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Home -> Orville Marcellus Powers -> Commerce and Finance -> Chapter XXXVI

Commerce and Finance - Chapter XXXVI

1. Chapter I

2. Chapter II

3. Chapter III

4. Chapter IV

5. Chapter V

6. Chapter VI

7. Chapter VII

8. Chapter VIII

9. Chapter IX

10. Chapter X

11. Chapter XI

12. Chapter XII

13. Chapter XIII

14. Chapter XIV

15. Chapter XV

16. Chapter XVI

17. Chapter XVII

18. Chapter XVIII

19. Chapter XIX

20. Chapter XX

21. Chapter XXI

22. Chapter XXII

23. Chapter XXIII

24. Chapter XXIV

25. Chapter XXV

26. Chapter XXVI

27. Chapter XXVII

28. Chapter XXVIII

29. Chapter XXIX

30. Chapter XXX

31. Chapter XXXI

32. Chapter XXXII

33. Chapter XXXIII

34. Chapter XXXIV

35. Chapter XXXV

36. Chapter XXXVI

37. Chapter XXXVII

38. Chapter XXXVIII

39. Chapter XXXIX

40. Chapter XL

41. Chapter XLI

42. Chapter XLII

43. Chapter XLIII

44. Chapter XLIV

45. Chapter XLV

46. Chapter XLVI

47. Chapter XLVII

48. Chapter XLVIII

49. Chapter XLVIX

50. Chapter L

51. Chapter LI

52. Chapter LII



The wonderful commercial progress and development of this
country during the past century has astonished the old world and
amazed even ourselves. In looking about for the moving causes
which have produced this great result, we must ascribe a large
part to our credit system, extending as it does, to every nook and
corner of the land. In no country in the world is credit so easily
obtained and so extensively used as in the United States. Capital
goes out freely and willingly and takes its chances in all manner
of enterprises, so long as they offer fair prospects of returns on
the investment. Thus the American people are educated in the
use of credit, and have learned to depend upon it, until it has
become closely interwoven with our commercial
system. In European countries credit is more or
less restricted. In Italy and Spain little credit is
extended, and accordingly we see a languishing commerce. In
Western Europe it is more widely used and commerce shows
corresponding vigor and activity. The use of credit is not alone
confined to the purchase or sale of goods on time or borrowing
or lending money, but extends to innumerable acts of trust and
confidence by which the machinery of the business world is
kept in successful operation. A borrows money at his bank
and the amount is placed to his credit. He owes B and gives a
check in payment. The check is deposited in B's bank and
passes through the clearing house, where it is offset by some
other check of like amount, and as a result the credit is trans-


ferred from the account of A to that of B. No money or actual
cash is handled in the transaction, but merely a transfer of
credit. It is one incident in our credit system. Our clearing
houses, stock exchanges and produce markets are all conducted
on the same principle one debt being set off against another,
and a small percentage of the transaction actually liquidated in
cash. All of our large corporations and their gigantic oper-
ations of both a public and private character are possible only
through the medium of our credit system. Our whole com-
mercial fabric rests upon it.

Since our credit system forms such an important factor in
the problem of business management, it becomes necessary to
understand and carefully use it. Losses are imperative under a
credit system, and the aim must be to more than recoup for the
loss by an increased volume of business. Losses in business
are largely the result of carelessness, inexperience and a lack
of proper system and discipline on the part of business men, or
a lack of knowledge and judgment in giving credit.
^ n experienced credit man is responsible for the
assertion that "we have only to take the average
business house for the last twenty years and figure up the
losses sustained by it and compare the sum total, plus com-
pound interest, with its present financial status, and we shall
find that it has lost more than the capital accumulated during
the period."

A lack of a prompt and effective credit department where col-
lections are looked after carefully and thoroughly, is sure to re-
sult in a stream of losses to the house, with possible failure in
the end. So extensive has the use of credit become that large
commercial houses have legal departments in connection with
their credit departments kept busy with the collection of ac-
counts of delinquent customers. Often the most energetic action
is necessary to obtain assets in advance of the sheriff or assignee.
The period of time covered by this table includes the year of
panic, 1893, and the depression which followed, as well as the
years of prosperity at the latter part of the table, and may thus
be taken as fairly representative of the average working of our
credit system. Out of 1,154,634 mercantile and manufacturing
firms, corporations and individuals doing business during the
period, as shown by the table, 12,440 failed, or one in every
ninety-five. Innumerable petty failures consisting of those
whose capital is too small for a rating, are not included in these
figures. The average total liabilities of the concerns failing are,
in round numbers, $166,000,000. This is not a total loss, as a
portion will eventually be paid. We may safely assume that
not more than thirty per cent, will be paid, leaving a net loss
to creditors of about $116,000,000 in each year. This makes
no account of the injury to trade consequent upon
having such a large amount of assets tied up in
litigation or pending settlement. Since thirty per
cent, of the liabilities are realized in cash, after the expenses
of conversion of the assets, shrinkage, etc., it follows that the


assets of the firms whose failures amount to $166,000,000,
as above stated, probably amounted to one-half or two-thirds the
liabilities, or, say, eighty to one hundred millions. The per-
centage of loss can only be ascertained by knowing the amount
of business done. Business houses usually compute the rate of
loss upon the volume of business transacted and not upon the
amount of their capital, and since the capital of a concern is
usually turned over several times in a year, the volume of busi-
ness may be four or five times the capital invested. Without
knowing the volume of business done, or the capital invested in
mercantile and manufacturing enterprises, it is, therefore, im-
possible to arrive at the percentage of losses under our credit
system, but it is apparent that, beneficial as the system is, we
are doing a large amount of business not only for no profit, but
at a loss of capital. It is true that within certain limits the
merchant adds his percentage of losses to his selling prices,
and thus the customer who pays makes good the loss occasioned
by those who do not pay, but competition is constantly tending
to keep prices uniform, and the merchant who makes the least
of bad debts comes the nearest to a successful career, provided
the volume of his business is not restricted by too much caution.
To what extent credit may be extended to a buyer in any
given case is a problem depending upon a combination of
factors. Outside of the capital invested, assets and liabilities,
is the character of the individual, the conditions surrounding
his enterprise which make it a success or failure, his experience,
etc., all of which must be carefully weighed by the credit man
before arriving at a decision. Mr. P. E. Earling, in his book
entitled "Whom to Trust," says: "On the supposition, justified

by experience, that the assets of a mercantile firm,
Limit of credit in the event of foreclosure or assignee's sale, do

not bring over 65 per cent., the limit of credit, to
insure us dollar for dollar, must be fixed at 65 per cent, of the
inventory of the assets. In the case we have assumed, $10,000


assets would pay liabilities of $6,500, and this amount must be
established as the limit, and in all cases this relative proportion
should be maintained."

The nature of the assets should be considered, however, as
this may vary the amount of shrinkage greatly. If the assets
consist largely of staple merchandise and secured notes or ac-
counts, the shrinkage may be comparatively small, especially if
the market for such goods or products is an advancing one.
On the other hand, old goods and stale accounts are subject to a
fearful shrinkage when an attempt is made to convert them into

Written and signed statements of assets and liabilities are
now exacted of customers applying for any considerable amount
of credit, by wholesale houses and banks, thus placing the
facts in such form that in cases of misrepresentation the person
signing the statement may be punished for fraud in "obtaining
goods by false pretenses." Buyers may intend to be honest in
their statements, but are frequently optimistic and inclined to
overestimate their resources and ability to pay. The written
statement tends to reduce the problem of "facts and figures,"
and dispel illusions. It is also customary to re-
statements quest references in order to ascertain how a firm
stands in the estimation of others, but these are
of much or little value, according to the motive of the writers.
A jealous desire to injure a rival may cause an unfavorable
report, or a disinclination to injure a friend may be the motive
for a half favorable reply concerning an undesirable customer.
Banks are constantly asked concerning the financial standing of
their customers, but it should be remembered that a man often
keeps faith with his banker when he stands poorly elsewhere,
and thus the banker's opinion may not be accurate.

Commercial agencies greatly facilitate credits by furnishing
information concerning the financial status of business firms
and individuals. This information is collected in a variety of


ways, by special reporters, lawyers and others, and supplied
confidentially to subscribers. In this era of extensive and varied
uses of the credit system, a systematic method of collecting
information concerning firms and furnishing it to those who are
properly entitled to receive it, is of immense advantage. In
addition to quarterly and semi-annually revised reference books
the mercantile agencies undertake to furnish their
subscribers with special reports, consisting of de-
tailed statements of facts concerning the financial
status of every dealer of any consequence in the country. The
mercantile agency also takes cognizance of mortgages, judg-
ments and transfers of property upon the county records, and
preserves the facts concerning them upon the agency's records.
They endeavor to get "Signed Statements" of assets and liabili-
ties from the debtor class whenever possible, and thus a mer-
cantile report, made up from a variety of sources, is of great
advantage to every dispenser of credit, especially as the courts
have held that under certain circumstances a statement fur-
nished a mercantile agency is as binding on the maker as if
furnished a creditor direct. The reliability of these reports
cannot always be depended upon strictly, but the prosperity
of the companies engaged in that field of research is an evidence
that the public has confidence in them.

The facts gathered by the mercantile agencies* are not pub-
lic property, but are furnished under restrictions to sub-
scribers to the agency only. It has been decided by the courts
that the agencies are not responsible for inaccuracies of their
statements, nor can they be prosecuted for libel on account of
furnishing facts which may prove damaging to the business
standing of a dealer. These institutions aim to verify all im-
portant facts before sending them out, and since no malice can
be shown, in case of error, there is little room for litigation. The

*The principal mercantile agencies are R. G. Dun & Co. and Bradstreet's,
although there are a number of lesser importance.


commercial agency is ever on the alert for every item of informa-
tion which would seriously affect in an injurious way, the credit

or financial standing of a dealer. The recording of
Report^' a chattel mortgage, confession of a judgment,

sale or other transfer of property, are noted,
and in the case of an absconding debtor his whereabouts
is frequently disclosed by the reporter or correspondent of the
mercantile agency.

In addition to the mercantile agencies we have credit asso-
ciations in many of the different lines of trade, in which a large
number of the firms and dealers are banded together for mutual
protection. A bureau is created and the information required
by members obtained by a clerk employed by the bureau. The
main object of these associations is mutual aid in the matter of

credits. Buyers who fail to meet their bills are
Associations prevented from obtaining credit from other houses,

by having their past record brought to the atten-
tion of all members of the association, and thus by a variety of
means, business firms aim to guard the expansion of credit, and
permit its proper and conservative use.

The laws with reference to the collection of debts in dif-
ferent localities must also be considered when extending credit.
In some states the laws are framed in a manner decidedly favor-
able to the debtor class. The exemptions are large enough to
shield several thousand dollars worth of property, and the "laws

delays" are more than necessarily numerous. Es-
" pecially in the western frontier states where it is

perhaps intended to attract settlers by favorable
laws, thus giving the pioneer an advantage to offset the hard-
ships which he must undergo, in opening up a new region, do
we find the laws most favorable to the debtor. In the eastern
and more populous states the laws are more equitable and judg-
ment and execution can be more quickly obtained. Every suc-
cessful credit man must be conversant to a limited extent, at
least, with the laws of the states in which he does business.


In extending credit to a co-partnership some factors enter
into the problem which do not appear in the case of a single
individual. In order that a partnership may be successful in
business it is essential that the different members of the firm
should be harmonious in their ideas and actions. Discord is
sure to lead to trouble and probable failure, or
Partnership dissolution. "A house divided against itself can-
not stand." The credit of an inharmonious co-
partnership must necessarily be rated low, and the credit man
must decide whether the partnership is one which combines the
elements of success, and whether the firm is stronger or weaker
than its individual members. It is an old adage in business life
that one would do well to "avoid unfortunate men in your busi-
ness affairs." If a firm is composed of several partners one of
whom has hitherto been unsuccessful it diminishes the credit of
the firm. We may sympathize with "an unfortunate man" but
hesitate to credit him.

Corporations have their advantages and their disadvantages.
One of the latter is met with in obtaining credit. For old and
well known houses whose credit is established, to incorporate
in order to facilitate management of the business or the transfer
of interests therein, is perfectly proper and wise, but in the case
of new enterprises, the corporation labors under
corporations a decided disadvantage. The partners of a firm are
severally liable for all debts of the firm to the
fullest extent. They are bound during a lifetime, or until re-
leased by the statute of limitations, to pay the firm debts, but
with a corporation, each shareholder is liable only to the amount
of his stock.* Failure of the company cannot involve him beyond
this. It is this feature, the non-liability of the individual mem-

*Each shareholder is liable only to the amount of the par value of his
stock, in most of the states, and cannot be proceeded against for corporate
liabilities except in case the shares have not been fully paid, in which
event the unpaid portion is collectible at law. In Ohio and a few other
states shareholder are liable to twice the par value of their stock.


bers of the company, which makes the credit rating of a cor-
poration lower than a partnership under the same conditions.
There is no individual character in a corporation upon which
credit may be based. It has no moral status. It is a "soulless"
creature of the law, limited and bound by legal enactments.
As a consequence it is entitled to a lower credit rating than
a partnership. Banks and credit men frequently require the
personal signature of a responsible officer of the company as a
guaranty of its obligations.

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