It is evident that no ordinary capital would be sufficient for the supplying of money on call to mills in the immense quantity needed, and it is here that the banker’s capital is called into use. The commission house is usually a concern of substantial means, sometimes very rich, and nearly always of a financial standing, which will give it, on its own account, an assured credit. At certain times of the year the calls for money from the mills are greater than at other times, and as shipments come forward, and advances are required, the commission house, in order to put itself in funds, will issue a series of its own notes in convenient sized amounts, $5,000 to $10,000 each, for instance, and will offer these for sale, through its note broker.
This paper, which commands an advantageously low rate of interest, and which is issued for convenient periods of time, averaging perhaps four months, is much sought after by banks and other institutions in primary markets and throughout the country wishing to invest current funds in a safe and not unprofitable medium. This paper is so acceptable to banks not only because the credit of the issuing firm is behind it, but also because it is known that the money which is obtained for the notes will be lent out to mills on ample collateral. The issuing house is in a position so entirely safe that hardly ever can a question arise as to its ability to take care of its borrowings.
CHAPTER V
Financing Cotton and Cotton Cloth
NO industry shows better than the cotton industry the economic importance of banking service. No industry, perhaps, utilizes to such a complete extent the modern instruments of credit, nor is so dependent upon these instruments for its proper functioning. At no point in the progress from seed to cloth is the capital represented by the cotton necessarily or even customarily tied up. And not only may the cotton itself at any stage be the basis of credit accommodation, but also, the actual added value which the labor of any factor in the chain may give to the cotton may itself be realized upon in advance. The credit possibilities of the industry have grown with the admission of acceptances to rediscount in the Federal Reserve Banks, and this admissibility has likewise played a part in the present growth of the warehouse system, the lack of which was a handicap to the industry in past years.
Credit Necessary from Seed
to Finished Product
In considering the raw cotton and the cloth market it was necessary to include some account of the financial and banking processes involved in the various commercial transactions undertaken. It is perhaps advisable, however, even at the risk of some repetition, to give a quick survey of the financial and credit aspects of the industry as a whole from the time the cotton is placed in the ground up to the actual sale to the cutter-up or the jobber.
The utilization of credit begins, as we have seen, with the very planting of the crop. Many of the growers, even those who own their farms, are men of limited means, and are not able to pay for the necessaries of life and of labor during the long growing season. The country storekeeper, accordingly, in return for a lien on the crop, allows them credit at his store, usually charging interest based on the monthly statement of their ledger accounts. He in turn receives the necessary accommodation for his own purchases from the local bank, or from the local buyer or factor with whom he is affiliated. The high prices prevailing during the past few years have undoubtedly changed to some extent the small grower’s financial position.