Clearinghouses of the Future

Non-members and Country Checks

Business men must borrow money. With rare exceptions every firm and corporation in the regular course of business must at times resort to the money lender. Credit lies at the foundation of our financial and commercial systems, and it is prudent business policy to use credit within proper limits. When a firm can earn more than the ruling rate of interest upon capital employed, after safely making allowance for all expenses and hazards, it may prudently use borrowed money as a part of its working capital. Suppose a firm with $100,000 capital turns its capital over six times a year and makes a net profit of 21/2 per cen., each time. Its yearly profits then would be $15,000. If now it can extend its business in the same proportion it can afford to borrow, say $50,000 at 6 per cent. interest to increase its working capital. Its profits would then amount to $22,500, from which deduct $3,000 interest, and we have a net profit of $19,500, or nearly 20 per cent. upon the capital of the firm.

The constant general tendency of prices of merchandise is downward. Competition tends to reduce prices and lessen profits. To offset these diminishing profits, firms aim to do a larger volume of business and make the expense proportionately less. This requires greater capital to introduce improved machinery, put more salesmen on the road, or otherwise improve the facilities of the house,

Necessity for Borrowing and acts as an incentive to the firm to resort to the moneylender.

As a country grows older and the surplus earnings of the people are carried over from year to year, there is an increased amount of money seeking borrowers, and competition of money against money tends to reduce the rate of interest, thus enabling borrowers to meet the falling market prices of their wares and yet pay the ruling rate of interest for borrowed capital. The machinery for massing capital, such as the savings banks which gather up the little rivulets of wealth, trust companies, insurance companies and banks, becomes more numerous and efficient and the knowledge of the conditions of financial safety in business, such as reports on the credit of firms and corporations, also becomes more thorough and reliable, so that the whole process of borrowing and lending in business is facilitated and made less hazardous. To take advantage of these trade forces and use them properly is the province of the financier.

The inexorable law of supply and demand obtains in the money market the same as in other things. Money is a commodity, and at times it is in greater demand than at others, the same as other commodities. Supply and demand, as they affect the money centers, affect the entire money market to a greater or less degree. Thus a "tightness" of money in Wall Street, or an unusual demand for money there, causes a rise in the rate of interest, and money at once flows to New York, perhaps causing a rise in the rate of interest through the country. In the agricultural districts of the West, when the great crops of corn and wheat must be carried to market in the autumn, a large amount of money is needed, and the banks aim to so time their loans as to have a good supply on hand at that time. In the sugar and cotton districts of the South the crops are ready for market in December and January, and these make a profitable demand for money.

The Money Market

Lenders