 
 
 Shares, railroad, 54. 57; municipal 
 street-car line, .54; bank, 54; 
 trust company, 54; preferred 
 and common stock, 57, 66. 
 
 Simmons Hardware Co., instruc- 
 tions to traveling salesmen on 
 fire insurance, 248. 
 
 Slow or fixed assets, defined, 229; 
 to what extent should be con- 
 sidered, 229; views on, 229, 230; 
 idea of illuminating, 230; plan 
 of illumination, 230; as a main- 
 stay of the business, 231 ; effect 
 of undue proportion of, 232; 
 when not a disadvantage, 232; 
 have averted serious losses, 232. 
 
 Smith, Adam, 4, 40, 41. 
 
 Smith, Fred. A., paper on "When 
 to Let Go of an Old Customer," 
 272, 273. 
 
 Speculation, 28, 29, 31, 56, 105, 
 109. 
 
 State bankers, associations of, 
 127. 
 
 State, lines, limitations, narrow- 
 ness, and pride, 310; exemptions, 
 315; treatment of creditors by, 
 318, 321; citizens of, securing 
 advantages, 318; creditors for- 
 eign to, 319; system, operations 
 of, 321; no uniformity of
 
 360 
 
 CREDIT AND ITS USES 
 
 statutes, 321 ; statutos on bank- 
 ruptcies and insolvencies, 321; 
 government, features of, 322. 
 
 State government, closer to the 
 people than national govern- 
 ment, 308. 
 
 State laws, expenses of administer- 
 ing estates under, 291; recourse 
 to, 298; suspended by, 300; in 
 operation, 307; why preferred, 
 308; assignments under, 309; 
 diversity in, 315; encourage 
 preferences, 318; in the interests 
 of home creditors 318; absolute- 
 ly uniform, 321; have no extra- 
 territorial effect, 321; diversity 
 in, described, 321, 322. 
 
 Statements, banks ask for, 127; 
 attitude of traders toward, 128; 
 businesslike character of, 134; 
 failure to make out correctly, 
 134; required by banks at least 
 once a year, 140; comparative, 
 140; safest method of obtaining 
 information, 181; signed in 
 person by applicant for credit, 
 181; great merit of, 181; failure 
 to respond to questions upon, 
 182; veiling unsatisfactory de- 
 tails in, 182; personal, 182; large 
 number of questions on confus- 
 ing, 182; New York legislation 
 affecting, 182; no uniform policy 
 in asking for, 183; men not in- 
 clined to give, 183; advantage 
 of using, 183; analyzing, 184, 
 229; exempt property shown in, 
 184; useless to solicit from cer- 
 tain classes, 199; practice of 
 giving more general, 199; cle- 
 ment of character in, 222; ques- 
 tion as to expenses in, 233; too 
 brief in form. 234; question as 
 to rent in, 234; question as to 
 fire insurance, 247. 
 
 States, bankruptcy and insol- 
 vency systems of, 300; legislate 
 in the interests of creditors, 321; 
 uniform law adopted by, 321; 
 no disposition to legislate on 
 uniform lines, 321; no two have 
 same system, 321. 
 
 States' rights, political element, 
 306; against curtailment oi 
 prerogatives of States, 307; pre- 
 venting passage of national 
 bankruptcy act, 307; differenti- 
 ation between, and Federalism, 
 308; liberties of people best 
 nurtured by, 308. 
 
 States' rights theory, student of, 
 321. 
 
 Study of credit, the, has been 
 stimulated, 338; not a separate 
 feature in courses of com- 
 merce, etc., 338; division of de- 
 partment of political economy, 
 338. 
 
 Subvention, 59. 
 
 Supreme Court of the United 
 States, appeals to, 304; decis- 
 ion in Sturgis vs. Crowninshield, 
 307. 
 
 Suspended accounts, description 
 of, 292; separate branch of 
 credit work, 293; treatment of, 
 293; card systems and, 293; 
 docketing information, 293; at- 
 tention given to, 293; results 
 realized from, 293. 
 
 "System for a Bank's Credit De- 
 partment, A," article by H. H. 
 Sanger on, 260. 
 
 System, not a complete bar to 
 losses, 123; important factor in 
 business management, 252; nec- 
 essary in credit work, 252. 
 
 Tappan & Douglass, 193. 
 
 Tappan, Lewis, organized first 
 mercantile agencj', 192; other 
 enterprises followed, 194. 
 
 "The Bond Issues" ("Presidential 
 Problems"), 77. 
 
 "The Credit System in France, 
 Great Britain, and the United 
 States," 9, 18. 
 
 "The Loan and Credit Depart- 
 ment," article by William Post, 
 222. 
 
 "The Methods of Banking," 196. 
 
 "The Theory of Credit," 9. 
 
 "The Trust Problem," 65. 
 
 "The Way to Wealth," 285. 
 
 Thornton, Heniy, 8, 44, 45.
 
 INDEX 
 
 361 
 
 Tocqueville, Alexis Charles Henri 
 Clerel de, remarks on bankrupts 
 in the United States, 309. 
 
 Toledo, Ohio, 335. 
 
 Trade agencies, a development of 
 the cooperative theory, 206. 
 
 Trade bureaus, reasons for, 206; 
 organized by, 207. 
 
 Trade organizations, collecting 
 accounts, 282; collection letters 
 used by, 282, 284; svstems in 
 use by, 282, 284; bulletins of 
 delinquent debtors, 284. 
 
 Traveling credit representatives, 
 represent advanced form of 
 credit work, 186; necessity for, 
 186; visiting all classes of trade, 
 186; relation to credit investi- 
 gations, 187; work of, 187; 
 thorough schooling in credit 
 work required, 187; must have 
 general knowledge of accounts, 
 187; understandmg character- 
 istics of customers, 187; making 
 an examination of books, 187; 
 examining merchandise, 187; 
 investigate among banks, etc., 
 188; advantages to a house of, 
 188; work in which most effica- 
 cious, 188; character of reports, 
 201. 
 
 Trustees in bankruptcv, under 
 Act of 1898, 304, 317; elected by 
 creditors, 317; when appointed 
 by referee, 317; must furnish 
 bonds, 317. 
 
 "Two Years of the Federal Bank- 
 ruptcy Law," article on, by 
 William H. Hotchkiss, 312. 
 
 Uncertain events, defined, 325 
 loss in credits depending on, 325 
 
 Uncollectible accounts, 90. 
 
 Union, greenbacks issued by, 77 
 interests of, 306. 
 
 United States, failures in, 225 
 bankruptcy legislation in, 299 
 300; first bankruptcy law, 301 
 
 Utopian stage, 31. 
 
 Venezuela, obli|Tated to pay, 79. 
 
 Voluntary bankruptcy, first in- 
 troduced in America, 303; pro- 
 vided for in Act of 1898, 314. 
 
 War, financial aid for, 68; expen- 
 ditures, 69; Russo-Japanese, 70; 
 modern cost of, 70; munitions 
 of, 99. 
 
 Warehouse receipts, 42. 
 
 "Ways and Means of Payment," 
 16. 
 
 Wealth, use of, 5; a merchant's, 
 104. 
 
 "Wealth of Nations," 4. 
 
 "When to Let Go of an Old Cus- 
 tomer," paper by Fred. A. 
 Smith on, 273. 
 
 Whigs, political party, 306. 
 
 Withdrawals, by partners, 131. 
 
 World's Mercantile Congress, June 
 19-26, 1893, 334, 335; announce- 
 ment of, 334; questions proposed 
 for discussion, 334; committee 
 to organize national association, 
 334. 
 
 Written references, 128. 
 
 (IS) 
 
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