17. COMMERCIAL PAPER. The ele ment of credit in the business world arises from two fundamental causes: (a) The fact that the merchant and, the manufacturer can profitably use more capital than he possesses and can make money by borrowing money; and (b) if the time of payment is postponed, the buyer can turn goods into money before the agreed time of payment arrives. Therefore, business men must either borrow money to buy goods or postpone the date of payment for goods. Out of the first process arises commer cial paper, and out of the second the "book now the principal form of credit in this country.
The usual methods of borrowing are: (1) Private loans from relatives and friends; (2) loans made directly to the borrower by the home bank, either in the form of loans on his promissory note, or indirectly in the form of bills receivable discounted; (3) loans in the form of commercial paper, which is a floating debt — borrowings in the open market.
The term commercial paper is, therefore, used to designate those instruments of indebted ness—promissory notes—which are issued by business men for the purpose of obtaining funds in the open market or which are given in settlement of business obligations and sold in the open market. They are to be dis tinguished from the ordinary promissory notes given to settle debts or to obtain money on a deferred payment, in that the transaction is impersonal, and an intermediary is employed to effect the sale. Legally there is no distinction, both being the same obligation in law.
There are two forms of commercial paper: (1) Single-name paper; (2) double or two name paper, commonly called °receivables.° Single-name paper is the sole obligation of the issuer, put out in large denominations (usually $2,500 and $5,000) and sold through the medium of a commercial paper broker to banks and bankers.• The proceeds of single name paper are, or are presumed to be, used for the purpose of paying bills promptly in or der to obtain the cash discounts, which are quite generally given for quick settlements.
The two-name paper or the receivable is the note given by the buyer to the seller and by the latter sold in the open market for cash. The payee thus anticipates its due date.
The advantage of single-name paper to the banker lies in the fact that it comes in large and uniform denominations, is of short matu rity and the lender is tinder no obligation to renew, for he purchases the paper strictly on an impartial and impersonal basis.
The very favorable experience that banks the country over have had with commercial paper and its intrinsic soundness have made these instruments a favored investment in banIc ing circles. Inasmuch as a bank must keep its funds invested in order to make money, and yet have them in such form as to be' readily convertible into cash to meet the demands of its depositors, a body of liquid assets muit be maintained, which will both produce an income and promptly liquidate itself. Commercial paper conforms ideally to this test in that its life is short, and its payment under ordinary conditions certain. Bankers are therefore com ing to look upon their commercial paper as next to cash as a quidc asset, treating it as a secondary reserve.
In order to purchase paper of firms in all parts of the country intelligently, as well as to have credit information about their own cus tomers, banics are now operating well-organized credit departments whose function is to gather and classify credit information bearing on the firms with which they deal and whose paper they buy.
This information consists of the credit statements, utually digested on the banlc's own forms, with provision for setting in apposition the various Items from year to year for the purpose of indicating the progress of the firm. In addition there are the reports of the great mercantile agencies, Dun and Bradstreet, which give the history and credit standing of the firm, and reports of judgments, liens, trans fers of property, etc., that would affect the credit risk.