The banker should note his borrower's bills payable. Why did he give notes? Are they met promptly? Many houses prefer to sell their own paper in the open market, and keep their banks open for accommodations when they are unable to secure outside credit. The insurance carried should be considered; also the volume of business done. A large business on moderate capital, with long credits, will naturally have large liabilities, while a small business with a liberal capital and short credits should have small liabilities.
Paper offered for discount is of a variety of kinds. The larger proportion of it is from customers of the borrower who have extended their credit by paying their accounts in notes instead of in cash.
Such paper is really, though having two names, very little better than single-name paper, for it is not the maker's credit, but the payee's, which the bank usually considers. Many very small notes offered for discount usually indicate a very needy condition.
There are many firms which carry two or more bank accounts, and others who sell their paper to out-of-town banks. In buying paper it is important to ascertain whether the firm is in the habit of taking up paper at one bank by floating a loan at another.
Paper may be classified for purposes of discount as follows:
1. Bills drawn by shippers on the houses to which the goods are shipped.
2. Bills drawn by importers against commodities placed in brokers'
hands for sale.
3. Bills arising out of our manifold trades and industries.
4. Drafts with bills of lading attached.
5. Paper having personal indorsements.
6. Paper secured by collateral.
7. One-name paper.
XV. CORPORATIONS
Stock companies are in a sense corporations, but the name CORPORATION has in its common application a broader meaning. PUBLIC CORPORATIONS are those which are created exclusively for the public interest, as cities, towns, counties, colleges, etc. PRIVATE CORPORATIONS are created wholly or in part for the pecuniary benefit of the members, as railroad companies, banks, etc. Corporate bodies whose members at discretion fill by appointment all vacancies occurring in their membership are sometimes called _close corporations_. In this country the power to be a corporation is a franchise which can only exist through the legislature.
In municipal corporations the members are the citizens; the number is indefinite; one ceases to be a member when he moves from the town or city, while every new resident becomes a member when by law he becomes entitled to the privileges of local citizenship.
The laws which corporations may make for their own government are made under the several heads of by-laws, ordinances, rules, and regulations. These laws may be made by the governing body for any object not foreign to the corporate purposes. A municipal corporation, for example, makes ordinances for the cleaning and lighting of its streets, for the government of its police force, for the supply of water to its citizens, and for the punishment of all breaches of its regulations. A railway corporation establishes regulations for signals, for the running of trains, for freight connections, for the conduct of its passengers, and for hundreds of other things. But such by-laws and regulations must be in harmony with the charter of the corporation and with the general law of the land. For instance, a municipal corporation could not enforce a by-law forbidding the use of its streets by others than its own citizens, because by general law all highways are open to the common use of all the people. Again, a railway corporation could not make a rule that it would carry goods for one class of persons only, because as a common carrier the law requires that it carry impartially for all.
As a general rule private corporations organised under the laws of one State are permitted to do business in other States. It is quite often to the advantage of a company to organise under the laws of one State for the purpose of doing business in another. For instance, there are many companies chartered under the laws of Maine with headquarters in Boston. The Massachusetts laws require that a large proportion of the capital be actually paid in at the time of organising, while the Maine law has no such provision. For similar reasons many large companies doing business in New York or Philadelphia are organised under the laws of New Jersey.
A corporation may make an assignment just as may an individual. If all the members die the property interests pass to the rightful heirs, and under ordinary conditions the corporation still exists.
A FRANCHISE is a right granted by the State or by a municipal corporation to individuals or to a private corporation. The franchise of a railroad company is the right to operate its road. Such franchise has a value entirely distinct from the value of the plant or the ordinary property of the corporation.
An UNLIMITED LIABILITY corporation is one in which the stockholders are liable as partners, each for the full indebtedness.
A LIMITED LIABILITY corporation is one in which the stockholders, in case of the failure of the corporation, are liable for the amount of their subscriptions. The name _limited_ is required by law to appear after the name of the company. If a subscription is entirely paid up there is no further liability--that is to say, the property of a shareholder cannot be attached for any debts of the company.
Understand clearly that the name _limited_ printed after the name of a company does not indicate in any way that the capital or credit of the company is limited, only that the liability of the shareholders of the company is limited to the amounts of their shares.
A DOUBLE LIABILITY corporation is one in which, in case of failure, the stockholders are further liable for amounts equal to their subscriptions. All national banks are double liability companies. If A owns $5000 stock in a national bank, and the bank fails, he loses his stock; and if the liabilities of the bank are large he may be obliged to pay a part or the whole of an additional $5000.
XVI. BONDS
When a railroad company, or a city or any other corporation desires to borrow money it is a common practice to issue instruments of credit called BONDS. A bond means something that binds. Bonds bear the same relation to the resources of a corporation that mortgages do to real estate.
Corporation bonds are issued for a period of years. They usually have coupons attached which are cut off and presented at regular intervals for the payment of interest. A bondholder of a corporation runs less risk than a stockholder, first, as to interest: the corporation is obliged to pay interest on its bonds, but may at its own pleasure _pass_ its dividends; secondly, the bondholder is a creditor, while the stockholder of the corporation is the debtor. On the other hand, if a concern is very successful, a shareholder may receive large dividends, while the bondholder receives only the stipulated interest.
A _bond_ is evidence of debt, specifying the interest, and stating when the principal shall be paid; a _certificate of stock_ is evidence that the owner is a part-owner in the corporation or company, not a creditor, and he has no right to regain his money except by the sale of his stock, or through the winding up of the company's business.
The name DEBENTURES is given to a form of municipal bond in common use. Nearly all the large sums of money used by States and cities for the building of State or municipal buildings, bridges, canals, water-works, etc., are raised through the issue of bonds (_debentures_), which are sold, usually at a price a little below par, to large financial institutions, banks, and insurance companies.
Generally speaking, such bonds are good _securities_, and are marketable anywhere.
[Illustration: A private bond.]
At different times the United States government has issued bonds to relieve the treasury. These bonds are absolutely safe and are always marketable. _Registered bonds_ have the name of the buyer _registered_; _unregistered bonds_ are payable to _bearer_. _Municipal bonds_ are issued by cities and other municipalities to raise money for local improvements. If proper precautions are taken by buyers, municipal securities may be considered among the safest and most remunerative investments.
When a new railroad enterprise is undertaken its promoters often expect to make the road not only supply the money for its construction but also give working capital in addition. This is done by the issue of mortgage bonds. Default in the payment of interest throws the road into the hands of a receiver. The securities immediately fall in value and are perhaps bought up by a syndicate of crafty speculators who are permitted to reorganise the road and its management. This is the history of many of our roads. There are exceptional cases, of course, but the investor should be familiar with the facts before buying railroad mortgages.
A BOTTOMRY BOND is a kind of mortgage peculiar to shipping. It is a conveyance of the ship as security for advances made to the owner. If the ship is lost the creditor loses his money and has no claim against the owner personally. It is allowable for a loan made upon such a bond to bear any rate of interest in excess of the legal rate. A vessel arriving in a foreign port may require repairs and supplies before she can proceed farther on her voyage, and in occasions of this kind a bottomry bond is given. The owner or master pledges the keel or _bottom_ of the ship--a part, in fact, for the whole--as security.
We have now upon the market stocks and bonds representing all conceivable kinds of property. Not only are properties of many kinds used to issue bonds upon, but many kinds of bonds are often issued upon the same property. Thus we find among our railroads not only first, second, and third mortgage bonds, but income bonds, dividend bonds, convertible bonds, consolidated bonds, redemption bonds, renewal bonds, sinking-fund bonds, collateral trust bonds, equipment bonds, etc., until they lap and overlap in seemingly endless confusion.
RECEIVER'S CERTIFICATES are issued by receivers of corporations, companies, etc., in financial difficulties, to secure operating capital; they are granted first rights upon the property and are placed above prior lien and first mortgage bonds.
XVII. TRANSPORTATION
The most common effect of cheapened transportation is to increase the distance at which it is possible for producer and consumer to deal with each other. To the producer it offers a wider market and to the consumer a more varied source of supply. On the whole, cheapened transportation is more uniformly beneficial to the consumer; its temporary advantage to the producer very often leads to overproduction. It has the effect also of bringing about nearly uniform prices the world over.
The time was when nearness to market was of the greatest possible advantage. At the present time a farmer can raise his celery in Michigan or his beets in Dakota and market them in New York City about as easily as though he lived on Long Island. It is no longer location which determines the business to be carried on in a particular place, but natural advantages more or less independent of location. But the railroad or the steamboat very often determines where a new business shall be developed. It is this quickening and cheapening of transportation that has given such stimulus in the present day to the growth of large cities. It enables them to draw cheap food from a far larger territory, and it causes business to locate where the widest selling connection is to be had, rather than where the goods or raw materials are most easily procured. It is the quick and comfortable transportation facilities which our large cities possess that have given strength to the great shopping centres. Shoppers for thirty or forty miles around can easily reach these centres, and the result is that trade gathers in centres rather than at local points. A city of a million population in the most productive agricultural section of country could not be fed if the food had to reach the city by teaming.
With this growth of trade centres comes the increased gain of large dealers at the expense of the small; with it comes organised speculation and its attendant results, good and evil.
Prior to the completion of the organisation of trunk or through lines, freight was compelled to break bulk and suffer trans-shipment at the end of each line, where a new corporation took up the traffic and carried it beyond. To prevent this breaking of bulk and to expedite the carriage of freight, fast freight lines on separate capitalisation were organised. The purpose of the interstate-commerce law is largely to prevent discrimination and corruption in freight charges, to secure for every person and place just and equal treatment at the hands of the transportation companies. The freight rates are arranged and regulated by the traffic associations, and the various conditions and compromises necessary have made both classifications and rates about as complicated as anything possibly could be.
The name DIFFERENTIAL as applied to freight rates refers to the differences which are made by railroad companies. Certain roads are by agreement allowed to charge a lower rate than others running to the same points. To and from each of the eastern cities there are two classes of roads--the _standard_ lines and the _differential_ lines.
The standard lines have the advantage of more direct connections; the differential lines reach the freight destinations by circuitous routes, in some instances by almost double the mileage. With a view to equalising these conditions the general traffic associations allow the differential lines to carry freight at a lower rate per mile than the rate charged by the standard lines.
The transportation business of the United States is so varied and complicated that a proper study of its freight tariffs and classifications would require much more space than can be given the subject in these lessons.
XVIII. TRANSPORTATION PAPERS
The common transportation papers, familiar to all shippers, are the (1) _shipping receipt_, (2) _bill of lading_, (3) _waybill_.
ORIGINAL RECEIPTS, stating marks and quantities of goods, go with each separate lot of merchandise to the freight sheds or vessels, and these are summed up in a formal bill of lading, for which they are exchanged when all the cases or bundles belonging to the particular shipment have been delivered. The duplicate receipt, or the part commonly marked _invoice_, is kept by the receiver of the freight, and the other end, commonly marked _original_, is given to the drayman. In making ordinary shipments it is not usual or necessary to make out a formal bill of lading. Of course, when no bill of lading is made out, the receipt should be preserved by the shipper. The full contract is usually printed on the receipt, but it must be remembered that a receipt is not a negotiable instrument and cannot be used as security for money.
[Illustration: A shipping receipt (original).]
A BILL OF LADING is an acknowledgment by a transportation company of the receipt of goods specified, and contracts for their delivery at a certain place, under conditions stated thereon, upon payment of freight and expenses. Bills of lading are negotiable and maybe transferred by indorsement, but are of no value apart from the goods to which they give title. A bill of lading goes with certain _named_ goods and cannot be transferred to other goods, even though of precisely the same kind and price. Marine bills of lading are usually made in triplicate; one is kept by the shipper, another by the vessel, and the third is sent by mail to the person to receive the goods.
[Illustration: A steamship bill of lading.]
The parties to a bill of lading are three--the shipper, the consignee, and the transportation company. The declaration of having received the goods in good order and condition, and the consequent obligation, subsequently expressed, of delivering them in like good order and condition, is sensibly lessened in its importance by the additional clause now adopted by almost all transportation companies--namely: "Contents and condition of contents of packages unknown." Should the goods or part of them be shipped in a damaged condition, or in a bad condition of packing, a note to that effect should be made by the transportation company on the bill of lading, which ceases then to be a _clean bill of lading_.
[Illustration: A local waybill.]