payments. on this kind of security have in many cases exhausted work in the handling of the loan and the collection of the every account assigned to the bank, as well as considerable volves a rigid investigation of the financial standing of Furthermore, borrowers who resort to loans

COLLATERAL NOTE-FRONT

every other kind of borrowing asset, and, therefore, need watching.

Another form of collateral security which is extensively used, especially by traders on boards of trade and produce exchanges, is the warehouse receipt. These are receipts for goods such as grain, cotton or tobacco, stored in a warehouse under the regulation of a produce exchange or

IN CONSIDERATION of one dollar, paid to the undersigned, the receipt of which is hereby acknowledged, and of the making, at the request of the undersigned, of the loan evidenced by the within note, the undersigned, severally and jointly, hereby waive demand of payment, protest and notice of protest thereof, and guarantee, and become surety for, its punctual payment, at maturity, to the Mellon National Bank of Pittsburgh, its successors, endorsees or assigns, agreeing and covenanting to pay the same to the holder, with interest, when thereafter: called upon so to do. The undersigned further assent to all the terms and conditions in said note contained, and particularly agree that the holder may accept partial payment or payments on, and grant extension or extensions of said pote, and may agerpt such exchange of securities for said loan, from time to time, and it and when partial payments are made) surrender such portions thereof, as to the holder may seem proper, all with or without notice, and without prejudice to this covenant and guarantee, the undersigned remaining bound hereby, notwithstanding such extension, exchange or surrender.

of the state authorities. They certify to the quantity and grade or kind of produce which will be delivered to the holder of the receipts when properly indorsed. The receipts are negotiable and when pledged for a loan at the bank are indorsed over to it, giving it a lien upon the goods. If the loan is not paid at maturity, the bank can take possession of the goods and sell them to satisfy the debt. If the borrower wishes to sell some of his cotton or wheat during the period of the loan he will generally

be required to reduce his loan by a corresponding amount or to substitute other receipts.

There has been a marked decline in recent years in the amount of trade paper offered for discount. The banks have therefore been compelled to look to other bases of security for their loans. The collateral loan based upon such security as stocks and bonds has come into wide use, but loaning upon merchandise has been regarded in some quarters as a kind of pawnbroking. Merchandise stored under adequate warehousing systems may, however, offer a perfectly safe form of collateral and this type of collateral is likely to have considerable development in the future. Already in the larger cities some of the banks in the wholesale districts carry large lines of loans on merchandise.

A bill of lading is a written acknowledgment by a railroad or other carrier of the receipt of goods for transportation. Since it is negotiable, and represents actual property, the bill of lading is a very safe kind of security. These bills are used extensively in connection with bills of exchange or drafts which they serve to secure. For instance, A, of New York, sells a bill of goods to B, of Chicago, subject to draft at thirty days. A attaches the bill of lading given to him by the railroad when he ships the goods, to the draft drawn either in his own favor or in favor of his bank and takes them to the bank. The bank forwards the draft with the bill of lading to its agent or correspondent in Chicago, who presents the draft to B for acceptance. Upon being notified by the Chicago correspondent that B has accepted the draft, the New York bank advances the money to A. Possibly, A may get immediate use of the proceeds of the draft upon depositing it. Ordinarily the bank is safe in advancing the money to A, since it retains title to the bill of lading until its Chicago correspondent secures B's acceptance of the draft, which is his promise to pay in thirty days. B cannot, at least he should not, get possession of the goods without the bill of lading which the Chicago correspondent sur

renders to him only after he has accepted the draft. The "acceptance" is in effect double-name paper, secured by actual merchandise the evidence of which, the bill of lading, has passed through the hands of the bank. At maturity the acceptance will be collected by the Chicago correspondent of the New York bank and forwarded probably in the form of a bank draft. If B fails to meet the acceptance at maturity, the bank can recover from A.

The bulk of the cotton crop and a considerable part of the grain crop and other products are financed in this way. A few years ago a New York bank reported the handling of bills of lading representing over one hundred different products. Recognizing the importance of this branch of the banking business, and the abuses and frauds attending the use of bills of lading, the American Bankers' Association has for years tried to secure national legislation to protect banks against losses in handling this class of security. Several states have enacted a uniform bill of lading law suggested by the Association.

Another form of collateral which is coming largely into use is the life insurance policy. The older policies in the straight life or endowment form were not desirable as collateral to a loan because the lender might have to keep up the premium payments and wait for years to get his money back. The modern policy with a cash surrender value is better suited for use as collateral. A bank can safely loan on such a policy up to its cash surrender value at the time, for it practically amounts to a demand certificate upon the insurance company. Moreover, as additional premiums are paid the margin of security constantly improves.

130. Loans on real estate. Prior to the enactment of the Federal Reserve Act in 1913, national banks were prohibited from loaning on real estate, though state banks in most of the states are permitted to do so under certain limitations. National banks may, however, take real estate mortgaged or sold to it to secure debts previously con

tracted or due to them. Even then they are required to dispose of such real estate within five years.

The reason for this prohibition upon national banks, and the restrictions found in most of the state laws upon the proportion of a state bank's assets which may be loaned upon real estate, may be found in the disastrous experiences of banks prior to 1863 when real estate security was fluctuating and uncertain and heavy losses were incurred in lending on this seemingly solid basis. It is a sound principle and policy of commercial banking that the assets shall be kept "fluid." Since most of a bank's obligations are payable on demand it is necessary that the securities it holds shall be readily convertible into money. Commercial paper arising from actual business transactions and having from thirty days to four months to run is of this nature. Such paper, maturing constantly from day to day and being paid or renewed for similar short periods at the option of the bank, gives to the bank close control over its funds. Real estate, on the other hand, is not a "quick" asset, but often a very "slow" asset. A mortgage upon real estate may be perfectly good security, but it cannot be turned into money immediately in case of an emergency. Personal securities and most of the forms of collateral security previously described can be quickly assigned and realized upon, but the transfer of real estate is usually attended with some delay. In the case of savings banks, trust companies and insurance companies there is not the same need for keeping the assets in a convertible form; indeed it is rather desirable that a considerable part of their investments shall be more or less permanent; real estate loans, therefore, are well suited to their purpose.

In the past, conservative bankers have regarded the restrictions placed by law upon real-estate loans as wise and salutary. In recent years, however, there has been a persistent demand, mainly in the agricultural sections of the West and the South, where land and its products constitute the chief wealth, for more liberal laws regarding 1 Bolles: Money, Banking and Finance, p. 118.