SHORT-DATED INVESTMENTS Advances to Traders.—Short-dated investments are possible because it suits the convenience of certain classes of people to borrow temporarily. That is especially true of traders who pro duce or buy commodities with a view to sale. Usually a trader either buys or sells goods in large quantities at a time; if he is a wholesale dealer he both buys and sells in large quantities. If all the goods he buys are paid for out of his own capital, he must always hold a large balance of idle cash just before a large pur chase or after a large sale. While these balances are accumulat ing or being disposed of, there is a loss of interest. Balances can be kept down and the loss of interest reduced to a minimum, if, instead of accumulating cash, the trader can borrow the sum required for his outlay and repay the debt out of subsequent receipts. If he possesses plenty of capital of his own, he can find profitable permanent investments for the resources released from his own business, so that all his capital will be earning interest, while he will only have to pay interest on the fluctuating amount of temporary indebtedness outstanding. And the trader whose business is capable of expansion beyond the limits of his own capital, can supplement that capital by temporary borrowing and take better advantage of his opportunities. Loans to traders of this type form the principal bankers' investment. But the degree of liquidity varies greatly. The banker reserves to himself the right to call in the advance at any time on demand or on short notice. But it may be highly embarrassing to the trader to pay up, and the banker cannot in practice wholly disinterest himself in his customer's affairs. The trader, if he had superfluous cash in hand, would in any case desire to pay. If he has not, he can only obtain the means of paying either (r) by borrowing from someone else, or (2) by selling something. It may be extremely inconvenient to sell. Even if he possesses goods ready in all respects for market, it may still only be possible to hasten his sales at a sacrifice (possibly a heavy sacrifice) in price. Forced sales might even make the trader bankrupt. On the other hand, if under pressure the trader borrows from someone else, the new lender will probably be another banker, and the result may be that the first banker will lose the trader's custom. The upshot is that advances to traders are apt to be wanting in liquidity unless either (z) the trader is one who deals in a very active market with a rapid turnover, so that in any case he repays his advances and reborrows them at short intervals, or he holds a certain amount of capital outside his own business invested in readily marketable securities.
Dealers in the investment market (stock brokers and jobbers) are a particular class of traders who are well placed to borrow from banks. Stocks and shares of the kind they deal in are likely to be more readily marketable than commodities. A slight sacrifice in price will often elicit purchases from investors in anticipation of future savings, whereas the consumer's demand for commodities can not be stimulated to any important extent in this way. The investment market is active, dealers are accustomed to borrow for short periods, and under normal market conditions can readily be induced to curtail their indebtedness.
But the banker's favourite liquid invest ment is the bill of exchange. A bill of exchange is an instrument for assigning a debt ; it takes the form of a written order from the creditor (the drawer) to the debtor (the drawee) to pay the debt to a third person (the payee), who, on the debtor signifying his assent (acceptance), becomes the new creditor. Thus a seller of goods may draw a bill upon the buyer in favour of his banker, payable at an agreed future date. He is thereby enabled to sell the debt to the banker, who will pay the present value of the debt, that is to say the sum due, less interest for the period up to maturity. This interest (discount) makes the holding of the bill a profitable investment to the banker. The bill has several in cidental advantages. (I) The bill is regarded as guaranteed by both the drawer and (after acceptance) the drawee. (2) The bill is saleable ; the bank can assign its rights in it, if need be, to another creditor. (3) The drawee is expected to provide at all costs for punctual payment on maturity. The bill in fact is subject to the law of negotiable instruments, with all the vener able traditions handed down from the law merchant. The per sonal relation which modifies the legal rights of the banker in the case of a direct advance to his customer is eliminated from the bill, because the bill is designed to be marketable. The cus tomer has no right to complain if the bill is sold and passes into the hands of strangers who know and care nothing for his affairs, and who will not listen to excuses, before enforcing their rights. In general the relation of banker and customer exists between the payee and the drawer, not between the payee and the drawee or acceptor, who is the debtor. In practice the drawee is often another bank. Banks are accustomed (at the charge of a small commission) to allow bills to be drawn on them on behalf of their customers. The bank assumes all the respon sibilities of the acceptor ; the customer, who is the ultimate debtor, undertakes to pay the sum due on the maturity of the bill to the accepting bank, but assumes no other obligation.
Another form of negotiable instrument is the promissory note. If a borrower from a bank gives the bank a note promising to pay the sum at the date it is to fall due, the bank can, if need be, sell the note before maturity, just like a bill. But the note differs from the bill in having (in the first instance) no second signature upon it as a guarantee. It also differs in that, in general, the note is the direct obligation of a customer of the bank that holds it, and while so held does not escape altogether from the influence of the personal relation of banker and customer. The banker is not in practice so free to harden his heart as when he holds a bill drawn on a stranger.
