between harvests. In factory towns where wages are paid monthly or weekly, credit at the neighborhood shops supplies the family needs. In the large department stores, the monthly "account" obviates the necessity of making frequent payments, and facilitates shopping. It is estimated that book credit figures in fully one-half of the wholesale and retail transactions of this country to-day. Generally, book credit simply postpones payment until settlement day, when some other form of credit, usually bank credit in the form of a check, settles the account.

56. Commercial or mercantile credit.-Commercial credit is the principal medium by means of which trade exchanges are carried on in the distribution of goods. The entire industrial organization of to-day is based upon credit giving. The process of distributing goods from the grower or original producer to the ultimate consumer involves the services of many middlemen-manufacturers, brokers, wholesalers, jobbers, importers and retailers. Each of these in turn frequently has to buy goods on credit, for few business concerns are so situated that they can always pay cash. The farmer or planter goes in debt for his seed, fertilizer and machinery, agreeing to make payment when his crop is sold; the manufacturer purchases his raw materials on time and sells his manufactured product to the wholesaler, jobber or commission agent under the same terms; and so on through the whole chain of distribution.

Great changes have been brought about in the mercantile credit system in recent years due largely to improved means of transportation and communication. In earlier days it was necessary for the merchant to make several trips a year to the large jobbing centers to purchase his supplies. Buyer and seller met face to face and agreed upon terms of payment. There was considerable risk owing to bad roads and uncertainty of shipments. The local merchant, therefore, "stocked up" heavily once or twice a year and usually had to ask for a liberal amount of time in which to make his payments. Quite commonly he gave his promissory notes running for six months or a year. Improved

railway and mail service, the telegraph, telephone and cable have greatly changed these earlier methods of merchandising. Now the buyer and seller rarely see each other. Traveling salesmen make periodic visits to the local merchant, selling by sample; or the merchant buys from catalogs or price lists sent through the mails. He may now send in smaller orders, knowing that he can get quick delivery if a good season warrants additional orders. Thus, the wholesaler takes the risk of overstocking rather than the retailer.

Changes have come, too, in methods and terms of payment and of securing credit information. Formerly the seller of merchandise determined upon the amount of credit he could safely extend to the buyer when the latter came to make his purchases for the year or the season. Now orders are received from hundreds of merchants scattered over a very wide territory of whose financial responsibility the seller personally knows little or nothing. Various agencies and institutions, such as the mercantile agencies and credit exchange bureaus, have been developed to supply the seller with information regarding the credit standing of buyers, and the large manufacturing and jobbing houses have established credit departments whose business it is to investigate the business standing of those seeking credit.

Under the old system of liberal and long terms of credit it was usual for the seller to require the buyer to give a promissory note which he could discount at his bank and so procure funds to operate his own business. With improved means of communication and better banking facilities these long-term note settlements have given place largely to short-time payments. The merchant who gave his note for six or twelve months under the old system had to pay the highest prices and the highest rate of interest. But with more liberal banking accommodations he was quick to see the advantage of borrowing money from the bank and "discounting" his bills for cash or an early settlement. This change from long-time paper has intro

duced into the credit system some business practices which, to say the least, have serious drawbacks.

One of these is the custom of dating, that is, dating bills a certain length of time ahead of the actual shipment of goods. In effect this is a method of granting extra credit by the manufacturer or jobber in order to induce retailers to make their purchases before the season opens. For instance, a manufacturer sells a bill of goods on March 1, with a dating of sixty days-terms 2 per cent, ten days, net, thirty days. This bill will not be due until June 1, as the dating carries it forward to May 1, after which the buyer has thirty days in which to pay it. The seller cannot demand payment on this bill before June 1, but of course the purchaser may settle it earlier if he chooses. If he pays cash before the end of the ten days (March 10) he can deduct two per cent discount and also interest at the rate of six per cent for the unexpired term of sixty days (the dating).1 Of this practice of dating, Prendergast says: "From a concession on the part of the wholesaler and jobber, the idea of dating seems to have become a right demanded by the merchant, and a settled principle in commercial practice or credit. It has led to an undue anticipation of wants on the part of those engaged in all divisions of trade from the manufacturer to the retailer; and in lines where the element of fashion is a leading one, and subject to sudden changes, it has been the cause of considerable loss to many. Dating transfers the risk from the manufacturer and the wholesaler to the retailer. It tends, moreover, to encourage dealers to overstock and to take larger risks in anticipating trade conditions. As a consequence heavy and frequent losses are likely to result. There seems to have been a disposition in recent years, especially on the side of wholesalers, to discourage the practice of dating. The tendency is toward shorter terms of credit.

57. Book accounts.-Another form of commercial credit which has been developed as a substitute for the promis1 Prendergast, Credit and its Uses, p. 114.

2 Ibid.

sory note and the commercial draft is the book account. With the disappearance of the long-time credit instrument the chief evidence of the indebtedness of the buyer to the seller of the goods was the record on the seller's books. Having the same need of raising money, but not having his customers' notes to discount at the bank, the jobber or wholesaler resorted to the practice of borrowing directly on these book accounts.1 At first the handling of this particular kind of credit was confined to the banks and some banking concerns have separate departments for dealing in book accounts. In recent years there have grown up brokerage or commission houses which specialize in negotiating loans on book accounts. Some of these houses, which are closely connected with banks and trust companies, have a very large and lucrative business.

There are several ways of realizing on book accounts.2 The book account may be sold outright to a bank or commission house which assumes all risks and charges a high rate of interest and, perhaps, a bonus in addition. Another plan is for the seller of merchandise to assign his book accounts and borrow upon them up to a certain percentage of their value. The assignee permits the assignor to collect the accounts when due, but requires the substitution of other accounts to maintain the agreed-upon ratio. Under this method the borrower's customers do not know that he has assigned their accounts. Sometimes the commission house or banker advances funds to a certain percentage of the value of the accounts assigned by the borrower and collects the accounts. In this case the borrower's credit may suffer somewhat because his customers learn that he has assigned their accounts to procure funds. Though the increasing number of firms whose business it is to make loans on book accounts is evidence of the large use of this method of procuring funds, a borrower who resorts to it, involving as it does heavy interest charges, is not generally considered as having high credit standing. 1 See Prendergast, p. 115.

2 See Hagerty, pp. 68-69.

It should be recalled that the familiar and longestablished practice in Europe of granting credit based on actual business transactions evidenced by bills of exchange was familiar in this country before the civil war. At the close of that war values were unstable, credits uncertain, and interest rates high. The depreciated greenback led to the shortening of credit terms and to the demand for cash payments. Cash discounts sufficiently liberal to induce the buyer to borrow money were offered by the seller. Out of the custom thus begun in times of great credit and business disturbance, the open account and the cash discount with their abuses and evils have developed.

The open book account method of doing business is wrong in principle because it puts upon the seller the burden of extending credit to the buyer, thus tying up his invested or borrowed capital for an indefinite time, whereas the granting of credit in this form is essentially the function of the commercial bank. Moreover, a seller who is compelled to carry his customers on open account usually has to procure funds by discounting his single-name paper at the bank or selling it through note brokers. Because of the lack of accurate information by the bank as to the character of his accounts receivable and because of their inconvertibility, the bank requires that his statements shall show a good margin, usually two to one, of quick assets over liabilities. By converting these credits into liquid double-name paper in the form of acceptances, the necessity for this large margin is reduced, and lower interest rates and better prices to the buyer are possible.

In practice the use of the open book account is attended by numerous abuses and unfair practices. It is a prolific source of slow collections, bad debts and losses. Though payable, theoretically, within a given time, it is very often. regarded as payable at the pleasure of the debtor, who allows his account to run for months without thought of paying interest for the overdue time. If, finally, the seller has to sue to collect his account, he may have to prove the correctness of his book entries and meet the objections, set