21
THE CHICAGO BANKER
August 22, jpo5]
time loans to solvent borrows, has steadily weakened. Congress even has recognized its soundness in a niggardly way, but the principle has been established by law, and when its importance is fully appreciated by the people as it will be in time, the use of such notes will be extended, the tax reduced or removed altogether. When this is done the worst of our currency problems will have been solved. If any one still doubts that bank notes secured by assets such as I have mentioned, when passed upon by a body of experienced and independent bankers, would be sound, it would seem that recent experience affords abundant proof.
All sorts of miscellaneous loans and securities were passed upon by clearing house committees, accepted and deposited as security for clearing house loans during the panic. Interested bankers passed upon such securities to the extent of more than $248,000,000, and thus far no one has heard of a default or a loss, whether such loans were made to settle clearing house balances or were used for the issuance of clearing house checks. These loans were made between October 26, 1907, and January 30, 1908. Practically all except a few checks held as souvenirs were retired by April 1st. Considering this experience it would not seem that any argument is necessary to prove the soundness of such assets as a basis for credit, whether that credit be in the form of a clearing house loan or a note issue to circulate as money.
Finally, in this connection there is one point further I wish to make concerning the soundness of commercial paper, and 1 desire to emphasize it with all the weight and force of its truth. This country is sound and its business industries and institutions are sound. This has been tested and proved in one of the sharpest panics we have ever experienced. The loans of all the banks of the whole country are no better and no worse than the conditions of the whole country itself, for who is it that holds the indebtedness of the business world but the banks? Do not their assets consist of these obligations? Now and again individual credits prove to be bad and always will. Now and again every bank will sustain a loss, but on the whole the average percentage of bad mercantile credits is exceedingly small and the overwhelming majority of such credits is not only good but excellent.
V
Window Gardening an Art
With the great development going on in flat and apartment building in all cities, there is an increasing army of lovers of plant life who necessarily can not have either a front or a back yard to beautify. The Bobbs-Merrill Publishing Co. of Indianapolis, not unmindful of their interests, have published a beautifully illustrated book by H. B. Dorner on “Window Gardening,” to sell at one dollar.
The chapters cover a wide range. “Window Gardening in General,” “Containers--Earthen Pots,” etc., "Potting,” “Soils,’’ “Watering,” “Fertilizers,” “Light, Heat and Ventilation,” “Insect Enemies,” are some of the headings which indicate the comprehensiveness of this little treatise.
The author’s qualifications for his work are vouched for by Prof. Stanley Coulter of Purdue University, who says:	“The author, Mr.
Herman B. Dorner. has especial fitness for the work assigned him, not only because of a thorough scientific training, but also because of years of practical experience in the handling of plants in an establishment of wide reputation for its successful methods in plant breeding and culture. It will be seen that the book appeals as strongly to those growing plants in the home or in small conservatories as to teachers, and to all such it is also commended with confidence as of high practical value.”
guides, and even they are not always trustworthy. Statements offered by brokers as a rule are made at a date most opportune for the borrower, and not infrequently after a good deal of dressing up for the occasion. On the whole it is safe to say that these statements represent the best showing the borrower honestly can make at any season of the year. In the case of very large and habitual borrowers the figures nearly always are misleading as to the average position, and are wholly unreliable as to the exact condition at less favorable periods. Banks have it in their power to procure facts by co-operation and to greatly diminish the dangers of loss; that they do not exercise this power for their own protection and in the interest of good banking is indefensible.
The committee was continued with several additional members. The subject will be brought to the attention of the bankers in the leading cities and it is hoped some practical way may be found to.safeguard these credits, even if it be no more than a general movement to procure annual audits and appraisals by certified accountants and the adoption of standard forms of statements to be made at shorter intervals than is now the common practice. Whatever these effects at reform may amount to, every bank which is a large buyer of com-mereial ״paper for itself or for its correspondents must work out through experience a system satisfactory to itself for determining credits.
I wish to make clear the fact that although some of the abuses complained of may be and probably are as much the fault of bankers who buy the paper as of the brokers who sell iff, that the buying is done by banks of necessity for'the purpose of preparing for the annual demand when money must go out; and to invest the funds quickly and safely again when returned after a few months from the country. It will be said that if this is true the paper handled by brokers supplies a necessity and that the rates of interest should accordingly be as low as the banks in competition for it are willing to accept. All of this is true; but it does not remove the easy opportunity thus afforded for over-borrowing. It also tends to aggravate the general disarrangement and discomfort to the whole community growing out of abnormally low rates in one season when funds are being put out, and the high rates prevailing at another season when the loans are paid.
In a country like ours whose products create natural seasonal demands for enormous amounts of ready cash, it would seem that our Yankee ingenuity and native inventiveness would years ago have discovered what has been known in other parts of the world, that the real secret of successful and prosperous trade is to make the volume of good, safe, sound money correspond to the volume of trade and not endeavor to force trade to adjust itself to the monej' supply. If we had a monetary system that could give us such a supply of currency,—and there is no reason why we should not have it,—we should witness not only a cessation of periodical panics, but the range of peaks and valleys in interest rates would disappear.
It must be clear to every one that if banks could utilize their sound credits in the form of commercial paper and freely issue notes against it, properly protected by reserves of gold, there would be no occasion for tight money in the fall or in any other season of the year; no cause for any apprehension about scarcity of notes, nor any reason to upset legitimate business by calling existing loans, and restricting new ones. After our recent and impressive object lessons in credit and its uses when supplied by competent authority, the opposition to currency secured by the good, live current assets of the banks in the way of short
How to Value Commercial Paper in Loans
(Continued from page 7) of note brokers. The only practical means of procuring such co-operation, if any exists at all, is through the clearing houses. 1 he 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, against 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 brokers would lend support to this movement. The audits should be made and certified by firms of chartered accountants of knowing skill and ability, working under the general supervision and direction of clearing house committees. The reports should cover in detail every fact necessary or desirable in granting credit, including appraisal and valuation of assets by experts. While it may not be advisable to require complete audits oftener than once a year, the annual audits should be supplemented at least semiannually by a report signed by officers of the company, showing whether any operations have meanwhile been undertaken that would unfavorably affect its credit, such as the undue inflation of debt or the conversion of liquid assets into fixed investments. Such reports, supported by a simple system of registering all notes sold by brokers, would constitute valuable means of protecting note holders and do much to correct bad methods, and to eliminate objectionable paper. Solvent borrowers having nothing to conceal should not object to these manifestly proper methods of protecting the holders of their paper. Neither would the advantages be all on the lender’s side, for compliance with reasonable regulations would justly strengthen confidence in the paper, create a demand for it and in time procure for registered notes the benefit of lower rates. The whole tendency of modern business thought is towards publicity of the affairs of corporations and others who are debtors to the public. W ithout exposing in any manner the relations of an institution with its own patrons, or giving publicity to private affairs, the interested public is entitled to know the quality and amount of the assets and the nature and extent of the liabilities of any concern inviting and enjoying public confidence. In like manner any borrower enjoying the advantages of the public market for his paper, however good or solvent he may be, has no right to refuse, nor any reason to complain of a demand from investors for frequent verified statements of his assets and liabilities by capable and disinterested persons. Probably not in any other business so much as in banking, and in no department of any business so much as in the credit department, does success depend upon an indefinable faculty of mind which we may call credit instinct. This* faculty,*where it exists, may by cultivation be developed so as to become keenly alert and efficient, but the faculty cannot be created by individual effort. So in the end the granting of credits involves the use of a talent in a manner which the possessor himself often could neither explain nor defend, and which those who do not possess may only approximate in results by patient, cautious and intelligent study, and by the processes of analysis, elimination and comparison. For such purposes financial statements certified by competent and disinterested authorities are the most reliable