HP 5356 S?6e S ch och - Eleirents of p Southern Branch of the University of California Los Angeles Form L-1 5Xe This book is DUE on the last date stamped below. .rt-8,'21 ELEMENTS OF BUSINESS BY PARKE SCHOCH . Principal of West Philadelphia High School for Girls and MURRAY GROSS Head of Department of Commerce, West Philadelphia High School for Girls AMERICAN BOOK COMPANY NEW YORK CINCINNATI CHICAGO BOSTON ATLANTA Copyright, 1918, by PARKE SCHOCH AND MURRAY GROSS ELEMENTS OF BUSINESS W. p. 5 cv PREFACE Much is heard on all sides to-day of efficiency — efficiency in affairs of government, in business, in the professions; efficiency, indeed, in all our public and commercial relation- ships. At the same time much is being done through special forms of education and of training to improve the quaUty of the service everywhere. Is it not strange, then, that in this nation-wide campaign for higher standards and better methods, we quite overlook the source of the trouble, or, if we recognize it, make Uttle or no effort to remove it? If we, as a people, are inefficient in the administration of pubhc affairs, of commercial enterprises, or of professional interests, is it not because we are primarily inefficient in the management of our own personal and family matters? All about us we see the failure of men and women to make progress in mercantile or in professional enterprises, just because they do not understand the elementary principles underlying all business relationships. Likewise in the home we are witnesses continually to the futile efforts of people to make ends meet, because through positive lack of knowledge on the subject they are employing the most wasteful methods in the administration of the family budget. Here Hes the key to the whole prob- lem. If we set about systematically to inform and to train the young people of this day in sound methods of personal finance, we shall at the same time be preparing them in the best manner possible for an economical use of their powers 3 4 Preface and resources in the larger and more responsible positions of later life. Permeating all our secondary school courses to-day is the idea of the appUcation of the instruction to the life needs of the. pupils, — first to their vocational requirements, and, second, to the larger question of successful living. Why is it that so many schools, no matter how many specialized courses they may offer, require that every boy shall take a minimum of training in the manual arts and that every girl shall take a minimum of training in the household arts ? Because, much as the vocational idea may differentiate people in their studies and in their wage-earning activities, there are certain duties in life common to all, for the proper discharge of which an elementary knowledge of these homely arts is indispensable. Why should we not insist similarly on a certain minimum study, somewhere in the school career of every boy and girl, of the elements of business as a necessity for success in every field? However skilled a man may be in science or in art, if at the same time he is ignorant of everyday business routine, he is at the mercy of unscrupulous people with whom he may deal. Or, however skilled a woman may be in the domestic arts, if she does not know the best methods of buying, sa\dng, and investing, she is seriously handi- capped. These are matters touching the lives of all, and they are of such vital import in the stress of mere living that they should find a place in the educational program of every school. As a contribution to this important field of study, the authors offer the following chapters on business methods essential to successful living. CONTENTS PART I EXCHANGE, MONEY, AND CREDIT PAGE I General Principles 7 II Money System of the United States 11 III Bills, Invoices, and Statements of Account 14 IV Commercial Drafts 19 V Promissory Notes . . 24 VI Indorsement and Protest 30 PART II BANKING AND SAVINGS INSTITUTIONS VII General Principles and Classification 35 VIII Commercial Banks 38 IX Depositing in a Commercial Bank 42 X Commercial Bank Checks 46 XI Commercial Bank Certified Checks and Other Instruments 50 XII Commercial Bank Collections and Settlements .... 54 XIII Commercial Bank Loans and Discounts 58 XIV Savings Banks 62 XV Cooperative Banks and Building and Loan Associations . 68 XVI Private Banks 73 PART m INSURANCE XVII Insurance Principles .77 XVIII Life and Accident Insurance . .81 XIX Fire Insurance .90 5 Contents PART IV PROPERTY PACE XX General Principles 96 XXI Leases 101 XXII Bills of Sale and Deeds 103 XXIII Mortgages 107 XXIV Distribution of Property Estates 110 XXV Taxation 115 PART V INVESTMENTS XXVI Bond Investments 122 XXVII Stock Investments 129 XXVIII Bond and Stock Market 134 XXIX Mortgage and Real Estate Investments 139 PART VI LETTER WRITING XXX Business Letters 144 XXXI Addressing Envelopes 152 XXXII Special Forms of Letters and Telegrams 156 PART VII PERSONAL ACCOUNT RECORDS XXXIII Cash Records 165 XXXIV Classification Cash Book 169 XXXV Elementary Principles of Accounting 173 Supplementary Questions 187 Reference Books 210 Index 213 PART I EXCHANGE, MONEY, AND CREDIT I. GENERAL PRINCIPLES Business exchange is the peaceful process of satisfying human wants. The business community, with its complex methods and its numerous institutions, is the organized means of affording the facilities necessary to carry on this exchange in a convenient and orderly way. At the begin- ning of a study of the elements of business, it will be helpful to glance briefly at the character of the business community and at the nature of some of the principal factors under- lying it. Barter. Under primitive conditions business exchange presented itself in the form of two men engaged in trading objects, each giving something he did not want for some- thing he did want. With the development and the expan- sion of business relationships, however, this simple method of exchange, known as barter, became cumbersome and there- fore unsatisfactory. So, in our day, while in fact men are still bartering or trading objects to satisfy their wants, the process of exchange is so concealed by the improved means and methods used to effect it that the persons concerned do not realize that bartering or trading is going on. Money. Several means have been employed to secure greater convenience and power in exchange. Of these the first to be noted is money. In barter, objects of actual 9 8 Exchange, Money, and Credit utility are exchanged under conditions of immediate advan- tage in the trade. In early times skins were traded for dried fish, as in our own times in the rural districts eggs are exchanged for sugar. As business experience ripened, however, the community found that some things, for various reasons, were always in demand and that these in consequence could be accepted in exchange for other things, held for a time, and later traded again. Any object so esteemed by the community became a medium of exchange, a medium by which trading was done, or in the terms of the modern business world, money. In different communities various articles served the purposes of money. The long list of things that have been used as money in times past includes such widely dififering commodities as dried fish, animal skins, cattle, wheat, salt, wampum, fishhooks, tobacco, and iron. Any of these, at the proper time and place, was accepted in exchange for other things, and was later used to pay for something that the holder found necessary for the satisfaction of his wants. In this way iron, zinc, copper, silver, and gold became money commodities. Eventually, in the civilized and highly organized communities, gold and silver displaced all the baser metals. They are now distinctively the money metals, although copper and nickel are still used in coins of small denominations. Gold and silver displaced other money commodities for many reasons, some of the most important of which are the following : (i) Owing to the difficulties that accompany their pro- duction, they show high value in small quantity. (2) They can be readily and accurately divided and con- verted into coins. General Principles 9 (3) They are beautiful and durable, and therefore highly prized by all communities. (4) They have in general shown a world-wide uniformJty in value, which makes them highly suitable as a medium of exchange in trading between different communities as well as among traders in the same community. Credit. The use of credit may be looked upon as the second means that has made possible the rapid develop- ment of the modern commercial community. There are conditions, of course, under which money is used every time a want is satisfied. When, however, transactions are numerous and extend over an area widely separating the parties involved, the use of money would be inconvenient and often impossible. Moreover, the use of money would limit business transactions to the amount of actual money available in a community and to the slow movement of money in exchange. Such difficulties have been eliminated by the use of credit. Credit may be defined as the power or the right to secure something at the present time for an equivalent to be given at a future time. From the definition it must be concluded that the use of credit rests upon the trust and tlie confidence that prevail among traders, or buyers and sellers. At the foundation of its use lie two judgments : first, that the one who has promised will be able to fulfill the promise ; second, that he will be willing to do so. It is estimated that only about 5 % of the business transactions of the United States are settled with money ; 95 % are eventually settled by the offset of one credit claim against another. This emphasizes the importance of a reputation for honesty and integrity in meeting obligations, and the advantage of developing in the business 10 Exchange, Money, and Credit community a condition of confidence as the most im- portant basis of success in Hfe. When confidence is lacking, business transactions on a credit basis are rendered difhcult, if not entirely impossible, and credit relationships can be entered into only on the basis of some kind of definite assurance that the promise will be fulfilled. This is known as " providing security." Even under normal conditions of confidence, this need for supplementary assurance gives rise to many contracts known in general as securities. Business Customs and Institutions. As a result of credit, great business institutions have developed that are designed to handle credit transactions and to organize and make available the credit of individuals. In our day, banking, insurance, and other business enterprises asso- ciated with the use of credit perform an important service in enabling business affairs to be conducted with conven- ience and security. Furthermore, as a result of the use of credit, customs and methods of doing business have arisen requiring the use of many business papers and instruments involved in the collection, transference, and security of credit relationships. Such instruments must be understood and used with care, in order to safeguard the interests of the parties to the contract. QUESTIONS AND EXERCISES 1 . How does the present method of satisfying wants differ from the means employed by primitive peoples? 2. What are the most important industries of your com- munity and immediate neighborhood ? 3. Why has specialization in industry emphasized the importance of exchange? Money System of the United States ir Notice the kinds of food served at one of your din- ners, and Ust the place or places from which each of the articles of food comes. Trace the journey in exchange of each item discussed under the previous question from its origin to the store from which it was bought. II. MONEY SYSTEM OF THE UNITED STATES While many business transactions are settled without the use of money, yet this is still the medium in terms of which the exchange values, or prices, of commodities, of wages and salaries, of rents, and of all kinds of pubHc and private obligations are expressed. Money is also the standard of deferred payments. Contracts are constantly made that promise to pay debts at a future date, and it is money that serves as a standard in making the pajTuent when due. The reliability and the stability of credit trans- actions depend to an important extent on the reliabihty and the stability of the monetary system of the country. Metal Money. It will be interesting, therefore, to note briefly the monetary system of the United States. At the heart of the system is the dollar. Congress has declared that 23.22 grains of fine gold or 25.8 grains of gold, nine tenths fine, properly coined, is a dollar, — the unit in terms of which the values of other things are to be expressed. For convenience, gold coins have been issued containing two and a half, five, ten, and twenty times the weight of gold in the dollar ; these are known respectively as the quarter eagle, the half eagle, the eagle, and the double eagle ($2^, $5, $10, $20). 12 Exchange, Money, and Credit For valuations less than a dollar, silver, nickel, and copper are used. At the head of the silver coinage is the silver dollar, which, as Congress prescribes, contams 371.25 grains of silver. The other silver coins are the half dollar, the quarter dollar, and the dime, containing respectively 173.61 grains, 86.805 grains, and 34.722 grains. Nickel and copper are used in the five-cent piece, and copper and tin and zmc in the one-cent piece. Congress does not attempt to fix the value of its coins in exchange. It limits its action to safeguarding the form, the weight, and the fineness of the coins issued, and to directing the government to hold itself ready to give a gold dollar for a silver dollar upon application. Paper Money. Besides the metal money to which ref- erence has been made, the government of the United States has issued a number of different kinds of paper money. Each of these is a promise of the government to deliver directly or indirectly a number of gold dollars upon de- mand. First, the United States note, or greenback, is a promise of the government to pay the holder a specified number of dollars on demand. Second, the gold certificate arises from a provision of the government whereby gold, either as coin or bullion, may be deposited in the United States Treasury and certificates equal to the amount of the gold may be issued. Third, the silver certificate rests upon a provision of the government for deposit in the Treasury of silver coins and for issue of certificates of deposit therefor, to avoid the inconvenience of handling the silver. Fourth, the treasury note arises from a privilege similar to that extended to owners of sUver bullion. Money System of the United States 13 Fifth, the national bank note is a promise of a national bank to pay the holder the amount named on the note in legal tender money of the United States. Such notes are secured by a deposit of United States bonds with the treasurer of the United States, which are forfeited and sold to redeem the obhgations, if the promises are not fulfilled. Sixth, the new Federal reserve note is a note issued by a Federal reserve bank, to serve as a kind of emergency currency, upon the security of commercial paper and a certain percentage of gold. There are other forms of paper money of varying im- portance, but as they are not in current use, it will not be necessa^ to consider them here. All the paper currency, however, promises payment of legal tender money, and as all legal tender money practically implies final settlement, directly or indirectly, in gold, the entire money system of the United States ultimately rests upon the gold dollar. The character of the gold dollar is fixed by Congress ; but its value is determined by intricate economic conditions, a discussion of which is beyond the scope of this study. Legal Tender. In conclusion- it may be added that at the present time the legal tender money of the country — that is, money which by the declaration of the govern- ment must be accepted in settlement of debts — includes any gold coins, silver dollars, United States notes or green- backs, treasury notes, and reserve notes, as well as fractional silver currency to the amount of ten dollars, and nickel and copper coins to the amount of twenty-five cents. Gold and silver certificates and national bank notes are not legal- tender money, but pass as freely in exchange as any of the other kinds of money. 14 Exchange, Money, and Credit QUESTIONS AND EXERCISES 1. What causes the ditYcrciice in size between a silver dollar and a gold quarter eagle ? 2. Why is not iron used for money instead of gold? 3. Read the wording on a one-dollar bill. What is the difference between it and a silver dollar? What gives the paper money value in exchange ? 4. In what ways would a man be inconvenienced if he held much property but absolutely no money? Could he get along comfortably without the latter ? 5. Secure as many examples of paper money as possible, and compare the promises made by the government in the different kinds. m. BILLS, INVOICES, AND STATEMENTS OF ACCOUNT As many transactions take place on the basis of credit, or on account, several types of business instruments or papers have come into use to effect payment and settle- ment at a future date. First among these papers may be mentioned bills, invoices, and statements of account. Bills and Invoices. A bill is an itemized statement of goods sold or of services rendered. When accompanying or following a shipment of goods as a memorandum of the shipment, it is frequently called by the buyer an invoice. It should show the names of the parties buying and selling, the date and the place of the sale, the kind, the quantity, and the price of the goods sold, or the nature of the work done, and the terms of the sale. When a bill is paid, it is customary for the one to whom payment is due to receipt the bill by writing at the Bills, Invoices, and Statements of Account 15 bottom, " Received payment " or " Paid " and his signa- ture, together with the date on which payment is made. If another person receives the payment for the one to whom it is due, it is usual for him to affix his own name after writing the name of the one entitled to payment ; as, " Jones, Dudley, and Company, per A. T. Lansing." Bill of Service Bangor, Maine, of&fdtem^&v 2, /<^/S To HENRY S. JOHNSON, «Z)r. /?% ^oA-> 00 Bill of Goods Philadelphia, Pa., September 2, 1918 Mr. Alfred J. Smith, Jr., 'Bought of JONES, DUDLEY, AND COMPANY Terms: 30 days net 1 bbl. "Standard Flour 10.00 ^ doz. cans Tomatoes 2.60 ^ doz. cans Corn 2.50 Paid JONES, DUDLEY, AND COMPANY Per a. S-. jCana^Ucf 10 1 1 00 30 25 12 55 i6 Exchange, Money, and Credit Statements of Account. A statement of account shows, in addition to the indebledjicss, the payments made toward settling the debt, as well as any offset credits in favor of the debtor. If an invoice was delivered to the buyer at the time of the purchase of the goods, it is not customary to list the items of purchase on the statement. Under such circumstances the statement simply gives the amount and the date of each purchase '' As per bill rendered." If an invoice was not delivered, .the statement is itemized the same as a bill. The following statement of account shows a part payment and an offset credit for goods that were returned. When finally paid in full, a statement of account is receipted in the same way as a bill. Baltimore, Md., September 2, 1918 Mr. J. H. Baxter, New Orleans , La. To THE BALTIMORE GROCERY COMPANY, Dr. July Aug. 1 1 To Mdse . per bill rendered If II 11 II It Cr. 140 50 00 00 190 July Aug. 5 1 By Mdse. returned By check Balance due 30 150 00 00 180 10 Cash and Trade Discounts. Reductions or allowances from the amount of a debt are known as discounts. Many business houses permit buyers thirty, sixty, or ninety days in which to pay their bills; but, as an encouragement of prompt payment, they allow a certain per cent of the total amount of the bill ^s a cash discount Bills, Invoices, and Statements of Account 17 if the debt is paid before the expiration of the credit period, as 5 % off if the debt is paid in ten days, and 2^ % off if it is paid in twenty days. Such discounts are stated as follows : Philadelphia, Pa., September 2, 1918 WINANT AND DRAKE Fine Imported and Domestic Dry Goods Sold to McWilliams and Jones, Boston, Mass. Terms : 1 % 10 days or net 30 days 20 yd. Silk 25 doz. Hose Less 1% discount 1.00 2.40 Rec'd payment 9/S/18 WINANT AND DRAKE 20 00 60 00 80 00 80 79 20 Manufacturers and wholesale dealers usually allow those who buy in large quantities a trade discount, which is a per cent to be deducted from the total amount of the bill. Frequently several trade discounts are allowed, as, 2o%, io%, and 5%. The 20% is. first deducted; then 10% from the remainder; then 5% from the second re- mainder. If there is a cash discount, this is deducted last. Assignment of Bills. The right to payment of a debt may be transferred by Writing across the back of the bill or the statement of account, " In consideration of . . . dollars, the receipt of which is hereby acknowledged, I EL. OF BUS. — 2 1 8 Exchange, Money, and Credit hereby sell and assign to ... , the within account, and I hereby authorize the said . . . , to collect it," together with the signature of the one to whom payment is due. Receipt when Bill Is not Rendered. In the settlement of a debt for which a bill or a statement of account has not been rendered, the pa5niient should be accompanied by a written receipt as follows : Chicago, 111., 191 Received of : Dollars (Signature) QUESTIONS AND EXERCISES 1. Draw up an original bUl for some service that you have performed. 2. Gather together several bills, and study the difierence in their headings and their form. 3. What essentials are common to all forms of bills? 4. Draw up a lawyer's bill for services in defending a suit for Robert Lee. Assume that you are the lawyer and that your professional fee is $275. The court costs amount to $30. A registration fee of $3.50 is involved and the services of a stenographer, employed for seventeen hours at $1.00 an hour. 5. Draw up a cabinetmaker's bill for remodeling an antique sideboard. Assume that you are the cabinet- maker. Extra materials cost you $175, and lab.or employed, $50. In addition, one dollar is spent to secure delivery of the piece of furniture. Commercial Drafts 19 IV. COMMERCIAL DRAFTS Development and Form. A second type of business instrument used to effect settlement and payment of a debt is the commercial draft. In its origin, the commercial draft is an order by one person on another to pay a third person a specified sum of money on demand or at a definite time. The person who draws the draft is known as the drawer ; the one drawn upon, as the drawee ; and the one to whom it is made payable, as the payee. Two-party Sight Draft At sight Pay to the order of Tflifi^elj- Value received, and charge to the account of To Q'k.o-yyvaA' jaii&Q^, Under earlier conditions of trade, this method of settling indebtedness constituted a convenient and reUable form, particularly when the drawee and the payee lived in the same community. Its advantage showed itself in re- lieving the drawee from sending to the drawer a sum of money over long distances, which, in early times, was accompanied by many risks. Under the improved con- ditions of modern exchange, these risks have been greatly reduced. Consequently the original use of the commercial 20 Exchange, Money, and Credit draft, involving three parties, has been reduced to a form that Imiits the transaction to two parties, the drawee and the drawer, the former remitting directly to the latter through channels for such purposes established by com- mercial banking institutions. The old form is known as a three-party draft; the restricted form, as a two-party draft. Two-party Time Draft with Acceptance SfOOQv{y&v 2, Kf/8 Thirty days aft^r date Pay to the order of Mv- - -LJJC9^^'' v Value ruiti4€d} ^^ pMiTge I \.Q^{^ account of To clko-yy^oii^ ^ant^, fSo-aZcyyv, Tflao^. WTien the draft is payable at sight or on demand, it is additionally designated by being called a sight draft or a demand draft ; if a specified time is allowed before payment of the instrument by the drav/ee is required, it is known as a time draft. Under the latter circumstances, however, in order to be regarded as an obligation of the drawee, business practice requires such a draft to be accepted. This means that the drawee indicates his willingness to pay the re- quested amount by writing across the face of the instru- ment " Accepted," together with his signature, and some- times the place of pa\Tnent. When a time draft reads *' after sight," the drawee must date his acceptance. When Commercial Drafts 21 once thus accepted, a time draft is commonly known as an acceptance, mider which title it passes in the business world. Use of Commercial Drafts. As an illustration of the practical use of commercial drafts, let us assume that James Madison, of Chicago, Illinois, is indebted to Henry. Long- streth, of Denver, Colorado, for $250. In the process of col- lecting the debt, the latter may draw either a sight draft or a time draft upon the former. If either form is used, the draft may be made payable to himself or to a commercial bank in Denver, which is made the agent in collecting the debt. If the drawer makes the draft payable to himself, he must transfer to the bank the right of collection by indorsing the draft, that is, by writing on the back of it " For col- lection, pay to the order of (name of bank)," together with his signature. In either case the bank then sends the draft to its own banking agent in Chicago, which presents it to the drawee. If the draft is a sight draft, its requirements are met only by immediate payment, and in due course the amount in- volved is remitted to the bank in Denver, which then gives the drawer credit. If, on the other hand, the draft is a time draft, the agent bank in Chicago presents it to the drawee for acceptance, as indicated on page 20. Upon securing acceptance of the draft, it is customary for the agent bank to hold the draft until it is due, and then to demand payment, upon which remittance is made to the drawer in the same way as in the case of a sight draft. Special Uses of Commercial Drafts. For some time it has been more or less a practice to make use of commercial drafts to secure payment for goods sent under circum- 22 Exchange, Money, and Credit stances in which the credit of the buyer is uncertain. This is done by attaching to the bill of lading, or the trans- portation receipt for the goods in transit, a draft calling for either pa>TTient or acceptance before delivery of the goods. The draft, by thus accompanying the bill of lading (which is forwarded by way of the commercial banking system), compels the purchaser to pay or dehnitely to obUgate himself to pay for the goods before they are released. This use of the bill of lading with draft attached is widely employed in some lines of business. hln -7/ ^ '°/ TRADE A QC E P T A N C E NEW YORK^^^S:^*^^!^X- (^Zi'-^^^^ ,n, (yyvtu, jiuidi to- Ui& aidsAj o-i Indorsement and Protest 31 Each one of these forms of indorsement legally signifies that the indorser vouches for the genuineness of the instru- ment which he is transferring, and agrees to be held respon- sible for its payment in case the original maker or the prior indorsers fail to pay it when it becomes due. The laws regarding the indorsement of notes, drafts, and other negotiable instruments vary in different states. In most states, however, indorsers can be held responsible for the payment of an instrument only in case the holder gives them notice of non-payment on the part of the maker within twenty-four hours after the instrument becomes due. Each indorser is responsible to all indorsers who follow and also to the holder of the note at its maturity. A qualified indorsement is effected by writing "With- out recourse " over the indorsement. By this means the holder of the instrument is compelled to look to the original maker or other indorser, if any, for payment, and not to the person who has indorsed "without recourse." The form of this indorsement is as follows : joxxy to tk& avcl&v oi cfa/m-'u.e'C S'oaA^ Protest. As was said above, in order to hold indorsers responsible for the payment of a negotiable instrument, notice of non-payment must be given to them. In com- pliance with this requirement, it is customary, when a promissory note or an accepted draft meets with non- payment, for the holder to make a formal protest to the 32 Exchange, Money, and Credit maker and the indorsers of the instrument before a notary public. The notary pu])lic. certifies that the note or other negotiable instrument was presented for payment and that payment was refused ; and he thereupon protests against the maker and indorsers for the amount of the instrument, including damages and costs. The purpose of this pro- test is to fix the liability of the indorsers, and to alYord good evidence of dishonor, that is, of the non-payment of the instrument. This notice of dishonor should be sent to each of the indorsers within twenty-four hours after the instrument has matured and has been presented to the maker for payment. Where possible, the notice ought to be served personally. If it is not possible to do this, the notice should be sent through the mails so as to bear a postmark date not later than twenty-four hours after dis- honor of the instrument. Notice of non-payment may be served upon the indorsers by the holder himself, but formal protest must be made by a notary. Form of Non-Payment Notice Mr. Henry R. Little Philadelphia, Pa. Dear Sir: A certain note nov/ in ray posoeosion drawn by Thomas Grove in your favor, for the sum of Two Hundred Dollars, payable in sixty days, from the fifth of March last, and by you Indorsed to me, was duly presented by me to Thomas Grove this day and payment refused. Please take notice that I look to you for payment. Youre truly, Philadelphia, Pa., April 30, 1918 Indorsement and Protest 33 Formal Certificate of Protest by Notary STATE OF PENNSYLVANIA^ buS'k^ i>c /U BE IT KNOWN, that on this ^th cLxu ol I'llciu in the year of our Lord '»^<£' tAcyu^a.'yicL ;tt-w-(5- himcLi&cL and etakte&n \, ^ci^yh&a^ lAJ-viMyru, a Notary Public, duly commissioned and sworn,, and residing in Doylestown in said county and state, at the request of joAiv CtcLawo,, went with the original note, which is above attached, to the office of J Ivo-'ifva^ ^vo-v-t' and demanded payment thereon, which was refused by him. Whereupon I, the said Notary, at the request of the aforesaid, did protest, and, by these presents, do solemnly protest, as well against the maker of said note and the indorsers thereof, as all others whom it may and doth concern, for exchange, for re-exchange, and all costs, charges, damages, and interest already incurred by reason of the non-payment of the said note. And 1, the said Notary, do hereby certify, on the same day and year above written, and within twenty-four hours from the time of such pro- test, due notice of the foregoing was put in the post office at Doyles- town as follows : Notice for /"f&niy /^. jCCttle-,

/i-a'vn.ilton For (Zniau^t avaS'&vu {f-ttt Balance brought forward- ^/£30 Amount deposited <^60 Total ^/^80 Amount of this check /<5 Balan ce carried forward ^/^06 whom the money is to be paid. It should be remembered, moreover, that a check drawn to order and then indorsed in blank — by the payee's writing of his name on the back — is really payable to bearer, and if the paying teller is satisfied that the payee's signature is genuine, he will not hesitate to cash it. If you wish to have a check cashed where you are unknown, or if it is not convenient for a Commercial isank UnecRs 49 friend who has an account at the bank to go with you for the purpose of identifying you, it may be necessary for you to deposit it with a bank until collection is actually made. Use of Commercial Bank Checks for Special Purposes. If you wish to draw money from your account, the most approved form of check is written " Pay to the order of Cash." This differs from a check drawn " to the order of Bearer," and the paying teller will expect you to present it yourself or at least through some one well known to him as your representative. If you write "Pay to the order of (your own name) " or " Myself," you will be required to indorse your own check before you can get it cashed. If you wish to write a check to withdraw money for the pay- roll, write " Pay to the order of Wages." If you wish to draw a check to pay for a bank draft, write " Pay to the order of Draft and Exchange." In this way a check itself may be made evidence of the purpose for which the funds were withdrawn. Transfer of a Commercial Bank Check to Another Person. If you wish to transfer a check to some other person, you must indorse it either by writing on the back, " Pay to the order of (name of person) " and your signature, or simply your signature. Remember, however, that the latter kind of indorsement is attended with risk, since it makes the instrument payable to bearer. Bank Checks Should Be Numbered. Checks should be numbered so that each may l^c accounted for. If your bank does not follow the practice of issuing to you a formal statement showing the condition of your account at the end of a certain period, your pass book or bank book should be left at the bank, at regular intervals, so that the book- BL. or BUS. — 4 50 Banking and Savings Institutions keepers may balance it. It may happen that your bank statement or your bank book may show a larger balance than your check book, indicating that there are still checks outstanding that have not been presented for payment. Numbering the checks thus becomes a great convenience in checking up the canceled checks, or vouchers, and in determining which ones have not yet been paid. QUESTIONS AND EXERCISES 1. Find out what devices are used to prevent " check raising." 2. How should you prepare checks for deposit? 3. What would be the effect if you should indorse a check '' Pay to (payee) "? 4. After you have mailed a check to the payee, suppose he notifies you that it has not reached him. What should you do ? 5. How can you reconcile a difference between your bank balance as shown by your check book, and the balance as shown by the bank's monthly state- ment? XI. COMMERCIAL BANK CERTIFIED CHECKS AND OTHER INSTRUMENTS Certified Checks. In settling many forms of indebted- ness, it may be necessary to have your commercial bank check certified. This is done by the cashier or paying teller, who writes or stamps across the- face of the check *' Certified " or " Good when properly indorsed," and his Certified Checks and Other Instruments 5 1 signature. The amount of the certified check is imme- diately deducted from your account, and the bank by thus guaranteeing your check becomes responsible for its pay- ment. After having a check certified, if you fail to use it, you ought to deposit the check to your account; otherwise your account will be short the amount of the order. This form of check is used especially in transactions where the ordinary check is regarded as not sufficiently secure. Certified Bank Check #2 ^--^"■"TTJT''^ Scranton, Pa., U'la.^ /5, /(Jf8 lational li5anft ecccmcltv /'fa^yrvvito-n Dollars CCxtA/uv ^icLnt Cashier's Checks. A cashier's check is an order on a bank signed by the cashier of the bank. Usually, to obtain this kind of check, as a customer of a commercial bank you would exchange your own check for one issued by the cashier made payable either to yourself or to such person as you may designate. If the check is made payable to yourself, you can readily indorse it to some one else, or, in the event of not using it, deposit it to your account. This form, like the certified check, is employed when the security af- forded by the ordinary check is insufficient to enable it to pass in business transactions. 52 Banking and Savings Institutions Cashier's Check #2 Fort Worth, Tex., j'W}i& ifiwt jjiational Bank /5, /f//6 Pay to the order of S^OAi^t ^ton-to^ ^e-v-&-yitu-lCv-&—~ ^'^'■-'^~~~~ — '^ '^ "^^"Dollars //^ ^anvet lO-kxX/m.a^'yh Cashier Certificate of Deposit. As commercial banks receive general deposits subject to the condition that funds are payable on demand by check to the order of the depositor, it is not, in general, customary for such banks to allow interest on general deposit accounts, although there are many exceptions to this rule. When funds are deposited, however, which are intended to remain for several weeks or Certificate of Deposit Certificate of Deposit #212 ffOOCf-^ Salem, Mass., //fe-y !6, \9\8 i?irs;t jl^ational Bank This certifies that-- has deposited in this bank- (jA^e, SkauQ^a/Kcl—- — — Dollars payable to the order of — ^kcwt&Qy BattQy in current funds on the return of this certificate properly indorsed, with interest at 4% per annum, if left six months. RiA^/xavd BiaOo Not subject to check. / Cashier Certified Checks and Other Instruments 53 months, not subject to check, most commercial banks issue to the depositors a certificate of deposit which entitles the holder to interest on the amount of the deposit for the time that it is left under the certificate. Such a certificate may be transferred in the same way as a check, by the process of indorsement ; or the funds represented by the certificate may be obtained by surrendering it to the bank that issued it. Bank Drafts. Nearly all banks keep funds on deposit in other banks in large commercial centers, and a bank draft Bank Draft //^^ . # 1920 Waterbury, Conn., jivtif !8, f (^ / 8 ^econD jl^ational Banh Pay to the order of S'/vvIvM' ^civt&v To the ffifjfmical National 3$aufe ' Rcdju^lv ?Ma'itin NEW YORK, N. Y. Cashier is simply a bank's check drawing upon its deposit in some other bank. Banks sell these drafts to their customers, and speak of the transaction as a sale of exchange. Such drafts are widely used in making remittances from one part of the country to another. Drafts upon deposits in the city of New York are especially used, and are known as New York drafts or exchange. Such drafts pass almost as cash anywhere within reasonable distance of the money center upon whicli they are drawn. These drafts are obtained from a commercial bank in the same way as cashiers' checks, but generally a small charge, known as exchange, is 54 Banking and Savings Institutions made for their use. This charge for the use of drafts varies with the condition of the money supply as affecting the two banking points involved. QUESTIONS AND EXERCISES 1. Give illustrations of various circumstances under which a certified check may be used to great advantage in making payment of a debt. 2. Explain the difference between a cashier's check and a bank draft. 3. Under what circumstances is a bank draft a highly desirable instrument in the transfer of credit? 4. What is meant by domestic exchange? What causes lead to a fluctuation in domestic exchange rates ? 5. Look up the current domestic exchange rate between New York and Chicago. Xn. COMMERCIAL BANK COLLECTIONS AND SETTLEMENTS Collections and Settlements. It has already been stated that there may be deposited to the credit of your account at the bank not only actual cash but also requests and obliga- tions to pay, such as checks, drafts, matured promissory notes, money orders, and similar items. These papers represent merely claims of the depositor which ar^ to be collected or settled by the bank. For this work commercial banks have established clearing houses and systems of cor- respondent banks. The clearing houses provide for the settlement of claims growing out of the banking business of the local community ; while correspondent banks afford a convenient means of collecting and settling claims arising from transactions with distant communities. Bank Collections and Settlements 55 Clearing Houses. If all the persons of a community were doing business through one bank, when one individual gave a check to another, a settlement of the transfer would involve merely the bookkeeping process of deducting the amount of the check from the account of the one who gave it and adding it to the account of the one who received and deposited it. When, however, one person draws a check on his bank in favor of another person, who deposits the check in another bank, the two banks must come together somewhere to make the transfer of funds requisite to settle the claim created by the use of the check. It is this mutual meeting place that is known as the clearing house. The checks, drafts, and other items which the banks present at the clearing house are called clearing-house exchanges, and the total exchanges, the day's clearings. The banks that bring claims amounting to less than those presented against them by the other banks must make the difference good in cash or its equivalent within a fixed time upon the same day . B y this means settlement between banks becomes merely a payment of balances through the clear- ing house, which acts as the agent to receive the amounts due from the banks which owe, and to pay the amounts due to the banks which have balances in their favor. New York Clearing House. An understanding of the workings of clearing houses can be best obtained by a brief account of the New York clearing house, which often has daily clearings equal to the sum of all others in the country. '' The banks represented send daily to the clearing house at least two clerks — a delivery clerk and a settling clerk. At the clearing house, each bank has a desk at which the settling clerk or clerks are seated. They bring to the clearing house in bundles the checks, drafts, and other 56 Banking and Savings Institutions obligations due them from other banks, each bank being represented by a separate package. They bring also a Hsl of the amounts due them from each of the banks in question. Before clearing begins, totals of these lists are handed to the manager. The sum total represents the aggregate amount to be settled for the day. " Promptly at lo o'clock the delivery clerks begin pass- ing from one desk to another, delivering to each the package of claims of all sorts that their banks have against other banks. These claims are accepted in bulk, with- out examination of the items. As soon as all the packages have been delivered they are carried back to the banks, where an examination of the items takes place; and if there are any that are not valid, the adjust- ment takes place between the bank which has , received them and that which presented them, without interven- tion of the clearing house or rectification of the accounts drawn up there. When all the packages have been received by the settling clerks at the clearing house, the latter draw up a statement of demands made upon them. "As these demands never balance the claims made by their banks, it is obvious that at the close of each day's business some of the banks will be entitled to receive money and others will be obliged to make payments to set- tle the accounts. When each clerk has made up his ac- count, he forwards a statement of the aggregates, with the amount of the balance to be paid or to be received. When all have forwarded their accounts to the manager, and the accounts are proved by the equality of the debit and credit aggregates and balances, the manager certifies the amounts which each bank owes to the associated l)anks or is entitled to receive from them." — New International Encyclopedia. Bank Collections and Settlements 57 Correspondent Collections and Settlements. The work of collecting and settling the items of deposit and collection that arc claims against persons or banks located at a distance is not so readily accomplished, but through the cooperation of banks in the " correspondent bank system," the task is reduced to a periodic settlement of balances. By this means a claim presented to a bank at one point is charged to the amount of a correspondent bank located near the point where the claim is due, the correspondent bank assuming the work of collecting the claim. To illustrate this process, let us suppose that a person liv- ing at Williamsport, Pennsylvania, who deposits in the First National Bank of that town, sends his check to another per- son residing in Waltham, Massachusetts, in payment of a bill. The latter will deposit the check in the Waltham National Bank and receive credit for the amount of the check. The Waltham National Bank may send the check to the First National Bank of Boston, which will give the Waltham bank credit for the amount. The First National Bank of Boston will then probably forward the claim to a bank in Phila- delphia, say the Girard National Bank. This bank will give the Boston bank credit and charge the amount against the First National Bank of Williamsport, which has an account for such purposes with the Girard National Bank. Banks generally collect by the most advantageous route, and frequently a check or a draft may pass through a large number of banks before it is presented for settlement at the point where it is due and is charged against the account of the customer who drew it. Collection Charges. From the above description, it may readily be seen that banks suffer inconvenience and expense by the deposit of widely distributed claims, as well as a loss 58 Banking and Savings Institutions of interest on the deposit while the items are in process of collection. For this reason banks frequently make a collection charge of not less than ten cents per item or one tenth of one per cent upon the total amount of the deposit for collection. QUESTIONS AND EXERCISES 1. In collecting a check on a bank at some distant point, why is a roundabout route frequently chosen? 2 . Why is the city of New York the greatest clearing center in the country? 3. In what way do Federal reserve banks facilitate settle- ment among banks ? 4. Find out how your bank collects the amounts called for by the checks that you deposit. 5. What should you do if a check which you deposited is returned to you, marked " No funds " ? XIII. COMMERCIAL BANK LOANS AND DISCOUNTS Borrowing from a Commercial Bank. One of the primary functions of a commercial bank is the lending of funds on interest for short periods of time. The length of time for which loans are made varies. Loans known as call loans are payable " on demand," while time loans are usually for periods of thirty days, sixty days, or ninety days. Such loans classify themselves into two groups : First, accommodation loans are loans made to a customer of the bank on the strength of personal security. This may be represented merely by the promissory note of the customer, if his credit satisfies the bank, or by such a note supported by the indorsement of some one approved by Commercial Bank Loans and Discounts 59 the bank, who thereby becomes responsible for its payment in case the maker fails to pay it. The former is known at the bank as single-name paper, while the latter is called two-name or indorsed paper. The extent to which a bank will -make loans upon the security of single-name paper is determined by the credit responsibility of the borrower and by his average monthly account balance. Usually a margin of 20% must be left on deposit. The form of note which the borrower must sign is gen- erally as follows : $600(f-^ ^etvalt, iTiUk., ftiOif /, /(^/8 3^rW\AAf cldu^ after date we promise to pay to the order of iltci^eCv-aO' '^vv-& {^/icii^a'';i.(5^— :^^^-^rt::-:^:r:^^:r^^:^^c^^cco^cr^:r^ Dollars ^"^ ■3'A,& TJltA/t-kant^' Ba.nJO; heZvo-it, ?7^vek. Value received No. /8 ^u& fivty, 31, ICf/8 (Residence or Place of Business) / 6 Riv-a^'uL oftve^&t, Jbei/hoiZ, Ifll/^k. This note must be indorsed by The Wilson Parker Company. It then becomes negotiable, and the bank can dispose of it, if it pleases, to some other bank or person. In the case of two-name or indorsed paper the note used is exactly like the preceding one except that the indorsement of the second person (say James B. White) is added to that of the maker of the note. 6o Banking and Savings Institutions If the note on page 59 were of this type, the indorse- ment would be as follows : joATve^ IS. 24Mitt& ^AA Second, coUateralloans are loans made to borrowers who deposit, as security for the payment of the loan, stocks, bonds, or other evidences of debt, called collateral, or more commonly securities. Borrowing from the bank in this way involves signing a note which includes, in ad- dition to the usual promise to pay, a supplementary agreement setting forth the right of the bank to sell the collateral on the non-performance of the promise con- tained in the agreement. Some collateral notes promise to pay " on demand " instead of at a specified time. The following is a form of the collateral note : ^6000"^ Chicago, 111., Tl'la.v^k I, /^I8 On the jiv^C day of H'^OAf next after date, for VALUE RECEIVED, W-& promise to pay to ^1)0 ^taOftfl!* IBSltk or order, at said Bank with interest at ^%, having deposited with said Bank as collateral security for the payment of this note, (Here follows a list of the securities and the agreement for the sale of the collateral, described above.) Tt is customary among banks, in making loans that run for a definite time, to deduct the interest for the period at Commercial Bank Loans and Discounts 6i the beginning of the period, or when the loan is made. In making call loans, that is, those payable on demand, interest is payable at least every three months. Discounting Commercial Paper, or Time Notes and Drafts. As many transactions in the business world are settled for the time being by notes or by accepted drafts, commercial banks find a profitable field of business in buying such commercial paper. They remunerate them- selves by appropriating the interest on the amount of the paper for the period until it is mature and payable. This practice is known as " discounting commercial paper." The discount is simply the interest on the note or the draft from the day on which it is dated to the day on which it is payable. By this means funds that would otherwise be tied up until the maturity of the notes or drafts are made available at once to the holders of the instruments, with no greater cost than a sacrifice of interest for the period during which the instruments have yet to run. QUESTIONS AND EXERCISES 1. Find out upon what conditions a commercial bank in your neighborhood will lend money to its depositors. 2. Assume that you wish to borrow $800 on your $1000 Liberty Bond. What steps must you take ? 3. Examine a collateral note and find out how it differs from a simple promissory note. 4. If a merchant gives a bank his 90-day note for $6000 when the rate of discount is 5%, what amount will the bank place to his credit ? 5. Find out the meaning of " single-name paper " and '' two- name paper " and under what circumstances each may be used as security for a loan. 62 Banking and Savings Institutions XIV. SAVINGS BANKS Nature and Kinds of Savings Banks. One of the most important means of building up individual credit is by saving a part of current income, thereby providing a surplus from which to meet obligations when due. A savings bank is an institution that receives on deposit small amounts of savings and provides for investing them in a prescribed manner. Some institutions take on deposit any sum from five cents to three thousand dollars, while others will not take less than one dollar at a time nor more than five hundred dollars in total amount. At the present time in the United States, these banks may be classified in three groups : (i) postal savings banks ; (2) mutual or trustee savings banks and fund societies ; and (3) joint stock sav- ings banks, including the savings bank departments of trust companies, state banks, and national banks. Postal Savings Banks. In June, 1910, Congress author- ized the Federal Post Office Department to conduct a sav- ings-bank business. The act which granted this authority created a board of trustees composed of the Postmaster General, the Secretary of the Treasury, and the Attorney General. An account may be opened in a postal savings bank with one dollar, but total deposits are limited to $ 1000, exclusive of accumulated interest. Provision is made for savings of less than one dollar through the sale of postal savings stamps in the denomination of ten cents, which are pasted to a card until the dollar amount is reached. As a record of deposit, a certificate of deposit is issued to cover the amount of the deposit. Under the law creating the postal savings banks, the rate of interest on deposits is limited to 2%, but provision is made that deposits Savings Banks 63 may be exchanged for United States bonds in denomina- tions of $20, $100, and $500, paying 2^% interest. Per- sons of ten years and over are allowed to open an account in their own name. Mutual and Joint Stock Savings Banks. Mutual or trustee savings banks and savings fund societies originated in the efforts of public-spirited men and women to better the conditions of the working classes by encouraging them to save, or in the desire of wage earners themselves to improve their condition by saving. This was particularly necessary during the latter part of the eighteenth century and the early part of the nineteenth century, when the lot of the wage earner was not only a hard one but one that was rendered still more acute by the absence of any means of caring for his savings. The joint stock banks developed during the latter part of the nineteenth century as enterprises to share in the profits arising from the investment of capital accumulated by saving. In organization and practice, the mutual sav- ings bank may be said to be typical, but in one important respect it differs from the joint stock bank ; that is, all profits derived from its operation go to the advantage of the depositors, while in the operation of a joint stock sav- ings bank, only a fixed interest goes to the depositor, the balance of profit, if any, remaining with the bank. Organization of Mutual and Joint Stock Savings Banks. The control of a mutual savings bank is generally placed in the hands of a board of trustees consisting of men of high character and financial ability, who serve without pay. The management of a joint stock savings bank is vested in a board of directors selected by the stockholders fur- nishing the preliminary capital. Both boards choose the 64 Banking and Savings Institutions necessary officers, who usually consist of a president, a treasurer, and a secretary, with assistants. The presideni is the cxecuti\e officer and exercises general supervision over the affairs of the institution. The secretary attends to the correspondence, acts as general auditor and accountant of all the departments, and keeps the minutes and records of the board. The treasurer makes the investments, has charge of the cash, deposits funds in other banks and draws checks upon them, collects interest on investments and loans, makes payments for the bank, receives payments of matured obli- gations, receives applications for loans, and otherwise per- forms the duties of the bank's financial officer. The impor- tant subordinate employees are the receiving teller, who receives deposits ; the paying teller, who makes payments to the depositors; and the bookkeepers, who keep the ac- counts of the depositors. Opening a Savings Bank Account. When you open a savings bank account, the receiving teller or the clerk having charge of new accounts will ask for your name, residence. Card to Be Filled out in Opening a Savings Account 1, , agree to conform to the by-laws and regulations of the Cleveland Saving Fund Society and any amendments thereto. Write name in full Residence Father's name Occupation Wife's name Husband's name Maiden name Birthplace - Opened Closed Savings Banks 65 place of birth, the names of your parents, and other facts useful in establishing your identity, together with a copy of your signature. After this preliminary requirement i? satisfied, he will give you a pass book bearing a number as well as your name. When you deposit, the receiving teller will ask you to state the amount you wish to deposit and will direct you to sign a slip on which this amount is entered. After taking your money, he will enter the amount in your pass book on the left side and also upon the bank's deposit book. In a large bank the latter is done by another clerk. Withdrawing Money from a Savings Bank. When you wish to withdraw money from your account at a savings bank, present your pass book at the paying teller's window, Receipt Account No. 63^5 Date /%xy /o, 191^ of notice Received, Cleveland, Ohio, TFlanf 26, 1918 from the CletjelauD ^aiJing jFunD ^oriet^ of nioneys standing to credit of the above account. and name the sum you desire to withdraw. You will usually be asked to answer some questions serving to identify you, and, unless you are well known to the teller, reference will be made to the bank's records to prove your identity. The amount requested will be written upon a receipt form which you will be asked to sign, and the date and the amount of your withdrawal will also be entered upon the FL. OF BUS. — 5 66 Banking and Savings Institutions right-hand page of your pass book, which will then be returned to you. You will thereupon be called by name and requested to state the amount for which you asked. Sometimes the paying of the money is delayed for a stip- ulated period, usually ten days or two weeks, as a protection to the bank against unforeseen and unexpectedly large with- drawals, but usually payment is made at the time of the request. Withdrawing Money from a Savings Bank at a Distance. For the convenience of customers who may be located too far away to appear personally at the savings bank to with- draw the money which they desire, many savings institu- tions make use of a witnessed order similar to the one shown below. Upon the receipt of this properly filled out and witnessed, the funds requested by the order are sent to the customer by check or by bank draft. Order to Be Signed in Withdrawing Money at a Distance The deposit book, unless in the Society's keeping, must accompany this order ^6OC0 Account No. 5d^(^ Jb&e f6, \^\S Wc^z CletelanD gating i?unD 0ociet^ Pay to S^iMAjJo S^itvyi&v or bearer of moneys standing to the credit of above account. Witness... Q)oj(XhlAJv (jj^OJV^--- Name . ^ Jfla.V'if ■^X/Mf Residence. - T'llxX'^Xo-OO/, CIItXo--- Residence.. iTla^vicyyi, €.ku> Savings Banks 67 Interest on a Savings Bank Account. The important service of a savings bank is taking small savings on deposit and investing them for the benefit of the depositor. Out of the income derived from the investments, the trustees of a mutual savings bank distribute annually or semiannually the profits in the form of dividends. The annual dividend rate of such banks varies generally from 3% to 4%. In the case of joint stock savings banks, the interest pro- vided is not subject to much variation in rate. Interest is allowed on a balance running for a certain complete period, as one month, three months, or six months. Any deposit made after the beginning of the period, or any with- drawal before its close, is excluded. Borrowing from a Savings Bank. As a great many deposits are made every day, savings institutions usually have large amounts of funds to invest, and are therefore wilhng to lend to borrowers who can furnish suitable secur- ity or assurance that the loan will be paid when due. The time of such loans varies, but it is usually from three to five years ; and the security required of the borrower is a mortgage on real estate, the value of which must be con- siderably more than the amount lent. QUESTIONS AND EXERCISES 1. Why is saving important not only from the standpoint of the individual but also from the point of view of the industries of the nation ? 2. Why does the Post Office Department form a suitable channel for conducting a savings bank business? 3. What steps must be taken to become a depositor in a postal savings bank? 68 Banking and Savings Institutions 4. Find out what difference there is in the organization, the administration, and the purpose of a mutual and of a joint stock savings bank. 5. What kinds of loans may a savings bank make under the laws of vour state ? XV. COOPERATIVE BANKS AND BUILDING AND LOAN ASSOCIATIONS Nature and Function. It has been seen that the savings bank affords the wage earner an opportunity to invest savings safely until they may be used otherwise to greater advantage. A few decades after savings institutions orig- inated, associations were formed for the purpose of advanc- ing to the wage earner funds for his immediate use on the security of his future savings. Such associations became known as cooperative banks, building and loan associations, mutual loan associations, savings and loan associations, savings fund and loan associations, and cooperative savings and loan associations. No matter under what name they appeared, these institutions were organized to furnish a safe means for the accumulation and the investment of savings and to afford opportunities to secure funds at reasonable rates for immediate use, particularly for the purchase or improvement of houses or other real property. Organization of a Building and Loan Association. Gen- erally speaking, membership is the only avenue by which the opportunities afforded by the building and loan association may be enjoyed, and this rests upon the possession of at least one share of stock of the association. The member agrees to pay into the treasury of the association each month a certain sum, usuallv one dollar for each share, until Cooperative Banks and Building Associations 69 the aggregate amount paid, increased by the profits coming from investment of the funds paid in, equals the matured value of the share, which, in most instances, is two hundred dollars. Prior to the maturing of the share, it has two values. One is the paid-in value, or the amount of actual pay- ments that have been made ; the other, the holding or book value, which is the amount of the payments made plus the profits that have accrued. If a shareholder pays one dollar each month, it would require two hundred months, or sixteen and two thirds years, to pay for a share ; but as money paid in is immediately invested and the interest received is also loaned out, the shareholder will have the advantage of compound interest, and the hold- ing or book value of his share will amount to two hundred dollars in a shorter time, or approximately in twelve and a half years. New members are admitted at regular intervals, usually every six months, and the shares issued at each time con- stitute a series. For organization and administrative purposes, the mem- bers, or shareholders, elect a board of directors. This board selects a president, a vice president, a treasurer, a secretary, a solicitor, and various committees, including the impor- tant property committee, for conducting the business of the association. A stated meeting of the association takes place once a month for the receipt of dues on shares, for the making of loans, and for the settlement of other business pertaining to the association. Membership Advantages in Building and Loan Associa- tions. If a person is in a position to save ten dollars a month out of current earnings, a profitable way to invest 70 Banking and Savings Institutions this amount will be to take ten shares of building and loan stock. This would require the payment of ten dollars a month as premiums, or dues, on shares. These payments, according to the experience of carefully managed building and loan associations, can be invested so as to amount to two hundred dollars a share in about twelve and a half years. Or, if the person has a suitable amount saved and desires either to build or to buy a property, the amount saved may be used as part payment on the property, and a given number of shares of building and loan stock may be taken out to cover the remainder of the value of the prop- erty. This may then be borrowed in funds from the build- ing and loan association on the security of a mortgage against the property in favor of the association. The amount of this mortgage can be satisfied by monthly pay- ments of premiums and interest on the mortgage until the shares mature, at which time the mortgage is surrendered by the building and loan association in settlement of the matured shares, and the property holder receives a clear title to his property. Borrowing from a Building and Loan Association. Among building and loan associations many- plans have been adopted for making loans to members. A few lend funds to members at a fixed rate of interest in order of application or by lot. In most cases, however, the loanable funds are put up at auction and sold to the highest bidder, either upon the basis of an advance of a definite amount of interest on the loan, or of ail advance of premium payments on the stock. In both instances, the association obtains the advantage of additions to its loanable capital in advance. In general, while various as to details, the i)lans for mak- ing loans are as follows : Cooperative Banks and Building Associations 71 (i) A shareholder may borrow not to exceed the par value of his stock if he can give satisfactory security for the loan. (2) If there is a limited amount of funds to be loaned and there are several prospective borrowers, the funds are loaned to the one who offers in addition to the regular interest and dues the highest bonus and premiums. (3) The borrower is required to pay monthly interest on his loan in addition to the dues on his stock. (4) The stock at maturity becomes the property of the association and extinguishes the principal of the loan. Security for Loans. From the members, or shareholders, two classes of security are acceptable : (i) A collateral deposit of stock in the association, which usually entitles the borrower to a loan of funds equal to seventy-five per cent of the paid-in value of the stock. (2) A mortgage lien on the property to be improved. Discontinuance of Membership. Discontinuance of membership in a building and loan association may take place regularly at the end of the period of time necessary for maturing the value of the shares upon which the member- ship rests, or irregularly by premature withdrawal from the association. When the periodical dues paid, with the profits earned, amount to the ultimate or maturing value of the shares, then the member, if the shares have not been pledged for loans, is entitled to receive the value in cash. If pledges for loans equal the amount of the maturing value, he is entitled to the cancellation of the loan ; or if the loans do not equal the amount of the maturing value, he is entitled to receive in cash the difference between the amount of the loans and the maturing value of the shares. 72 Banking and Savings Institutions Form of Note Used in Borrowing on Building" Loan Shares No. Boston, Mass., 191 One day after date I promise to pay to the order of the Union 15uili)ing $c iLoan ^sisociation Dollars with interest at six per cent per annum, payable monthly on the of each month at without defalcation, for value received, having assigned herewith my — shares of the capital stock of the said Association as col- lateral, as required by the By-laws of said Association, which 1 authorize the holder of this note upon a default in payment of said debt or interest thereon, in the manner required by the By-laws of the said Association, or upon non-payment of any of the monthly payments due on said stock, to sell either at public or private sale without demanding payment of this note or to cancel at its then cancellation value, without notice to me, and to apply the proceeds, or as much thereof as may be necessary, to the payment of this note or the balance which may then be due thereon, with all interest, premiums, penalties, and necessary expenses and charges, holding me responsible for any deficiency, or refunding to me my balance. And I further authorize the secretary of the said Association to transfer to the Association my shares of stock of the series, constituting him my true and lawful attorney for these purposes. Witness, Name Address- Seal QUESTIONS AND EXERCISES I. Why is it good business practice to be a member of a building and loan association as well as a depositor in both a commercial bank and a savings bank ? Private Banks 73 2 . Ascertain the names of several building and loan associa- tions in your neighborhood, and find out under what conditions they assist members in buying houses. 3. Get a copy of the by-laws of a building and loan associa- tion and see under what conditions ^the association is permitted to lend to its members on the security of shareholdings. 4. Why is it a disadvantage to a building and loan associa- tion to permit members to withdraw under very easy conditions ? 5. Find out under what circumstances a building and loan membership is said to " carry itself." XVI. PRIVATE BANKS Field of Activity. While the private banker has not been superseded by the highly developed banking institu- tions of the present day, he has been compelled to devote himself to special fields of banking. Private banking houses of to-day give particular attention to the collection and settlement of claims arising in foreign trade, to the lending of funds, to the buying and selling of stocks, bonds, and other securities, and to the transfer of funds from one country to another. The first three fields need not be con- sidered at length here. The last, however, is of impor- tance because of its close relation to the needs of the trav- eler ; for one of the imperative requisites in going from one country to another is a ready supply of funds of the country in which the traveler finds himself. Private banking houses endeavor to provide for this need in several ways. Circular Letter of Credit. Among the means provided by private banking houses to enable a traveler to secure 74 Banking and Savings Institutions Circular Letter of Credit No. Addressed to the Correspondents of i?ifi(be, Broton, anD WitiUi New York, U. S. A., 7^/^^ Gentlemen : We beg to introduce and commend to your kind attention Mr. , to whom you will please furnish funds in sums as required up to the aggregate amount of Pounds Sterling against sight drafts on Paris Bank, Ltd., London, each draft to be plainly marked as "drawn under F. B. and W.'s letter of credit number We request you to buy such drafts at the rate at which you purchase demand drafts on London, deducting your charges, if any, and we en- gage that these drafts will meet due honor in London if negotiated not later than 1919, under the condition that the amounts thus negotiated have been inscribed on the back of this letter. The letter itself must be attached to the draft which exhausts the credit. Please see to it that the drafts are signed in your presence, and care- fully compare the signature with the one below. We are, Gentlemen, your obedient servants. (Holder's signature) funds in a foreign country is the circular letter of credit. This introduces the holder to foreign correspondent banks of the banking house issuing the letter, certifies that he is authorized to draw upon its agents at specified points to the amount stated in the letter, and requests that his drafts be paid or honored. His signature is written at the Private Banks 75 foot of the letter, and sometimes a personal description is given to facilitate identification. A list of the agents of the banking house is contained on a separate sheet. When- ever a draft is drawn, it must be signed in the presence of the representative of the agent by whom it is paid. On the back of the first sheet of the letter of credit an indorsement Second Page of Letter of Credit Indorsements once made hereon of payments must be allowed to remain without alteration or erasure ; care should therefore be taken to understand exactly about payments desired before inscribing below. On the payment of any sum exhausting this credit, this letter must be surrendered by the holder and attached by the banker negotiating the last draft to the said draft. Date By whom paid Town Am't, writing Am't, fig. 5/8/18 Brown & Co. London Ten Pounds £10 is made showing the date, the place, the amount, and the name of the agent making payment on account of drafts. The unused amount of such a letter will be returned in cash to the holder by the banking house that issued it. International or Traveler's Checks. Another instru- ment issued by private banking houses to provide funds in a foreign country is the international or traveler's check. This is a draft or order drawn upon foreign correspondent banks to pay specified limited amounts or their equivalent in foreign currency. The purchaser must write his name on the face of each check and again sign the order when he has it cashed, thus afifording evidence of identity and genuineness. 76 Banking and Savings Institutions Form of International or Traveler's Check $20^ Sold by.-- - No Date Good within one year from date when countersigned with the op- — posite signature (Holder's signature) i?t0br, IBroton, anD ^eU0 Through their correspondents will pay against this to the order of TWENTY 22 Dollars or equivalent. FISKE, BROWN, AND WELLS Countersignature of holder which must correspond with above. QUESTIONS AND EXERCISES 1 . To whom should you go in your locality to make financial arrangements for a trip in a foreign country ? 2. Look up the monetary units of the important nations of the world, and ascertain their values in terms of the United States dollar. 3. Why does the foreign exchange value of monetary units vary from time to time ? 4. What advantages and disadvantages does a letter of credit show in comparison with an international money order or traveler's check ? 5. What conditions have enabled express and telegraph companies to conduct a large money order business? PART III INSURANCE XVII. INSURANCE PRINCIPLES Nature of Insurance. Under prevailing conditions ix the world, life and property are subject to the risk of injury and destruction, and in consequence even contract obliga- tions are exposed to uncertainties of fulfillment beyond human anticipation and control. When such injury or destruction occurs, the attendant loss is largely individual in effect. To offset this, various forms of insurance have been devised to protect the individual against what might be overwhelming loss. This is accomplished by a company or a group of individuals assuming the risks, distributing in various ways the incidental losses, and by this means indemnifying the sufferers. In practice, insurance is a contract by which one party, called the insurer, agrees for a stipulated consideration or payment to indemnify another, called the insured, in the event of loss due to specified causes. The contract ot agreement is known as the policy ; the consideration or payment, as the premium. In this broad meaning of the term " insurance," we may conceive contracts of indemnity to be made be-' tween parties, for loss due to many causes. Indeed, 77 y8 Insurance such is the condition and the extent of the insurance busi- ness to-day that contracts of indemnity exist, ranging in character all the way from the common poHcies on Hfe and property to the exceptional and unique insurance of a prima donna's voice or a famous pianist's fingers. What- ever has value to the possessor or to another dependent upon the possessor may become the basis of an insurance contract, provided that terms of consideration and indem- nity can be agreed upon by the parties to the contract. Of the many kinds of insurance in practice to-day — life, fire, marine, burglary, accident, health, boiler, plate- glass, tornado, credit — we need concern ourselves only with life, accident, and fire insurance, as the proper use of these types will sufficiently safeguard the interests of most individuals. Scientific Basis of Insurance. Insurance rates are, as a rule, based on past experience as to the extent of losses occurring each year in a class of risk. If, for illustration, in life insurance, the number of selected lives is one thou- sand, and the average number of deaths each year for ten years is fifteen, each life being insured for one thousand dollars, there will be a claim on the insurance company or group for fifteen thousand dollars annually. Theoreti- cally, therefore, the combined cost of insurance annually for those surviving is the amount w^hich, if invested, w-ill produce the sum of fifteen thousand dollars. To this charge must be added the costs of conducting the business and enough more to provide for its safe conduct. The primary idea of all insurance, therefore, is that relatively small amounts properly invested each year by a number of persons will make available relatively large amounts, falling due at irregular intervals with the maturing of Insurance Principles 79 contracts through deaths, fires, or accidents, as the case may be. Assessment and Level Premium Insurance. There are two kinds of premium collection : assessment, or natural, and level. In effect, assessment insurance is insurance paid for by annual and, naturally, variable assessments to meet maturing policies and expenses each year. The un- certainties of such insurance costs brought this plan into such disfavor that few important insurance companies continue to employ it for premium collections. Instead, the level premium plan is followed, by which a uniform premium is charged annually, without regard to the number of policies that become a claim against the company. It may happen under this plan that in a specific year the premium may be more than is requisite for the payment of actual losses. The excess is then accumulated in a reserve or surplus which, with interest, is relied upon to make up deficiencies of other years when the losses exceed expectations. Types of Insurance Organizations. Generally speaking, insurance organizations may be classified in order of im- portance as stock companies, mutual companies, and straight mutual associations. From the standpoint of the insured, however, there is in practice little difference at the present time between stock companies and mutual com- panies. The theoretical difference between the two is now of historical rather than practical significance. Both issue policies under which, for a definite and uniform premium, they assume specific risks and agree to indemnify sufferers for such losses as occur under the contracts. Originally, in the mutual companies, the relation of the insured to the insurer was by no means so simple. In the early organiza- 8o Insurance tions of this type, tlie funds necessary to pay losses were raised by assessnienl after the losses had occurred. Under such a system neither profit nor loss could arise, and neither reserve nor surplus could be established, as the assessments were made to cover only losses and expenses. Experience showed, however, that it was extremely difficult to raise the required amount in this way when losses were unusually heavy. At the present time, the general custom among all the important mutual insurance companies is to collect funds by premiums paid in advance on the level premium plan. ^lost of the older companies have accumulated large reserves or surpluses out of which they are able to pay exceptional losses. This to a great extent nullifies one of the original advantages held by stock companies in their possession of capital and reserves as security for policyholders. On the other hand, many stock companies now compete with mutual companies in offering to policyholders the privilege of participating in the profits of the company, which originally belonged solely to the stockholders and oftentimes enabled mutual companies to oflfer better rates. This participation usually takes the form of reduced pre- miums, direct dividends, or, in the case of life insurance, earlier amortization, or maturity, of insurance policies. Many straight mutual associations operating more or less on the assessment plan of premium' collection exist in the United States in the form of county and town mutual companies, factory mutual companies, and, with various modifications, among fraternal organizations ; but, with the exception of the factory mutual companies, they present limitations in management and resources that seriously handicap their usefulness. The success of factory mutual Life and Accident Insurance 8i associations as contrasted with the others is attributed chiefly to their pohcy of preventing fire losses rather than of merely paying claims. QUESTIONS AND EXERCISES 1 . A certain number of books are lost by members in every class. How may this loss be made good without imposing heavily upon the persons who lose the books ? 2. As between insurance companies of national scope and those of local activity, which is to be preferred for insurance ? 3. In the great fire disasters of San Francisco and Balti- more, certain fire insurance companies were unable to meet their obligations while others met them promptly. What scientific basis 6i insurance accounts for this? 4. Why is a constant inflow of new insurance essential to the success of an assessment insurance enterprise ? 5. What kind of insurance companies or associations are writing insurance in your community? XVIII. LIFE AND ACCIDENT INSURANCE Life Insurance. In a broad sense, life insurance is divided into two fields — ordinary life or standard insur- ance, and industrial insurance. The distinguishing features of these two kinds of Hfe insurance are as follows : Ordinary life insurance began in (he United States early in the nineteenth century, and was intended for the head of the family only, who is insured for a relatively EL. OF BUS. — 6 82 Insurance large amount, one thousand dollars and upwards. Indus- trial insurance in this country is of recent origin (1875) and is designed for every member of the family, who may be insured for small amounts, generally from ten dollars to five hundred dollars. The former might therefore be called class insurance, and the latter mass insurance. The fundamental idea of industrial insurance is to provide for the expenses of burial and the cost of the last illness of every member of the family. It is called industrial insur- ance because the system is designed primarily to meet the needs of wage earners employed in the industries. In ordinary life or standard insurance, the amount of insurance desired, say $5000, is determined, and the premium or annual cost is adjusted to the unit amount. In industrial insurance the amount of insurance is ad- justed to the unit . premium ; that is, the amount per week that it is desired to pay, say $.20, is fixed, and this regulates the value of the policy. Premiums in ordinary life or standard insurance are payable annually, semiannually, or quarterly at the office of the company. In industrial insurance they are collected weekly from the house of the insured by the agent of the company. Mortality Tables. Out of the actual experience of American life insurance companies have grown mortality tables, which, starting with one hundred thousand people living at ten years of age, show the number dying each year, and hence the probability of death to each person each year throughout the course of the tables, to the ninety-fifth year. From these tables the cost of insurance to any person at any age within the range of the tables can be readily reckoned. Lfire and Accident Insurance «3 American Experience Table of Mortality This is the mortality table prescribed by statute in most of the states as the basis upon which the reserves of life insurance companies shall be computed : Age Number Living Num- ber Expec- tation Age Number Living Num- ber Expec- tation Age Number Living Num- ber Expec- tation Dying of Life Dying of Life Dying of Life lO 100,000 749 48.72 39 78,862 7S6 28.90 68 43,133 2,243 9-47 II 99,251 746 48.08 40 78,106 76s 28.18 69 40,890 2,321 8.97 12 98.505 743 47-45 41 77,341 774 27-45 70 38,569 2,391 8.48 13 97,767 740 46.80 42 76,567 785 26.72 71 36,178 2,448 8.00 14 97,022 737 46.16 43 75,782 797 26.00 72 33,730 2,487 7-SS IS 96,285 735 45-50 44 74,98s 812 25.27 73 31,243 2,505 7.11 16 95,550 732 44-85 45 74,173 828 24-54 74 28,738 2,501 6.68 17 94,818 729 44.19 46 73,345 848 23-81 75 26,237 2,476 6.27 18 94,089 727 43-53 47 72,497 870 23.08 76 23,761 2,431 5-88 19 93,362 725 42.87 48 71,627 896 22.36 77 21,330 2,369 5-49 20 92,637 723 42.20 49 70,731 927 21.63 78 18,961 2,291 5-11 21 91,914 722 41-53 SO 69,804 962 20.91 79 16,670 2,196 4-74 22 91,192 721 40-85 SI 68,842 1,001 20.20 80 14,474 2,091 4-39 23 90,471 720 40.17 52 67,841 1,044 19.49 81 12,383 1,964 4-oS 24 89,751 719 39-49 53, 66,797 1,091 18.79 82 10,419 1,816 3-71 25 89,032 718 38.81 54 65,706 1,143 18.09 83 8,603 1,648 3-39 26 88,314 718 38.12 55 64,563 1,199 17.40 84 6,955 1,470 3.08 27 87,596 718 37.43 S6 63,364 1,260 16.72 8S 5,485 1,292 2.77 28 86,878 718 36.73 57 62,104 1,325 16.05 86 4,193 1,114 2.47 29 86,160 719 36.03 58 60,779 1,394 15-39 87 3,079 933 2.18 30 85,441 720 35-33 59 59,385 1,468 14.74 88 2,146 744 1. 91 31 84,721 721 34-63 60 57,917 1.546 14.10 89 1,402 555 1.66 32 84,000 723 33-92 61 56,371 1,628 13-47 90 847 385 1.42 33 83,277 726 33-21 62 54,743 1,713 12.86 91 462 246 1. 19 34 82,551 729 32.50 63 53,030 1,800 12.26 92 216 137 .98 35 81,822 732 31-78 64 51,230 1,889 11.67 93 79 58 .80 36 81,090 737 31-07 6S 49,341 1,980 11.10 94 21 18 .64 37 80,353 742 30.35 66 47,361 2,070 IO.S4 95 3 3 .50 38 79,611 749 29.62 67 45,291 2,158 10.00 Preliminary Steps in Insurance. The first essential is to determine whether you are insurable; that is, whether you are in good health, as only healthy persons can be insured. Granted that your general health is good, you must make sure that you have no organic affection of lungs, heart, or kidneys, the organs principally tested by the insurance companies. A wise precaution before submitting §4 Insurance your case to llie company's [physician is to consiill youi lamil\" (lo( tor on iIksc points and <^v\ his judgment upon your insurablf condition. It is a detriment to Nour future chances of insurance with other companies to be refused by the physician of any one company. If your own physician finds your physical condition satisfactory, the company's physician will probably pass you. Having convinced yourself that you are a fit subject for insurance, you decide upon the amount of insurance that you desire, the kind of policy, and the person, called the beneficiary, to whom this amount is to be paid at your death. Before entering into an insurance contract with any company, ask to see a sample of the policy you want, and if you are unable to pass judgment upon every clause in the policy, consult some one in whose judgment you have confidence. A little care at this point may save you much disappointment later on. Many people are accepting pohcies which they do not understand and are carrying them under a misapprehension as to their most vital provisions. Remember that your contract with the com- pany is the policy you accept, and do not depend upon the verbal understanding you have with the agent. You are now ready to present yourself formally to the company, and do so in the form of an application. This requires you to state your age, your address, the kind of insurance you want, and the name of the beneficiary. It also asks questions about ages and causes of death of your parents and sometimes grandparents, your occupation, use of tobacco and alcoholic drinks, recent illnesses, whether you have had certain diseases, what other insurance you carry, if any, whether you have ever been refused by any other company, etc. Your answers to all these questions Life and Accident Insurance 85 become part of your contract with the company, and should be carefully made. Answers of vital consequence to the policy, that are later proved to have been untrue, may invalidate the contract. If the medical examination and the application are satisfactory to the company, the policy will be prepared at once and placed in your hands. You are not bound to it, however, until you have paid the first premium. Life Policies. Policy contracts of many kinds are offered by all companies to-day, but those deserving the consideration of the average person fall into three groups — whole-life, term, and endowment. The whole-life policy represents insurance in its first and truest form. It is one that does not mature until the death of the insured. Premiums are based upon two methods of payment : either annually throughout life, the policy in this case being designated as ordinary life ; or for a given period of years only — ten, fifteen, or twenty — in which case the policy is called a limited payment life policy. Ordinary life premiums are naturally the cheaper of the two, as they are indeed the cheapest of all premiums made for full insurance. This is the type of policy best suited to heads of families who wish to secure the maximum amount of protection for their dependents at minimum cost. Term insurance, covering a fixed period, say ten }ears, is resorted to in periods of life when there is a special strain or extra hazard confronting the insured. This kind of insurance expires at the end of the period stipulated, with- out providing any subsequent return to the one insured. Endowment insurance finds special favor with unmarried people and with newly married couples. Its distinguish- ing feature is that the face of the pohcy falls due at llie 86 Insurance end of the endowment period, generally twenty years, and is then payable to the insured himself ; and should he die meantime, it is payable to his beneficiary. It thus com- bines the element of investment with that of insurance. The premium rate of endowment policies is high because every policy of this kind becomes a claim upon the com- pany at the end of the definite endowTnent term, if not before. On $1000 of insurance, if the premium for ordi- nary life were $30, for an endowment policy at the same age it would be $50. This type of policy is to be specially recommended to young people. It is popular also with older people who have no one in particular de- pendent upon them, and who wish to lay by a regular sum which will guarantee the payment of their living expenses in case they outlive the endowment term, and will, at the same time, provide for their funeral expenses. It is neither the best kind of insurance nor the best kind of investment, but it fulfills both ends fairly well. Selecting a Policy. The choice of a policy is of far more consequence than the choice of a company. All companies, whether they are stock or mutual companies, will agree to write and to sell practically the same kind of policies at about the same cost. The slight differences in premium charges in favor of one are offset by higher dividend pay- ments and more liberal conditions in favor of the other. Increasingly stringent laws regulate the insurance funds wherever placed, so that on this score the insured is in safe hands with any one of the well-known companies. It should be remembered, too, that of the many kinds of insurance in effect, one is just as cheap or as dear as another. All premiums are calculated upon the probable length of life as indicated by the mortality tables, or upon the term of the Life and Accident Insurance S7 insurance, and a certain rate of interest which the invest- ment of the premium must earn. The basis of charge is therefore identical, and a choice of poHcy is not to be made on the ground of relative cheapness, but rather on the pur- pose the insurance is to serve and on the privileges and restrictions of the policy itself. Broadly and theoretically, one poHcy is as good as another. After deciding that you want a whole-life, ordinary life, limited payment, term, or endowment policy, choose one with these desirable features : (i) freedom from restric- tions ; (2) convenient premium payments ; (3) liberal terms and non-forfeiture ; (4) surrender and loan privi- leges ; (5) exemption from claims of creditors ; (6) privi- lege of changing beneficiary ; (7) participation in the form of annual dividends ; and (8) liberal convertibihty privileges. Annuity. An annuity is the annual income which the purchaser, called the annuitant, receives throughout life in return for a principal sum deposited with the insurance company. The annuity principle is the exact converse of the insurance principle. In insurance, as we have seen, the company, in consideration of a small annual premium paid by a man throughout life, agrees to pay a large sum at his death ; in the annuity, in consideration of a large sum paid to the company at once, the company agrees to pay a small sum, called the annuity, each year throughout life. This principal sum is sunk with the company, and if after the first annuity is paid the annuitant should die, the com- pany is entitled to retain the balance ; just as, on the other hand, the company stands ready to pay the face of a life policy if death occurs unmediately after the first premium has been paid. 88 Insurance As the amount of the annuity is based on the probable number of payments to be made, and as this depends on the probable length of the amiuitant's life, the mortality tables are again necessary to the calculations. Good health and a long life are as desirable and as vital, in this con- tract, to the annuitant as they are in the insurance con- tract to the company insuring. The annuity contract is one to be recommended to those who wish to make a profitable and safe investment of a principal sum, either for themselves or for others dependent on them. The annuity is naturally considerably greater than the income from other investments, since it is paid only throughout life and at death the principal becomes the property of the company. Money deposited in savings in- stitutions or invested in stocks, bonds, or mortgages yields a smaller yearly income; but the principal is ultimately returned to the investor. The rate of annuity income depends, of course, upon the age at which the annuity is bought. At twenty-five years of age $1000 would assure an annuity of $50 for life, and at fifty years an annuity of $70. The same sum placed with a savings bank would yield an interest of from three to four per cent, or $40 a year at most. Accident Insurance. Persons who travel much or whose work or business tends to expose them to injury or death by accident, should protect themselves and their families by taking out accident insurance. So extensive is the business in this department of insurance that many companies de- vote themselves entirely to the writing of accident poHcies. As a j:;()li( y of this kind becomes a claim upon the compan\' only in ca.se of injury or death due to accident, and as an accident is by no means so sure to befall a man as is death. Life and Accident Insurance 89 tlie cost is very small as compared to life insurance. A man of thirty might pay an annual premium of $30 for an ordinary life policy of $1000, and a premium of only $5 to $10 for an accident policy of the same amount. Such a policy would entitle his estate to .$ 1000 if he met death by accident, and, if he suffered injury from acci- dent, would pay him an amount varying according to the seriousness of the injury. In view of the relative cheapness of accident insurance and of the increasing risk of accidents in our daily move- ments, an accident policy is a precautionary insurance measure of which men should avail themselves without hesitation. QUESTIONS AND EXERCISES 1 . Which type of insurance — industrial or standard life — is most convenient for a wage earner, with an income of $15 a week and a dependent family of wife and three children ? Why ? 2. Are the premiums charged by insurance companies at present in strict accord with actual loss experience? If not, why not ? 3. Get three or four standard life insurance policies and compare them, in order to see how they differ and what advantages their provisions offer to the insured. 4. Why is a limited payment insurance policy more suit- able for a man elected or appointed to office than for a man in an established business or profession? 5 A man comes into possession of $10,000 and decides to invest it in insurance in the interest of his son and daughter. What type of insurance is it advisable for him to take? Give reasons. 90 Insurance XIX. FIRE INSURANCE Nature of Fire Insurance. Second only to life insurance in the extent of its application to mankind generally, and first in importance to business enterprise, is fire insurance. Fire insurance may be defined as a contract to indemnify the insured for actual destruction of certain specified property by fire. Too much emphasis cannot be placed upon the words " to indemnify the insured for actual destruction." The one thing which fire insurance must not result in is a profit to the insured. Therefore, no matter what value is stated in an ordinary fire insurance policy, the insurer is not liable for more than the actual value of the property destroyed. As property deteriorates from daily use and as a frequent revision of values is impractical, the value contemplated is that which the property represents at the time of destruc- tion. The principle of fire insurance is protection not of the property said to be insured, but protection to its owner against loss by fire. To go beyond such indemnification for actual loss would be to admit the possibility of profit and to invite the intentional firing of properties for profit, a contingency wholly at variance with the insurance idea. Economy of Fire Insurance. Destruction of property by fire is inevitable. The annual loss in the United States alone by this agency is in the neighborhood of $200,000,000. Every property owner, therefore, should fortify himself in some way against loss due to the possible destruction of his property. He does this by paying into a common fund managed by an insurance company his pro rata share of the losses likely to occur to any property insured by the fund. Fire Insurance 91 This pro rata pa)anent is called the fire insurance premium, and represents in itself a relatively small annual expense to each contributor to the fund, who thus is a party to his own full insurance, as well as to that of every other contributor. Single-handed, no busi- ness man can afford to tie up sufficient of his capi- tal to guarantee himself full protection from uncer- tain losses. In the collective principle of protection, however, there is business economy in joining with many others to safeguard each against almost certain failure due to wholesale destruction of property values by fire. Fire Insurance Policies. The type of fire insurance poHcy in common use is what is called an open policy. An open policy is one which, while it insures up to the maxi- mum of the amount written in the policy, agrees to pay only the amount of loss actually incurred. For instance, a policy insures a house for $5000, and a fire destroys that house. If it can be shown that the house was worth only $4000, the company is liable for that amount only. Because of much dissatisfaction caused by contracts of this character, many states have enacted laws pro- viding that when the insured building is totally de- stroyed by fire, the insurance company shall pay the full amount of the policy. Such a policy is said to be valued. The valued policies are opposed to the in- terests both of the insurer and the insured. In the open policies the owner of property is generally allowed to name his own value, and the company protects itself by limiting its liability to actual loss, making a correspondingly low premium. In the case of valued policies, if the company is to protect itself, it must carefully examine each prop- erty to be insured, and the expense of this examination is 92 Insurance added to the premium, which without this is high because of the full risk assumed. It is hardly necessary to add that the poUcy holder must liaAc an insurable interest in the property. This means that he must have some right to or share in it, in his capacity as owner, as mortgagee, as executor or adminis- trator, or as trustee. Important Features of Standard Fire Insurance Policies. The standard policy, after mentioning the names of the parties to the contract, states the term of insurance and the amount of risk assumed, ^ and gives a description of the property. Then follows the liability paragraph, which reads as follows : " This company is not liable beyond the actual value of the property at the time any loss or damage occurs, and the loss or damage shall be ascertained or estimated according to such actual cash value, with proper deduction for de- preciation, however caused, and shall in no event exceed what it w^ould cost the insured to repair or replace the same with material of like kind and quality. Said ascertain- ment or estimate shall be made by the insured and this company, or, if they differ, then by appraisers, as herein- after provided ; and the amount of loss or damage having been thus determined, the sum for which this company is liable pursuant to this policy shall be payable sixty days after due notice, ascertainment, estimate, and satisfactory proof of the loss have been received by this company iji accordance with the terms of this policy. It shall be optional, however, with this company to take all or any part of flu' arlicles at such asccrlaiiicd or appraised value, and also to repair, rebuild, or replace the j)roperty lost or damaged with others of like kind and quality within a rea- Fire Insurance 93 sonable time on giving notice within thirty days after the receipt of the proof herein required of its intention to do so ; but there can be no abandonment to this company of the property described." The terms of insurance explicitly state, it should be noticed, that the company insures against all " direct loss or damage by fire," and not against loss by any other cause. It should be added that "' loss or damage by fire " holds the company liable for damage to property by water used in extinguishing fire in adjacent properties. Frequently ju- dicial decision is necessary to determine what is " loss or damage by fire"; but companies generally stand ready to meet the losses incurred through fire either directly within the building or ' indirectly from other buildings, if d'ue precaution has been taken to protect exposed property. A vacant property, such as a house standing temporarily untenanted, is likely to nullify the company's liability if fire occurs during such vacancy, in cases where the terms of the policy expressly state that an occupied house is insured as described. Therefore, if circumstances require temporary unoccupancy of a house or building of any kind, notice should be given at once to the insurance company, and a special permit should be obtained. Such permits are often attached to the policies at the time when they are issued. In some states, the vacating of a building by a policyholder, without the consent of the company, works a complete forfeiture of the policy. In other states, forfeiture is only temporary, or during the time of vacancy, after which the policy is considered to revive itself, and if loss then occurs, the company remains liable. There are numerous other vital elements in the standard policy that should be thoroughly understood by the in- 94 Insurance sured, but those above mentioned are most essential to common knowledge. The general admonition to read all contracts to which one is a party apphes with special force to the fire insurance policy. Fire Insurance Policy Terms and Rates. Property insur- ance contracts run for short terms, generally one to five years. The old-style perpetual policy issued on residences has become obsolete. The changing conditions surrounding a building and affecting it as an insurance risk, as well as the inevitable deterioration, make it necessary and desirable to limit such contracts to very brief terms. Ease and simplicity of renewal arrangements contribute further to the expediency of the short-term policy. Short-term insurance also means lower unit rates, as it admits of more frequent observations and examinations of the property, and revision of rates up or down as hazards increase or diminish. As compared with life insurance rates, the annual fire insurance premium of $2 or $5 on $1000 of insurance is very low. It must be borne in mind, however, that every life insurance policy becomes a claim upon the company sometime, as every life must end ; whereas every fire in- surance policy does not necessarily become such a claim, because every building will not burn, the percentage being about one to thirty. As a closing thought on fire insurance, it should be borne in mind that since the company is liable for actual loss only, since total destruction of property values is exceed- ingly rare, and since only about one in thirty policies becomes a claim upon the company, overvaluation and hence overinsurance of property are both unwise and un- economicaJ. Fire Insurance 95 QUESTIONS AND EXERCISES 1. Explain why fire insurance rates for furniture in apart- ments are higher than in individual houses. 2. Make an investigation of your neighborhood to find out what variation there is in the fire insurance rates and what difference in the rates is due to variation in the use to which property is put. 3. A house with its contents is valued at $8000. What amount of insurance is it advisable to place upon it? 4. Get several fire insurance policies and compare them to find out what differences they show. 5. In rural communities farmers have formed local mutual fire insurance associations. What disadvantages ac- company this type of insurance? PART IV PROPERTY XX. GENERAL PRINCIPLES Nature of Property. There are two conceptions of the term property. Commonly it is used to designate the objects or things that may be owned ; abstractly, and legally, it is used to designate the right, the interest, or the estate, which a person has in land and other things for his exclusixe use and enjoyment. This twofold meaning often leads to confusion and therefore should be borne in mind. Further- more, property is of two kinds — real and personal. Real property consists of land and all things attached to it in a permanent way and intended for use in connection with the land. Personal property includes all other things ; that is, those things which, generally speaking, are mov- able in character. The term estate is used to designate the nature and the extent of interest one has in. either real or personal property, and gives rise to the expressions real estate and personal estate. In connection with the practical use of property there are two kinds of property rights — absolute and special. The owner of property is said to have an absolute right in it. On the other hand, one who rents, borrows, or in any other way comes into possession of property for some 96 General Principles 97 particular use has only a special property interest in it. Such rights may be exercised to the exclusion of all others except those of the owner, who must, however, respect the special rights of the other person or party. In real estate, the owner is sometimes called the freeholder and the one who rents the property the leaseholder. Title to property, an important term from the legal standpoint, signifies a combination of all the elements that make for a just claim of exclusive ownership. Transfer of Property. Transfer of the title to property may be by contract of sale or exchange, by will or by in- testacy procedure, by forfeiture, by judgment of the court, or by bankruptcy. Use of property may be allowed by lease, or in trust by bailment. At the basis of the contract of sale and of the lease are the principles of contract law. Although it is not possible to treat these principles tech- nically or exhaustively, the essentials of the typical con- tract obligations common to most people should be studied. Meaning and Essentials of Contracts. A contract is an agreement enforcible by law. All agreements are not necessarily contracts ; but every contract must represent an agreement. In order that an agreement may be thus enforcible, the law requires the fulfillment of certain con- ditions, the principal of which are the following : (i) The agreement must be made by persons who are legally competent to make a contract. By this is meant all citizens of sound mind who have reached the legal age of twenty-one years. Some states include girls of eighteen years, or even younger, if married. - Therefore so-called infants, or those under age, cannot l3e bound by contract ; neither can convicted criminals be thus bound — for they EL, OF BUS. — 7 98 Property- are deprived of the right to perform civil duties in the eyes of the law ; nor lunatics nor drunkards, provided that their disabilities are established to be of such degree that they permanently unfit the persons for rational actions. (2) There must be mutual consent to the agreement. If one or the other person is led into the agreement through misrepresentation, mistake, fraud, undue influence, or duress, he cannot be held responsible. By duress is meant the securing of the signature to an agreement by physical force or by threats of bodily injury. (3) There must be a consideration-underlying the agree- ment. For instance, A may promise to give B an automo- bile; but if it is a mere gift promise, without intention that B shall exchange money or value in any other form with A, the agreement is not binding upon A. As soon as B agrees to give in exchange one hundred dollars, which is a consideration, a valid contract is made. (4) The act of agreement must be within the law itself. Two men might prepare an elaborate contract form setting out conditions on which they would rob a house and divide the spoils; but their agreement would not be binding, be- cause burglary is illegal. Kinds of Contracts. Contracts may be classified as (i) written, (2) verbal, and (3) implied. Written contracts are of two kinds : (a) ordinary, and (b) under seal. The best and most binding contracts are the written con- tracts. Little is left to uncertainty or dispute as to the conditions of the agreement if they are reduced to writing and if the names of the parties to the agreement are attached. An ordinary or simple contract is one thus committed to writing. The law prescribes no particular form, sim- General Principles 99 ply requiring that the agreement entered into be clearly stated and be in conformance with the four essentials noted above. Any such simple contract may be converted into a contract under seal by a slight change in the phrase- ology of the closing paragraph and by the additions of the seals to the names of the contracting parties. A seal may be represented by any of several legal devices or signs, such as a paster, the word " seal " or the letters " L. S." for locus sigilli, " the place of the seal." The laws of the states require that certain kinds of contracts be in writing and that certain of them be under seal; but as these laws are not uniform, it is necessary to consult the statutes of each state in order to avoid the drawing of an illegal agreement. Generally speaking, the following contracts must be in writing : (i) The promise of an executor or an administrator to pay out of his own estate that which is due from the estate he is administering. (2) The promise to answer for the debt or default of another; that is, to be surety that another will pay his debts or discharge any other of his legal obligations. (3) The promise to do anything, in consideration of marriage, as for example, to transfer property. (4) Any contract for sale of lands, or any interest in or concerning lands (though in the United States sometimes leases for less than one year are excepted). (5) Any contract which by its terms is not to be per- formed within the space of one year from the time of mak- ing it ; but if it may be fully performed within one year it is not required to be in writing. The law holds equally binding many kinds of agreements made by word of mouth. If the manager of a store engages 100 Property a clerk, verbally, at a salary of $60 a month for one year, such agreement is enforcible by law. Important engage- ments of this kind should not be left, however, to verbal understanding, as memories are defective and constructions to be placed upon such understandings differ greatly. Implied contracts are unconsciously entered into every day, but are none the less binding because of the lack of ex- pressed agreement. For example, a taxicab rushing down the street is hailed by Mr. Smith, who jumps in and instructs the chauffeur as to his destination. No thought of contract en- ters Mr. Smith's mind ; there has been no bargain with the chauffeur as to what the service is to cost; yet Mr. Smith, by his act of taking possession of the public conveyance, puts into effect a contract to which the law holds him bound. He cannot legally escape paying the regular charge for such service. The same is true of a man who enters a railway train without a ticket ; he binds himself by implied contract to pay the railway's rate of fare for the distance he travels. QUESTIONS AND EXERCISES 1. By what ways may one come into control of real and personal property ? 2. Explain how property may be lost by forfeiture, by judgment of the court, and by bankruptcy. 3. Look up several special types of agreements against public policy in your locality, and therefore not subject to contract. 4. Give reasons why it is important that all agreements pertaining to real property should be put in writing. 5. What is a franchise, and how does it differ from other personal property? Leases loi XXI. LEASES Leases. Of the four most common instruments growing out of transactions in real estate — the lease, the bill of sale, the deed, and the mortgage — the lease touches the lives of the greatest number of people ; it should therefore be clearly understood in its main provisions. The lease is a written rent contract permitting one person, called the tenant or lessee, to use for a given period of time the property of another person, called the landlord or lessor. Vital Provisions of Leases. Perhaps no document more frequently passes hands than the common house lease. Satisfaction in the operation of such leases can only be had after a thorough understanding between the landlord and the tenant. For instance, the tenant should know beyond question whether he or the landlord is to make general repairs other than those following damage by the elements. Unless agreement upon this point is expressed in the lease, the tenant in most states must keep up the property so far as wear and tear are incident to his occupancy, and must surrender the premises in as good condition as when received. A second subject of consideration is the lessee's right to sublet the property for an unexpired portion of the term. On this point it may be borne in mind that standard leases do not give the tenant this right without the consent of the landlord. A third point to be emphasized is that rented buildings cannot be used legally for any other purpose than that specified in the contract. A building leased for resi- dence purposes could not be converted into a store, or into a hotel, for instance, without the consent of the owner, which should be given in writing. I02 Property Lease LEASE MADE AND EXECUTED between .^i^:)!^ S'o-w-e/ia., of €v-a/ytQA>-Cttt , cJrvct., of the first part, and ^alwi /r&n'vu, of the (u^m.e' e^Ctu, of the second part, this ivioZ day of CZtcau^t in the year c>'yi& Uic>UA,*>^c>^^t& Uvo-u(umcl '}tvn& h icyiclv&co a-'rvco &vanL&e.n, between S'leoZo-n f. /CiAn.^-a.tt, at the g'^itif oi c4'&^^f' iJa^k', merchant, and cfa,vci/v Stiqa,{)-eth, ki^ w-vie,, of the one part, grantors, and S^ve^cLeA^Uiyk/ 3^. h&v-trv&, of the same city, ta^%v-u&Vj of the other part, grantee, WITNESSETH, that the grantors for and in consideration of the sum of t^\^■o- tliou^a,')^ct cLo-itaio^ {^^2000 ), lawful money of the United States of America, unto them well and truly paid by the grantee, the receipt whereof is hereby acknowledged, have granted, bargained, and sold, released and confirmed, and by these presents do grant, bar- gain, and sell, release and confirm unto the grantee, his heirs and assigns (here follows full description of property) TO HAVE AND TO HOLD the said tot av ^e^e ajy (juncyvct {>'hVeJC' >n-£a-iZ4 ix^f., av t&n&ni&iit Uv&v&on, &ve^te-ct, heredita- ments, and premises hereby granted, or mentioned and intended so to be, with the appurtenances unto the grantee, his heirs and assigns, to and for the only proper use and behoof of the grantee, his heirs and assigns forever, and for the said S'vea-to-n' f. /Ci/yyi6-^ ^^XSlXa^^nyXX^.—) much value in certain of his property as the loan repre- sents. If the note is paid when due, the mortgage is canceled. If it is not paid then, or if meantime the interest is not paid as it accrues, the mortgagee (the person to whom temporary title is given) is empowered to institute foreclosure proceedings against the mortgagor (the person granting temporary title). Such suit at law involves the selling of the property mortgaged at public sale. The mortgagee is entitled to just enough of the proceeds of such sale to meet the mortgage debt and the expense of fore- closure and sale. The remainder reverts to the mort- gagor. io8 Property Kinds of Mortgages. The following is an illustration of a real estate mortgage because it pledges real estate in security of the pa\Tnent of the loan. Similarly personal property Real Estate Mortgage THIS COTTTRACT WITNESSETH THAT WHEREAS Martin Bellamy, of Salem, Mass., has this day executed his promissory note to Samuel Clement, of the same city, for the sum of two thousand dollars ($2000) due five years from date, with interest at the rate of five per cent. NOW, THEREFORE the said IJartin Bellamy, and Marguerite, his wife, in order to secure the payment to Samuel Clement, or his assigns, of afore- said promissory note for two thousand dollars, receipt of which is hereby acknowledged, have sold and conveyed to the said Samuel Clement (Here follows a description of the property con- veyed ) IT IS AGREED that if the said Martin Bellamy shall pay to the said Samuel Clement, or his assigns, the sum promised in the said note according to the conditions thereof, then this con- tract shall be null and void, otherwise to remain in full force and effect. IN WITNESS WHEREOF we have hereunto set our hands and seals this first day of October, 1918. Witnesses: may be offered as a loan security, in which case the instru- ment would be called a chattel mortgage. Not infrequently several mortgages are given upon the same property. Unless otherwise provided, such mort- gages have priority in the order of their creation. First mortgages, generally applicable to two thirds of the value of the property mortgaged, carry with them a lower rate of Mortgages 109 interest charge than second mortgages, which give prece- dence to first mortgage Hens in case of foreclosure. Other Mortgage Facts. Like the deed, the mortgage should be recorded, because it affects the title to the prop- erty. If a mortgage is assigned to a second person as mortgagee, the assignment should also at once be recorded. It will be observed that both in the deed and in the mort- gage illustrations, the wife has entered into the granting of title. A husband carmot alone give a perfect title to real estate, as the wife is entitled to a dower in such property, and must consent to the necessary title transfer. The mortgagee, in order to protect his interest in the property mortgaged, should require from the mortgagor a poHcy of fire insurance. Mortgages are commonly exe- cuted for a term of five years, rarely for less than three years. They automatically extend themselves if neither party desires to have the loan paid. By agreement money loaned on mortgage may be paid in installments, each pay- ment being indorsed on the note. The unmortgaged in- terest in property constitutes the owner's equity. QUESTIONS AND EXERCISES 1. How do the rights of a modern mortgage holder differ from those of earlier days ? 2. Get a copy of a mortgage and analyze its provisions. 3. Should you prefer to hold a mortgage on a centrally located business property or on a house in a residential district of a city? Give reasons. 4. Find out whether money is loaned on second mortgage in your community. 5. What margin of security is usually required when a first mortgage is placed ? Why? 1 10 Property XXIV. DISTRIBUTION OF PROPERTY ESTATES Methods of Distribution. Property of deceased persons is disposed of in one of two ways : (i) By statute law, which in the main provides fairly for the distribution of real estate and personal effects to the heirs or next of kin entitled to it. (2) By will, an instrument by which a person disposes of his property as he sees fit, disregarding his natural heirs, if he pleases, except as the law may forbid. For instance, the law in most states guarantees to the wife a one-third interest for life in her husband's real estate and a one-third share of his personal property outright. This interest, therefore, he cannot will away. In the case of small property interests and of normal family relations, there is no real need of making a will, as the impartial provisions of the state for the distribution of such property are generally satisfactory to all parties con- cerned. When there is no will, the owner of the property is said to die intestate. When the estate is large or when the owner of a small estate wishes to discriminate between certain of his heirs and next of kin, or wishes to bequeath property, or some of it, to persons outside of his family, a will is necessary. How to Make a Will. Any person of sound mind and of legal age may make a will, disposing of both real and personal property. Persons under legal age, as boys under twenty-one or girls under eighteen, may by will bequeath personal property. A will should be in writing; but no set form is required, the law being satisfied with a clear ex- pression of the wishes of the testator, as the person making Distribution of Property Estates in the will is called. The signature to the will must be wit- nessed by two persons, called witnesses. These persons need not, and generally do not, know the contents of the will. No beneficiary should be a witness, as it would invali- date his share of the bequest. Will MOW ALL MEH BY THESE PRESENTS THAT I, James Orr, of the city of Goldsboro, of the coun- ty of Wayne, of the state of North Carolina, be- ing of sound mind and memory, do make, publish, and declare this my last will and testament, in manner following, that is, to say: First: I direct that all my debts and funeral expenses shall be paid. Second; I give and bequeath to my son William Orr, five thousand dollars ($5000). Third: I give and bequeath to the Orr Hospital of Goldsboro three thousand dollars ($3000). Fourth: I give, devise, and bequeath to my wife, Elizabeth Orr, all the rest, residue, and remainder of my estate, both real and person- al, in lieu of her right of dower. Lastly: I hereby appoint Henry Watson executor of this my last will and testament, hereby revoking all former wills by me made. IN WITNESS WHEREOF, I have hereunto subscribed my name this tenth day of June in the year of our Lord one thousand nine hundred and eighteen. .JtuSx^^tSjt:^ Witnesses:^ ^ There are some unwritten wills, made by men in the serv- ice of the army and the navy, or by persons meeting with fatal accidents, who must make wills under conditions that will not admit of preparing written instruments. The validity of such wills rests upon the circumstances at- 112 Property tending their making and on the reliability of the witnesses. As a rule, only personal properly may be disposed of in this manner. Executing or Administering Wills. Upon the death of a property owner his will is read, in order to learn its provisions as to bequests and the name of the person or institution authorized to carry out or execute its provisions. If no person has been named as executor, or if the one so named refuses to act, the court, called the probate court in some states, and the surrogate's court or the orphans" court in others, must appoint some one to settle the estate. Such a person is known as the administrator. A woman appointed as executor or as ad- ministrator is sometimes called respectively an executrix or an administratrix. It is the business of an executor to carry out faithfully the provisions of the will. The will usually states whether or no: the executor must give a bond for the performance of his duties. An administrator, as a rule, takes charge of an estate of one who has died without leaving a will. He must give a bond for the faithful performance of his duties. The administrator's course of action generally runs thus : First, he determines the extent and the value of the property of the estate as well as of its debts. Then he pays the debts, consisting of expenses of last illness and burial, widow's dower,' state debts, and claims of creditors. What remains, if anything, is then paid to the legal heirs. A careful accounting of every step in the settlement is made, and when the process of closing the estate is completed, a statement of the entire proceeding is made to the court. If such a statement is satisfactory, the court then discharges the administrator. Distribution of Property Estates 1 1 3 The Trust Company as an Executor or Administrator. Prior to the formation of the so-called trust companies, the settlement of estates was in the hands of individuals. The owner of the property about to make a will would select a member of his family or a friend as an executor, preferably a lawyer or a business man ; and the court in appointing an administrator would do likewise, after consulting with the heirs. The inexperience and unreHabiHty of individ- uals thus chosen furnished good ground to the trust company for offering its services in this capacity. Indeed, the trust company of to-day is equipped as no mdividual can be for the prompt, efficient, and economical admin- istration of estates and trusts of all kinds. The com- plexity of its organization, its departments of legal advice, real estate, investments, banking, etc., afford it such facili- ties for conducting and closing estates that it is named with increasing frequency as executor or administrator. Since more than one person may be selected as executor, it is well in drawing a will to choose a trust company and a member of the family, say a son. This guarantees a prompt and businesslike settlement of the estate, and at the same time provides for a family connec- tion with its settlement, which is most desirable. The Trust Company as Trustee. Among the various other powers granted to the trust company by state charters may be mentioned the following: (i) to act as trustee of property of any and all kinds left with it as guardian of minors ; (2) to act as agent in the management of real property ; (3) to act as receiver for defunct concerns of all kinds and those needing reorganization ; (4) to act as depository for trust funds, securities, and other personal property. EL. OF BUS. — 8 1 14 Property The safe-deposit departments of trust companies render an increasingly large and valuable service to the public. Their vaults contain receptacles of all sizes that may be rented by the year at a moderate rate. There is little need to-day for the individual safe or strong box in the house ; valuables of all kinds are more conveniently and safely cared for in the safety-deposit boxes provided by many banks as well as by trust companies. The charges or commissions of the trust company are generally systematized and uniform ; those of the personal agent are Ukely to be uncertain and uneven. The benefits of combining many processes in one organization and the resulting economies in administration have brought to the trust company much business of a banking and trust nature that formerly required for completion the services of several independent agencies. QUESTIONS AND EXERCISES 1. A man having a $100,000 estate dies intestate. What provisions are made by your state for the distribution of the estate among his wife and children ? 2. What steps must be taken by an executor in closing an estate and what compensation is allowed him under the law? 3. A man without direct heirs dies without making a will. In what order are collateral heirs entitled to his property ? 4. What disposition is made of an estate if no heirs can be found ? 5. What legal idea is back of the practice of giving an heir only one dollar ? Taxation 1 1 5 XXV. TAXATION Nature of Taxation. Taxes are charges laid upon persons or property for the support of government. In the older days taxes were levied regularly and irregularly. When a ruler needed funds for his own expenditure or to carry on war, he simply levied additional taxes, in the form of duties on exports or on imports. These taxes were at the personal disposal of the ruler. The struggle of modern nations for political freedom centers in no small degree around the problem of getting control of the public purse. Our own Revolutionary War was aroused by various acts of tyranny, but none more important than " taxation without representation." Since we now hold that " government derives its just powers from the consent of the governed," the assessment and levying of taxes is particularly the concern of the direct representatives of the people in our legislative assemblies. Federal Taxes. The Federal government of the United States derives its revenues in the main from indirect taxes, that is to say, taxes le\'ied not upon individuals but upon the production and the sale of articles. In ordinary times, the main revenue comes from customs and internal revenue. Customs or duties are taxes paid on articles imported from abroad. The law that contains the schedules of articles of import, the classification of articles, and the rates of duties levied on them, is called a tariff. The purpose of our tariff on imported goods is twofold : first, to raise revenue ; and second, to foster American industries by making it expensive to import articles that would compete in price with those made at home. Customs or duties levied under the tariff system are ii6 Property collected al tustomliouses :il the principal ports, along the borders of Cana(hi and Mexico, and at some large inland cities. Wlien goods are purchased in foreign countries for importation into the United States, the importer must file with the United States consul at the foreign port from which they are to be shipped an invoice covering a list of the goods and their value at the place where they were manu- factured or produced. The consul certifies the accuracy of the invoice and sends a copy of it to the collector of the port in the United States at which the goods are to be landed. Upon arrival at this port, the shipment is examined by the customs officers to see that it corresponds with the descrip- tion in the invoice. If there is evidence of fraud, a heavy fine is imposed on the importer, or the goods are confis- cated. If it is found that the goods are undervalued, their value is raised by the customs appraiser. In personal traveling only' a Hmited amount of goods purchased abroad may be brought to this country free of duty. Any concealment of goods from the customs in- spectors, technically known as " smuggling," is punishable by a heavy fine and by confiscation of the goods, which are generally seized by the customhouse or Treasury officials and sold at public auction. Care should be taken, therefore, to make out an accurate declaration, or statement, of goods to be brought into the country, a copy of which must be handed to the customs officer in charge of inspection at the port of entry. Another form of tax levied by the Federal government is the income tax. During the Civil War incomes from $600 to $5000 paid to the Federal government a tax of 5 % ; incomes above $5000, a tax of 10%. In 1894 an effort to impose an income tax was nullified by a decision of the Taxation 117 Supreme Court of the United States that it was uncon- stitutional. In 1913, however, the demand for an income tax had become so great that the Sixteenth Amendment to the Constitution was adopted to provide for such a tax. Under this act the Federal government levied an in- come tax, which, as provided in the law of 1916, exempts $3000 for every individual and $4000 for every married couple or for the head of a family. Moreover, by the law of 191 7, war income taxes were levied under which exemptions were fixed at $1000 for single persons and $2000 for married couples, or for heads of families, with an allowance of a Income Tax Rates Under Act of Total Income Tax 1916 1917 Normal Tax On net incomes over exemptions 2% 2% 4% Progressive Tax Over $5,000 to $7,500 none 1% 1% 7,500 10,000 none 2% 2% 10,000 12,500 none 3% 3% 12,500 15,000 none 4% 4% 15,000 20,000 none 5% 5% 20,000 40,000 ^ r% 7% 8% 40,000 60,000 2% 10% 12% 60,000 80,000 3% 14% 17% 80,000 100,000 4% 18% 22% 100,000 150,000 5% 22% 27% 150,000 200,000 6% 25% 31% 200,000 250,000 7% 30% 37% 250,000 300,000 8% 34% 42% 300,000 500,000 9% 37% 46% 500,000 750,000 io% 40% 50% 750,000 1 ,000,000 10% 45% 55% 1 ,000,000 1,500,000 11% 50% 61% 1,500,000 2,000,000 12% 50% 62% 2,000,000 13% 50% 63% iiS Property- special exemption of $200 for each dependent child under eighteen years of age. These taxes were made progressive, that is, the rate was made higher as the amount of income increased. In the table on page 117 the tax rates of the Act of 1 91 6 and those of the Act of 191 7 must be added together to determine the total income tax. In addition to the tariff duties and income taxes, the Federal government resorts to other forms of taxation. It levies upon articles raised or produced in the country, such as tobacco, liquor, and toilet articles. These taxes are termed internal revenue taxes, and are payable by stamps secured from the collector of internal revenue and affixed to the articles before sale. Another minor source of Federal revenue is the pro- gressive tax on legacies. The inheritance tax of 1916 exempts $50,000 from an estate left by a resident of the United States. After debts and the $50,000 are de- ducted, the rates on the net estate are as follows : Inheritance Tax Rates Over $50,000 to $150,000 . 150,000 250,000 . 250,000 450,000 . 450,000 1 ,000,000 . 1,000,000 2,000,000 . 2,000,000 3,000,000 . 3,000,000 4,000,000 . 4,000,000 5,000,000 . 5 000 000 2% 3% 4% 5% 6% 7% 8% 9% 10% Under the emergency created by war conditions in 191 7, new stamp taxes upon internal business were put into force, being made applicable to amusements, railroad tickets, telegraph and telephone messages, etc. Taxes were imposed also on important papers and transfers of prop- Taxation 1 19 erty, promissory notes, acceptances, and other evidences of debt. These are kno.wn as document taxes. State and Local Taxes. The taxes levied by the different states and by their subdivisions vary with the states and with their needs. In the main, the taxes imposed are direct, that is, levied upon persons and property directly. Some states levy a tax upon personal property ; some levy an income tax ; many of them impose an inheritance tax upon property transferred by will or inherited under the law. A large number of states tax corporations, as well as profes- sions, and such effects as mortgages, bank stocks, chattels, and machinery. Counties and townships levy taxes upon land and various occupations. Cities levy taxes on real estate within the city Hmits as well as on personal property. They also impose a tax for water and light where the city owns the plants. Under the head of taxes imposed by local govern- ments come assessments- made upon property holders when a street is opened and paved or when other improve- ments are undertaken, — the government holding that the improvement has benefited the property and that therefore the beneficiary, or owner, should pay toward the betterment. Direct taxes are levied either according to the sworn statements or returns which the taxpayer makes of the value of his individual property holdings, or according to the valuation of the taxable property made by a board of assessors. This board is supposed to be familiar with the value of property in different locaUtics and to make an honest appraisement. The rate of taxation is estabHshed by the various governmental authorities according to their financial needs, after valuations are returned by the board 120 Property of assessors. A reasonable time is usually allowed to prop- erty owners in which to object to the valuation placed upon their property. When the taxes are unpaid for a specified time, the property is advertised for sale and the sheriff levies on it and sells it for the taxes. Under some circum- stances, the property may be bought back within a limited time by payment of the taxes plus the cost of advertising, sale, and interest. The right to do this is called the equity of redemption. To these forms of state and local taxes must be added the poll tax levied generally upon every citizen entitled to vote. This tax is a fixed sum, usually from fifty cents to a few dollars, and the uses to which it is devoted are various. Some states devote it solely to education ; others to election expenses ; while others regard it as part of the revenue of local government to be spent for local purposes. It is largely by means of ta'xation that the Federal, state, and local governments pay the expenses for military, naval, police, fire, and health protection ; for the erection and the maintenance of public buildings ; for the construc- tion and the operation of irrigation works ; for river and harbor improvements ; for agricultural experimentation ; for education ; and for the relief of the poor. It is con- sequently to the interest of every citizen to meet promptly and honestly the obligations imposed upon him by taxa- tion. QUESTIONS AND EXERCISES I. What is the difference between a national policy of I free trade and one of protection? Think out as many arguments in favor of each as possible. Taxation 1 2 1 Find out what the tarilT rates are on several kinds of manufactured woolen goods, on a number of iron and steel products, and on sugar ; and determine who ultimately pays the tax. Look up the assessed valuation of several real estate properties in your own immediate neighborhood and several in other \dcinities. Compare the valuations with one another and with the market value of the properties, and endeavor to explain the variation. What is the rate of real estate tax in your locality? How much must be paid on personal property, and how much inheritance tax is collected by your state ? What is meant by " single tax," and what are some of the arguments in its favor? PART V INVESTMENTS XXVI. BOND INVESTMENTS Investment and Speculation. Before considering the character and merits of securities, it would be well to agree upon the distinction between a security as an investment and a security as a speculation. Investment and specula- tion and the processes they signify are much confused in the popular mind. Speculation, as defined in one of the accepted dictionaries, is " the act or practice of buying land, goods, shares, etc., in expectation of selling at a higher price, or of selling in expectation of repurchasing at a lower price." Another dictionary defines it as " trading on anticipated fluctua- tions in price, as distinguished from trading in which the profit expected is the difference between the retail and the wholesale prices, or the difference of price in different markets." Still another source defines speculation as " any business venture involving imusual risks for a chance of an unusually large gain or profit." In these three definitions of speculation, three ideas pre- dominate — risk of principal, desire for unusual profit in the transaction, and absence of income. Any transaction, therefore, in which these elements predominate is a specu- lative transaction. We may assume, then, that the direct Bond Investments 123 antithesis of such a transaction is an investment, the re- quisites of which are security of principal, indifiference to profit, and certainty of income. Speculation aims at large profit and is attended with unusual risk. Investment aims at income and should be attended with safety of principal. The man who to-day buys stock at $95 a share with the expectation of selling it to-morrow or next week at $96 or more, is speculating; but the man who buys the same stock outright and holds it for the sole purpose of receiving the five per cent divi- dend which it pays is investing. We are now ready to consider security fields in which money may be safely invested and yield a satisfactory income. Bonds. A bond is a receipt for money borrowed and a prom- ise to pay interest on it at a fixed annual rate and to return the principal at the end of a specified term of years. The security to such promise may be either per- sonal or lien. Bonds arise out of the needs of national and local governments, corporations, and other concerns, for funds with which to carry out new enterprises. Such funds must be borrowed either directly from the people or indirectly through bankers, and the bonds represent the written obli- gations of the borrowers. As defined above, a bond is a type of promissory note, the only difference being that the 124 Investments Bond Investments 125 bond is a long-time loan mstrumeiit, generally from twenty to thirty years, and is more formal and pretentious in char- acter. The bond is a form of serial note, the particular purpose of which is to admit of the borrower's dividing his relatively large debt into convenient unit amounts usually of $ioco or $500. A corporation might have difh- culty in borrowing $100,000 from a single banker on one note of that amount, and yet might have no trouble in finding one hundred bankers or business men willing to lend it $1000 apiece, each to take from the corporation a bond for that amount. Bonds are frequently issued in low amounts so that they may be available to people with small savings. In order to stimulate popular buying, the United States government, with a view to paying the expenses of the Spanish War in 1898, issued $20 bonds. United States postal savings bonds are issued in denominations of $20, $100, and $500. The bonds of the first, second, and third Liberty Loans were issued in denominations of $50, $100, $500, and $1000. Kinds of Bonds. Bonds may be grouped under five general heads : (i) govermnent bonds, or those issued by the Federal government ; (2) state and municipal bonds, or those issued by states, cities, villages, counties, and school districts ; (3) railroad bonds, the issue of railroad com- panies ; (4) public utility bonds, such as emanate from corporations that serve cities, namely, street railways, water, gas, and electric companies, etc. ; and (5) industrial bonds, the obligations of companies engaged in general commercial and industrial enterprises. Bonds are further divided into two general classes : (a) coupon and {b) registered. Coupon bonds are usually made payable to bearer, both as to interest and principal. 126 Investments iuu;jj ywKMi %m))jr\<{\J)Ji...mJVJ.\A''^ N9 5 NOV.I9I5 H$30. WILLARD J. ROLLINS COMPANY WILL PAY TO BEARER.AT THE OFFICE OF ESS EX TRUST COMPAN Y, IN THE cmroF new york THIRTY DOLLARS. WITHOUT ANY DEDUCTIONS fORTAXES.BEIHG SIX MONTHS INTEREST THEN DUE ON ITS FIRST MORTGAGE GOLD BOHD K ■»T/-v SUBJECT TOAILTHE CONDITIONS STATIOIMMIO " rUU eQNOMOINTHEIimCIHURE'niEREINREFERREDTO "^^^^ TREASURER. assffi ,\V— /y/AWV'?Wi sa and are accompanied by small interest-due notes, called coupons, which arc detached and presented for payment as they mature. Registered bonds require the recording „ of the names of the Coupon , ,, holders upon the books of the obli- gated company and provide for the pay- ment of interest by check to such hold- ers or owners. Bond Securities. In the case of gov- ernment and state and municipal bonds, the good name of the authority issuing the bonds is the security for their pay- ment when due, as well as for the payment of interest accruing annually. We freely lend money to our nation, state, or city because we have faith in the governing authority. Our feeling toward railroad companies, public service corporations, and commercial and industrial organizations in general, is quite different. The greater risks attending the development of such enterprises prompt us to demand a positive guaranty for the return of money lent, and hence their bonds are generally secured by mortgages on property. Lien Security Bonds. Various kinds of property are of- fered in security of bonded indebtedness — lands, buildings, stocks, other bonds, etc. Bonds are usually known by the kind of lien security underlying them. Lien-secured bonds may usually be found under one or the other of the following six heads : (i) first mortgage bonds, which have first claim Bond Investments 127 upon certain specified real property ; (2) second mortgage bonds, with a second claim upon certain specified real property ; (3) general mortgage bonds, secured by a mort- gage on all the real property of the issuing company ; (4) consolidated mortgage bonds, secured by a general mortgage on the properties of the companies that have been consoHdated ; (5) collateral trust bonds, secured by stocks and other bonds deposited with a trust company that acts as trustee ; (6) refunding bonds, which are the outgrowth of a new loan created to pay off bonds that have matured. There are various other kinds of bonds, the special object for which the loan was created determining the exact character of the obligation. For instance, in rail- road finance we find, among others, these special issues : equipment bonds, sometimes called car-trust certificates, which are supported by mortgages on the equipment pur- chased ; convertible bonds, or such as may be converted into the stock of the company, if the holder so desires ; deben- ture bonds, which as a rule are nothing more than promises to pay, with the credit only of the issuing company as security. Merits of Bonds. The value of any bond is dependent upon (i) its security, (2) the rate of interest, (3) the length of the bond term, and (4) marketability. A good bond proposition depends, too, upon the financial purpose that the instrument is to serve. Judged by these standards, we may now consider the merits of the several kinds of bonds mentioned above. Government bonds meet all the requirements of a good bond investment, except that of interest earned. As our national banking law, until recently, made it imperative upon banks to own government bonds as the basis of their 128 Investments currency issues, these IjoikIs were purchased mainly by banks. StabiUty is their great merit. The usual interest rates, of 2 % or 3 %, are lower than the average. The bonds of the Second Liberty Loan, however, pay 4 % inter- est and those of the Third Liberty Loan, 4t%- They have the further advantage of being almost entirely free from taxation. State and municipal bonds, especially the issues of our principal states and cities, are safe investments and are usually exempt from certain classes of taxation. They are fairly good income producers, averaging about 4 %. Even at this rate, however, they must be recommended mainly for their stability and secondarily for their earning power. The bonds of towns, counties, and townships, whose credit is not so well established, yield a higher interest rate, but at the expense of stability. In the field of railroad and public utility bonds we find in normal times the best opportunities for investments that are at once reasonably safe and fairly remunera- tive. Here stability and income reach the fairest balance. Of course, all bonds of this class do not possess equal merit, and much care must be exercised in making a choice ; but on the whole they may be purchased with the fair assurance that a satisfactory investment is being made. As mortgage securities underlie these bonds, the values of properties so mortgaged should be investigated in order to determine the worth of the securities themselves. Reliable real estate or other property mortgages usually constitute such securities; hence the element of stability may be assumed to be adequate, and attention should be given mainly to income, which, as a rule, should grade |% to I % higher than that of state and municipal bonds stock Investments 129 Industrial bonds rank lowest in point of safety of princi- pal, because less stable types of securities accompany them and because greater uncertainties attend the development of all private commercial enterprises. Though generally not classed among speculative securities, industrial bonds approach nearest to that classification. QUESTIONS AND EXERCISES 1. Explain the difference from an investor's viewpoint between the following transactions : buying an unim- proved seashore lot and purchasing a house for rental purposes. 2. A city, wishing to pave streets, issues a twenty-year bond series in order to raise the necessary funds. Is this good or bad practice, and why? 3. Why is a purchase of industrial bonds likely to be more speculative than a purchase of government bonds ? 4. How do the two bonds following compare in merit : a first-mortgage bond issued by a railroad company and a debenture bond issued by a mining company? 5. Contrast the investment features of bonds of a railroad operating in an industrial district with those of a road operating in an agricultural section. XXVII. STOCK INVESTMENTS Stocks, or Stock Certificates. Stocks, or stock certifi- cates, are the issues of corporations or stock companies which certify that the holder in each instance is an owner of the capital stock of the company to the amount stated in the certificate. V corporation is an association of individuals incorporated , or cluirtered, by some state for the purpose of conducting EL. OF BUS. — 9 1 30 Investments certain kinds of business stated in the charter. One of the privileges granted by the state is to sell stock or shares, as they are called, in the business to any one who may wish to buy. These shares vary in value according to the wish Stock Certificate INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA t\c. /(?03 /O Shares ^«r YrpiuxMufj 3ron ^timpanij t%aiufeui('(£ . ^rid the common stock receives what is left. In very prosperous years, this may exceed the divi- dend on the preferred issue. This explains why the com- mon stock of certain companies is quoted at higher prices than the preferred stock. In order to prevent this con- tingency, it is sometimes agreed that if any profits are left after both preferred and common stockholders have re- ceived stipulated dividends, say 5 % or 6 %, the remainder, or a certain per cent of it, shall go to the preferred class. Some stocks have never paid a dividend. When, how- ever, dividends are guaranteed annually on stocks, the failure to pay in any one year constitutes an additional dividend charge that accumulates with that of the succeeding year, and the stock is called cumulative preferred. It amounts to an obligation to pay a fixed income on the par value of such stock. In their regular income feature stocks are like bonds, but their security rests only upon the earning power and the credit standing of the company. Watered Stocks. Stocks are said to be watered when they are issued to persons who have paid no actual money for them, although they may have given valuable advice or other service. Another term used to express the same process is overcapitalization; that is, the issuing of stock above the actual amount of capital invested. In the cases of many large industrial companies that are overcapitalized, the preferred stocks represent real investment and the common shares " water." • Merits of Stocks. The merit of a stock as a real invest- ment consists (i) in the character and the business record of the issuing company ; (2) in the amount and the regu- larity of dividends earned ; and (3) in the marketable value stock Investments 133 of the security. Considered as a class, stocks do not fulfill the main requisites of an investment, — security of princi- pal and regularity of income. As stocks are not secured and have no guaranteed dividend, one reason for buying them is generally the expectation or hope of selling at a higher price, which amounts to speculation. Bonds as a class are the ideal investment ; stocks as a class are equally ideal for speculation. But just as some bonds have speculative value, so some stocks are safe investments. Stocks of Banks, Trust Companies, etc. Banks, trust companies, insurance companies, and the like issue stock that may generally be considered safe as an investment and reasonably good as an income producer. Because of the large dividends paid by such institutions, there is a good demand for their stocks, which often rise to such a premium that the actual yield to the investor is small. These securities do not usually have an active market, as they are controlled by comparatively few people. They can be purchased, as a rule, only through private sources. Railroad Stocks. The railroads generally offer greater opportunity for safe stock investment than any other kinds of enterprises. The constant expansion of the railway area and the increasing amounts of capital needed for exten- sions make frec^uent stock issues necessary and keep the markets supplied with a type of security which, if pur- chased with discrimination, offers a reasonably safe and lucrative avenue to the investing public. Some of the conditions peculiar to railwa}' ownership and management which give stability to their stock issues are : (i) the sound business foundations underlying raih-oads ; (2) their special l)rivileges in rights of way and terminals, a constantly in- 134 Investments creasing asset ; (3) the economy of their management ; and (4) the conservatism, in the main, of their capitalization. Other Stocks. Stocks of city or suburban railways, known as tractions, as well as industrial and mining stocks, are less safe than railroad stocks for conservative investors. Speculative mining stocks, in particular, are subject to great risks. QUESTIONS AND EXERCISES 1. Trace the development of a business organization from the individual proprietor to the corporation. 2. How do the liabilities of the ordinary partner differ from those of a shareholder in a corporation? 3. What real and artificial causes enter into a change in the market value of stocks? 4. Why is common stock better adapted to speculation than preferred stock? Under what conditions may com- mon stock be a better investment than preferred stock ? 5. What different circumstances affect the merits of stocks - issued by railroads and industrial concerns? XXVIII. BOND AND STOCK MARKET Buying Stocks and Bonds. In selecting a good invest- ment security, the knowledge of an expert in business enter- prises and in stock and bond issues is just as important as is the opinion of a specialist to one setting out to buy a house or a motor car. The prudent purchaser of a house would enlist the services of a real estate specialist, the careful buyer of a motor car would ask the advice of an automobile expert. So the investor in securities shou'd iput bis case Bond and Stock Market 135 in the hands of a reputable stockbroker whose business it is to know the merits of securities. Inexperienced people often intrust the investment of their funds to friends or to relatives and even permit them to hold the securities. Convenience and momentary econ- omy are the only advantages of this method ; ultimate disaster and distress are likely to follow. In the first place, the friend or the relative generally is not a specialist in securities, and he will invest the funds quite as inexpertly as might the owner himself ; and in the second place, with the securities in his hands comes the temptation to manip- ulate them in various ways, which may so involve them that loss is likely to follow. The only safe course is to select a reputable stock and bond broker, and leave the case in his hands. The Stock Exchange. The stock exchange is an associa- tion of brokers for the buying and selling of securities. It has as its legitimate aim the providing of an open and regular market where stock companies may go to find buyers for their stock certificates and where capitalists or investors may go to select securities into which to convert their funds. Each one of our principal cities has its stock exchange ; but the original and authoritative market of the United States is the New York Stock Exchange, where, in prosperous financial seasons, there is a daily average sale of eight hundred thousand shares of stock and ten million dollars worth of bonds. It must not be understood that this vast business is made up entirely of investment sales. A large part of the business of the stock exchange is purely speculative ; that is, many stocks are bought or sold with a view to a quick realization of profit. Practically all such transactions arc 136 Investments based upon marginal operations, the buyer or the seller putting up 10% or more of the price involved, dependent upon the reputation or character of the stock. The purchaser of the stock borrows the remainder from his broker, expecting to realize a profit by selling at a higher price or by buying at a lower price, before his margin is wiped out by price fluctuations. These are some of the evils connected with the stock exchange. This perversion of the legitimate function of the stock exchange should not blind us to the very important service it performs for the business community. The New York Stock Exchange. A brief description of the New York Stock Exchange will furnish a general idea of the character and the methods of all stock markets. The New York Stock Exchange is an unincorporated asso- ciation of 1 100 members, organized for " the purpose of supplying a continuous and regulated market for the buying and selling of stocks and bonds." The limited membership, long since filled, makes places, or " seats," as they are called, very valuable, especially in times of large business. The profits to the broker member consist in the commissions he receives from his customers in executing their orders on the exchange. At the rate of i% for either buying or sell- ing, the receipts in commissions are very large and justify the investment of a considerable capital in a " seat." During the past ten years memberships have been sold at from $50,000 to $95,000. Investors do not have direct access to the exchange floor, but leave their orders in the offices of broker members, who, the same day, or the day following, execute them at the exchange. The results of such transactions can be immedi- ately communicated, over the telephone, by the broker in Bond and Stock Market 137 the exchange to the customer in the broker's office. 'Die exchange is open on business days between ten and three, except on Saturdays, when the closing hour is twelve. The exchange is officially opened and closed by a chair- man, whose further business it is to preserve order and to make all necessary announcements. About the trading room are posts bearing placards on which are printed names of stocks, and around these posts the brokers group themselves according to their commis- sions in the various securities specified. As soon as a purchase or a sale is completed, memoran- dums of the transaction are made by the contracting brokers, and a copy is given to a waiting page who carries it quickly to the secretary of the exchange. The secretary notes the transaction on his book of record. He then directs a clerk to have it recorded on the price board and to transmit it by telegraph to other exchanges, and to customers of the exchange who have contracted to receive regularly through the so-called stock-indicator or ticker a complete record of each transaction made. By these means the public is apprised of the last quotation on any stock, and those desiring to buy or to sell are guided accordingly. These tickers are to be found in brokers' offices generally and in certain public places, like hotels. Quotations of the market values of stocks and bonds, which vary from day to day, may be found in the daily newspapers. Other Avenues of Purchase. Besides the stock exchange, the securities market includes what is called the curb, the auction block, and the many less public and more personal methods of bringing together the two parties to stock or bond investments. Not all stocks and bonds can be purchased at the regular exchanges, but only those of 138 Investments companies whose officers are willing to comply with the rules of the exchanges as to stock lists. Such restrictions have operated to keep out of the official exchanges certain good stocks that are offered publicly at the outside or unofficial curb market, so called because the brokers have often met on the sidewalks. Also there are certain stocks that are never active and hence are not suitable for Hsting on a regular exchange. These ffiid new buyers only over auction blocks, places where at stated times during the week securities of all kinds are auctioned off to the highest bidders. The safe guidance of a reliable broker is espe- cially important in the purchase of such stocks. Many private and personal sources may be Used to con- vert funds into securities, especially bonds. Possibly the largest of these is the field of private banking. One of the chief sources of profit to our great private banks is the underwriting of securities that are issued by corporations. To underwrite is to issue and to be responsible for. For instance, if the Universal Metal Corporation should wish to raise $10,000,000 additional capital by bond issue, it might place the mortgage security required in the hands of Dwyer and Company, private bankers, who would seU the bonds to the public and themselves agree to pay for every bond not sold. For this service they would receive a com- mission. Trust companies, financing as they do extensive build- ing operations, offer a type of mortgage bond that is at once sound and remunerative. Lawyers, too, in caring for large estates are in a position to steer the investor into safe channels. No matter what the ultimate medium of purchase may be, the general direction to seek the ad\dce of an experienced securities broker should be followed. Mortgage and Real Estate Investments 139 QUESTIONS AND EXERCISES 1. What advantage accrues to a municipality which issues bonds in small denominations and markets them itself? 2. What is meant by the " bull movement " in the stock market? the " bear movement "? a " lamb "? 3 . What advantage accrues to a company in having its stock listed on the stock exchange? 4. Why is the stock exchange more necessary now than it was fifty years ago ? 5. Is there any difference between buying stocks on margin and buying wheat on margin ? XXIX. MORTGAGE AND REAL ESTATE INVESTMENTS Mortgages. As already explained, the mortgage is a written instrument representing a claim on land or buildings against which the owner has borrowed money for a stated term of years. The borrower agrees to pay interest at a rate based on the risk assumed and on the abundance or scarcity of money seeking investment. The average rate is between 5 % and 6 %. The distinguishing feature of a mortgage as compared to a bond is that the holder of the mortgage can never realize on his claim more than his mortgage calls for, since he has lent a definite amount of money for a given period at a stipulated rate of interest. The bondholder, though he, likewise has lent his money for a given period at a fixed rate of interest, may sell at a premium or at a loss because of the fluctuations in bond values due to active trading in such securities on the exchanges. There is no open market I40 Investments for mortgages and they are costly to transfer, hence traf- ficking in them is reduced to a minimum. This handicap of mortgages is offset by larger income and correspondingly greater security, the two indispensable elements in every perfect investment. The only advantage that a well- secured bond has over a mortgage is the longer term of the loan, although as a matter of fact most mortgages, while written for a relatively short time, three or five years, are by common consent allowed to extend them- selves indefinitely. Mortgages, therefore, seem to fulfill completely the requirements of a stable and profitable investment. A mortgage on land is better than one on a building, as the value thus mortgaged is at all times inherent in the land, whereas much of the value of a building is de- pendent on the nature and the extent of the use made of it. For instance, a mortgage on an office building, based mainly on building value, depends for its stability too much on whether the building is profitably tenanted, a commer- cial uncertainty that should be eliminated as much as possible in mortgage securities. Good city or farm lands retain their value irrespective of the buildings occupying them, and increase in value, thus adding security to mort- gages attached to them. The investor can find no better or safer investment of his money than a first mortgage on land accepted for not more than 60% of its value. In support of this opinion may be mentioned the fact that the state of New York permits savings banks to invest 65 % of their funds in real estate mortgages. There may be second mortgages or subsequent mortgages on a piece of property. In case of foreclosure these are paid in the order of their date ; that is, the first mortgage Mortgage and Real Estate Investments 141 must be paid in full before anything is paid on the second mortgage. Second mortgages have merit in proportion to the value that the prior lien has in relation to the full value of the property mortgaged. Because of the subor- dinate relation of the second mortgage and the greater risks surrounding it, it yields a higher rate of interest. A borrower getting first mortgage money at 5 % will generally have to pay 6 % for a second mortgage. Real Estate. In considering real estate as an investment field, we shall divide it into (i) improved real estate, prop- erty on which something is built ; and (2) unimproved property, land without anything built on it. As we are endeavoring to guide the average citizen in this investment process, we may at once dismiss the subject of unimproved property as a field too speculative in character and as a business proposition too slow of development to suit the purpose. Real estate, to be worthy of consideration, should be improved and should represent a growing enterprise. Even under such conditions the element of risk cannot be eliminated, since all such property depends for its value on profitable occupancy. If it is 'a farm property, the income to the owner grows out of his tenant's successful tilling of the soil, raising of stock, etc. ; if it is a business or residence property, income depends on a good tenant with rentals adequate to leave a fair interest on the investment after all taxes and other fixed charges are paid. Real estate is a field of investment offering opportunities for fair income and large profits to men of large capital, who by investing in a number of properties have a chance to earn a good average income even though some of the properties are unproductive. The purchase of property, especially residences, even though cheap and promising a 142 Investments high per cent of income, is not to be recommended to small investors. The annoying circumstances attending the rent- ing of such property, the uncertainty of getting and keep- ing a good tenant, the generally declining values — all tend to make the ownership of such property a burden ; and the owner often disposes of such investments at a loss, in his anxiety to relieve himself of the annoyance. An invest- ment that gives constant anxiety to the owner is not de- sirable. Real estate for the small buyer possesses these faults, and should not be purchased when good mortgages and bond securities are available. How to Purchase Mortgages and Real Estate. There is no open and continuous market for the purchase and sale of real estate and mortgages as there is for stocks and bonds. Real estate exchanges in this sense do not as yet exist. Transactions in real property and in mortgages are relatively so few as not to promise an adequate basis for a regular daily market ; hence all purchases, except occasional auction sales, must be made privately. If we contemplate buying a house, we should go to a real estate broker. He will act in the same professional capacity for his commis- sion of I % or 2 % as the stock broker does for his com- mission of 1%. The realty broker in addition handles mortgages, insurance policies, and other instruments inci- dent to property transactions. Lawyers likewise make it part of their business to place mortgages ; that is, to find buyers. The newest and possibly laYgest agency for this business is the trust company, whose real estate depart- ment can offer to the money lender mortgages of many kinds and amounts. In many respects this agency offers to the in- vestor in mortgages and real estate an avenue of purchase that is generally marked by both convenience and safety: Mortgage and Real Estate Investments 143 QUESTIONS AND EXERCISES In the purchase of a mortgage, what should you know about the property involved ? If the interest on a mortgage is not paid, what steps must be taken by the holder to safeguard his invest- ment? In considering the question of investing in real estate, should you prefer to buy in the central business district of a city, in the suburbs, or in a farming community? Give reasons. What efifect does a line of transportation have upon adjacent property values ? Why ? In investing in real estate, should you prefer to employ a trust company or an individual real estate broker to attend to the business of transfer ? Why ? PART VI LETTER WRITING XXX. BUSINESS LETTERS Kinds of Letters. The field of letter writing embraces (i) friendship letters; (2) social letters, including invitations, acceptances, letters of congratulation, of condolence, of introduction, etc. ; (3) business letters ; and (4) public letters, addressed to a public official or other person through the newspapers or some other form of public print. Business Letters. The purpose of this chapter is to present the essentials of business correspondence. In doing this we shall incidentally consider the important elements of other kinds of correspondence as well. Good business letters largely constitute the basis of good business practice ; and nearly every one, at some time or other, has incidental business relations with some one else, the suc- cessful conduct of which necessitates a knowledge of letter forms acceptable to the business community. Points to Be Observed, (i) Be sure that you have something worth writing about. (2) Before beginning to write, have a clear idea of what to say and how to say it. (3) Write concisely, completely, and briefly. (4) Make sure that your letter is correct in form and neat in appearance. 144 Business Letters 145 These precautions are all of the greatest importance. First, many a person compromises himself by writing a superfluous letter or suffers a disadvantage by writmg at an ill-chosen time. Second, a clear mental outline of the letter will result in a logical presentation of facts, and will protect the writer against loss of time occasioned by the necessity of rewriting the letter or a part of it several times. Third, the principal merit of a business letter is brevity with completeness of statement, and this cannot be secured unless the writer is direct and concise in expression. Fourth, a letter that lacks neatness and correctness is a discredit to the sender and a discourtesy to the recipient. Parts of a Letter. A letter may be divided into six main parts, as follows : 1. Heading. 4. Body. 2. Inside address. 5. Complimentary close. 3. Salutation. 6. Signature. Skeleton Letter Form (Heading) . (Inside address) (Salutation) (Body of Letter) (Complimentary close) ■ (Signature) EL. or BUS. — 10 146 Letter Writing Heading. Standard business practice places the heading in the upper right-hand corner of the sheet, as shown in the form on page 145. It should be complete, containing in the case of large cities the street and the number, and in the case of small towns the county of the state. Business letterheads provide these headings in print, with a blank line for filling in the date. The following are acceptable forms of headings: Headings Elmlra. N. Y. , Jan, 10, 1918 625 Polsom Street San Francisco, Calif. July 1, 1918 Hew Bedford, Lawrence Co., Pa. sept. 2, 1918 Harvard University Cambridge, Itoes. Dec. 14. 1918 There is a growing tendency to omit the punctuation marks at the ends of the heading lines, except where the line ends in an abbreviation. Note that the abbreviations "th," ''st,"and "d" are not used with the date in headings; " nd" and " rd " are obsolete in all cases. Business Letters 147 Inside Address. The inside address is placed on the left-hand margin line, about an inch below the date line. It consists of the name of the person, the firm, or the insti- tution written to, together with the name of the city or the iNsroE Addresses and Salutations Messrs. Kline, Barber, and Company 1150 Broadway New York, U. Y. Gentlemen: Miss Katherine Wells 450 Gay Street Knoxville, Tenn. Dear Miss Wells: Western Lumber Company Seattle, Wash. Gentlemen: Prof. Arthur A. Fiske Yale University New Haven, Conn. Dear Mr. Fiske: Mr. Samuel Stone Bethel, Maine Dear Sir: town and the state of residence. It may occupy two or three lines. It is not always necessary to include the street number or the county. In addressing men, the com- mon title " Mr." is always appropriate. Instead of this 148 Letter Writing title, " Esq." may be appended to the name of lawyers and those occupying pubh'r positions. It is wrong to use both these titles with the same name, or two like titles of any kind. A physician may be addressed either as Dr. John Spencer or John Spencer, M.D., but not as Dr. John Spencer, M.D. ; Rev. John Fisher, D.D. and Prof. Frank Patton, LL.D. are permissible, because the two titles in each instance are of different significance. " Messrs.," the abbreviation for the French " messieurs," applies to two or more men or to business firms. " Honorable " or " Hon." is appropriate when addressing men in high public office. Use "Miss" or "Mrs." in addressing a woman, and " Misses " or " Mesdames " in addressing more than one woman. Salutation. The style of salutation to be employed depends on one's relation to the person or persons ad- dressed, and on the nature of the communication itself. Standard styles in business are as follows: Dear Sir : Dear Madam : My dear Sir: My dear Madam: Sir : Ladies : Dear Mr. : Mesdames: My dear Mr. : Dear Miss : Gentlemen : My dear Miss : Dear Sirs: Dear Mrs. ■: Sirs : My dear Mrs. — ' — : " Sirs " and " Sir " apply to communications of a more formal character. "Dear Mr.— — ," "Dear Miss ," " Dear Mrs. ," and " My dear Mr. ," " My dear Miss ," " My dear Mrs. " are less formal and should be used in personal correspondence and in letters of an incidental business nature. "Dear Madam" is proper as Business Letters 149 a salutation for either a married or a single woman. The salutation of a business letter is usually followed by a colon. Note the forms on page 147 for address and salutation. The first form is finding favor ,for t3^ewritten letters be- cause it facilitates operation. The commas are frequently omitted after the address lines. Body of the Letter. The body of the letter is the com- munication proper, and may begin on the line below the salutation, about an inch to the right of the margin. Leave generous margins on all sides, as crowding spoils the ap- pearance of the letter. Paragraph only when you change from one subject to another, or when you wish to give emphasis to important subdivisions of a given subject. Paragraphing merely for the sake of appearance is not justifiable. Every new paragraph should begin directly under the first word of the body of the letter. Do not overpunctuate ; punctuate just enough to make the construction clear. Until you acquire by experience the punctuation sense, as apart from grammatical rules, you can get on pretty well with the comma, the period, and the interrogation mark, with very occasional use of the colon and the dash. The semicolon is a troublesome mark. When the young writer feels the possible need of it, he is safer in using the period. This will have a tendency to keep the sentences short, — a desirable feature in writing. Do not overcapitalize. The tendency to-day is away from meaningless capitals, which only mar the page and somewhat confuse the eye in reading. Besides, in type- setting and in typewriting, considerable time and labor are saved by avoiding capital letters and all " upper case " marks as much as possible. Even the words " street " and " avenue " in such expressions as " Market street " or I50 Letter Writing " Park avenue " are now frequently written without capi- tals. The abbreviations " inst.," for "instant" (the present month) ; " ult.," " ultimo " (the last month), and " prox.," for " proximo " (the next month) are falling into disuse. " ist," " 3d," " 5th," etc., are not abbreviations and should not be followed by a period. Do not use these forms unless they precede the month. " Your letter of the 25th of April is received," and '' Your letter of April 25 is received," represent the best business practice. The names of cities should never be abbreviated ; there are no author- ized abbreviations for cities. Names of states should not be abbreviated unless preceded by the name of a town or of a city. Complimentary Close. The terms in which a letter should be closed should be in harmony with the salutation, as both are selected with reference to the relations existing between the correspondents. The more formal letters of business which open with " Dear Sir," " Gentlemen," etc., should close with " Yours truly," " Very truly yours," or " Respectfully yours." " Cordially yours," " Sincerely yours," and the like, are proper for less formal communica- tions. In the complimentary close, note that only the first word is capitalized. Signature. The most important thing to say about the signature is that it should be written so that it can be read. The courtesy of a readable signature is due to every person addressed, especially if an answer is expected. A woman's signature should clearl)- show thai it is the signature of a woman, and this requires that the first name be written in full or that "Miss" or "Mrs." be added in paren- thesis. A married woman should sign her own first name, Business Letters 151 but should at the same time indicate her married state and suggest the manner in which she should be addressed in reply, by writing in parenthesis her husband's first name or initials. Thus, Mrs. William D. Forman, whose given name is Anna L., should sign " Anna L. Forman (Mrs. W. D.)." When signing for another, write your own name or initials in smaller script immediately under the principal signature. The initials of the person who dictates a letter and the one who typewrites it are often placed at the left-hand margin. Study the following letter as a model in which all parts are brought into proper relationship. 15 State Street Toledo, Ohio July 12, 1918 Mr. Charles 0. Stimaon 84 Boylston Street Boston, Mass. Dear Sir: During my recent visit to your city I had the pleasure of an interview with you, in the course of which you expressed a desire to inspect my goods with a view to placing a stock of them on sale in your store. In order to facilitate this end, I take pleasure in sending you to-day, ty express, a package containing samples of a new line of wall paper Just ready for the market. I trust that you will be sufficiently impressed with these samples to place with me a trial order, as I feel confident that the de- mand for these goods will Justify your decision. Yours truly. 152 Letter Writing Paper. Business letters should be written on business styles of paper. These commonly consist of two sizes, the larger approximately 8|" X ii", being called letter size; and the smaller, which varies in dimensions and shape, note size. Folding. The letter-size sheet should be folded by bring- ing the bottom edge up and laying it evenly along the top edge, or within a half inch of it, then turning the right edge to the middle and laying the left third over it. The note-size sheet requires two folds only. Insert the sheet in the envelope so that the open parts of the folds are toward the back and the top. XXXI. ADDRESSING ENVELOPES Envelope Address. The addressing of the envelope admits of considerable variation, but some features are /&Si»«. -to invariable. Write clearly, as the postal officials must work quickly and accurately. Avoid the doubling up of titles and the writing of anything superfluous on the envelope. Titles are sometimes omitted entirely, as in the envelope on page 153 addressed to " Win ton and Baxter." Addressing Envelopes 153 The abbreviation of certain states may easily be confused when written with a pen. '' Pa." and " Va.," " N. Y." and " N. J.," " Me." and '' Mo.," are causing much annoy- ance to postal officials. It is better to write the name of After 10 days relu T. J. Lord 6 Julia Street Hew Orleana, I^ '-y-^^ may be likewise specific, but frequently are general and open in address, as shown in the form on page 158. 158 Letter Writing Letter of Recommendation Richmond, Va., January 21, 1916 To whom It may concern: This 18 to certify that the bearer. Miss Jennie Courtney, has been a bookkeeper in our service for the past three years. A reorganization of our business, which involves a reduction in our office force, is the sole cause for dispensing with Miss Courtney's valuable services. In addition to certifying to her efficiency as an accountant, we take pleasure in recoirmending Miss Courtney as a woman of fine character and good business Judgment. Respectfully yours. C^-'yAt <>-«Kj)..i<--,-.T^-v.T-,U-c« E. WESTER UNION i6o Letter Writing 'The Trent Warden Company, of Denver, requiring the promptest possible sliipment of l"i\e Model M touring cars from Detroit, would wire the builders, the Eagle Motor Car Company, as shown in the model on page 159. EXERCISES 1. Write a letter to the boot and shoe manufacturing firm of Fitch and Holden, Lynn, Massachusetts, ordering one dozen pairs of men's black Oxford shoes, two dozen pairs men's tan Oxfords, and two dozen pairs women's canvas tennis shoes, sizes and styles to match those recently purchased. Ask that they be shipped promptly by express, as you have now on file orders for some of them. Remind the firm that you will expect the usual trade discounts. Sign the letter for your firm, J. Smitheman and Company. 2. John Alexander, of Wheeling, West Virginia, is about to add to "his store a department of carpets and rugs. He writes a letter to the Domestic Carpet Manu- factory, 1750 North Fiftieth Street, Philadelphia, Pennsylvania, stating this fact, and asking whether they will furnish to him his introductory stock up to $5000 in amount, and extend to him a credit for four months. He refers them for his credit standing to The Wells Sanders Company, wholesale dealers in notions in Philadelphia, with whom he has had an open account for five years, and to the First National Bank of Wheeling, his depository. Write this letter in the name of John Alexander. 3. You have just become a resident of Chicago, with address at 5310 Prairie Avenue, where you expect to continue your practice in medicine and surgery. special Forms of Letters and Telegrams i6i As you wish to open for your family a general mer- chandise account with the Walton and Hayes Com- pany, you write to them asking for the privilege of doing so. Before coming to Chicago you lived for ten years in New York, where you maintained ac- counts with the Whitaker Company and J. A. Stiles and Company. You are personally known to Mr. F. C. Warner, president of the Merchants' Bank of Chicago. Write the best letter possible in your own interest to the W^alton and Hayes Company. 4. You own a house at 1224 Commonwealth Ave., Boston, Massachusetts, your own address being Newton, Massachusetts. Miss Fannie Langford, of Brook- line, Massachusetts, wants to rent this property, and has written to you of her desire to do so, asking terms of rental. You reply to her letter to-day, stating you will be pleased to lease the house to her at $60 a month, in addition to the water rate of $20 a year. As you have no personal acquaintance with her, you ask her for references. 5. Mrs. Wmston Phillips (Annie W. Phillips) of New Rochelle, New York, has occasion to communicate with Walter L. Dyer, real estate agent, 1012 Broad- way, New York, from whom she rents her house. She wishes to inform him that certain repairs to the roof are necessary because of damages occasioned by a recent wind storm. Suppose yourself to be Mrs. Phillips, and write a courteous letter to Mr. Dyer, calling his attention to the damage and asking that repairs be made promptly. 6. You are in your last year at high school and contemplate going to college ; if a boy, to Yale, and if a girl, to EL. OF BUS. II 1 62 Letter Writing Bryn Mawr. Address a letter to the Registrar of Yale University, New Haven, Connecticut, or to the Registrar of Bryn Mawr College, Bryn Mawr, Penn- sylvania, asking that a catalogue of the institution be sent to you, and inquiring whether you can be admitted on certificate or whether an examination will be required. Write this letter as though you were a resident of Easton, Maryland, and a student in the Easton High School. 7. As treasurer of the Browning Society of Springfield, Ohio, you find a number of the members to be de- linquent in the payment of their annual dues. Among these is Mr. O. R. Witherby, who has not paid his dues for two years. Write him a courteous but firm letter, calling his attention to his delinquency and to the rules of the society which do not permit of an arrearage of more than two years. Express the hope that he will hasten to place himself again in good standing by remitting to you immediately. 8. Lawyer John B. Dickson, 839 Market Street, San Fran- cisco, California, has written to you at 430 Pine Street, Oakland, Cahfornia, reminding you that you have failed to pay your house rent for the past two months, and that the account has been placed in his hands for collection. Reply to his letter expressing regret at the non-payment of rent, offering as excuses abnormally heavy expenses during that time, due to serious illness in your family, and reduced income because two of the supporting members were unable to work. Ask the favor of another month's exten- sion, stating that at the end of this time you hope to be in a position to pay all rent due. special Forms of Letters and Telegrams 163 Q. You have come into possession of $1000 for which you have no immediate need, and you have decided to invest it. Write a letter to J. S. Burt and Company, Baltimore, Maryland, specialists in bonds and mort- gages, asking their professional advice in the matter. Assure them that you want to avoid all risks of a speculative nature, and that the first element of the investment should be stability of principal. Ask them to favor you with a prompt reply and to include in it their rates of commission both for initial investment and for the collection of interest. You live in Roland Park, Baltimore. 10. The firm of Wayne Brothers, Milwaukee, Wisconsin, has just rendered to you a bill for your January pur- chases of general merchandise. This bill contains two errors : the Jan. 5 purchase of 10 yards of silk is charged at $1.00 a yard instead of 90^ a yard, and the shoes returned on Jan. 8 are credited at $3.50 instead of at $4.00. Write a letter to accompany the return of this bill to Wayne Brothers, requesting a prompt adjustment of the account. Your address is 1 61 9 Jackson Boulevard, Milwaukee. (Inclose this letter in an envelope properly addressed.) 11. Write a note of introduction for your friend, Henry A. Morley, who is about to spend a week in Washington, D. C, this being his first visit there. Address the note to your acquaintance, George Quinton, who lives at 310 Pennsylvania Avenue, Washington, D. C. (Inclose this letter in an envelope properly addressed.) 1 2 . John Kent has been a chauffeur in your service for two years. You are dispensing with your motor car, 164 Letter Writing and have no further use for him. Write Mr. Kent a letter of recommendation which he can use in a general way to lind new employment. 13. Write a letter of recommendation for Ida L. Williams, who has been a governess in your family for ten years. As the children are now grown to school age and are to be placed in private schools, Miss Williams is no longer needed. She is a woman of broad education, social refinement, and forceful character. Address your letter to Mrs. L. M. Funston, who is a stranger to you but who, you have heard, is desirous of engaging the services of a governess. (Use a note sheet, fold and inclose it in an envelope properly addressed.) 14. While your father, Peterson Bond, is attending to busi- ness matters in St. Louis, IMissouri, your mother falls seriously ill. Dispatch a telegram of not more than ten words to your father, informing him of the illness and asking him to come home at once. 15. You recently purchased from the Purcell Company, Chicago, Illinois, by mail order, 10 yards of black silk. You find you require 2 yards more, and being in haste, you telegraph, specifying that the goods be sent by mail, and charged to your account. Prepare the message not to exceed ten words. 16. You are in Southampton, England, ready to take passage back to New York but are unexpectedly delayed. In order to allay anxiety on the part of your family, whose address is 4509 Sixth Avenue, New York, you cable these facts to your father. Prepare the cablegram not to exceed six words. PART vn PERSONAL ACCOUNT RECORDS XXXIII. CASH RECORDS One of the primary necessities of every well-ordered life is an understanding and use of some simple system of recording personal business transactions. Every one has receipts and expenditures of money, the wise or unwise employment of which vitally affects success in life. The following pages present a method of personal accoimts adequate to the needs of most people in private life. Cash Records. Statements of receipts and expenditures may be simple or complex. Commercial accounting in its diversified forms is adapted to the affairs of people who make a business of buying and selling for profit ; while personal or household accounting is especially adapted to the simpler needs of people whose income is derived from labor or invested wealth. In non-commercial, as in commercial accounting, one of the most important elements is the cash book for recording money received and paid out. A simple cash book need be nothing more than a book ruled so as to provide columns for (i) the date of the transaction, (2) a statement of the source of the money received, or of the purpose for which money is paid out, (3) the amount received, and x6s 1 66 Personal Account Records (4) the amount paid out. The following example illus- trates this form and a series of entries : Gz,ULY 9? If the items of receipt and expenditure are carefully written down in accordance with the above form, it is easy to find out how much money has been received and how much has been paid out, by merely adding up the items in the two columns. It is easy also to ascertain how much money ought to be on hand as a balance, by subtracting the total of the paid-out column from the total of the received column. In the above illustration the record shows that $130 was received in the course of the week and that $31 was paid out. The difference between the two amounts, it will be noted, is set down in red ink (here represented by heavy writing) as a balance on hand in the paid-out column. As the balance is distinguished from the entries denoting actual payment by color of ink, it may be summed up with the items of payment as a test of the previous sub- Cash Records 167 traction, for if the subtraction was correctly made, the sum of the paid-out column plus the balance on hand must equal the total of the received column. Exercise i. Draw up a simple cash-book form according to the model shown on page 166. Enter the following cash transactions, find the balance of cash on hand at the end of each week, and rule up the form. This process is commonly designated as balancing and closing the cash book. March i Student received one month's salary in cash, $100. 2 Paid one month's rent of room, $12. 3 Paid one month's table board in advance, $20. 4 Received cash for extra work, |i 5. 5 Paid laundry bill in cash, $2.50. 6 Bought a suit of clothes for cash, $25. Directions. As it is the end of the week, balance and close, being careful to enter the balance according to the example above and tc rule according to the form. March 8 Bought a book costing $1.50. 9 Received as a gift from home, $50. 10 Paid for mending shoes, $1.25. March 10 Bought a new hat costing $4. 10 Paid for instruction in music, $20. 11 Paid for writing materials, $.65. 11 Bought magazine, $.15. 12 Received for extra work, $2.50. 13 Paid for theater tickets, $2. 14 Entertained a friend at luncheon, $2.15. Directions. Enter the above, balance and close the cash book exercise, as before. Classified Expenditures. A careful manager, however, will not be satisfied with the use of the simple cash book alone. Receipts and expenditures must be classified in order to reveal the answer to the important question, "Where did the money go?" In personal accounting. 1 68 Personal Account Records for example, payments arc constantly being made for clothing, food, amusements, and other purposes, and it is evident that not only the interest but also the usefulness and the influence of the cash record will be emphasized by grouping expenditures of the same kind together. A classification of expenditures can be made in a simple way by making use of another little blank book, setting aside a page for each type of expenditure and entering upon the page the nature and the amount of expense, after payment is entered in the cash book. At the end of the week or the month the pages may be summed up, and the result will be the amount spent during this time in each classification. The following are two examples of classifi- cation pages, one covering " Clothing " and the other ''Table Expense:" L-^ ^>-t^^?V<-K, ^^ JU^ eyci^-{jL' G/;t'JQeyn,4JL- 21 zs 7S- 7-s- ^o/yia. f •s C 2 3 Go &, /o Exercise 2. Classify the following expenditures, as suggested above, by grouping them on separate pages, entitling the pages Classification Cash Book 169 respectively: " Clothing," " Table Expense," " Light and Heat," " Laundry," " Transportation," and " Miscellaneous." April 2 Bought i ton of coal, $7.50; crackers, $.50. 3 Bought I bbl. flour, $4.50. 4 Bought oranges, $.60; sugar, $.60; berries, $.20; street car tickets, $1.00. 5 Paid for dress goods, $11.50; bananas, $.20. 6 Paid daily paper for week, $.11 ; theater tickets, $3; oatmeal, $.25 ; suit for Henry, $22 ; shoes for Clara, l3- 7 Paid gas bin, $5.75 ; collars and ties for Charles, $1.25 ; laundry, $1.36 ; transportation tickets, $1. 8 Paid picnic expenses, $2.85; magazine, $.35; meat bill, $2.85; potatoes, $1.50; paper and pens, $.60. Directions. Sum up the expenditures entered on each page to determine the amount spent under each heading. XXXIV. CLASSIFICATION CASH BOOK A classification of cash expenditures can be made con- veniently and systematically by appending to the cash book record a series of columns to take the place of the extra pages to which reference was made in the preceding chapter. By this method, the amounts of expenditure in the various directions can be compared and studied to good advantage and as a result unduly large unproductive ex- penditures may be avoided in the future. In the following example in personal expenditures, pay- ments are classified according to " Rent," " Food," " Cloth- ing," "Laundry," "Transportation," "Pleasure," and " Miscellaneous." Columns are attached to the cash book form corresponding with this classification. As an expendi- ture is made, the amount is entered not only in the paid- out column but also in the classification column to which the I/O Personal Account Records pa}Tnent belongs. Thus, in the illustration given below, the record shows that out of an expenditure of $75.55, $16 was spent for room rent, $10 for food, $40.50 for clothing, $.75 for laundry, $2.10 for transportation, $2 for i)leasure, ancl $4.20 for miscellaneous items : S^rCtX &tioii/J'^Mt/ e^JrwncaetCem. /S^. Okui. "S^ /Srt/ 9iw^ (Zff^'a. CuimO*^ Tieui^irt 'TboMM hutai latixi Si^ V^' Exercise 3. Carefully rule a sheet of paper according to the preceding form, making sure to provide a column for the date and a sufficiently wide space for a description of the transactions ; a column for the receipt and another for the payment of money ; ten columns for a classification of expenditures ; and a column for totals. Enter the titles at the top of the column as shown in the model. Record the following cash transactions in the cash book section, and as you do so, enter the item of expenditure in the proper classification column : May I Received cash for one week's wages, $18 ; paid board for one week, $5. 2 Paid for daily paper, including Sunday edition, I.77 ; bought suit of vmderwear, $1.60. 3 Bought collars, $1.50; paid laundry bill, $.78 ; received for playing piano in theater orchestra, $15. 4 Bought suit of clothes, $18 ; paid for street car tickets, $1 ; bought necktie, $1. Classification Cash Book 171 5 Bought birthday gift for Richard, $1.50; paid for maga- zine, $.30; paid for boat ride, $.50. 6 Paid for baseball ticket, $.50. Directions. Balance the cash record for the week by writing in red ink " May 6, Balance on hand, $ — ," the difference between the cash received and the cash payment columns ; and rule in accordance with the model shown on page 170, extending the single ruling through the classification sheet. Then sum up the various classifi- cation columns and carry the total of all expenditures forward in the " Total " column. Household Classification Cash Book. The cash book and classification of expenses described above may be readily adapted to the requirements of household accounts by modifying the classification of expenses to suit the char- acter of the expenditures of a household. The classifica- tion must be broadened appropriately to include in addi- tion to the columns of the model, columns for heat, light, wages, furniture, insurance, etc. It may be made still more comprehensive by the addition of other columns devoted to special expenditures, but, as set forth, the classification presents a distribution of the cost of house- hold maintenance sufficient to enable the head of the household to account definitely for funds paid out. Exercise 4. Rule a sheet of paper according to the household classification cash book form shown on the preceding page, providing a column for the date and a space for a description of the transactions ; a column for the receipt and another for the payment of money ; eleven columns for classification purposes ; and a column for totals. Enter the column titles in accordance with the classification sheet already shown. Record the following household cash transactions and classify the expenditures : June I Received cash, $117.21. 2 Paid for upholstering 3 parlor chairs, $22.50; bought 172 Personal Account Records outing hat, Ss ; bought 6 Turkish towels, $1.50; bought bed sheeting, $5.40. 3 Bought a copy of The Harvester, $1.35. 5 Paid weekly meat and produce bill amounting to $13.00. 6 Paid weekly bills as follows : groceries, $5.50 ; bread and rolls, $.77; milk and cream, $1.12 ; ice, $.70; laundry, $1.65. Directions. Balance and close the record in the same way as in the preceding personal classification cash record and carry down the balance of cash on hand in black ink as " June 8, Balance on hand, $ — ," entering the amount in the cash received column. Enter the totals in black ink at the foot of the classification columns as heretofore. Jime 8 Paidforthcater tickets, $4; received cash, $100; bought rain coat, $10. 9 Paid for street car tickets, $2 ; paid for dress goods, $16.25; luncheon, $.65. 10 Bought 2 tons of coal, $14 ; paid for shoes, $5 ; bought an American history, $3.50. 11 Paid weekly meat and produce bill amounting to $7.60. 12 Paid weekly bills as follows: groceries, $4.50; laundry, $2.24 ; bread and rolls, $.75 ; ice, $.80 ; and milk and cream, $1.20. Directions. In a continuous record it is desirable to carry forward from week to week the total expenditure in each classification group. To do this, add" up the items of expenditure in each column in pencil, and then add the result to the total of expenditure in the column at the end of the preceding week. Then single rule and enter the new total in black ink as heretofore. By this method the total in each classifi- cation column will represent the total expenditure under the coliunn head to date. June IS Bought i doz. handkerchiefs, $3; bought alarm clock, $2.50; paid wages to servant, $25. 17 Paid taxes, $50. 18 Bought old English sideboard, $75. Elementary Principles of Accounting 173 19 Paid weekly meat and produce bill amounting to $7-63. 20 Settled other weekly bills as follows: groceries, $9.70; milk and cream, $1.36; bread and rolls, $.80; ice, $.70; laundry, $1.97. Also paid gas bill to date, $4.40. Directions. Balance and close the record in accordance with pre- ceding instructions. XXXV. ELEMENTARY PRINCIPLES OF ACCOUNTING So far the account forms that have been suggested are adapted particularly to recording cash transactions. When transactions take place on account, that is, upon the basis of an arrangement for future settlement, the cash record must often be supplemented by a system of ledger records in order to summarize the condition of business affairs. This enables us to determine the net results of our business activities : whether there has been a profit or a loss ; the relationship between debts, or liabilities, and resources, or assets ; and the net worth. This use of more formal methods of record keeping necessitates the emplo>Tnent of the fundamental principles of accounting, and therefore re- quires an elementary acquaintance with them. Elementary Principles of Accounting. At the basis of accounting is the conception that in every transaction, or trade, value is received on the one hand and given up on the other. The side receiving value is spoken of as the debit side and the one giving up value as the credit side. A record of debits and credits pertaining to the same per- son, thing, or phase of business is known as an account. This conception gives rise to two elementary accounting ideas : 174 Personal Account Records (i) Every individual account comprises both a debit and a credit side. (2) A transaction affects two accounts, the one which receives value and the one which gives up value. Expression is given to these ideas by the use of the fol- low^ing model, which may be obtained in the form of a book, known as a ledger, or in the form of cards about 3" X 5" in size. HjulrLt-tSLJU . AjluCqa^^ ^^ClfliyyLt: 'vvkyt^.i^ OuuUltSiM*^ 1 <(n f—. f (P n a« C^j^ju^ajti,^ ;n .l.^»'7)XM^tctr C'j^/j- '1 7 2)^^ A 'f '8 1 As value to the amount of $25 has been received by the furniture and equipment, Mr. Henry debits his Furniture and Equipment account for the amount, as shown above, indicating the date of the transaction, the nature of the value received, and the amount of value received ; at the same time he credits the James Marshall and Company account, similarly showing the date of the transaction, the nature of the value given, and the amount of value given. A glance at the two accounts thus reveals that Mr. Henry has put into furniture and equipment value to the amount of $25 and that James Marshall and Company has given up value on account, that is, has a credit or an unpaid claim against Mr. Henry of the same amount. 1/6 Personal Account Records Organizatioiv of a Set of Accounts. By means of the following ten transactions, extending over a period of two weeks and representing a series of personal business dealings, the organization of a set of accounts is to be studied, and the transactions themselves are to be recorded according to directions and illustrations given below : Feb. I. You begin a record of your affairs, starting with cash, $1500. Directions. Write your name over the account form on a ledger card as shown in the illustration. Write " Cash " similarly on another card, which, in this record, will be used instead of a cash book. As you are turning cash into your business affairs, debit the cash account and credit your own personal account with the amount. '2^^l..^oU*^ ^9 'tf . J,r '* Aa^iJo ' Q- _J_ Feb. 12. Bought a lamp on account from Albert Price, valued at $10. Directions. Write " Albert Price " over a card. Debit the furni- ture and equipment account with the value of the lamp and credit the account of Albert Price with the same amount. Elementary Principles of Accounting 179 (^^^^d^t^Ot f^c^ ^ '9 >7 A^,~. A / - Feb. 13. Lent $100 in cash to John Martin. Directions. Write " John Martin " over a card. Debit the ac- count of John Martin with the amount lent and credit the cash account with the same amount. \//y*L!^.f^. yCf^a^Zu^ 1 ^ ] hi 1 Feb. 15. Received weekly salary in cash, Directions. Debit the cash account for the amount received, and credit the earnings with the amount earned. Feb. 15. Paid table board in cash, $8. Directions. Debit the expense account with the payment, and credit the cash account with it. Closing the Ledger Accounts. In order to find the profit or loss that results from a series of transactions, and to i8o Personal Account Records clc'lcnniiu" what you are worth, it is necessary to close the set of accounts. The first step in this direction is the making of a trial balance. This is simply a statement of the total debits and total credits as entered on the several ledger accounts. In this connection it must be borne in mind that all individual debits among the en- tries were accompanied by parallel credits, and that therefore the total of all debits must equal the total of all credits. Directions. Take a sheet of paper, rule it according to the form shown below, and write the title " Trial Balance " and the date at the top. Then write the titles of all accounts that appear in the ledger set as shown by the trial balance following. Carry the total debits and credits from each account opposite the name of the account on the trial balance, using the left-hand or debit column of the trial balance for the debits, and the right-hand or credit column for the credits. Add both columns of the trial balance. If all the work has been carefully done, the column totals will be equal. c2^^ SaMi^^y^^e^.^^jU-. /k, /f/^ A-oy^^^ S'n /¥<. /»o AV^ z/iujt^t^^'Xl*^ , . «*«,? C^t^^^mtj-^zf: i^ ^UA..^ /^^. /o /Li. c^^CLTj. o> Li.T7L. tLT^th^^ ,ir !f^yhy^^ y ^y-i^.AjLtjtur,^ /CO ^ /^7/ /8y/ : Elementary Principles of Ac(5ounting i8i The next step in the process is closing the individual ledger accounts and transferring the profit or loss and the resources or liabilities ascertained to two summary accounts, entitled respectively " Profit and Loss " and " Resources and Liabilities," made a part of the set in order to deter- mine net profit and the net worth. Directions. Close the " Cash " account as follows : Ascertain the difference between the credit and the debit columns of the account, and, in practice, check the difference thus found with the actual amount of cash on hand ; for this difference and the actual amoimt of cash on hand must agree. Write in red ink on the credit side of the account, " Feb. i6, Balance, $1534." Sum up both the debit and the credit columns, entering the totals evenly on both sides of the account and ruling carefully in accordance with the model below: €a^^ 1 It 't / .<■ f? e 7 /6*^ ,T ^ i, Ja.irO.-fr^*y,^ 9 f / 19 / f&->>• .7 ,7r/r ^^tr 4 f, C P /$ f ^ 6 ■V & — — — m-ta — — — — -' _ l82 Personal Account Records Close the " Earnings " account. Find the total of the entries on the credit side of the account, and on the debit side in red ink write " Feb. i6, Profit, $i8o." Then carry down the total of both sides of the account as was done in the case of the cash account or as follows : Ls CL'tyl'\^t,^t.^^A* 4 1 'f Ps.^ // 70 3a 'L ff SkaVt ^Sn^ / o . 1 1 /S /Ta-^^^,j .u / i JO ..-^u^ / a\o ™" as — = — — _ Close the " Furniture and Equipment " account. In closing this account, it is necessary to take into consideration the present value of the furniture and equipment, and, as the lamp, purchased during the transactions involved in the set, was broken by accident, an inventory of furniture and equipment shows only the desk with its value of $35. According to the account, furniture and equipment cost $45. According to the inventory, it is now worth only $35. This situation is shown on the " Furniture and Equipment " account by writing on the credit side in red ink " Feb. 16, Inventory, $35," and then writing in red ink beneath that entry " Feb. 16, Loss, $10," as the difference between the two sides of the account. Foot and rule both sides as in previous accounts. r-T4^Kyvx.L^*utA^ O^i p^-L^ife-mA^ ^ Z..A. 1 1 1 ~- SS fi 1 , :\ /6 ^C»S ^ JO 1 '^ £- ''[_ a SI =* a= ■ — 9,< J 5- 1 1 1 _ Elementary Principles of Accounting 183 All the book accounts in the set are now closed. In accordance with practice, the remaining personal accounts will not be closed until settlement balances them. Determining Net Profit or Loss and Net Worth. Net profit or loss is determined by assembling the profits and the losses shown by the accounts in the "Profit and Loss" ac- count which has already been opened. Profits are entered on the right side and losses on the left. It is important to note that when items are transferred from one account to another, they are carried to the opposite side of the other account in black ink. Directions. On referring back to the accounts it will be seen that the " Earnings " account shows a gain of $180. Enter this gain on the right side of the " Profit and Loss " account in black ink, " Feb. 16, Earnings, $180." The " Expense " account and the " Furniture and Equipment" account show losses. Enter these losses on the left side of the "Profit and Loss" account in black ink respectively, " Feb. 16, Expense, $46 " and " Feb. 16, Furniture and Equip- ment, $10." The difference between the two sides of the "Profit and Loss " account shows a net profit of $124. The account is now balanced by writing in red ink on the left side " Feb. 16, Net Profit, $124," and is closed by summing up both sides and ruling similarly to previous accounts. Completed, this account appears as follows : Cr?r/tJI^ qm^/jmj 1^ Oxkt^jt. f(1 4 '8 ^Lv.„^<.^ / a /"■^ t r Ih J^ktA^ ' 1 '* \¥ / fi 7 Q / ir "=" tB = = = - - 1 84 Personal Account Records On glancing back at the student's account, it will be seen that the student started with $1500. Since there has been gained, according to the " Profit and Loss " account, $124, the student must now be worth $1624, and this amount must be available after all debts, or liabilities, are subtracted from the resources, or assets, which include not only cash but also property owned by the student as well as balances due the student. It is important to note at this point, in personal accounts, that if the total debits exceed the total credits, the account shows a resource ; and, on the other hand, if the total credits exceed the total debits, the account shows a liability. Directions. To determine the net worth of the student, gather together all the resources and the liabilities shown by the set of ac- counts and enter them in the " Resources and Liabilities" account, /r*^ p f 7 T aJA.,i-<^/., ■^ y ^ — a^k^. / i Jiot^rnn^iJL / 6 Z if t / b t f ~^ ■ / i, i 9 ~ = ^= = z= — — r- = 1 putting the resources on the left side and the liabilities on the right side. Going back over the accounts, you find that the first one to show a resource is the " Cash " account with its balance on hand. Enter this on the " Resources and Liabilities " account in black ink on the left side, " Feb. 16, Cash, $1534." The second account showing a resource is the " Furniture and Equipment " account with its in- ventory of furniture on hand valued at $35. Enter this also in the " Resources and Liabilities " account in black ink on ihc left side, " Feb. 16, Furniture and Equipment, $35." The third account Elementary Principles of Accounting 185 showing a resource is that of John Martin, who owes the student $100. Enter this on left side of the " Resources and Liabilities " account, " Feb. 16, John Martin, $100." The accounts of Richard VVhaj-ton and Albert Price each show a liability. Enter them on the right side of the " Resources and Liabilities " account in black ink, respectively: "Feb. 16, Richard Wharton, $35" and " Feb. 16, Albert Price, $10." The difference between the student's resources and liabilities, according to the " Resources and Liabilities " account, now shows it- self to be $1624, thereby confirming the student's net worth as estab- lished by adding to the original $1500, upon the basis of which the transactions were started, the $124 gained as a result of the transac- tions. To balance and close the " Resources and Liabilities " account, enter on the right side in red ink " Feb. 16, Net Worth, $1624," sum up, and rule as usual with the other accounts. The final step in closing the set of accounts leads back to the student's own account. To balance and close this account, enter on the right side in black ink under " Feb. i, Cash, $1500, " the amount ^tLi.aCoy^'jf: 1 "f /f, ^f^-linnl2. f (c 7 if 4"^ ;ment of depositor's account, 43 Commercial draft, collection and settlement of, 19, 21 defined, 19 discounting, 61 dishonor of, 31 kinds of, 20 liability of indorsers, 31 non-payment and protest of, 31 parties to, 19 uses of, 19, 21 Contract, defined, 97 essentials of, 97 kinds of, 98 under seal, 99 written, 99 Cooperative banks (See building and loan associations) Correspondent bank system, 57 Credit, defined, 9 extent of use of, 9 Curb market, 137 Day letter, 159 Deed, parties to, 104 quitclaim, 104 recording of, 106 warranty, 104, 105 Discount, bank, 61 cash, 17 trade, 17 Discounting acceptances, drafts, and promis- sory notes, 61 Distribution of property, no Dollar, United States, 11, 12 Draft, bank, 53 commercial (See commercial draft) New York, 53 Envelope, addressing of, 152-154 Equity, in mortgaged property, 109 of redemption, 120 Estate, distribution of, 110-114 procedure under will, 112 procedure when there is no will, 112 Exchange, business of, 7 medium of, 8 Federal reserve note, 13 Federal Resen'e System, described, 40 districts of, 40 purpose of, 40 reserve centers of, 40 Index 215 Fire insurance, nature of, 90 policies of, 91, 92 rates and terms of, 94 Gold, reasons for use as monetary unit, 8,9 Gold certificate, United States, 12 Gold coins, United States, 11 Greenback note, United States, 12 Indorsement, blank, 30 defined, 30 full, 30 qualified, 31 restrictive, 30 Indorser, liability of, 31 Insurance, 77-95 assessment, 79 level premiiim, 79 nature of, 77 organization of, 79 scientific basis of, 78 {See accident, fire, and life insurance) Interest, on savings banks accounts, 67 International check, 75 Investment and speculation, difference be- tween, 122, 123 Investments, 122-143 Invoice, 14 Joint stock savings banks, 63 Judgment, confession of, 28 Judgment note, 28, 29 Landlord, 101 Lease, parties to, loi terms of, 102 vital provisions of, loi Legal tender, 13 Letter of introduction, 156 Letter of recommendation, 156 Letter writing (See business letters) Liabilities, determination of, 184 Life insurance, beneficiary of, 84 desirable features of, 87 endowment, 85 industrial, 82 limited payment, 85 mortality table of, 82, 83 ordinary whole life, 81, 85 policies of, 86 preliminary steps in, 83 premiums of, 79 Life insurance — Continued selecting a policy of, 86 term, 85 Loan, accommodation, 58, 59 building and loan associations, 70, 71 call, sS collateral, 60 commercial bank, 58 savings bank, 67 security for, 27, 60, 67, 71 time, 58 Loss, determination of, 183 Medium of exchange (See money) Money, 7, 8 development of, 8 functions of, 7, 11 United States system of, 11-13 Mortality table of life insurance, 83 Mortgage, chattel, 108 defined, 107 equity under, 109 first, 108 foreclosure proceedings, 107 investing in, 139, 142 nature of, 107 parties to, 107 pertinent facts concerning, 109 real estate, 108 second, 108, 140 Mutual savings banks, 63 National bank note, 13 National bank system, deficiencies of, 40 origin and purpose of, 39 Night letter, 158 Note, promissory, accommodation, 28, 58 collateral, 28, 60 collection of, 54 defined, 24 demand, 27 dishonor of, 31 important features of, 25 indorsed, 28 joint, 27 joint and several, 27 judgment, 28, 29 kinds of, 26, 27 liability of indorsers, 31 nature of, 24 negQtiable, 27 non-negotiable, 27 non-payment and protest of, 31 2l6 Index Note — Continued parties to, 24 security of, 27 time, 27 Personal estate, 96 Personal property, 96 Postal information, 154-136 Postal savings banks, 62 Private banks, field of activity of, 73 function of, 37 letter of credit of, 73, 74 traveler's checks issued by, 75, 76 Profit, determination of, 183 Promissory note {See note, promissory) Property, 96-121 absolute rights in, 96 freeholder and leaseholder of, 97 nature of, 96 personal, 96 personal estate in, 96 title to, 97 transfer of title to, 97 (See contract, lease, deed, mortgage, and distribution of property) Protest, non-payment, 31-33 Real estate, defined, 96 investment in, 141, 142 Real property, 96 Receipt, form of, 18 Receipting bills, 15 Records, cash account, 163-173 Reference books, 209-211 Reserve note. Federal, 13 Resources, determination of, 184 Savings banks, borrownng from, 67 defined, 37, 62 distribution of interest by, 67 joint stock, 63 kinds of, 62 mutual, 63 nature of, 62 opening an account at, 64 organization of, 63 , 64 postal, 62 withdrawing funds from, 65, 66 Securities, 10, 28, 60 Silver certificate. United States, 12 Silver dollar, 11 Speculation and investment, 122-143 Statement of account, 16 Stock exchange, defined, 135 New York, 136 Stocks, auction block, 137 bank, 133 common, 131 cumulative preferred, 13a curb market, 137 industrial, 134 kinds of, 131 merits of, 132 mining, 134 nature of, 129 preferred, 131 purchase of, 134 railroad, 133 stock exchange, I3S-I37 tractions, 134 trust company, 133 utility, 134 watered, 132 Supplementary questions, 187-209 Taxes, assessment of, 119 customs or duties, 115, 116 direct, 115 equity of redemption under, 120 Federal, iis income, 116, 117 internal revenue, 118 legacy, 118 local, 119 poll, 1. 10 state. 119 tariff, IIS Telegram, 157, is8 Tenant, loi Title insurance, 106 Title to property, 97 Trade acceptance, 22 Traveler's check, 75 Treasury note. United States, 12 Trust company, as trustee, executor, and ad ministrator, 113 defined, 37, 113 functions of, 38 relation to banking, 37 Usury, 26 Will, administering and executing of, 112 making of, no Wireless message, 157 Worth, determination of net, 183 Wl Tcuiui^HL LiDnanr rHuiLi i T AA 001018 466 Vr ..\J