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The Loan

warehouse, loans, receipts, merchandise, lading, bills and paper

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THE LOAN DEPARTMENT—OTHER LOANS Merchandise Loans and Commodity Paper Merchandise loans are those loans which are secured by com modities of various kinds represented by warehouse receipts and bills of lading. The notes and drafts and bills of exchange so secured are called "commodity paper." Commodity paper is defined by the Federal Reserve Board as "a note, draft, bill of exchange, or trade acceptance accompanied and secured by ship ping documents or by a warehouse, terminal, or other similar receipt covering approved and readily marketable, non perishable staples, properly insured." This definition suggests many of the peculiarities of merchan dise loans. In general, higher risks attend them, because the collateral is more likely to deteriorate than stocks and bonds; it is in the keeping of warehousemen or transportation companies whose facilities and financial character may be questioned; it is subject to shrinkage; and it is difficult to grade and describe with precision. Because of the greater risks banks must, with respect to certain collateral at least, insist upon higher rates or higher margins, or both, and use exceptional care in granting and watch ing the loans. Moreover, the loans are necessarily of short term. With due care and protection warehouse receipts and bills of lading can be made very excellent security; "grain paper," for example, has won a high position in the discount market.

Loans on such pledges are necessary to the good marketing of produce, and if banks fail to make merchandise loans they are not only losing a source of profit but are also not fulfilling their public duty. Warehouse receipts and loans based on them facili tate speculation in produce. The Federal Reserve Board has authorized preferential rediscount rates for commodity paper; these rates are intended to assist actual producers during crop moving periods and are not designed to benefit speculators, and for this reason the board reserves the right to suspend the special rates whenever it appears that the movement of crops has been practically completed. As the produce, say, cotton, for example, moves from farm to consumer, it may be financed by a series of loans, secured successively by cotton tickets, gin tickets, compress receipts, bills of lading, and warehouse receipts; the provision of capital for the whole commercial operation devolves upon the banks, and the producer and middleman can thus do business on slender means.

Legal Protection of Merchandise Loans The first care in granting a merchandise loan is to see that the warehouse receipt or bill of lading is a bona fide, duly executed instrument, as evidence that the merchandise is in the custody of the transportation or warehouse company. The determina tion of these particulars has been very much aided: (r) by the adoption by the various states of the Uniform Warehouse Re ceipts Act and the Uniform Bills of Lading Act, prepared by the Commissioners on Uniform State Laws with the assistance of committees from the American Warehousemen's Association and the American Bankers' Association; and (2) by the Pomerene Bills of Lading Act of Congress, 1916. It is necessary that the bank know the signatures and forms used by the warehouse. The bank may also insist upon validation of the instrument by the issuing company.

To determine whether the merchandise conforms to the de scription as given on the receipt and whether it is in good condi tion, the banker either trusts the borrower who furnishes the list of goods, giving their weights and prices, and the various certifi cates of appraisals of the graders; or, in case he suspects that the borrower is not telling the truth, he makes an independent physi cal inspection or appraisal. Which procedure the banker follows will depend upon his regard for the borrower.

In the case of several staple goods the state warehouse com missions and the produce exchanges provide for the inspection and grading of commodities and for the regulation of warehouses and the issue of warehouse receipts. Especial effort is made to have the stored commodities conform rigidly to the inspection certificates and warehouse receipts as to weight and quality and to require financial responsibility of the warehousemen and to guard against the issue of false or spurious warehouse receipts. It is common to require that the receipts be registered with the state com mission; and the commodity is described in terms of the grades established by the exchange or by the United States standards. Since the commodities can be most efficiently handled in bulk, standardization and grading are necessary and make possible warehouse receipts representing certain quantities of goods of a certain grade and not specific goods.

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