First lessons in finance (school edition of Funds and their uses)

Preface

Except in its public aspects, the subject of finance has received little attention at the hands of writers. The necessity for funds with which to carry on King William's war with France gave rise to the Bank of England and, with it, to modern funding methods. JSTearly all of the great banks and banking systems of the past have grown out of public rather than private needs. So constantly has attention been drawn to funding measures of Government, that the words " finance " and " funds " have come to be associated almost exclusively with public affairs. The fast increasing funds in private institutions, the magnitude of modern industrial and commercial undertakings, the large funding operations wholly private in their character that have gone along with private enterprise during the last decade, have awakened an interest in private finance far exceeding that which attaches to public revenues and expenditures. Kecognizing the need for the collection and coordination of data in this branch of the subject, effort has been directed toward the development of a literature such as may bring the facts of financial life within the reach of the reading public. This larger work was undertaken some years ago in cooperation with Dr. Edward S. Meade, of the University of Pennsylvania. The present essay is the

VI PREFACE

first of a series aiming to give a wide survey of the field of finance.

Looking upon the Subject of private finance as one which has to do with the getting and spending of funds for private enteTprise, the materials of this book have been grouped around three central ideas, viz. : (1) What are Funds ? (2) How Funds are Obtained. (3) The Institutions and Agencies Employed in Funding Operations. The more technical fields of financiering — the several departments of financial operation — are reserved for subsequent essays. In Part I the various forms of money and credit used as funds, and the means of transfer of credit funds, are discussed. An understanding of the nature of funds is regarded as fundamental. Part II, which has for its subject " How Funds are Obtained," divides modern funding methods into two classes, namely, (1) the methods of the industrially and socially dependent, and (2) the methods of the industrially and socially independent — i. e., those who depend upon active participation in business. The only method by which the former may obtain funds is that of gift and inheritance^ which is the title of Chapter lY; in this the consideration is one of personal attachment and direct appeal. The funding method of the second class, those actively cooperating in industrial life, is that of exchange. The consideration for exchange is one of " value." In business there is but one way of obtaining funds — that is, to have something to sell, something for which those having funds are willing to exchange them. To this method several chapters are given. Those without capital or other property must resort to sales of labor. The limitations of the laborer, the advantages of education and industrial training, and

PREFACE vn

savings as a means of obtaining industrial capital, are some of the important considerations for this class. Those possessed of property or established business may avail themselves of methods which are made the subject of the three concluding chapters of Part II. For illustration of instruments and methods, those actively employed in the market-place have been used. In their reproduction, however, it has been necessary to reduce all exhibits to typepage dimensions. Engravings of checks, notes, scrip, drafts, etc., are about one-fourth of the size of the originals from which they are made. Stocks, bonds, and the larger security documents are in some instances reduced to oneeighth of their original size. In Part III a chapter has been given to each of the leading financial institutions. The labor of collecting the data and illustrations in many cases must have proved fruitless had it not been for tha friendly assistance of those in control of financial concerns, and those in possession of instruments acquired by years of contact with financial life. In this relation I am especially indebted to Mr. Charles C. Harrison, Jr., of the banking and broking firm of McMichael & Co. ; Mr. John C. Dawson, of the banking house of Brown Brothers ; Mr. L. G. Fouse, President of the Fidelity Mutual Life ; Dr. Stewart Culin, Curator of the Free Museum of Arts and Sciences of the University of Pennsylvania ; Mr. Herbert G. Stockwell, and Mr. H. A. Chambers.

F. A. C.

Contents

CHAPTER PAGE

I.— Introductory » 1

Part I What Are Funds?

II. — Money funds . . . . » 11

III. — Credit funds o ... 30

IV. — Instruments of transfer of credit funds . . , 55

Part II How Funds Abe Obtained

V. — Funds obtained by gift and inheritance. ... 79

VI. — Funds obtained by exchange ...... 89

VII. — Funds obtained by sales op commercial credit . . 109

VIII. — Funds obtained by sales of long-time paper . . , 149

Part III Institutions And Agents Employed In Funding Operations

IX. — The United States Treasury ...... 195

X. — The savings-bank 209

XL — The building loan association 239

XII. — The commercial bank 240

XIII. — The trust company 256

XIV. — The broker and the brokers' board .... 265

XV. — The insurance company 282

Index 299

ix

LIST OF ILLUSTRATIONS

PAGE

Copper-sheet money 19

Silver-sheet money 23

Note of first Bank of United States 43

Note of second Bank of the United States 43

Note of Southern Bank of Kentucky . 43

Note of Exchange Bank of St. Louis , . .44

Note of Tioga County Bank 44

Certificate of Chattanooga Savings-Bank 46

Clearing-house certificate 46

Scrip of Easton & Wilkesbarre Turnpike Company . . . .47

Sutler's scrip 47

Store scrip ' . .48

Camden & Woodbury Railroad scrip 48

Chesapeake & Ohio Canal scrip 49

Marion Change Association scrip 49

Patapsco Bank certificate of deposit 49

Dividend warrant 50

Town scrip of Fayetteville, Ark. . . 51

Scrip of Port Deposit 52

Port Deposit loan, 1862 52

Check of Pulaski JSational Bank 56

Andrew Jackson's check on Bank of United States . . . .57 Daniel Webster's check on Bank of United States . . . .58

Wages check of Lehigh Valley Railroad 60

Dividend check 61

Coal shipper's check * . . . .61

Receipt used as check 62

Daniel Webster's power of attorney 63

Crossed check 64

Certified check . , 65

Cashier's check 66

Bank draft, Bank of United States 67

Express money-order 68

xi

Xli LIST OP ILLUSTRATIONS

PAGE

Letter of credit . .69

Draft list to letter of credit 70

American Express Company's traveler's cheek 70

Brown Brothers' traveler's check 71

Identification signature on same 72

Knauth Nachod & Kiihne's traveler's check . . . . . 73

Interchangeable bank money-order 74

Share of stock in Bank of United States 97

Common stock of United States Steel Corporation .... 99

Non-cumulative preferred stock 101

Common stock of Gramercy Finance Company .... 102

Preferred stock (cumulative) of Gramercy Finance Company . . 103

Standard Oil Company certificate . . . . . . . 105

First preferred trust certificate, Reading Company .... 107

Promissory note (non-negotiable) 112

" " (without payee) . 112

" " (negotiable) 113

" " (negotiable by delivery) . . . . . .113

" " (joint and several) . ... . . .114

Interest note 115

Note with waiver of grace 116

Signature " His mark " 117

" Value received " and " without defalcation " 117

" Credit the drawer " note . . . . . . . . . 118

Accommodation, credit the drawer note 119

Assignment of note 121

" Without recourse " indorsement 121

Indorsed guarantee 122

Detached guarantee of note 122

" Iron-clad " collateral note 123

Memorandum collateral note 124

Judgment note (simple form) 125

Judgment note with power of attorney ...... 125

Collateral judgment note . . • 126

Notice of non-payment 128

Note with waiver notice of non-payment 129

Protested note 130

Notarial notice of protest 130

Notarial certificate of protest 131

Account stated 134

settled 135

" paid 136

LIST OF ILLUSTRATIONS xiii

PAGE

Memorandum of settlement and due-bill 137

Commercial draft (simple form) 137

London draft of Bank of United States ...... 139

Sight-draft . .140

Documented bill — invoice 142

Bill of lading attached to draft 143

Insurance policy on shipment 144

Draft of Burnham, Williams & Company 145

Ad\ ice of sale of draft 146

Balance sheet 152

Mortgage note 154

Mortgage securing note 155

Parti-mortgage receipt . . . 158

Collateral gold receipt 160

Collateral trust certificate of Asphalt Company .... 162

Individual private bond . . 163

Receipt for money deposited on bond purchase .... 165

Same, purchase Glen Echo Railroad bonds 166

Unsecured bond, Bank of United States 167

Real estate bond 168

Guarantee of bonds ' . 169

Individual real estate bond 170

Guarantee of Reading Terminal bonds 171

Indorsement of bonds 172

General mortgage bond of Reading Company 175

Car-trust bond of the Railroad Equipment Company . . . 177

Same, American Transportation Company 179

Debenture bond 180

Income gold bond 182

Chesapeake & Ohio purchase money bond 184

Improvement bond of Reading Railroad Company .... 186

Bond extension contract 188

Exhibit in sale of note broker 266

Release from liability on indorsement 266

Memorandum of note purchase 267

Memorandum of note sale 267

Floor plan of Philadelphia Stock Exchange 275

Philadelphia board-room of Haight, Freese & Company . . . 278

Haight, Freese & Company's chart of private wires .... 280

Chapter I Funds And Their Uses— Introductory

Among the first ideas that one gets from early association is a notion of respect for the "property" of others; we soon come to know that there is a differ- ^ ence between those things which we may call

" our own " and those things which " belong " to another. Parental authority within the family first impresses the lesson ; later, association with playmates enforces it. Any attempt to violate what are commonly recognized in the community as "rights of property" brings us to grief. The jealousy with which the child guards his right to use his own top, his own marbles, his own knickknacks, and the respect which he comes to have for things displayed in shop-windows, or in the possession of his playmates, illustrate the force with which ideas of property are early impressed upon the race.

INo sooner, however, does the child come to know the use of things, or begin to long for objects that attract his jj^^ notice, than he learns that the " consent " of

'property is some one must be obtained before they may be acquiie . taken. From a parent, a sister, or a brother — members of the household — this consent may be had for the asking ; within the family, acquisition takes the form of "gift." From others, however — those not bound by ties of affection or mutual regard — a mere request is not sufficient. In front of a shop is a basket of apples. Their rich 1 1 color and fragrance suggest to the child passing that he would like to have some of the fruit. He asks the shopkeeper — seeks to obtain an apple " bj gift," as he had been accustomed to do at home. His request is refused. How is he to obtain the coveted fruit? The shopkeeper helps him out of the difficulty. " Have you a penny ? " " No." " H you will get me a penny I will let you- have an apple." With this suggestion the boy has his first idea in finance. He runs to his father, obtains a penny " by gift," and, returning, "exchanges" it for an apple. Thus he learns how the " consent " of shopkeepers may be won, and that this is a second method by which the property of others may be acquired.

Exchange lies at the foundation of the world's industrial progress. The story of Crusoe serves well to illustrate the possibilities of life without it. Among a primitive people centuries may be required to obtain the metals needed for weapons and a few rude implements. We have but to reflect upon the many thousands of things about the modern household, each of which contributes a share to comfort or pleasure, to realize how incapable man would be to provide for himself. How long, for example, would it take a man, working alone, to extract from nature a pound of iron ? Having the metal in hand, how long must he labor to make a needle or a screw ? Few of the common things in use to-day could be had at all ; they are each the product

of hands whose skill has come from years of Exchanqe the . i x • • i • -i-i

chief method experience and traimng, workmg with pro-

of acquiring cesses and appliances inherited from a society piopei y. ^j^^^ j^^g labored for centuries past — a cooperative society in which, without exchange, cooperation would have been impossible. In every instance, increased facilities of exchange have led to a wider range of social and industrial activity. To its development we owe the economies of division of labor, the benefits of the factory system, the larger return and more intelligent con-

INTEODUCTORY 3

trol, coming from differentiation and centralization of industries — -in fact, every mile-stone of human progress has engraved upon it the significant emblem " Exchange,"

Out of exchange arises the necessity for " funds." In business parlance there is probably no word so big with Importance meaning as this one. '' If I could get the necof funds in essary funds," says the blacksmith, " I would usmess. build a wagon shop." The grocer does not

add to his stock of sugar when the price is low " for lack of funds." " We are in need of funds," says the building contractor to his partner — " we must have at least $1,000 more to pay our men." " Our funds are running low," says the miller's clerk ; " we must realize on outstanding bills, or make some other arrangement to meet obligations maturing on the first of the month." It is out of just such situations and just such problems that the business of finance arises. " Funds " are the key to business under an economy of exchange — a necessary part of business equipment.

Business is said to be a contest in which every one is striving for the same thing. This is not entirely true, yet one has but to look out on Broadway or any main thoroughfare of a great city to be impressed with the fact that some kind of contest is going on. Men are hurrying

hTl^fJfo to and fro, pushing each other about, each try-

ousiness f / j. o .

ing to get somewhere, to do something one does not know what. But it is evident that each has something very definite in mind and that he is straining every nerve and muscle to accomplish a purpose. What is it that brings these millions into the street, takes them to the shops, causes some to stand behind counters and others to work and sweat before a furnace ? Each seems to be working and striving in a different way, but if you ask the clerk or the foundry man, the day-laborer or the banker, what he is striving for, each will make the same answer. " I am not in business for my health," is a saying which expresses a great deal of truth. Each one has certain wants and desires 2 to satisfy. On all sides are found the requisite materials. To gain those things which will satisfy desire, in an orderly and peaceful way, is the aim of business. Under an industrial regime, based on exchange, the quest of business is for "• profits." The success of a business enterprise is measured by its " profits " — i. e., the gains to proprietors made through it. Profits, however, are measured by the standard of increased or decreased ability to resolve one's property into funds.

A peaceful contest must have rules to govern it, for without rules there would be violence between parties. A number of marbles are placed within a ring ; a line is drawn, behind which each player must stand for the first throw ; the one who lands his marble nearest the center takes first shot. So the rules are laid down for the beginning of the game. After the contest is over each counts the marbles which he has driven out of the ring. Each player has put in two marbles as " counters." At the end,

one has scored three ; he is one ma.rble ahead, law and while the other player has driven out but one

order w — he has lost a marble. There must be a rule

for every possible situation and every point at issue, otherwise the game could not proceed. The one boy would not allow the other to take his marble (his property) unless he did it according to rules understood by both at the beginning. The same is true of football, baseball, lacrosse, every contest for points. Not only must the rules be known, but they must also be strictly observed. In case of a dispute as to what the rules are, or how they should be applied, the parties may come to a subsequent agreement, or, failing in this, they may refer the point at issue to some one not in the game who knows the rules. He who does not play " fair " may have some of his points taken away, or, on continued offense, may be " ruled out of the game." Business is a contest in which the ''counters" are money. Business law is nothing more nor less than the

INTRODUCTORY O

rules governing the contest. The honest man is the one who plays according to rule. A law-breaker not only runs the risk of losing points (i. e., of being "penalized") but he may be "ruled out." This may be done by his fellows refusing longer to do business with him, or by his being " locked up," — put in jail as often as he breaks the rule. Business may be a very large game. The whole world is the field, and its rules must be understood and observed by

all who come into common business relations. Busmess ^j^g jj^^g ^f business must be common to all

people trading together, it sometimes happens that those known as civiHzed people attempt to do business with others who do not understand their rules or who have different ones. This is like two sets of players entering a football contest, the one trying to play "association ball," and the other trying to play "rugby." Two systems of business come into conflict. The rules of the one people must be made to conform to those of the other or else there will be trouble. The common advantages of trade are so great that no one industrial group can afford to shut itself off. In fact, no barrier is strong enough to preclude men from following up a business advantage when it presents itself. This brings the people of all nations into constant contact. In the conflicts between systems, the stronger forces the weaker to change its rules. The importance of obedience to rules of business law is so great that nations as well as individuals are made to suffer by what is deemed a violation of them. That " honesty is the best policy " is a saying trite but true. Whatever may be said of the attitude of one nation toward another, no single individual can afford to raise even a suspicion of dishonest conduct, as this would cut him off from opportunity and preclude him from the advantages offered by broader cooperation with his fellows, cooperation made possible by confidence in fair dealing. To quote a saying of Mr. Croker, the Democratic leader of New York : " ]S"o combination can be made where all are dishonest and each one knows it. The first element of leadership is honesty, perfect honesty. The honest man will prevail because other men will trust him. A rascal can trust an honest man, but a rascal can not trust a rascal. You may take one hundred men, ten of them honest and ninety of them false, and put them away on an island; come back in two montlis and, for the reasons I have given you, you will find the ten men dominating the rest." While Mr. Croker is not often referred to for standards of morality, his success as a politician has depended very largely upon his recognition of the advantage of strict integrity among his political followers, and the advantage of fair play is even more striking in business organization and control.

In a game, two conditions are prerequisite to success : (1) An intimate knowledge of its rules ; (2) Skill in the use of the instruments employed. A knowledge of business laws, and skill in the use of the instruments and agents by means of which " gains " are to be made, are just as necessary to business success. To the laborer — the one who relies for income on the sale of his labor, who subordinates his own business or talent to help another work out his schemes for gain — a general knowledge of law may be of less importance than skill in the use of some particular tool ; but he must know enough of the rules to play his part well, otherwise he will not be able to render service to X.T ^ f the manager to whom he engages himself. The success in man who manages a business plant and seeks business. income from the sale of its products must equip himself in a different way. He may have less skill in the use of some particular instrument than has the man whom he en;ploys, but he must know the use of instruments, and know the manner in which they may be used by others to the highest advantage in order to direct the efforts of his working force in such a manner as to make largest gains without breaking rules. Like a football cap-

INTRODUCTORY 7

tain, lie must know liow to manage liis men and his plant so as to take advantage of every opening. Business is co- Funds a operative. A man can not do business alone. necessary He must play a part. He must be properly business equipped for whatever part he plays. Business

equipment. training, knowledge of the law, equipment adapted to the enterprise, materials, services, all are necessary, but in obtaining these the first need is for " funds." The acquiring of funds (capital), therefore, may be said to be the first step in providing for business equipment and business success.

Children are frequently found on the street asking for pennies. They have learned the use of money as a means of obtaining things desired, but they have not yet risen above the most primitive knowledge of how to get money. Their fathers and mothers may provide it by gift, as they would also provide the things which pennies will buy, but those not moved by affection or, as sometimes happens, by charity, turn a deaf ear to appeals of this kind. In early jp 1 fj, years, "gifts" based upon affection afford a subject of means quite adequate, except in cases of inabilfincmce. ^^j ^f parents to provide. Generally speaking,

girls and women throughout their lives are limited to this means of obtaining funds. Many men also pass their lives in this fashion — they obtain all things desired by means of funds contributed. Those who may not depend upon endowments of ancestors, and those engaged in active business, have quite different financial problems to solve. Finance is that branch of business which has to do with the getting and spending of funds necessary to the equipment and. management of enterprise. A student of finance must first consider what is meant by " funds." When a business man says that " his funds are running low," what does he mean ? Does he mean that his money is nearly all gone ? Perhaps he has not had more than a dollar in his purse for a week, and has had no particular use for that, yet he has been carrjing on a large " cash " business all the time — has had no lack of " funds." What are " funds " ? How are they obtained ? How are thej managed ? These three questions answered, the whole field of finance will have been covered.

PAET I WHAT AEE FUNDS?