Mr. Lawyer: When our meeting broke up last Wednesday night, Mr. Banker had just outlined the different forms of credit, and I was very glad that he did, because it gave me an opportunity to read up on the subject and be prepared to listen intelligently, at least, to what any of you may say tonight.
Mr. Merchant: I did some investigating, too, and found the subject far more interesting than I supposed it could possibly be. Indeed, that is true of any subject. Your interest is always measured by your knowledge, and many matters that seem to us difficult to understand, become exceedingly simple as you get into them, and comprehend them. How often the apparently impossible task completely dissolves under persistent attacks.
Mr. Banker: I am more than pleased that you gentlemen have given your spare time to this subject. Simple in function it is, but it is immeasurably great in its possibilities, extent and responsibilities from the standpoint of the banker.
Just as we parted last Wednesday I had described or defined the different forms of credit, so far as they enter into banking directly or indirectly. As I then stated, the first and simplest use of credit is that granted for the production of something to eat, wear or use—what we call consumable commodities, that is, credit granted to aid in production.
If Mr. Farmer over there should come into my bank now as he used to before he got rich, and ask for a thousand dollars to pay his expenses while he was planting, cultivating and harvesting his crop, and then in the fall should come again and ask me for three thousand dollars more to buy some steers and hogs with, because he thought he could make more money feeding than by selling his corn outright, and I had let him have the total amount of $4,000 from time to time as he wanted it, because I believed in his honesty and intelligence, and also because I regarded the venture as a good one, that would be granting credit for the production of beef and pork, food products—the very necessities of life.
Just as soon as his steers and hogs had become fit for market, and had ceased to gain anything to speak of, by holding them and further feeding, he must sell or lose the cost of holding on the chance of a rise in the market. But even this delay must be temporary. Virtually he is compelled to sell from the very nature of the case. When he sells his steers and hogs, suppose he should receive $5,000. First, he pays me the $4,000 and interest, and has about $1,000 profit on the transaction. You will all perceive and understand, that as I gave Mr. Farmer this credit of $4,000 from time to time, he gave me his promissory note for an equal amount, so that as fast as I granted credit he created a debt. I acquired the right to demand payment of $4,000 and he incurred the duty or obligation to pay $4,000.
So for every credit granted a corresponding debt is created; and if every debt is paid every credit will be canceled. Though the credit granted to Mr. Farmer was for the production of the necessities of life, it was not the safest kind of a loan to make as we shall soon see—his personal responsibility aside of course; because after I had given the $1,000 he might have to replant his corn. The summer might be dry and the frost might come early and cut off his crop; but passing over these possible dangers to his crops, if we assume that his crop is the biggest he ever raised, and that that very fact makes it desirable to borrow the additional $3,000, pleuro-pneumonia might strike his cattle, and cholera might seize his hogs and the transaction might result in a loss of $1,000 instead of a profit of $1,000; or even a greater loss than $1,000.
It is these risks that the banker takes in making loans to farmers that justifies higher interest rates than are charged under some other circumstances. Again it is these risks that lead a banker out of caution to take real estate loans in addition, to cover the accidents of crop raising, although the National Bank Act forbids making loans upon real estate.
Mr. Farmer: Under such circumstances, I think it ought to be possible for a bank to take real estate loans. I believe it would help the farmer to get his money at a trifle lower rate of interest.
Mr. Banker: I agree with you, and provision should be made for just such cases; but the rule of the National Bank should still prevail with regard to loans upon real estate so far as a regular business is concerned, unless the bank is doing a savings bank business or a trust company business, in which event it would be entirely proper to use such funds for that purpose.