The information submitted consists of a condensed statement showing the various items which constitute the firm's assets and lia bilities in uniform arrangement, as follows: Assets—Cash; merchandise; accounts receiv able; bills receivable. These four items con stitute the (quick assets.° Then follows the fixed assets, such as real estate, furniture and fixtures, patents, investments, good will and other assets. The quick liabilities consists of : Accounts payable and bills payable, the latter term including both the single and double name paper; then follows the other liabilities of the concern, such as mortgages, stock issues and other obligations.
The purpose of the above arrangement is to enable the banker to readily ascertain 'the ratio between the quick assets and the quick liabili ties, the purpose being to determine the rela tive safety of the credit risk. It is well settled in all credit circles that a firm should have quickly available at least $2 for every $1 of quick debts, thus allowing for a shrinkage of 50 per cent before the other assets would need to be drawn upon to settle the firm's obliga tions. In some lines, such as meats, groceries, etc., where the shrinkage is light and a quick sale possible, a narrower margin is permissible —as low as one and one-half to one; but in a seasonal or specialty line, such as millinery or ladies' wear, subject to fashion and change of seasons, a large margin is generally desired.
Having the information classified, the broker submits the same to his clients, who, if in the market and satisfied with the rates, will pur chase the paper on option; that is to say, with the right to return within a certain time, if upon further investigation it is not desired. The investigation is made through bankers, who have either purchased the paper before and are acquainted with its value, or the home banks, which are fully conversant with the borrower's affairs from close observation. Such refer ences, together with mercantile firms with which the borrower has had business dealings, are furnished on the credit statement. This process is called ((checking° the paper.
In purchasing commercial paper the banker is usually concerned about the following points: First, the statement should be recent, not over six months past. Second, it should be an audited statement made by a firm of public accountants, whose sole object is to present a correct statement of fact. Third, the ratio of
quick assets to quick liabilities should, as a rule, be at least two to one. Fourth, the char acter of the business. Most bankers prefer staple articles to businesses which cater to fashion or seasonal demands. Fifth, to scatter the risks territorially as well as to the various lines of merchandising. Being satisfied on each of these points, he is in a position to pur chase with intelligence.
It is a rule of banking that a firm should not•issue both single and two-name paper, and one of the surest tests is the presence or ab sence of odd cents in the item 'bills payable.° If the item is in an even amount it is good evidence that only single-namepaper is issued. If there are odd cents it indicates that the firms' bills receivable have been sold, thus part ing with one of its quickest and best assets, and is a practice that is frowned upon by bankers who know the science of commercial paper.
Under the Federal Reserve Act, commercial paper has been given a new dignity and stand ing in the financial world. The Federal Re serve banks are permitted to rediscount paper that conforms to certain qualifications, the essence of these conditions being that the paper shall arise from a business transaction and be of short maturity. This process enables a bank to cash in its holdings on a few hours' notice, a very marked advantage in periods of unrest. The Federal Reserve banks may in turn use such paper as the basis of note issues, for as long as the Federal Reserve bank has $40 in gold for every $100 in paper, it may put out $100 in bank notes, thus making commercial paper the foundation of our circulating cur rency.
Instruments of Credit—The instruments of credit in this country are as follows: 1: Negotiable bills of exchange, which are unconditional orders in writing addressed by one person to another, signed by the person giving them, requiring the person to whom the order is addressed to pay on demand or at a fixed or determinable future time a sum cer tain in money to order or to bearer.
2. Negotiable promissory notes, which are unconditional promises in writing, made by one person to another, signed by the maker, en gaging to pay on demand or at a fixed or determinable future time, a sum certain in money to order or to bearer.