statements. The failure in 1914 of one of the largest dry goods jobbing houses in the country with numerous affiliated retail stores having over $30,000,000 of paper outstanding drew renewed attention to the need for properly safeguarding commercial paper. The revelations following this failure showed that in some instances the treasurers of the retail companies who signed the notes were employed in the office of the parent concern; that in some cases the notes were issued without the knowledge of the other officers or directors of the concern; and that commonly they were paid at maturity by the sale of new notes.

Reference has been made above to dealers in acceptances. Trade and bank acceptances, provided for in the Federal Reserve Act and regulations of the Federal Reserve Board, have come into increasing use throughout the country. They constitute the basis of the open discount market contemplated by the Act. As a consequence, several large discount corporations have been organized to deal in this class of commercial paper, and many of the old note brokers or commercial paper houses which formerly dealt in singlename paper solely are now handling acceptances. Despite the stringency occasioned by war and post-war government financing, the burden of which rested heavily upon the Federal reserve banks, they have coöperated heartily in the development of an open discount market.

The future of single-name paper as an investment for bank funds may be materially affected by the spreading use of trade acceptances and by other changes growing out of the Federal reserve system. The Federal Reserve Act provides that Federal reserve banks may discount for member banks, notes, drafts and bills of exchange arising out of actual commercial transactions and having at the time of discount a maturity of not more than ninety days. The Act specifically excludes from the rediscount privilege paper issued for the purpose of carrying or trading in stocks, bonds, or investment securities, except government

securities. The Reserve Board has the right to define the character of the paper thus eligible for discount.

In its first regulations issued in November, 1914, defining eligible paper the Board included single-name paper, but urged close scrutiny of such paper to give assurance that it came within the spirit of the Act and that it was selfliquidating at maturity. Future regulations of the Reserve Board and the growing use of acceptances may narrow the use of single-name paper, yet the ramifications of our financial and credit structure are such that this form of borrowing, especially for investment and speculative purposes, is likely to continue as an important factor in our financial system.

138. The credit department. The credit department is one of the most recent, yet most important, in the organization of the modern commercial bank. In the large city bank having a great variety of customers and activities, it is indispensable, and even in the small country bank, credit information regarding its customers, carefully collected and filed for ready reference, is highly desirable. Formerly the cashier was supposed to be sufficiently informed upon the business standing and credit of all the bank's customers, but to-day the larger banks find it necessary to have highly organized credit departments in charge of a specialist whose chief or sole duty is to accumulate and make easily accessible credit information regarding all customers of the bank. Where loans are conservatively made on high-grade collateral security the question of credit is not so important, but in the case of the discount or purchase of commercial paper resting upon personal credit the financial responsibility and character of the borrower is a matter of first importance.

The credit man should keep complete records regarding mortgages, judgments, assignments, petitions in bankruptcy and like matters affecting the bank's customers. He should have available the financial history, the present standing, and the habits of life and character of every borrower. He should also keep posted on the general condi

tions of business. In aiding the lending authorities of the bank to determine whether credit shall be extended to a borrower and to what extent, the credit man should be able to present facts concerning the character of the busi

STANDARD FORM OF STATEMENT FOR CORPORATIONS AS ADOPTED BY NEW YORK STATE BANKERS ASSOCIATION

FROM

ADDRESS

چه

во

TO NATIONAL BANK OF COMMERCE IN NEW YORK

FOR THE PURPOSE OF PROCURING CREDIT FROM TIME TO TIME WITH YOU FOR OUR NEGOTIABLE PAPER OR OTHERWISE, WE WITH YOU FURNISH THE FOLLOWING AS A TRUE AND ACCURATE STATEMENT OF OUR FINANCIAL CONDITION ON 1994 WHICH YOU ARE TO CONS:DER AS CONTINUING TO BE FULL AND ACCURATE UNTIL WE GIVE YOU WRITTEN NOTICE OF CHANGE

BOGEN53 1020002

CONTINGENT LIABILITY: NOTES RECEIVABLE OF QUSTOWER DISCOUNTED OR SOLD AND NOT INCLUDED IN ABSETS ENUMERATED ABOVE

OTHER CONTINGENT UABILITY.

WE HAVE NOT PLEDGED on ASSIGNED ANY OF THE ABOVE ACCOUNTS RECEIVABLE; OUR ASSIGNED ACCOUNTS RECEIVABLE AMOUNT TO

TIME OF YEAR WHEN NOTES AND ACCOUNTS RECEIVABLE CUSTOMERS,ECTED, ARE GENERALLY MAXIMUMY
TIME OF YEAR EN STOCKS OF MERCHANDISE on MANAE GENERALLY MAXIMUM

Dept.

BORROWER'S STATEMENT-FRONT

(OVER)

ness, its form of organization, its management and business methods, the extent of competition, the promptness with which bills are paid, the financial worth of the business, the extent of borrowing at other banks, business reputation among other people, etc.

The credit man obtains his information from various sources, the chief source being the statements of the customers themselves. The practice is growing of requiring borrowers to make a full statement of their affairs when they apply for a loan. Uniform blanks have been adopted by the bank associations of several states. Some banks require applicants to make oath to their statement. In some of the states laws have been passed making it a criminal offence to obtain loans on false or misleading statements. Sometimes the banks require the statement to be certified by a public accountant. Separate forms are used for individual borrowers, for firms, for corporations, and for banks. Shorter forms are sometimes used when minute details are not deemed necessary.

These statements call for detailed information regarding the resources and liabilities of the applicant, including such typical assets as: cash, merchandise in both the raw and manufactured form, bills receivable, accounts receivable, acceptances receivable, plant, machinery, equipment, real estate, franchises, treasury stock, etc.; and such liability items as bills payable, accounts payable, acceptances payable, stocks, bonds, mortgages, depreciation, net worth, net earnings. The ratio of quick assets to the two important liability items-bills payable and open accountsaffords a rough basis for determining the commercial standing of the borrower. One dollar of indebtedness to a dollar and a half of quick assets is usually regarded as a safe proportion.

Other sources of information are the mercantile or credit agencies, the most important of which in this country are Dun's and Bradstreet's. It is the business of these credit agencies to collect and summarize credit information regarding all kinds of business concerns all over the country.

Though the banks do not depend very largely upon these agency reports they are valuable in suggesting credit information that might otherwise be overlooked. Such reports should always be supplemented by personal investigation.

The signed statements, agency reports, letters, memoranda, and credit information of all kinds are tabulated, analyzed, and filed in the credit department in readily available form. New statements are required from time to time as borrowers apply for new loans or as paper is offered for discount. In the case of regular borrowers banks may require statements only at intervals; for example, once, twice, or four times a year. In this way the banks will have after a time a series of statements from borrowers showing the changes in their business.

In the bank having a well-organized credit department every new application for a loan or offer of commercial paper is referred to the credit man. After investigation he prepares for the loaning officers a condensed statement showing the essential facts affecting the applicant's credit. Upon the basis of these facts mainly is determined the granting or refusing of credit accommodations by the bank.

139. Elements of credit. In any analysis of credit, emphasis is always laid on four main elements-character, capacity, capital and collateral. It is not enough that a borrower shall be of undoubted integrity and honesty; the most reputable men sometimes fail in business because of lack of capacity or capital. Capacity without character and business probity may possibly secure temporary credit and business success, but there is always present an element of uncertainty. A borrower with plenty of capital but without character and capacity is likely to waste it or to turn it into unproductive channels, bringing discredit upon himself and distress to his associates. This holds true also of the borrower having collateral but lacking character and capacity.

"If the borrower have character and capacity," says a