share in the distribution of profits, while preferred stock is either cumulative or non-cumulative, participating or nonparticipating as to dividends. Common stock is always uniform in nature.

A stock certificate is not exactly a credit instrument. The holder is not a creditor of the corporation but really a part owner, and therefore, in the event of insolvency, possesses no claim upon assets, but in fact he may even under circumstances be assessed for losses in proportion to the amount of his stock holdings.

2. The Bond.

A bond in every respect is an instrument of credit. It possesses practically all the features of a time note, for it is a promise by the maker to pay interest and principal at a designated time in the future. It is a promise written in a formal manner, for it is always under seal. As the bond. may have a maturity as long as one hundred years, the maker is usually a government or a corporation, for neither an individual nor a partnership could have this expectancy of life. As the amount of the loan may aggregate millions of dollars it is obviously impossible to borrow the entire sum from one person, and so it is divided into smaller denominations, usually of $1,000, $500, and $100 for each bond. It also bears a fixed rate of interest which is generally payable semi-annually.

The bond, like any other promissory note, may be either secured or unsecured. The first type is secured by a mortgage in which the corporation conveys property to a trustee, who may take steps to sell it for the benefit of bondholders if the interest or principal is not paid (see page 335). The corporation may thus pledge property such as terminals, factories, or stocks and bonds. The unsecured (or, as it is usually called, the debenture bond) is based upon no tangible assets but rests merely upon the general credit standing of the corporation. In the event of default, holders of such bonds cannot foreclose on any special assets of the corporation, for their only redress is to bring suit as creditors on notes which have been unpaid, and so dishonored.

The degree of negotiability of a bond depends on whether or not it is registered. A registered bond is payable only to the party whose name is designated on the instrument and recorded on the books of the corporation. It can be transferred only by the indorsement of the payee and by the recording of this assignment on the ledgers of the corporation or its agents. While the registered bond is thus difficult to negotiate, this very feature may prove advantageous in case of loss or theft, for payment could then be made only by forging the owner's name. The unregistered bond is more readily transferred, since it is payable to bearer and is therefore negotiable merely by delivery. Interest on the registered bond is paid directly to the party specified, while in the case of the unregistered bond this disbursement is given to any holder of the coupons attached to the instrument, and so it is usually called a coupon bond. Bonds may be registered as to principal and also as to interest. The coupon itself may be regarded as a promissory note in which the corporation agrees to pay the holder the interest.

3. Short-term Note.

The purpose in issuing a bond is to raise capital for undertaking more or less permanent improvements, and this accounts for the length of its maturity. The corporation may secure funds to cover a briefer period of time by means of the short-term note. This instrument is similar in nature to the bond, for both documents are promises to repay borrowed money. They differ in the matter of interest, principal, maturity, and general form. The short-term note is generally used by a corporation in a period when stringency renders the money market unfavorable especially for long-term borrowers. The note thus bears a higher rate of interest, and because of this expense the makers seek to limit as much as possible both the amount and the maturity of such borrowings. The duration of a short-term note seldom exceeds five and usually averages two years. It is also quite informal in content and no seal is required.

Bonds and stocks differ in several important respects. The bond expires after a definite period of time, while the stock has in fact no fixed date of maturity. Furthermore, the interest on the bond must be paid absolutely, while dividends on the stock are distributed only if justified by the earnings of the corporation. In the event of default on either principal or interest, bondholders may press their claims as creditors, while stockholders possess no such rights since they are part owners in the enterprise.

CHAPTER IV

THE FIELD OF BANKING

I. PRINCIPLES OF BANK CLASSIFICATION.

THE thirty thousand banking institutions in the United States may be classified according to the following principle: (1) legal status, (2) economic function, (3) operating method, (4) customers' control, (5) territorial activity. As it has not been mandatory until recent years for bankers to secure the authority of law before beginning to operate their business, there are still many private or unincorporated banks. However, the vast majority are chartered under the laws of the various states or the national govern,ment. So in a general way banks may be grouped as either private or public. These terms, of course, refer only to the subject of incorporation and imply no difference in ownership, for American banks are universally operated by private capital. One exception is the Bank of North Dakota, which is operated by state funds and is therefore a publicly owned enterprise.

Public or incorporated banks exist by virtue of charters, either passed as special acts of a state legislative body or issued under the general incorporation laws of the government. In the United States the granting of special charters soon gave way to a system which permitted any group of individuals to enter the field of banking if they complied with the regulations of the general incorporation law. Such a statute was enacted first in New York and was later copied by the western states. Finally, in 1863 Congress provided for the federal chartering of banks under a general law known as the National Bank Act.

A second classification of banks rests upon the economic function which they perform. One class of financial institution gathers the savings of the community and provides business enterprises with permanent capital represented by stocks, bonds, or notes. A considerable part of these funds may be applied to erecting factories, extending railways, and developing other permanent aids to production. Investment banks supply industry with these long-term funds, while on the other hand commercial banks to a large extent furnish short-term credit, enabling the business man to purchase materials, pay his employees, and meet his current expenses (see page 11).

A third basis for classifying banking institutions is furnished by their method of operation. One group receives deposits and through them obtains the funds which it employs in making loans. Other banking institutions accept no deposits, but finance business undertakings by acting solely in the capacity of middlemen between borrowers and lenders.

A fourth basis of classification depends upon the control of the bank. It is usually operated precisely as an ordinary business enterprise, in which customers have no control over management. While the depositor may at times be a stockholder or even a director, he usually exercises no influence over the policies of the bank. Certain other institutions, however, are co-operative in nature and are designed to extend loans mainly to their own members.

Banks may also be grouped as domestic or foreign, depending upon the territory in which they conduct their operations.

These five methods of classification are by no means of equal significance. The legal structure of a bank exerts small influence on the nature of its business, for it matters little whether or not it be incorporated. As only a few banks are co-operative in nature, the question of customers' control requires only brief attention. Also there is no essential difference in the nature of a bank whether engaged in financing foreign or domestic business. It should, more