7. Advances

A third way in which banks and bankers finance loans is to act as agents or brokers in selling the securities, receiving a commission therefor, but also making advances before selling them, reimbursing themselves from the money received, and also for the interest on their advances. It often happens that a city or other corporation, sometimes a state, wishes money at once, and can not conveniently wait for its securities to be sold by the usual method. Or it may be that the time is not favorable for selling them, the money market is tight, or some other unfavorable circumstance is impending over the borrower. The banker, with whom an agreement has been made, having confidence in the borrower, makes an advance to the amount of fifty per cent or more of the proposed loan, believing that in due time he will have no difficulty in selling the bonds and thus reimbursing himself besides earning his profit. This usually is a safe enough investment for the banker unless his advances have been very large, and he is unable to reimburse himself from the sales made afterward.

8. To Whom Loans Are Made

Such loans are not confined to states and cities. Others are made to corporations. A factory is organized for making woolen goods. The shareholders have money enough to build it, but they desire a working capital. None of the members have any to lend. They do not wish to borrow of banks on short-time loans, because the payment of these will be too inconvenient and difficult. As we have already said, and the truth can not be too strongly enforced, a bank of discount and deposit deals primarily in mercantile loans; it has no right, save under exceptional circumstances, to invest its proceeds permanently. The reason is apparent, - its deposits, which, with all large banks, is the principal item of resources, are payable on demand. It is not good banking therefore to lock these up in permanent loans.

What the factory directors desire is a permanent loan, and they go to a banking house and arrange therefor. They agree to issue bonds for the payment of which their property is to be pledged payable in five or seven years, or other period, bearing interest payable annually or semiannually, and these are given to the banker to sell by one of the methods above described. It is much easier for the factory to pay interest on the bonds and to provide for the payment of the principal of them at maturity, than it is to give four months' notes with all the risks of non-renewal when they mature. In issuing such bonds the bank gen erally advises concerning the most expedient length of time they should run, from the Seller's point of view; in other words, what kind of bond the investor is most likely to take, whether for three or five years, or for a longer period.

Sometimes a bond which is to run for five or ten years commands a more ready sale than one for a shorter period, and this is especially true of the bonds of a government in high credit like our own The same thing may be said of the bonds of a city which has always promptly fulfilled its obligations and has a high sense of responsibility.