CHAPTER II

THE SELECTION OF COMMERCIAL PAPER.

W

E have seen that commercial paper, if it is properly issued, is one of the safest forms of investment that can be had. We have also seen that unless commercial paper appears in the form of true receivables, that is, notes bearing the names of two responsible and distinct parties to a transaction in merchandise, or unless it appears to be very carefully protected, it is difficult to guard against poor commercial paper. An enormous amount of commercial paper is in circulation, practically all of it good at bottom, but with a tendency in much of it to represent transactions which may not arrive at maturity in time to pay off the notes when they fall due. Too often, also, commercial paper in this country represents transactions in which there will occur absolutely unnecessary loss.

Rules for the Buying of Commercial
Paper Have to be Very

Conservative.

It is now our task to lay down certain laws which should provide for the selection of commercial paper as it exists with us today with safety, without proving too great restrictions on the borrower. Rules are always a momentary

drag and they are things to be avoided if possible. Often they bear unduly hard on certain people governed by them; but they have to be made. sufficiently wide to cover all classes, and this should be borne in mind by those on whom they fall and who do not need them. Rules for the safe buying of commercial paper must necessarily be especially conservative, for they have to protect as nearly as can be those who lend what is apt to be their own and other men's dearest asset, money.

Where Possible Every Case Should be
Considered on Its Individual

Merits.

The following rules cannot insure absolute safety, nor can they be made hard and fast. Every case should be considered individually as much as possible, especially where commercial paper is presented for discount at the borrower's own bank, where intimate knowledge of the borrower should guide more than anything else the amount of credit to be extended. For the general purchase of commercial paper, however, particularly in the case of lenders who cannot have an intimate knowledge of the borrowers, the following should suffice to insure the buying of paper with the confidence afforded by other forms of investment, and at the same time not offer restrictions which will bear too heavily on the borrowers. The disregarding of any one of these rules should occur only with certainty as to conditions in the mind of the lender.

(a) If possible buy real receivables or accept

ances.

There is so much commercial paper in the market that is good and that is not in the form of receivables that it may seem an undue restriction to limit at first the purchase of paper as largely as is possible to this class, but there is no better method of proving the worth of paper than by finding a strong firm or corporation which is not the real borrower ready to endorse that borrower's note. Not only does this endorsement act as a check on the goodness of the original note, but it brings with it usually at least as much strength again as the original name carries. Such paper in our market, therefore, is like the trade bills. current in England, which bear the endorsement of some powerful firm. These receivables would not be classed abroad as prime bills; but comparatively speaking they appear as such with us, and they should without question claim a lender's first attention whenever they are offered. It should be noticed, however, that commercial paper having the endorsement of a firm or corporation which controls the original maker of the note, may not be as satisfactory as paper which carries the names of two separate and distinct mercantile companies. The wheel within a wheel system should be watched, if not guarded against.

Under our new bank act, banks joining the Federal Reserve System may accept paper. Such bank acceptances should be classed as the best. commercial paper.

(b) In buying other than local commercial paper,