The exact line of division between notes delivered to note brokers and by them sold to banks, and notes delivered to private banking houses and sold to the general public may seem somewhat hazy. As a matter of fact, however, there is usually little difficulty in classifying a note as belonging in one or the other of these two groups. A note intended for' sale to bankers is seldom more than 90 days and never more than six months, in length. A note intended for wider distribution is customarily from one year to five years in length. As just indicated, the note brokers who handle the sale of the first class are entirely different from the stock and bond brokers and private banking firms that handle notes of the second class.

Short-term notes for sale to the public may be legitimately issued for one of two purposes: either in anticipation of a later issue of long-term bonds or other securities, or in order to finance purchases or an improvement which is expected to produce so much new revenue that the note issue can be paid off at maturity out of the corporation's income.

In order to facilitate the repayment, notes running for three to five years or longer are frequently issued in series; that is to say, an equal proportion of the note issue matures each year. They are in denominations ordinarily of $1,000, although they are sometimes as low as $500 or even $100, and they frequently go up to $10,000 or even $100,000.

* See article on "Advertising as a Bankable Asset," by Edward Mott Woolley, in Printer's Ink, October 15, 1914.

Short-term notes have been a feature of practically every financial crisis since the Civil War with the exception of 1884. This has been due to the desire of established corporations to avoid refunding of long-term bond issues which fall due during a crisis. This is certainly legitimate enough within proper limitations. In recent years, however, the habit of putting out note issues has grown even among the conservative companies to such an extent that it is regarded as a real source of danger.

Note issues have been utilized of late for almost every conceivable purpose for which long-time bonds used formerly to be emitted; for financing consolidations, to procure cash in connection with liquidations, to effect segregation of corporations. Approximately $130,000,000 in short-term notes were issued in Wall Street in 1903-1904 in connection with the "rich men's" panic of that winter. In 1907 they aggregated about $300,000,000; in 1912, approximately $500,000,000; and over $550,000,000 fell due in 1914.*

Until recently, short-term note issues have been almost universally successful. The railroad notes have generally been refunded on maturity by bond issues. Their danger, however, is shown by the experience of the Erie Railroad Company in 1908. This company had put out one-year notes in the middle of the crisis of 1907, which matured April 8, 1908. Four days before maturity J. P. Morgan and Company, as the railroad's financial agents, published a notice to the effect that the notes would be refunded provided they were all deposited on or before April 8. As some of the notes were in Europe, compliance with this request was impossible. The 8th of April came. Some European notes were presented for payment and it was announced that the money for their redemption was not at hand. To all appearances another bankruptcy was impending. Then suddenly E. H. Harriman, from his sick-bed, telephoned that he would take the whole burden upon himself. Immediately he arranged for a refunding issue of three-year notes and brought about a satisfactory redemption of the previous issue. It was one of the most dramatic incidents in the history of American finance. The occurrence serves to illustrate clearly the dangers that beset every corporation that relies too much on short-term notes which it cannot possibly hope to meet except by issuing other securities. As was remarked by Guy E. Tripp, chairman of the Westinghouse Electric Manufacturing Company in 1914, "It is a bad thing to have a debt that you never intend to pay and never can pay; and that is what some short-term notes are".

* See article on "A Rickety Practice in Finance,' by William Z. Ripley, in New York Annalist, April 6, 1914.

Aside from the danger, excessive financing through short-term notes is apt to become expensive. The interest payments may not be high, but every issue must be underwritten, and the underwriting commissions in a few years become a heavy burden.

The highest grade short-term notes of large railroad and industrial corporations, ordinarily sell on a basis of 4% to 5 1/2%. A specialist in these notes said recently that he regarded those yielding over 7% as the rankest kind of speculation, and "much more dangerous than active stocks which can generally be sold within one point of previous sales. A loss on a note when it comes, is like a fire loss; it is generally total".

At the present writing, some securities of this type are being quoted to yield as high as 10, 12 and 15%. Some buyers of these high-yield notes have made a great deal of money on them, but they are to be regarded as dangerous in the extreme for any one who is not intimately acquainted with the issuing company.

As the notes approach within six months or less of maturity, they come into an entirely different class, for they become available for the use of banks. Hence, they sell at prices which make their yield approximate the yield of commercial paper of the highest class. Sometimes the yield may be as low as 1 1/2 or 2%.

A curious situation arises as a note comes very close to maturity, due to the fact that fluctuations of as little as even 1/8 or 1/16 in the purchase price may make a considerable difference in the yield; consequently, the tendency is for such notes nearing maturity to keep out of the market.

Some short-term notes are secured by collateral; others, as in the case of the Pennsylvania Railroad, rest solely upon the credit and reputation of the issuing company. Curiously enough, notes which command the best price and have the broadest market have no collateral behind them. The fact that collateral is posted is looked upon as indicating that the company has already used up all its unsecured credit.

Professor Ripley has forced direct attention to what he well calls "the most deceptive practice" of carrying short-term notes in corporation balance sheets as a portion of funded debt instead of including them among the current liabilities. This has been true even of corporations of the standing of the Erie Railroad, and the Baltimore and Ohio Railroad. Notes running as long as 4 or 5 years are not, it is true, in exactly the same class as bank loans and accounts payable, most of which fall due within 30 to 90 days, but they are by no means a funded obligation. They must be met either out of income or by the issuance of long-term loans. They are properly offset and secured, as we shall see a little later, not by the permanent property and investments of the issuing corporations, but by the assets which are readily convertible into cash.