The Redwood gazette. [volume] (Redwood Falls, Minn.) 1873-1940, 1916-06-21
TALKS ON THRIFT
NO. VI
DESIGNATING A NOTE


cash, for most Of the business
is done on credit in one form or
another. Small purchases and
many Of the daily expenditures
are cash transactions; but bust
ness as a whole moves on credit,
the form depending upon the
customs characteristic Of that
peculiar business. The m1st COM
mon form of credit is the book
account, where goods are sold
and Enlarged" to the purchaser.
When you go into the grocer's
and tell him to "charge it," you
are opening a credit with him
in the form of a book account.
This is common to all retailing
transactions. But in the larger
dealings. the credit is i'll the
form of promissory note, which
is merely a written promise to
pay a sum certain, in money, to
a designated person, firm or cor
poration, at a stipulated time.
Hundreds of thousands of these
notes are made every day They
are given, merchant to mer-
chant, in payment of debts re-
sulting from the sale of goods,
and while they settle tho debt
must themselves be paid IN mon
ey, in order that the obligation
may be finally discharged, for a
promise never liquidates debt.
If these promises could be
treated as money and passed
from hand to hand, they might
answer very we'll, but they are
of non-uniform denomination,
their goodness is a matter not
commonly known, and even
though the maker might be "as
good as the government" few
know it and few would take the
risk.
And if the holder could wait
until maturity, he would get
cash from the promiser. But he
does not want to wait that long
he wants to turn his evidence
of debt into money at once; for
with money-real mCney-he
can get better terms, and for
certain purposes, such IS pay
ing laborers, he must use cash.
There must. therefore, be some
medium through which he can
turn this promise into money
before it is due-for a price
and that medium is The bank.
The process of doing this is
called discounting, which in 9TH
er words means buying the pa
per. A simple Illustration will
explain.
Suppose A sells 3 2 cill of
goods on three months credit.
A does not want to wait while
B sells the goods and gets the
money to pay him, and there
fore offers to take BIS note for
the amount. But the note is not
money, and if A would use the
money, he must find someone
who will give him money for it.
He might find someone who, for
the hope Of gain, would advance
the money; but the logical place
to get this done is the bank, for
the bank always has money. It
knows men and their ability to
keep their promises, and can
Judge the quality of the risk.
A therefore offers the note to
his banker, who says in sub
stance. 81 think B is good for
this amount. If you will en-
dorse-promise to pay if he
does not will buy that paper
evidence Of debt from you" Let
us say it is for 500, due in
three months. The banker
knows that at the end Of three
months he will get the $10O
and so gives A $98.50 for it, the
$3.50 being interest on the mon,
ey for that time at 6 per cent
Ordinarily the banker would not
give A the cash, but credit his
account, with the privilege OF
checking against it, which is vir,
Z tually the same thing.
Now, what is the result? A
7 sold his goods and got his mon.
ey at once. B had three months
to sell the goods to get he mon
. ey to pay the note when the
banker presented it at maturity,
A could use the $98.50 to buy
more goods to sell to G., and the
bank has made a profit Of S1.5C
for taking the risk. That is what
banks are for-to take risks, tc
know men, to help business and
make profits for itself. And
this it does to very marked