The Birmingham age-herald. [volume] (Birmingham, Ala.) 1902-1950, 1914-11-18

panic OF 1907 and the other the so-called
rich mans or silent panic of 19o2-was
over expansion OF credit. Some 10 or 30
years ago, a new method was adopted
by many of those who borrowed money
Tor the purpose of carrying on their BUSH
ness. They either signed or Endorsed
commercial paper and then placed it ~
the hands OF note brokers, VINO sold 1t
TO the banks all over the country. Theirs
was no pretense that anything but the
credit of the makers of this paper fur
nished security for its payment. How
widely extended became that practice
was some months ago Illustrated by the
revelation that a large mercantile house
had been accustomed to secure discounts
of It's paper or to sell it to note brokers
without any suggestion that 1t repre-
sented actual commodities in the course
of barter. The aggregate or these o.
legations was discovered to be In excess
of $40000,0o0
To take another illustration, some u
the large industries in the Mississippi
valley controlled many suboIdlnates.
These are to be found in every consAd-
cradle town in the United STATES. When
the parent houses stood in need of money
someone of the subordinates were asked
to make notes. These, having been thus
made. were Endorsed by the parent house
and then marketed with the note brokers.
The claim was sometimes made that
transaction of this kind did really rep
resent purchase and sale of commod-
tiles. But the temptation was always
great to issue such paper without the
Slightest reference to actual mercan-
tile transactions.
The New Ruling
Apparently the ruling of the federal
reserve board will hereafter compel
.he makers or indorsers of CONNER
cial paper to certify that behind this
paper stand actual transactions. In the
old days a merchant or manufacturer
Who sold goods for 60 days or six
months took in payment therefor the
notes made by the purchaser. Having
Endorsed these notes. discounts of them
were secured. The expectation and, III
fact, the experiences We're that in or
binary mercantile transactions three
months was a sufficient time for the
retail merchant who had bought COM
modfties from the wholesaler to sell
them and in that way secure suffi-
Gent funds with which to nquidats
his paper when it became due
Experience showed also that more
than three months was, as a general
thing, necessary in order to realize
upon the sale of agricultural products.
1t took about six months to complete
barter of this kind. Banks were or
iginally established for the purpose OF
! facilitating barter and the security
behind the negotiable paper which rep
resented that barter was the commod-
tiles. 1t rarely happened that paper
thus issued defaulted at maturity.
The federal reserve beard apparently
believes that the facilities of the new
sy stem. so far as discounts and re-
discounts are concerned, should be ex-
| clusively concentrated upon CONNER
oil hah fr1 fof,
| commodities. Nevertheless, as there is
a good deal of paper now outstanding
eLd as it might prove to be a real
hardship If the federal banks turned
their backs Immediately upon this pa
per the reserve board has decided to
defer until the first of the new yea-
TIC rigid enforcement of its rule. On
January /, whenever any merchant sor
lmanufa cturer seeks 4 discount f)r
commercial paper he Is compelled to
certify to the bank what the char
acter of that paper Is in a general
way, what kind of commodity in the
course of barter 1t represents. Some
hind of a certificate Is to be attached
to this commercial paper. In this way,
us less fraud be committed or intend
ed, the bank can feel confident thd-
the paper which 1t accepts for discount
represents actual commodities which
are passing from the pr oducer or mer-
|
Suppose. for instance, that banks of
the new system which have taken this
commercial paper desire for good rea-
soKs to rediscount 1t with the region
al bank. The managers of the re-
gional bank will find attached to this
paper succinct statement of what Il
4 represents and what Is behind It,.
Therefore, the danger of overexpansion
| of credit from this source is practi
cally eliminated. That means that the
manufacturer and the wholesaler, as
we'll as the retail merchant or the small
manufacturer. can with confidence res
| assured that the business and banking
! fabric is established upon a sound
statement This viii serve to slim
ulate and constantly to increase con-
| fl6ence. 1t will. to some extent, pre-
vent business panics OF course, 1t can :
no. prevent business depression. but If
| there be depression. nevertheless, the
commercial paper which has been dis
| counted or rediscounted through the
| facilities of the new system Will not
be affected appreciably by this depres~
slon. The commercial paper which has
! already been discounted VIII have
| value behind it and in times of de
| preston merchants or manufacturers
| Will have no occa sion to offer new pa
per for discount, or, II they attempted
| to do that, would find themselves
| Blocked through their inability TO per-
suade the banks that the new paper
represented commodities.
IL may take "A little time TO shift from
tue methods which were so generally
| adonted after 1895 or 1896 to the new
method which is eXerplified by the
! federal reserve rule. Fortunately, the
BUSINESS depression of the past yeas
and a half and especially that which
was emphasized for awhile by the out
| break of war in Europe, has made IL
al Cd n
| the new method