[;Volume XXV
THE CHICAGO BANKER
12
SWEDISH AMERICAN NATIONAL BANK
MINNEAPOLIS
CAPITAL $500,000 SURPLUS AND PROFITS $400,000 DEPOSITS $3,300,000
N. 0. WERNER, President C. S. HULBERT, Vice-Prest. J. A. LATTA, Vice-Prest. E. L. MATTSON, Cashier	A. V. OSTROM, Asst. Cashier
Write us regarding your Northwestern Collections
CHICAGO SAVINGS BANK AND TRUST COMPANY
Chicago Savings Bank Bldg., State and Madison Sts., CHICAGO, ILLINOIS
Facilities meeting every requirement of the most discriminating bankers. Dormant accounts solicited on which interest is paid at a liberal rate. Interest paid by check the last day of the month.
LUCIUS TETER, Prest. E. P. BAILEY, Vice-Prest. CHARLES H. RE QUA, Vice-Prest. WILLIAM RUPP,Jr., Cashier
W. M. RICHARDS, Asst. Cashier LEVERETT THOMPSON, Secy.
Capital, $800,000.00 Surplus and Undivided Profits $546,299.00
Assets Over Seven Million Dollars
OLD NATIONAL BANK
Grand Rapids, Mich.
Largest Bank in Western Michigan
Solicits Bankers’ Accounts and Collections
OFFICERS M. BARNETT, President
W. BARNHART, Vice-Prest.
HARVEY J. HOLLISTER, Vice-Prest. CLAY H. HOLLISTER, Cashier
banker can subscribe to this doctrine and our efforts should be directed to the end that a system of credits be established among banks which shall enable us to determine in advance with the greatest possible degree of certainty when a credit constitutes a proper commercial risk; bearing always in mind that every credit is a risk. The whole problem is whether this can be done in a practical way. It may not be possible to accomplish it fully, but perhaps the movement may be assisted through some form of effective co-operation, involving ledger experiences and the record both with banks and in the trade as to promptness of settlements by borrowers. Admittedly the present system is not as thorough as it can be made nor nearly as much so as it should be.
Some time ago the executive council of the American Bankers Association, prompted by a desire to serve the interests of its members, and to extend the usefulness of the association, appointed a committee to consider the practicability of the establishment of a credit bureau to be operated by the association, for the purpose of collecting and disseminating information to the members concerning the credit standing and financial responsibility of all concerns whose paper is sold through note brokers. The committee gave careful consideration to the subject and came to the unanimous conclusion that the establishment of such a bureau would be a costly experiment and might be a serious mistake. After reviewing at length the abuses which have been briefly mentioned, the committee in its report to the executive council among other things said :
“The correction of abuses, and the proper safeguarding of credit as far as it can be done at all in the purchase of paper, appears to lie in co-operation between the banks and the best of the note brokers. The only practical means of procuring such co-operation, if any exists at all, is through the clearing houses. The real difficulty in gauging credits is to get at the truth and the whole truth. This is nearly always inaccessible, but even when attained the credit man is not often in position to know absolutely that the information before him is the whole truth. Aside from the relatively few cases of barefaced fraud and dishonesty, against the happening of which there can be no protection, severe losses are nearly always sustained because of misleading statements and of incomplete knowledge of the facts. It seems clear, therefore, that the greatest measure of protection lies in bringing about through the co-operation of clearing house banks a system of annual audits of the books and accounts of all concerns selling paper through note brokers. Your committee is encouraged to believe that the strong and reputable houses of note brok-(Continued on page 20)
competition among banks for loans, and the note broker is all but out of an occupation ,־ but when money is easy the broker, as a dispenser of credit, is in strenuous conflict with the banks, and he becomes an active and expensive rival. The competition of brokers among themselves for the paper of good concerns constitutes to the bank a two-edged sword, for not only are interest rates depressed on brokers’ paper, but the recession in rates necessarily becomes effective on the whole body of loans carried by a bank. It is argued that this depression is but the natural result of supply and demand. Nothing could be further from the truth. It is part and parcel of that ruinous form of commercial piracy which we witnessed twenty years ago in destructive railway rate wars, and is far more harmful in its results. The mere matter of depressing interest rates is not necessarily an economic evil; because while it affects unfavorably the earning power of banks it does on the other hand benefit the borrowers, and thus the loss is offset. But the chief danger lies in the fact that borrowers are induced to expand credits beyond the point of safety, while undue depression induces and creates speculation. The enormous business which may be done by brokers operating with small capital, the freedom from personal liability and the need for but limited training, are in a large measure chargeable with the growth and extension of these abuses and others which have become incident to the business. That banks which are thus keenly pressed by their rivals are made the agents willingly or unwillingly for establishing a market and selling the brokers’ notes, is one of the anomalies of the financial world, but it is one which has grown up and become a part of the business and we shall be obliged to accept it until ways and means are found to correct it.
It is not my purpose here to discuss the note broker or his business, except as it becomes necessary in relation to commercial paper. Whether banks or brokers are more responsible for ex-isting abuses may be open to question but it is a fact that abuses exist and it is to be hoped that they will be cured in time and that a proper solution will be found ultimately for all unsound and harmful practices. To this end responsible brokers no doubt will work as earnestly as the banks themselves for the irre-sponsibles work as much mischief to the business of the conservative and legitimate broker as they do to the banks. In the meantime our chief concern of banks and the better class of brokers should he to improve and perfect the methods upon which credits are granted in the purchase of commercial paper and to minimize the risks involved. The only safe foundation for a system of credit is soundness, and the final test of soundness is redemption. Every
corporations, if there are endorsers on the notes, usually they are the officers or other members of the company. Commercial paper recently has been defined by federal statute as follows :
“Commercial paper shall be held to include only notes representing actual commercial transactions, which shall bear the names of at least two responsible parties and have not exceeding four months to run.”
This is a good definition and a strict interpretation would mean only the notes of a firm or company engaged in trade, given to another such concern in the settlement of trade obligations. In European countries this is what commercial paper means, but it is commonly known among banks and brokers in this country as “Trade Paper.” When endorsed by the payee and discounted at bank such notes bear the names of two parties. Where both are responsible such paper takes high rank in the commercial world, and is looked upon by banks everywhere as the safest and most liquid of credit risks. Unfortunately the custom among our merchants does not render necessary or even possible the making of such paper in all lines of trade a common practice.
The ease with which loans are obtainable in normal times by responsible houses on their own direct, unsecured obligations, through the agency of note brokers, has nearly done away with trade paper of the highest grade. All good concerns and many even in second or third grade credit are enabled to borrow all the funds required to take advantage of trade discounts, and enough more to meet all other bills at maturity, so there is little or no reason to settle trade accounts by notes. So true is this that under ordinary circumstances it is considered rather an evidence of weakness when it is done. No house can habitually do so without ultimate damage to its credit. The business of the note broker indirectly supplying capital when needed by solvent borrowers for productive use in trade is comparatively a modern occupation, and it is highly beneficial if confined within legitimate and prudent limits. In this country the business has developed enormously within two or three decades and along lines that were unthought of a few years ago and which then would have been deemed impossible and extremely hazardous. The system as we know it is not in common practice anywhere else in the world. It has nearly revolutionized the established customs of borrowers, as well as of lenders, and has entailed abuses that are numerous and serious.
In the matter of loans the banks are no longer the closest competitors of one another. When money is in active demand, and interest rates are high there is no occasion for close