or both; is usually made non-voting; includes many protective provisions; and is ordinarily limited as to the amount it may receive in dividends, which, again, may be cumulative or noncumulative. It should be borne in mind that a preferred stock is identical with the common stock in every respect, except to the extent of definite provisions to the contrary, by means of which it is endowed with special rights and limitations.

When viewed from one angle, a stockholder is a creditor and stocks are credit instruments. According to law, a corporation is an entity; it can sue and be sued in its own name. Again, from the economic viewpoint, a corporation may be considered an organization separate and distinct from its stockholders and bondholders. Frequently, stockholders take no more active interest in the business than the other security holders and merchandise creditors, particularly in the large corporations, so that even in practice the business is virtually divorced from its legal owners. Therefore, it is argued, stockholders are in a sense creditors and stocks are forms of credit. Besides, certificates of stock are negotiable and readily salable by indorsement and delivery the same as are bonds and promissory notes. They are also frequently put up as security for loans at the banks, and are particularly valuable when listed on an important stock exchange and actively traded in.

From another standpoint, however, stocks must not be considered credit instruments. They are but certificates of ownership. Legally, again, a stockholder is a part owner of the issuing corporation. He cannot enforce claims against the corporation either for dividends (unless they have already been declared) or principal so long as the company remains a going concern, unless it can be proved that fraud or unbusiness-like methods have been exercised on the part of the board of directors. This is so because the board of directors serves in a fiduciary capacity for the stockholders to whom they are responsible or, rather, accountable for the manner in which the property is handled. It appears, therefore, that, although from many angles stocks partake of the features characterizing credit instruments, they are nevertheless, in reality, but evidences of ownership involving no postponement of payment so long as the company remains a going concern.

SELECTED REFERENCES

BREWSTER, S. F.: "Legal Aspects of Credit," Pt. VI, chaps. 33 and 35. DEWEY, D. R., and SHUGRUE, M. J.: "Banking and Credit," chaps. 3, 4, 5, and 6. EDWARDS, G. W.: "Foreign Commercial Credits," chaps. 3, 4, 5, and 9. ETTINGER, R. P., and GOLIEB, D. E.: "Credits and Collections," chap. 2. HAGERTY, J. E.: "Mercantile Credit," Pt. I, chap. 2.

HOLDSWORTH, J. T.: “Money and Banking," chap. 5.

MOULTON. H. G.: "The Financial Organization of Society," pp. 151-168. WALL, A.: "Analytical Credits," chap. 5.

CHAPTER III

INVESTMENT AND BANKING CREDITS

All credits may be grouped under two principal heads, public and private. These, in turn, are subdivided in different ways, depending upon the respective bases employed. In the following pages the discussion will be entirely confined to private credit, which is divided for our purposes into investment, banking, retail or personal, and mercantile credits.

INVESTMENT CREDIT

At its inception, as well as thereafter, a business enterprise requires three classes of credit: investment, banking, and mercantile. Investment credit is utilized for the purpose of obtaining funds with which to purchase and acquire fixed assets, such as land, buildings, machinery, fixtures, delivery equipment, and intangible assets of a more or less permanent character. A sufficient amount must also be provided in this manner for the working capital which a concern requires in its normal condition of business activity. Permanent working capital is that portion of the funds of a business which is constantly needed from week to week and from month to month. It is the sum required to carry minimum inventories of merchandise and supplies.

Characteristics of Investment Credit.-Investment credit is obtained through the issue of relatively long-term obligations. These obligations take the form of bonds, real estate mortgages, equipment obligations, and long-term notes of individuals or firms. They are promises to pay definite sums of principal and in most cases also certain rates of interest. Stocks and shares in joint-stock companies, which are merely evidences of ownership or partnership rights to participate proportionally in the residual equity of the business enterprise, are used practically in the same way. These loans are made purely for investment purposes, hence the term "investment credit." The money ob

tained in either of the forms enumerated is permanently or for a relatively long period of time invested in the business.

Sources of Investment Credit.-Four principal sources are available from which investment credit may be secured. The chief source is the ultimate individual investor, of whom there are numerous gradations. These are individuals who have saved, inherited, or married wealth. Instead of hoarding or engaging in business primarily for the purpose of utilizing these funds, they are invested in long-time securities. Hoarding is both insecure and profitless. Funds may be destroyed by fire or stolen, and if insured against these contingencies, additional expenses are incurred. Again, many individuals possessing wealth are either unwilling or incapable of actively managing their own business. Accordingly, these persons are constantly searching for places where their funds can be invested so as to bring a fair return and where the principal will at the same time remain secure.

Some of the ultimate individual investors are interested primarily in securities of an investment character, namely, obligations which bring a steady return and the prices of which do not fluctuate to any considerable extent. The income on such securities is usually low, since, as a rule, security of principal and a high rate of return are incompatible. On the other hand, a great many investors are attracted by promises of high rates of return. These are interested in speculative securities the prices of which fluctuate frequently and violently and from which income may be high at times. Many persons are anxious to invest in them also in the hope of their appreciation in value. Between the two extremes, we find numerous types of individual investors seeking different combinations of security, maturity, and rate of return. This is why so many different types of bonds and stocks have come into existence, all for the purpose of satisfying the whims and fancies of the investing public and thereby widening the market for the securities.

A second class of investors in long-term obligations are trus tees of funds of individuals and estates. Funds of deceased persons are thus invested by the trustees for the benefit of the beneficiaries. In this class are also to be included investments of educational and eleemosynary institutions.

Insurance companies constitute another class of heavy purchasers of investment securities. They are primarily interested

in high-grade obligations the prices of which lack the nervousness attending the more speculative securities and the marketability of which is well assured. It is thus possible to put the surplus funds and part of the reserves to work, thereby enhancing the profitability of the enterprise.

Finally, banking institutions commonly invest in long-time securities. Certain savings banks operating on a non-profit basis invest the funds for their depositors in this manner. The same situation obtains in case of investment in real estate mortgages on the part of building and loan associations and the like. Although most of the high-grade bonds and stocks pass through the hands of investment bankers, they are nevertheless excluded from among the sources of investment credit. They are merely middlemen, standing between the issuers of the securities on the one hand and the ultimate investors on the other.

BANKING CREDIT

Definition.-Banking credit is the power which enables commercial banking institutions to attract the funds of depositors and to make loans and create obligations, payable on demand, which are not backed by a 100 per cent cash reserve. The credit granted by a commercial bank to an individual or firm is generally in the form of short-term loans. The length of the credit period usually varies from 30 to 90 days, since only those notes which mature within 90 days can be rediscounted by banks, with the exception of paper used for agricultural purposes or that arising out of foreign trade transactions. In these cases a period of six months is allowed for rediscounting purposes by Federal Reserve Banks. Commercial bankers, nevertheless, occasionally accept notes maturing within more than the stated period.

The purpose of credit extended by banks is to help a concern, whose business is subject to seasonal variations, carry the peak of the load at the time the business is paying for its purchases and waiting for remittance from its customers. Banking credit. also furnishes a means of taking advantage of cash discounts through the payment of bills before due with the proceeds obtained therefrom.

Development of Bank Credit Work.-Were a census taken of all the commercial banking houses in the country, it is believed that relatively few would be found to have complete and