one else who will pay them a return on their ownership. The savings bank decides to lend the $3,000 to Farmer A, and does so, charging remuneration for its service in investigating and making the loan. X, Y, and Z have now become indirect creditors of the farmer upon, let us say, a fiveyear mortgage. The farmer with his $3,000 in hand uses the funds in employing labor-that is to say, he gives the "money" to laborers, who use it in supporting themselves. Viewed from another standpoint this merely means that the laborers have received the money and have used it in buying clothing, food, etc., so that they-and not X, Y, and Zhave enjoyed and used up these consumable goods. Their labor has resulted in improving the farm, and as a result the farmer is able to produce a larger crop yield. A part of this crop yield he pays to X, Y, and Z as "interest." In effect, then, the long-term credit function is a process of converting immediate titles to goods into productive machinery or income-yielding opportunities.

IX. COMMERCIAL AND INVESTMENT CREDIT DIFFERENTIATED.

A difference between this kind of credit operation on one hand and commercial credit on the other may be found in the fact that, whereas reimbursement or liquidation of commercial credit comes from the interchange of existing goods, or goods which are on the point of being rendered consumable, investment credit may eventually be liquidated as a result of savings made through the increase of productive power. Both interest and principal will be repaid to those who have advanced the current funds only in case of a real increase in wealth resulting from the productive operation. It is evident from this analysis that the operations which are covered by the term investment banking rest upon a very different basis from that which is usually included under the term commercial credit. The function of the investment bank or credit institution is that of accumulating units of savings or current funds whose owners are willing to allow them to be converted into investments-productive or income-yielding opportunities. The difference between such credit and that furnished by the commercial

bank is ordinarily spoken of as being one of time but, as has already been frequently indicated the essential difference is not that of time but rather of the use that is made of time. It is a difference in the character of the enterprise that is undertaken. The characteristic enterprise undertaken with the use of commercial credit is that of bringing together consumers and producers, while the characteristic enterprise undertaken by the investment institution is that of bringing together producers and those who desire income. rather than immediate enjoyment of capital. This is a difference which, as will be seen, involves broad and fundamental differences of method in banking and far-reaching differences in canons of judgment as to banking soundness or liquidity.

CHAPTER III

CREDIT INSTRUMENTS

CREDIT, in the sense in which it has already been defined as a means of exchanging goods, has to take some definite form. Although credit itself is intangible, in actual practice it assumes a distinct shape. The forms in which credit is represented in ordinary business life—or from another point of view, the forms of credit, or still in other words, tangible evidence of credit-are what are known as credit instruments. Credit instruments may be broadly defined as evidence of obligations between the individuals who are parties to them. They present a variety of aspects, and since they have been the product of gradual business development, they are naturally different both in form and in legal status.

I. COMMERCIAL CREDIT INSTRUMENTS.

1. Open Book-Account.

The most elementary type of credit instrument may be said to be the open book-account. A sells goods to B and debits him with the value of these goods or, in the current phrase, "charges" them to him. A necessarily carries some kind of account books which, in the event of necessity, can be produced and which contain entries to show the amount of goods he has transferred to B. Such books are records having, of course, only the validity which they acquire from the fact that they are entries made in good faith at the time of the transaction to which they refer. Ordinarily they present no evidence of having been acknowledged by B. Nevertheless, they are in a sense a credit instrumentthat is to say, they are a means of recording or measur

ing credit, or of furnishing evidence that it has been extended. The idea becomes more fully developed when we conceive of both A and B as keeping records-each perhaps purchasing from the other and their records, therefore, agreeing substantially with regard to the amount of goods given and received. If at the end of a fiscal period they exchange receipted statements, these are evidently elementary credit instruments which present, on their face, evidence that the transaction indicated by the charges to account has been completed through the transfer of an equal amount of goods or through some other form of credit. Such receipted statements are a derivative of the books of record of the concern, and may be regarded in an even fuller sense than the former as being credit instruments.

2. Promissory Note.

Another step in the direction of the credit instrument is taken when the recipient or buyer of the goods gives to the seller an acknowledgment that they have been received. This might conceivably be nothing more than a receipt for the goods-a signed statement that he had received a given number of bushels of wheat or yards of cloth of a certain kind. Examples of this sort are seen in the warehouse receipt which plays so important and growing a part in business to-day. A cotton warehouse receipt, for example, is merely the acknowledgment of the warehouse operator that he has received from his customer a given amount of cotton of a specified grade and is holding it for him. A still further step is taken when the receipt specifies the value of the goods-B, for example, certifying to the receipt of a given number of bushels of wheat at $1 per bushel. Since in this instance B has acknowledged receiving goods of a specified value, it is inferred that he has obligated himself to settle for or liquidate the obligation in an equal amount. A final step may be taken when B does not specify the kind or character of the goods received, but merely acknowledges himself to be indebted in a specified amount for "value received." In this case a full-fledged

"credit instrument" has been worked out. It is what is ordinarily termed a note and constitutes a legal obligation on the part of B to pay A a given number of dollars; that is to say, to return value to B which is represented by a given sum in dollars-although A may, if he choose, exact an actual settlement in money.

3. Bill of Exchange.

Exactly the same result might be reached by a somewhat different route, giving rise to a rather different type of credit instrument. If A, when he sent the goods to B, had drawn upon the latter by issuing an order to him to pay a specified sum either to A himself or to some one else at a given date, this order would have been called a draft or bill of exchange.

Bills of exchange may be classified according to the parties by and on whom drawn or the time when payable. If drawn by and on a business man, firm, or corporation they are called trade bills; and if by and on a banking institution they are described as bankers' bills. An instrument drawn by a business man on a banker is technically known as a commercial bill. Bills are termed sight drafts if payment can be demanded on presentation, and time bills if they mature on a specified future date. The term "acceptance" may have several meanings and therefore requires explanation. In the first place it may refer to the act of the drawee in writing across the face of the instrument a formal acknowledgment of the order addressed to him by the drawer, and an agreement to pay the obligation at its maturity. The term acceptance is also applied to a time bill of exchange which has thus been duly accepted. This use of the expression "acceptance" is found in commercial practice, but is not recognized in law. An acceptance in commercial usage implies that the instrument is drawn to finance an actual sale of goods. Thus a trade acceptance should be drawn by a seller of merchandise on the purchaser of the goods.

In a more restricted sense, acceptance is the expression