New-York tribune. [volume] (New York [N.Y.]) 1866-1924, 1917-11-19
Eliminating Personal Credit

Since the mere embodiment of credit
in credit instrument does not affect
it's essential nature, it follows that the
more complex business relations be-
come and the broader the discount and
rcdiscount operations bankers have to
take into account, the more accentu-
ated must become the tendency either
to eliminate altogether or effectively
to buttress purely personal credit. The
tendency to get away from personal
credit has been observed throughout the
whole modern banking world. By some
il has been lamented. but it was in
evitable. My banker may know me and
may trust me, but no credit instrument
embodying my unsupported credit can
circulate afar in the market where |
am not known, and consequently where
| will not be trusted.
The development OF sound COM
mercial paper that is TO become the
basis of a broad rediscounting system
or of an open discount market. there
fore. requires either the reduction TO
lowest terms of the purely personal
element in credit or satisfactory
buttressing of it to insure its ultimate
solidity.
Two lines of procedure are open.
The first implies the attempt to dimin-
ish the scope of personal credit. In
this connection it may be said that the
more directly a credit instrument is
attached TO definite, concrete, dispos-
able wealth Of assured and easily cal
culable value, the better adapted it is
to rediscounting or 70 rapid sale in
discount market Documentary bills
of exchange will here Immediately sug-
eest themselves as good examples.
Where, however, the nature Of the
transaction prevents any attempt TO
eliminate the personal element, the eff
fort must be made to buttress it in
such a way as to fit the resulting credit
discounting operations. Here, again,
two possibilities present themselves.
Diffusion and Substitution
Personal credit may be strengthened
through diffusion of the risk involved.
This is the time honored method of get
ting additional names" or indorse-
ments. 1t rests on the law of chance
that two individuals are much less
likely to let an obligation go by de-
fault than is one alone. By the same
token. three are better than two, and
so on. While diffusion of risk obvi-
ously lessons the chance Of final dis
honor, il must be recognized that never
is the credit stronger than the actual
ability to pay Of the individuals whose
names are employed. A promissory
note, for example, is just as good as
the men whose names are on il. IL is
also of the greatest importance to no.
tice that the form of the instrument,
whether promissory note, acceptance.
etc. in which such credit is embodied
has not the slightest bearing on the
essential strength Of the credit itself.
IL is always and only a question of
the names which adorn the instrument.
Personal credit may also be strength
ened through what may be called sub
stitution. The great example here is
the bankers acceptance. In the bank
er's acceptance the banker substitutes
his credit for that of the ultimate
dc btor. In rediscounting bankers
acceptance no attention need be given
TO anything except the standing of the
accepting banker. The banker is nor
rally we'll known and his position with
other bankers established. He will
normally substitute his own credit for
that Of the ultimate debtor only when
he has completely satisfied himself as
TO the use which is TO be made of the
credit and as to the all-around capac-
ity and prospects of his client. Hence
il is that all over the world bankers
acceptances stand in the front rank of
commercial paper. Not only are thew
secure because banker guarantees
payment, but they normally imply
use which from the banking view
point is sound.
Considering all the aspects involved.
1t behooves our bankers to study well
the practices as we'll as the types OF
paper TO the development of which
they are going to lend their influence.