The Fabric of Civilization Part 4

The financing of a business conducted in this way can be a.s.sisted by loans from warehouses upon stocks of raw material stored there, by bank accommodation, and by facilities which certain banks give for the cashing of a substantial percentage of those accounts on the books of the concern which the customers have not discounted themselves. Also, in handling his merchandise in this way, the manufacturer must have a thorough understanding of the best means of marketing his product, and this care of the selling end is, of course, an added burden upon his shoulders which, in many cases, he may not feel competent to handle properly.

Therefore, the comparatively few concerns which do have sufficient capital to sell directly, in addition to the many from great to small who have not, will market their product through what are known as dry goods commission houses, sometimes referred to as factors, and simply as commercial bankers. The commission house system, as we have it here, does not exist anywhere else, and its great growth in the United States has been largely due to certain peculiarities in our banking methods, which have prevented mills--even those with a reasonably sufficient supply of capital--from obtaining the amount of direct banking accommodation necessary for their needs.

The commission house, in its usual relations with its mills, undertakes to conduct the sale of their products. Some commission agents insist upon having the entire selling control of all of the goods the mill produces, or at any rate, of all the goods of the kind which they are equipped to sell. Others, again, will take over a partial selling control of the product of a mill, and various lines of the same manufacturer may be found offering through different channels. There are some obvious disadvantages connected with this latter procedure.

If the mill is a very large one, the selling agent may handle no goods except the product of that mill, but in the great majority of cases, the factor will represent a considerable number of mills.

Immediately on receipt of the invoices of the goods consigned to the selling agent, the mill can draw against them a percentage of their value, previously agreed upon, usually about two-thirds of their net selling price, and upon these loans interest at the rate of 6% is charged. The difference between the rate at which the commission house can borrow money, (in normal times perhaps 4 to 4-1/2%), and the 6% which is usually charged to the mills, const.i.tutes a considerable part of the profits of the factor's business.

Factors Provide Selling Facilities

The factor often provides a store, together with a complete selling and office force, and every facility for receiving, storing, selling, and shipping the goods, and for financing the business. The salesmen of the house travel throughout the country, reaching all the important markets, and the managers of the different departments, who thus understand the needs of the market, are in a position to advise the mill with intelligence and exactness as to the kind of goods which should be made to meet the requirements of the trade. The cost of warehousing and of insurance on the merchandise is also paid by the commission agent.

[Ill.u.s.tration: _Spinning room in a large mill. These are all ring spindles_]

The prices at which the goods are to be sold are fixed by the mill, but, of course, they will finally sell at prices determined by the market conditions. As the goods are sold, the amounts which they bring are credited to the mill, less whatever has been advanced against them. The selling agent also stands ready, no matter on what time and terms the goods may be sold, to credit the mill with the net value of the sale, less 6% interest for the unexpired time within which the customer may pay, and from this interest charge also he secures part of his return. Of course if bank rates are very high, as they sometimes are for short periods, the factor may be out of pocket on the interest account, instead of making profit. As the goods are sold, so are the equities in them released, and the balance is credited to the mill. If, however, the goods sell at a loss there will be no equities coming to the mill, and, in fact, there are not infrequently deficiencies to make up.

For these services, and according to the nature of the goods being sold, various commissions are charged, usually ranging between the limits of 4 and 8% of the net returns of the sales. Plain unfinished goods which are marketed in large quant.i.ties are charged for at a relatively low figure, while fancy goods, sold in smaller quant.i.ties and requiring more effort and expense to sell them, are charged for at a higher figure.

The selling agent also guarantees the credits of the firms to which he sells, so that no losses for bad debts can fall upon the manufacturer, but, at the same time, he will decline orders from any concerns except those with whose credit he is entirely satisfied.

Not infrequently when the manufacturer conducts his own selling operations, he will use the facilities afforded by the commission house for the financial part of the business only, taking advances on his goods, having his sales cashed, and his credits guaranteed, etc. For these lesser services, of course, the commissions charged are smaller.

When goods are charged out, the bills are payable to the commission house, and so, as far as the customer is concerned, the commission house is the princ.i.p.al in the transaction. In many cases certain modified arrangements are made, but in most instances the business is conducted as herein described, and it may fairly be said that the bulk of the dry goods of all kinds produced in the United States finds its way into the market through commission house channels.

Making Plain Goods for Future Orders

It is the policy of most cotton mills, and certainly of those making plain goods, to run steadily all the year round, and thus the commission agent, whether he has secured advance orders on the goods or not, has constantly flowing into his hands an a.s.sured stream of merchandise which must eventually, when sold, pay him a commission. Thus the securing of a good account means an a.s.sured source of revenue to the commission agent.

There are no more important selling organizations for textiles than these dry goods commission houses, many of them having an immense and profitable turnover, and their businesses are conducted on a very high plane of efficiency, and probity, although, in itself, there are many evils attendant upon this method of the distribution of merchandise, and which exercise at times a most adverse influence upon the well being of the mills whose product is thus disposed of.

Strength of Agents Makes "Paper" Acceptable

It is evident that no ordinary capital would be sufficient for the supplying of money on call to mills in the immense quant.i.ty 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 a.s.sured 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 inst.i.tutions 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 repet.i.tion, 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.

Cash for the Grower From the Local Bank

The larger growers, or the great corporations which let out cotton lands to renters, usually operate the stores in their villages upon the same basis, credit being advanced against the renter's share of the growing crop. Even these large corporations are seldom able to meet the heavy demands of the growing season without recourse to the credit service of those to whom they sell their cotton, or to the local banks. The banks, or buyers, in turn discount at least a proportion of the commercial paper thus created with their correspondent banks in New York, Boston, or other financial centers. This credit arrangement, it will be seen, is almost entirely based on a moral risk, the lien being made upon the growing cotton which cannot be liquidated until it is grown, picked, and ginned.

When the crop is picked, it is weighed by the merchant before it is ginned, and the farmer is credited on the merchant's books with the amount due him, the balance in his favor being given him in cash. His concern with the cotton is thus ended. In the event that he is able to finance himself through the season he takes the cotton directly to the gin, and has it ginned and baled there, paying the ginnery for the operation, and selling the cotton directly to a local buyer and the seed to an oil mill. If the gin warehouse is available, and he desires to wait for a more favorable opportunity to sell, he may store the cotton, taking a gin receipt for it, against which the cotton will eventually be delivered. The gin receipt may be collateral for a loan from a cotton factor, or from a local bank.

Thus, it will be seen that the grower receives accommodation throughout his season, and is paid cash for his product when it is delivered. This arrangement puts a heavy strain upon the cotton buyers, particularly upon those who deal in large lots for the mills. The method by which the buyers pay the growers is thus described:

The buyers make arrangements with the local bankers where the gins are located for the payment of the cotton, the banks furnishing the actual cash against tickets issued by the buyer's representatives, holding the tickets in question as their collateral in the meantime. When a sufficient amount of cotton has been acc.u.mulated the local banker, at the request of the buyer's agent, delivers the tickets in question to the local agent of the railroad, who in turn issues a bill of lading covering the shipment to the compress point, which then is attached to the draft drawn by the buyer's agent upon the buyer's head office, which draft includes the price paid for the cotton plus interest and exchange charged by the local banker, who is reimbursed for the amount of the draft thus drawn. When this cotton is ready for export (or for shipment to the mill in the United States) local bills of lading, covering shipment from point of origin to compress point, are exchanged by the cotton buyer's banker for local bills of lading to port or for through bills of lading.

[Ill.u.s.tration: "_Picked 100 pounds today_"]

When cotton is bought at compress points, compress receipts instead of tickets are delivered to the local banker, who pays for the cotton as purchased by the buyer's representative from time to time. When a sufficient amount of cotton is ready for shipment the compress receipts are exchanged by the banker for local bills of lading to port (or to mill), or through bills of lading, as the case may be. These bills of lading are attached to the draft drawn by the representative on the head office of the buyer, the local bank being reimbursed for the amount thus drawn.

Buyers must necessarily hold great quant.i.ties of cotton in storage, for they buy whatever cotton is offered, and must sell, as we have seen, certain grades and qualities to the mills in order that they may weave the cloth for which their orders call. Cotton must, therefore, be held in storage, either at the compress points, which is usual, or at warehouses operated by factors, or by independent corporations, or in their own warehouses.

While the buyers by cash payments are concentrating the cotton necessary to fill their domestic or foreign orders, their need for funds is a pressing one. Their arrangements with local banks we have seen. When the cotton is shipped, the local bank, by means of drafts on the buyer's head office, is relieved of the burden it has been carrying, but the cotton still represents capital, and if that capital is to continue to earn its wages it must be the basis for credit. The factors and large banks in New York or Boston, which have been a.s.sisting the local bank, must now a.s.sist the buyer and the warehouseman. The methods by which this burden is shifted to the larger banks are varied, and we can consider only one or two of their aspects.

Same Mills Pay Cash, Relieving Factors of Burden

Some of the larger New England mills pay cash for the cotton which is shipped to them, buying sufficient in the season to carry them through, or nearly through, the year. Their buyers, therefore, need support, if they need it at all, only during the period of concentration. They may have their private banking arrangements, and may be able to utilize their warehouse receipts or bills of lading, or their mere notes based upon mixed collateral, for an advance of sixty to seventy-five per cent. of the value of the cotton, the line having been arranged in advance. Credit may be obtained by the buyer directly from the warehouseman, who thus becomes a factor in his own right, being supported by arrangements previously made with his own bank. Credit may also be obtained from a bank, upon bills of lading which are exchanged for warehouse receipts when the cotton is delivered at the port or at any warehousing point; or the credit obtained from the bank may be settled and a new credit opened with the warehouseman when the cotton is shifted from cars to storage.

Warehous.e.m.e.n as Factors of Growing Importance

The growing importance of the warehouseman has been mentioned. His services have developed with the need of mills for greater credit, and their unwillingness to tie up their working capital in cotton held in their own warehouses. Mills which formerly bought all their year's supply during the buying season, so-called, now take their cotton from warehouses as they want it, buying it from their buyers, and making payment according to the individual standing arrangements. The advent of the warehouseman who is either a banker, or closely affiliated with a bank, has undoubtedly done much to make the financing of cotton a more elastic and feasible proposition, distributing the risk over a wider circle and making credit more readily available at any point in the succession.

[Ill.u.s.tration: _Weighing gin bales in a ginnery yard_]

[Ill.u.s.tration: _Cotton warehouses in the South_]

The mill, we have seen, frequently pays cash for its raw stock, or else buys upon short term notes. The average mill does not have a working capital large enough to enable it to tie up the thousands of dollars necessary for such a proceeding, as well as the funds which must constantly be paid out for wages, for operation expenses of all kinds, for upkeep, and all other overhead. Mills, as a matter of fact, are frequent borrowers, either from general banks, or from textile banks or factors, or from their selling agents, who, as we have seen, combine their primary and original function of selling with that of supplying financial a.s.sistance.

Mills which purchase cotton from their buyers and pay cash, or approximately cash, for it, usually buy such cotton to fill orders which they have already received from their selling agents. They may, in certain instances, obtain an advance from their agents of a proportion of the whole selling price of the order, and out of that advance pay for the purchase of cotton, or they may hold the cotton in warehouses, using it only as needed, and putting up the warehouse receipts as collateral for loans.

The raw cotton itself, however, represents only a portion of the mill's operating expenses and it cannot be the entire basis for financial operations of the magnitude often needed. These broader financial wants may be met out of the prospective selling price of the cloth by means of loans from the selling agent; or, they may be met by direct relations with a commercial bank, which may make loans on ordinary collateral, on acceptances, or, as frequently happens in the case of mills of undoubted integrity, on the mere note of the company operating the mill.

Selling Agent May Shift Burden to Banks