When a bank has surplus funds which it is unable to lend to its local customers by reason of there being no demand for them, it usually goes into the open market and buys paper which it considers desirable. This is done through note-brokers, who have become important factors in the banking business. These note brokers call daily at the banks and present their offerings, and in the case of country banks they usually send daily a list of the paper which they have to offer. The paper peddled in this way consists of receivables, single-name paper, and acceptances. Note-brokerage and other houses that specialize in acceptances are sometimes called "acceptance dealers." The custom of issuing and buying paper through the open market is a recent growth. Until late years conservative fi nancial men criticized concerns for borrowing on the open market and pronounced it a method of kiting credit. Local banks and interests regarded it as unfair to their community to let funds go outside their district for commercial purposes. A decided change of attitude has occurred and today a large proportion of the strongest and best concerns finance themselves in part through note-brokers and the open market.
Factors of Development of Open-Market Borrowing The change is due to several facts: 1. The growth of the open market has contributed most to the development of open-market borrowing. Formerly the market was limited to a few big cities of the East, but since the banking resources of the country have developed so generally and faster than local demand could utilize, banks have sought a field for the safe and judicious employment of their extra funds. The banks have slowly come to realize the safety and high liquidity of open-market paper, which, although an earning asset, has been found to be excellent secondary reserve, convertible at will and with ease. Banks and others in every part of the United States have become buyers of open-market paper and the business of note-brokers has grown enormously.
2. Another factor has been the development of credit depart ments in banks; to be in a position to purchase paper of concerns with which the bank is not personally familiar, a credit depart ment is indispensable. These departments have become common in large banks, and smaller banks have access to the credit service of their central correspondents. The result is that now, through correspondence, it is usually possible to secure trustworthy credit information aboUt concerns, no matter how distant. The de velopment of credit men's associations, mercantile agencies, and interchange bureaus has worked to the same end.
3. A third factor has been the growth of national concerns, those that do a national business and are well known and well reputed from ocean to ocean. This growth rests upon improved means of communication and transportation, national public ity, and increased capacity for business organization and direc tion.
Kinds of Open-Market Paper Open-market paper is of three kinds: 1. Receivables or indorsed paper or two-name paper.
2. Single-name paper.
3. Acceptances.
Receivables are notes which have been received by a firm and are indorsed by it and sold in open market through note brokers. It is presumed they represent actual transactions; they
are drawn in odd amounts and may bear evidence of their com mercial origin; they bear two names, the indorsement both authenticating and adding strength to the note. Among the best known receivables were those issued by the great Claflin house before its failure in 1914. Sometimes a company has a selling organization which is separately incorporated, and the goods shipped to this subsidiary are represented by accounts receivable or notes receivable. The parent company may not disclose the relationship existing between it and its subsidiary distributing organization, and may indorse these receivables and sell them through note-brokers on the open market. Obviously this class of paper is objectionable, for the merchandise which the sub sidiary still carries is in reality as much a part of the merchandise account of the parent company as if it were on its own premises, and is no warrantable basis for a receivable. Only such of the merchandise as is actually sold by the subsidiary warrants a receivable.
[One form of indorsed receivable] is the note of a New England or southern cotton-mill, with the indorsement of the New York or Boston commission house which sells the mill's output. Commission houses are of various kinds; some make advances to the mills and some do not; some guar antee the accounts to the mills, while others do not; some own their accounts receivable, and in other cases the accounts are owned and collected by the mills; some commission houses own the mills for which they sell and some mills own their own cora mission houses. As this commission business is handled in these various ways, the strength or value of a commission house in dorsement, aside from the wealth of the concern, is dependent largely on these other factors. The commission house indorse ment which is of the most value is, ordinarily, that of the one with wealth and responsibility, which does not make advances, neither owns nor guarantees the accounts receivable, but is willing morally and financially to back the mill whose product they are selling. The cotton-mill notes thus indorsed are famil iarly known as "mill paper."' The Note-Broker—Commission Rates The prime function of a broker is to bring buyer and seller together; a note-broker is the intermediary between borrowers desiring accommodation and the banker or others desiring invest ment. He establishes a clientele of issuers of paper and a clientele desirous of buying paper. To gain the former he must prove able to place paper in desired sums at desired times; to gain the latter he must offer paper which has attained a reputation for safety or for which he is willing to vouch. This necessitates an extensive credit department, financial responsibility, and dependable service. To reach buyers, a selling organization is necessary; the paper is offered through the mails and by means of traveling representatives who go from bank to bank.