Giving and getting credit

CHAPTER I. Credit and Money

PAGE

The meaning of Credit.— It utilizes the present value of a future payment. — It neither creates nor destroys capital. — Credit system a vast series of mutual dependencies. — Credit the "soul of commerce." — Ninety per cent of business done upon Credit. —Coined money the standard measure of values.— Is a medium, and also an object of exchange. — Money is supposed to stand still while prices of other things move. — The wealthy deal chiefly by Credits, they exchange the title to money by checks, etc. — Long and short Credits. — A link broken in the chain. — When confidence gives way to distrust. — Credit unused grows rusty. — Merchants' notes in the market. — The simple and national relations of buyer and seller. — The merchant a better judge of Credits than the banker.— The "nimble sixpence." 7

CONTENTS.

CHAPTER II. Of Failures and Changes in Business Conditions

PAGE

Some failures will surely occur. —Proportionate uniformity in the number of failures in a series of years. — Average losses on credit sales. — Total failures and liabilities during the last thirty-eight years. — Business prosperous about three-quarters of the time. — Cardinal considerations in giving Credit.— Changing conditions. — Fraudulent and unfortunate failures. — It is the unexpected which makes bad debts. — Meaning of insolvency, failure, and bankruptcy 22

CHAPTER III. Suggestions and Precautions

Business men should make known their financial position, the age of mystery passing away. — Applicant for Credit should prove that he is worthy of it. — Policy of establishing a Credit when it is not needed. — Chances taken with old patrons. — Merchants' ledger his barometer. — Where is the money of a tardy debtor? — "Dry rot" in old concerns. — "No friendship in business" an atrocious maxim. — Most men mean to be honest. — "Weakness of the Credit system. — Must walk by facts and not by faith. — Neither display nor liberality should mislead. — Should be not merely persuaded but convinced.— Giving Credit implies risk.— The weakness of timidity and over-caution. — The cost of con-

CONTENTS.

ducting business. — Personal expenditure. — The catechism of a business house. — Red tape. — " Not processes but results" wanted

CHAPTER IV. Estimating Credits

Balance sheet or statement, duly signed and verified, the best test of a man's financial condition. — The construction of a statement indicates much. — Assets shrink, but liabilities never. — " Real" and "nominal" assets. — Houses in irretrievable difficulties holding on. — References and their value. —Questionable references. — The best type of buyers. — Overloading Credit customers. — Dating. — Cash discounts. — A "time to watch and a time to pray. " 53

CHAPTER V. Points on Giving Credit

Nature of the patronage upon which a credit customer must depend. —Agricultural, manufacturing, mining, and mixed pursuit communities. — Over-production. — Better stimulate consumption than try to check production. — A crusade of development. — Losing sight of the trend of affairs.— Business a matter of principles and methods. — Difference in men.— Luck. — The line between speculation and enterprise. —Amateur gambling. — Opinions of a New York merchant. — Giving Credit upon instinct or intuition. — The Jewish race in commercial affairs. —Credit in other countries

4 CONTENTS.

CHAPTER VI. Collection

PAGE

Enforcing prompt payments. —Differing collection laws of the States.— Credit obligations resting upon honor. — Fraudulent default. — The menace most effective which lies in firmness, not irritation of speech.— The first offer of a bankrupt.— Circumstances should qualify final basis of settlement in each case. — Sending distant claims for collection to unknown lawyers. — Collection agencies, etc 91

CHAPTER VII. Corporations

Advantages of a corporation over a partnership.— A favorite method of forming corporations in times past. — Liabilities of stockholders defined. — Unincorporated companies.— Industrial corporations.— Trusts.— The Sherman Anti-Trust Law has but little restraining power. — Many corporations have been based on schemes of dreamers and swindlers. —Special cautions in extending Credit to corporations 106

CHAPTER VIII. The Mercantile Agency System

Its origin in 1841.— Early history and growth. — Leading mercantile agencies of the past and present.— Agency methods.— The usefulness of

CONTENTS. 5

PAGE

an agency. — The American mercantile agency system unique. — The agency of the future. — The agency has become a necessity of trade 120

CHAPTER IX. Credit Guarantee or Indemnity Systems

Their beginning and the principles on which they are based. — New and ingenious features. — Some notable differences between Credit insurance and other kinds considered. — May in time become a bulwark of trade. — Merchants appear to wish them success.— They have met with unfavorable conditions so far, in the business depression. — Must pass through their experimental stages 136

CHAPTER X. A Uniform Bankrupt Law

The general need of such a law. — Difference between bankrupt and insolvent laws. — Earlier bankrupt laws. — Bankrupt laws in other countries. — A good law would operate to punish fraud, and protect creditors.— The Torrey Bill.— Popular demand for its passage.— Advocated by the National Board of Trade, and why 144

CHAPTER XI. Panics

Panics since 1814, equal in number in the civilized countries, and practically simultaneous. — Speculations on their underlying causes. — History of each panic in the United States since 1814. . 153

6 CONTENTS.

CHAPTER XII. The Panic of 1893

PAGE

Its proximate cause distrust of the stability of the currency. — Other events which helped to produce and intensify it. — The demonetization of silver a monetary evolution. — Its effects upon trade.— The Bland Bill. —The Sherman Bill. — These measures held responsible by many for the crisis. — The Barings' failure. — The condition of affairs in 1891-2.— The year 1893 opened with gray skies. — The Australian bank failures. — Gold exports. — The President's action. — Failures in June, and scarcity of currency. — The Government of India suspends free silver coinage. — Congress repeals the silver-purchase clause of the Sherman Act, Nov. 1. — It did not restore confidence. — Review of affairs in 1894. — The export of gold checked early in 1895. — The turning-point in the panic. — The advocates of free silver coinage. — The nation demands an honest dollar. — Bimetallism a "back number." — The prevention of panics. — Panics beacon lights of warning and instruction. — Their lessons to business men , 168

Appendix

The assignment, insolvent, exemption, and other laws of all the States and Territories 195

GIVING AND GETTING CREDIT.

Chapter I. Credit And Money

Commercial credit is the name of that trust which is reposed in men because of their character and resources. In other words, it is an estimate of ability and disposition to fulfil business engagements which confers purchasing power; power to command the industry or the capital of others.

Credit is the opposite of money, for it pays nothing. Debt is a thing to be paid, and money is the thing that pays. But the value which is attached to a merchant's word, the skill and experience he has acquired, and the relations he has established, must surely be considered, in some sense, as capital.

The man who buys with money uses the realized profits of the past. If he buys upon credit, he utilizes the present value of a future payment. He promises to pay a sum of money, and gives the creditor a right of action against him if he fails to pay ; this is the legal basis of credit. If, by the lapse of time, or a bankrupt law, he is legally discharged, the obligation is not thereby extinguished ; the creditor is merely denied the use of the law to enforce his claim.

Credit neither creates nor destroys capital ; it merely transfers to the debtor the property of the creditor, and one is plus only by as much as the other is minus.

If, for example, five men buy from each other, consecutively, a thousand dollars' worth of goods, and each gets the note he receives discounted, five thousand dollars are thus brought into circulation, but no new value is created. If the last purchaser fails to pay his note, and none has surplus capital, the loss of a thousand dollars must run along the line, and each becomes bankrupt. Yet the goods may still exist, and, except in the confusion and distress which follow, the community is neither richer nor poorer than before.

CREDIT AND MONEY.

This is the condition of affairs when credit becomes too much expanded and the crash of widespread bankruptcy sponges the slate. It shows that the credit system is a vast series of mutual dependencies, and that the solvency of merchants rests largely upon that of their neighbors.

Credit is a tax upon labor, because prices on credit are higher than for cash. Those who take credit and pay, are charged to make up average losses from those who do not pay. The good insure the bad, so to speak, and cash discounts show the cost of credit.

No one becomes bankrupt who does not owe. Credit is, therefore, a cause of bankruptcies.

Credit favors extravagance and speculation. It is easy to spend or risk money which has cost neither labor nor self-denial, but merely a promise to pay hereafter. Social economists say that a family which buys its supplies on credit spends much more than if it pays cash. Credit stimulates demand and raises prices, yet it is a blessing to the sick or unemployed workman, because it enables him to draw upon the future for his necessities.

Credit pays capital for permitting itself to be employed in reproduction, and transfers it from hands that cannot use it into hands that can. It enables those who have industry but no capital to enjoy the advantages of both, and leads it into channels through which commodities are moved over the civilized world from producer to consumer.

Without credit, the present business of the world could not be transacted. Not all the gold ever taken from the earth could perform its service.

It constructs railways, opens mines, improves farms, and builds houses: it is "the soul of commerce," an agent and promoter of civilization wherever human energies can be exerted.

Credit is the fruit of a settled condition and was therefore unknown in the early stages of society. It has succeeded the primitive periods of barter and money, or cash, and appears only when the observance of contracts is enforced by public authority. Wise and beneficent credit follows the largest personal liberty, but is opposed to every form of misrule and anarchy,

CKEDIT AND MONEY. 11

and flourishes best under the wing of strong and secure government.

It is estimated that from ninety to ninety-five per cent of the world's present business is transacted upon credit. Daniel Webster declared that " credit has done more a thousand times to enrich nations than all the mines of all the world."

Real or metallic money, coined by public authority, is the standard measure of values which denotes and carries in itself an exchangeable value equal to that of the average quantity of labor required to mine and coin its metal. It is therefore not only a measurer and medium of exchange, but an object of exchange, like other products of labor and capital.

It is this intrinsic property which insures absolute confidence in it, without which there is sure to be confusion and distress. One of the chief causes of the panic of 1893 was that while gold and silver were equal in legal-tender qualities, their relative value was unstable. 1

1 Silver dollars are an unlimited legal tender in the United States. In Great Britain silver is a legal tender for forty shillings. A legal-tender dollar contains 412£

The price of a thing, which is its trade or commercial value, may fluctuate according to demand and supply ; money is also subject to constant oscillations between plenty and scarcity, but it is supposed to stand still while prices of other things move. As a gold dollar is a unit of value, we cannot think of it as worth more or less than a dollar. Its pulsations of commercial value are not registered in itself, but in the prices of staple commodities; increase their supply and they become cheaper; increase the relative quantity of money and they tend to rise in price. If business stagnates, less money is needed; consequently it becomes more abundant, with an easy rate of interest, which encourages enterprise and advancing prices.

Money is also a token of credit for labor per-

grains of standard silver. The faith of the Government is pledged to maintain its current parity with gold. The " free silver" advocates desire that the Government shall coin all the silver offered by any person, at the ratio of sixteen to one with gold.

The Act of June 9th, 1879, provided that the subsidiary silver coin of the United States should be legal tender in all sums not exceeding ten dollars. Five-cent nickel pieces are legal tender to the amount of 25 cents ; onecent pieces to the amount of 4 cents.

CREDIT AND MONEY. 13

formed. Bastiat says, " Money is, in effect, an order to pay to bearer a service equal to that which he has rendered mankind." Burke called gold and silver "the two great recognized species that represent the conventional credit of mankind."

Paper money is merely a promise to pay in metallic money. Coin money is the standard, paper money the instrument. Being more convenient, it is seldom converted into coin unless the holder becomes alarmed.

Perhaps the wealthy actually handle less money than the poorer classes, because they deal chiefly by credits. They exchange the title to money. They deposit checks in bank and draw checks upon it. The principal function of the bank is to transfer credits from one account to another, and it neither receives nor pays out much cash, relatively to the amount of its transactions. It has been said that the bulk of current money is used by those who are too poor or too little known to obtain or to utilize credit.

Proportionally less money is now required to transact the world's vastly increased volume

of business, because it has been so generally superseded by credit, with its implements or machinery. But credit must rest upon some substantial foundation, some absolute, stable measure and representative of value, and to furnish this is, in these days, the chief function of money.

As confidence, so essential to credit, is best assured where personal and property rights are most secure, there is the highest civilization; there also is the largest variety of pursuits; money and credit are most active, and the rate of interest lowest. There, therefore, is the greatest demand for labor and the most abundant production.

Credit is practically the rule in wholesale transactions throughout the world, while money passes chiefly in retail trading, or in payment for labor. It is obvious that the abolition of credit would mean a vastly increased demand for money.

It is to be noted, however, that while time transactions may still maintain their relative proportion in general wholesale business, the credit system is undergoing certain important modifications. During the last few years there

CREDIT AND MONET. 15

has been a great decline in the price of most commodities, and to secure former profits a larger bulk of goods must be handled. Increasing competition adds to the cost of effecting sales, while it also decreases percentages of profit. Under these circumstances manufacturers and merchants find it necessary to eliminate risk as much as possible from their dealings; hence the large discounts offered for cash, and an increasing desire to curtail the length of credits.

Industry, like climate, has its seed-time and harvest, and the consumption of its annual products has its natural progression and its periodic completion. The distribution of these products under the credit system should properly conform to this natural order of production and consumption. So, also, shorter credits should follow improved transportation, because goods pass more quickly from producer to consumer. But, in fact, long credits are given rather as a temptation to the purchaser than as a requirement of natural conditions.

Every debt implies a credit, and all the debts are equal to all the credits. Debts for merchandise are extinguished by selling that merchandise and applying to them the proceeds. Men buy and give promises to pay, they sell and take promises to pay, and their capital or credit enables them to stand in the gap and apply those they take to those they give. It virtually requires all the credits to pay all the debts.

Experience shows that, during a generally prosperous condition of affairs, credit is expanded until a fever of speculation culminates, and debts are incurred by "booming" towns, building railways, and similar projects. But when the mercantile community has been seduced into devoting any considerable proportion of its credits to purposes outside its natural channels, the process of adjustment is deranged and confidence gives way to distrust with its train of evils. Our periodical panics have . in fact been born less of adversity than of the abuse of prosperity.

Again ; it is impossible that the entire debts of a community could be paid at once. The ability to pay depends on the gradual and regular manner in which they mature, and the amounts paid to-day render possible to the

CREDIT AND MONET. 17

business world its payments of to-morrow. Each line of trade establishes for itself its customary terms of credit. If it were the general custom to extend a credit of four months to purchasers in the boot and shoe trade, for instance, and a material quantity of intermediate credits of eight months be granted, a link is broken in the chain.

Bankers complain that " an adequate supply of business paper is yearly becoming more difficult to obtain." Some trades, notably those which deal in staple products, the rubber, the jewelry, and a few other lines, still largely retain the old-fashioned system of settlement by notes ; but merchandise is now chiefly sold on open account. So common has this practice become that the offer of a bunch of small notes, as bills receivable, for discount, is sometimes held by bankers to signify a "needy condition."

At least two-thirds of all the paper bought by banks and capitalists in New York is " single name" paper. It is generally preferred by them to " double name" paper, because the simple and direct promise to pay of a concern whose character and resources are known and approved, is deemed safer than a shared responsibility which may introduce some devious feature of accommodation for both maker and mdorser. 1

It is no longer considered " kiting" for houses in good credit to sell their notes, and with the avails secure cash discounts on purchases. It is even currently said that if, in ordinary years, merchants in some lines of trade cannot float their single name paper and buy for cash, they are " undesirable as customers. " But there are many concerns which enjoy excellent credit in mercantile circles, whose paper cannot be sold to banks and capitalists, because it is not known to the note-brokers.

An enormous volume of paper is kept afloat by some large houses, and they cannot afford to withdraw their names from the street, even though they have no use for the money. Credit unused grows rusty. "It is now," says a

CREDIT AND MONEY. 19

banker, "a prevalent idea among merchants that a concern which does not place its paper in the open market, or use bank facilities, is not in first-class credit." 1

Chartered trust companies and savings banks are forbidden by law to loan on single name paper ; large amounts are, however, passed into loans by some of these institutions, through brokers, with "straw" indorsements. National banks are not thus restricted.

There are some who think that later on, in accordance with specialization, or the division of labor principle, the special and peculiar concern of the manufacturer will be more to fabricate, and of the merchant to distribute, and that the credit of both will increasingly centre in the banker. In other words, it may become still more his function to measure the responsibility of the others and supply them with cash for their dealings. But it is unlikely that any

1 It will be understood that the movement of commercial affairs under exceptional conditions, such as have existed during the present business depression, may not indicate their general drift or tendency. " All signs fail in dry weather. "

system will ever prevail extensively which brings a financial intermediary between the simple and natural credit relations of buyer and seller, unless under some form of guarantee.

Nor is the banker, as a rule, as well qualified by circumstances to estimate the responsibility of an applicant for credit as the man from whom he buys his goods. It is an old saying in the business world that " if you wish to know anything about a bank's customer, don't ask the bank." The merchant's relations with his customer are closer. He knows whether he is a prudent buyer and a good business man, and his ledger account shows the degree of promptness with which he has met his payments and the manner of his dealing. All this knowledge the banker can only obtain at second-hand.

Aside from the fact that there is less risk in granting a short credit than a long one, there is also more profit in the nimble sixpence, or the more frequent turning-over of capital. It is interesting to see the figures; for example, a thousand dollars turned over once each year with accrued profits, for five years, reckoning the profit on each investment or sale at twenty

CEEDIT AND MONEY. 21

per cent, will give an aggregate of $2,488.32. The same sum turned over twice each year, for five years, under the same conditions, will amount to $6,191.74; and three times yearly to $15,407.02; in another year, or in six years, the thousand dollars will, under the same conditions, if turned over three times yearly, aggregate $26,623.33 as against but $8,916.10, if invested but twice a year.

Chapter II. Of Failures And Changes In Business Con- Ditions

On the Canton River numbers of people live in house-boats, or sampans, and raise waterfowl, which are taught, upon a signal, to scurry home to the boat as fast as possible. But some one of the ducks and geese must be the last to get in, and that unfortunate is always punished. And so among business men; some failures will surely occur because it is not in the nature of things that all can succeed. All in trade are liable to casualties and reverses which imply no crime, and which the average sagacity can neither forecast nor avert.

And there appears to be as practical uniformity in the number of business failures, proportioned to the " business population," in a series

of years, as in the social phenomena of mar-

FAILURES AND CHANGES.

riages, births, deaths, suicides, etc., in proportion to the general population. 1

There is much disparity in the proportion of losses by bad debts in the various kinds of business, and it is difficult to obtain facts upon which to base calculations of the average percentage of net loss on the total volume of credit sales of merchandise. Some estimates have placed it as high as T Vo of one per cent, others as low as T 4 o°o of one per cent. Probably it lies somewhere in the mean, but we shall never know how near we are to the truth of the matter until we have reliable data upon which to generalize and reckon. We do know, however, that about one concern in ninety fails annually, on the average, and statistics show also the aggregate liabilities of all failed concerns and their assets.

A French economist reckons that ten out of every hundred who enter business succeed, fifty vegetate, and forty become bankrupt. It has been lately calculated that in the United States

1 The expectation of everywhere discovering regularity in the midst of confusion lias now become an article of faith with the most eminent scientific men.

ninety-five per cent of the business men "fail to succeed." Things in business go chiefly by law, and not by luck ; the fittest only survive, and at least eighty per cent of those who fail, with liabilities exceeding assets, can find in themselves the causes of their failure.

The Mercantile Agency approximates the total number of commercial failures in the United States during the last thirty-eight years, or from 1857 to 1894 inclusive, at 252,524, with liabilities amounting, in round numbers, to $5,- 500,000,000. These constant losses have fallen upon the mercantile community sometimes as noiselessly as snowflakes, and again fitfully, in gusts and swirls. Some idea may perhaps be had of the amount of new business necessary to be transacted in order to retrieve them.

Such an aggregate gives one a feeling of respect for that cautious and thoughtful Dutchman, who sold his goods lower on credit than for cash, in order to cut down his risk from bad debts. These figures show the average liabilities of each failure to be about $20,000.

No data is obtainable to show, even with approximate accuracy, what proportion of this vast sum was finally paid to creditors, or what relation it bears to the total volume of business transacted upon credit during this period. These and many kindred statistical facts, carefully gathered, analyzed, and considered in their relation to currency, tariffs, and other varying political and financial conditions, would certainly be of practical benefit to the business world and useful to public men, as a basis for induction to great and guiding principles.

The history of commercial affairs during the last fifty or sixty years demonstrates that business in the United States has three phases, viz., prosperity, panic, and reorganization, or liquidation and settlement, and that we have been relatively prosperous about three-quarters of the time. There seems to be a rhythmic oscillation toward a period of extreme depression about every tenth or twelfth year.

These facts are suggestive. There are times when a prudent merchant will take warning from the past; seasons when he should be advised that a panic is "due." Again, after a panic, when the liquidation has been radical and complete, he may reasonably expect a period of comparative safety for expanding enterprise.

It is often asserted that, in credit dealings, a poor man who is honest is safer than a richer one whose good faith is not assured. Certainly, men possessing a talent for business can often largely increase the energy and effectiveness of even a small capital and come safely off. Captains like Napoleon have led a handful of soldiers to victory against overmatching battalions, and many a poor man with superior qualities has struggled against great odds to the very front rank of fortune and credit; and many more will do so.

But Mercantile Agency returns show that, in recent years, downright dishonesty is a less important factor in mercantile losses than " lack of capital and capacity," which are held to account for about " three-fifths of the total number of business failures, and three-quarters of the aggregate liabilities." Too many are like Artemus Ward when he " tried to do too much and did it."

Therefore simple probity, which means proved honesty, while a great strengthener of confidence, cannot be generally accepted as a sufficient basis for extensive credit. It is evident that capital and capacity should also be cardinal considerations.

A man with tangible means has a hostage in sight. His property is, in a manner, collateral security that he can and must fulfil his engagements. The first steps to wealth are difficult ; its accumulation implies sagacity, experience, and thrift, or the valuable habit of saving, and its owner usually becomes more cautious and conservative than one who has no capital to lose. Cynical observers say that men in comfortable circumstances are also less liable to do crooked things than those who are pinched for money, because they are less tempted.

Those who with a large capital do an unsafely large business are proportionately less numerous than those who carry too much sail on a limited, or small, capital, and they are apt to be in a relatively better position to secure quicker and stronger support in time of need than the smaller concerns. Changed and changing business conditions render it constantly more difficult to succeed, without sufficient capital and business aptitude, and they tend also to limit losses by hastening, as never before, the almost inevitable catastrophe.

Steam and electricity have changed the relations of men. 1 The range of affairs to be overseen is immensely widened. We are now in quick touch with all the world, and every im-

1 It is stated as a significant instance of economic progress that the works at Niagara Falls will, when completed, furnish and distribute as electricity "an amount of power available for manufacturing purposes, equalling, if not exceeding, the aggregate amount of steam and water power in use in all industries in the United States as reported by the census of 1880. " The passing age of steam bequeathes to us the coming age of electricity, and probably the dreams of to-day will be the substantial realities of to-morrow.

In a recent issue of The North American Review, the English statistician and political economist, Professor Mulhall, says : " If we take a survey of mankind in ancient or modern times as regards the physical, mechanical and intellectual force of nations, we find nothing to compare with the United States in this present year of 1895. At the same time we see that the wealth of the American people surpasses that of any other nation, past or present. . . . The United States in 1895 possesses by far the greatest productive power in the world ; ihis power has more than trebled since 1860 ; the intellectual progress of the nation is attended to in a more liberal manner than in Europe, and the accumulation of wealth averages $7,000,000 daily."