check for the amount due payable to the order of the bank and it is charged to his account. Sometimes customers have an understanding with the bank that their notes when presented for payment shall be paid in the same way as their checks. This practice is generally undesirable as it opens the door to possible forgery or alteration of the note. 129. Collateral security.-By collateral security is meant stocks, bonds, and other evidences of property deposited by the borrower to secure a loan made to him by the bank. Such securities are deposited as a pledge or guarantee that the loan will be repaid at maturity; if not paid the securities may be sold to reimburse the lender. Collateral loans though made generally to brokers on such security as stocks are made also to merchants and commercial houses, and all kinds of collateral are offered. They may be made on "time," running for thirty days to several months, or on "call," that is, subject to payment on demand. The various forms of collateral offered to secure bank loans may be roughly grouped into three divisions: stocks and bonds, merchandise, and real estate. Some of the more important types of collateral loans may now be briefly considered.

Sometimes a merchant, instead of discounting the notes he receives in the course of business, may prefer to offer his own note to the bank for discount, pledging the “bills receivable" as collateral. If any of the bills thus pledged fall due during the term of the loan they must be "taken up" and replaced with other security or a corresponding part of the loan must be paid.

Assigned accounts may be used as collateral to loans when business houses cannot secure their customers' notes or acceptances for goods sold. The practice is to select some of the larger and better accounts receivable and assign them to the bank from which the loan is sought, with the understanding that the bank is to receive all payments on account and apply all receipts to the reduction of the loan, returning any surplus thus received above the amount of the loan to the borrower. This kind of collateral security is not held in high esteem generally among banks. It in

on this kind of security have in many cases exhausted payments. Furthermore, borrowers who resort to loans work in the handling of the loan and the collection of the every account assigned to the bank, as well as considerable volves a rigid investigation of the financial standing of

every other kind of borrowing asset, and, therefore, need watching.

Another form of collateral security which is extensively used, especially by traders on boards of trade and produce exchanges, is the warehouse receipt. These are receipts for goods such as grain, cotton or tobacco, stored in a warehouse under the regulation of a produce exchange or of the state authorities. They certify to the quantity and grade or kind of produce which will be delivered to the holder of the receipts when properly indorsed. The receipts are negotiable and when pledged for a loan at the bank are indorsed over to it, giving it a lien upon the goods. If the loan is not paid at maturity, the bank can take possession of the goods and sell them to satisfy the debt. If the borrower wishes to sell some of his cotton or wheat during the period of the loan he will generally be required to reduce his loan by a corresponding amount or to substitute other receipts.

On August 11, 1916, Congress passed the United States Warehouse Act, which was designed to establish a form of warehouse receipt for cotton, grain, wool, tobacco, etc., which will be more easily and widely negotiable as a delivery order or as collateral for bank loans. To this end warehouses are licensed and bonded under conditions which will insure the integrity of their receipts and make such receipts reliable evidence of the condition, quality, quantity and ownership of the products stored. The Act gives the Secretary of Agriculture authority to investigate the storage, warehousing, classification, etc., of these products, and to issue annual licenses for conducting warehouses in which such products may be stored for interstate or foreign commerce. Persons other than warehousemen may be licensed to accept agricultural products for storage in warehouses owned, opérated or leased by any State. It is not compulsory, however, that any warehouseman shall be licensed by the Secretary of Agriculture. Under an amendment to the Federal Reserve Act permitting member banks to make domestic acceptances provision is

made for accepting bills of exchange having not more than six months to run "which are secured at the time of acceptance by a warehouse receipt or other such document conveying or securing title covering readily marketable staples." Some of the Federal reserve banks have encouraged the use of this so-called "commodity paper” by making a preferential discount rate on it. Merchandise stored under adequate warehousing regulations is a safe and convenient form of collateral, which is bound to have considerable development in the future.

A bill of lading is a written acknowledgment by a railroad or other carrier of the receipt of goods for transportation. A "straight" bill states that the goods are consigned or destined to a specified person and normally is non-negotiable. In an "order" bill the goods are consigned to the order of a person named in the bill, which is therefore negotiable. Since the bill of lading may be made negotiable and presumably represents actual merchandise in transit, it is comparable in importance with the warehouse receipt as a safe and satisfactory form of collateral upon which to make loans. These bills are used extensively in connection with bills of exchange or drafts which they serve to secure. For instance, A, of New York, sells a bill of goods to B, of Chicago, subject to draft at thirty days. A attaches the bill of lading given to him by the railroad when he ships the goods, to the draft drawn either in his own favor or in favor of his bank and takes them to the bank. The bank forwards the draft with the bill of lading to its agent or correspondent in Chicago, who presents the draft to B for acceptance. Upon being notified by the Chicago correspondent that B has accepted the draft, the New York bank advances the money to A. Possibly, A may get immediate use of the proceeds of the draft upon depositing it. Ordinarily the bank is safe in advancing the money to A, since it retains title to the bill of lading until its Chicago correspondent secures B's acceptance of the draft, which is his promise to pay in thirty days. B cannot, at least he should not, get possession of the

goods without the bill of lading which the Chicago correspondent surrenders to him only after he has accepted the draft. The "acceptance" is in effect double-name paper, secured by actual merchandise the evidence of which, the bill of lading, has passed through the hands of the bank. At maturity the acceptance will be collected by the Chicago correspondent of the New York bank and forwarded probably in the form of a bank draft. If B fails to meet the acceptance at maturity, the bank can recover from A.

Though the bulk of the cotton, grain and other crops moving to market has been financed on bills of lading, their use has been attended by grave abuses and frauds. They have presented an easy means of obtaining money fraudulently, and so have had a somewhat insecure value as collateral. The Southern cotton frauds of a few years ago may be cited as an instance. Bogus bills of lading were issued purporting to represent shipments of cotton to Europe, drafts were drawn, sold and forwarded to Liverpool for payment, only to reveal that no cotton had been shipped and that the bills of lading were forgeries.

For years the American Bankers' Association and other organizations strove to secure the necessary legislation to provide protection against the frauds attending the use of bills of lading, and many of the States enacted a uniform bill of lading law suggested by the Association. Finally Congress passed the Bill of Lading Act, August 29, 1916, which became effective January 1, 1917. Among other features it provides for a uniform bill of lading; makes bills of lading easily and safely negotiable; shifts the burden of responsibility from the bank to the carrier; and makes fraudulent practices in connection with such bills misdemeanors, punishable by imprisonment or fine or both.

130. Loans on real estate. Prior to the enactment of the Federal Reserve Act in 1913, national banks were prohibited from loaning on real estate, though state banks in most of the states are permitted to do so under certain limitations. National banks may, however, take real estate mortgaged or sold to it to secure debts previously con