August 1, 1920.] 



THE INDIA RUBBER WORLD 



711 



know the warehouseman at Houston, and cannot lake the trouble 

 10 investigate his responsibility 



COTTON WAREHOUSES OWNED BY BORROWERS. 



It is a well-known fact that practically every cotton ware- 

 house in the South is owned, either directly or indirectly, by 

 the cotton factors and merchants of the locahty. Few of 

 these have ever heen operated as independent business enter- 

 prises, but rather as adjuncts to the chief business of their own- 

 ers — trading in cotton. Another disturbing factor in cotton 

 financing, as it has been conducted in the past, is this fact of 

 ownership. A cotton merchant in, say. Savannah, Georgia, has 

 bought 100 bales of cotton which he proposes to hold for a future 

 sale. He stores the goods with the X. Y. Z. Warehouse Com- 

 pany in which he is a large owner and possibly an officer or 

 director. The receipt given him for the cotton so stored he takes 

 to his local bank and negotiates a loan with it as collateral. The 

 local bank officer knows perfectly well that he is a large owner 

 in the warehouse and that, in loaning him money with this re- 

 ceipt as collateral he is leaving the cotton practically in the hands 

 of the borrower instead of in the hands of an outside independent 



corporation as is the theory of warehousing. Loans so made 



are therefore based more on the personal standing and integrity 

 of the borrower than on the cotton represented by the receipt 

 which he oflfers. The bank knows perfectly well that owing to 

 his ownership and control he can take the cotton out of store 

 and sell it and the bank will be none the wiser until afterwards. 



Much the same condition obtains in the New England mill 

 centers. There are few public cotton warehouses in the North 

 and cotton is usually stored in the mill yards. Whatever loans 

 are made by local banks with this cotton as collateral are based 

 on the personal standing of the borrower rather than on the 

 merchandize itself, for the New England banker knows well that 

 the cotton for which he holds receipt is out of his jurisdiction 

 and the technical fact that he holds a receipt for it, which he has 

 taken as collateral security, cannot prevent the mill owner from 

 using the cotton and he will be none the wiser until afterwards. 

 COTTON FINANCING-PRESENT PRACTICES. 



I will illustrate further the system that has grown up as a 

 precedent, of financing a cotton crop — a system that has grown 

 obsolete with the advance of time and in the price of cotton, 

 and demands revision, for it now requires more money to finance 

 the cotton crop than any other of the principal crops raised in 

 the United States. 



Following the beginning of the crop movement, around Septem- 

 ber first, demand for funds is made upon local banks by the 

 interior farming districts. These banks, in turn, call upon the 

 large banking institutions in the cities. The first calls are 

 usually for funds to pay for labor employed in picking and har- 

 vesting the crop, and for incidental expenses. Small farmers 

 have usually been financed by the local storekeeper from the time 

 of planting to the time of harvesting, but this merely shifts the 

 burden of the bank from the farmer to the storekeeper. 



The cotton factors are also dependent upon the local bank 

 for financing their purchases and for their assistance in carrying 

 the farmers. As a result the local bank may find its credit 

 pretty well extended by the time the crop begins to move. 



Financing the factors or cotton brokers is the next step. Bank- 

 ers in the town where the cotton gins are located arrange for 

 payment for the cotton sold by the factors, by furnishing cash 

 tickets issued to the buyers. These tickets the banks hold as 

 collateral. When sufficient cotton has accumulated to permit 

 making a shipment, the local banker delivers the tickets to the 

 agent of the railroad in his town and receives a bill of lading 

 covering the shipment to a compress point. 



After arrival of the cotton at the concentration points comes 

 the demand of the mills and exporters. These demands begin in 

 October and continue throughout the winter. From the time 



the cotton is picked until it nas been converted into a manu- 

 factured product fully six months must elapse. 



This old method of financing, which is based on single name 

 paper with the staple as collateral, is giving way to the use of 

 trade and bankers' acceptances, and the advantages resulting 

 from such a system have been made possible by the provisions 

 of the Federal Reserve Act. 



To illustrate (I quote from John Bolinger of the Shawmut 

 National Bank, Boston) : "A Boston cotton broker purchases 

 cotton to the value of $50,000 from a dealer in Galveston. .As the 

 Galveston man wants immediate payment for the staple, the 

 buyer arranges with his bank in Boston for an acceptance credit 

 for ninety days. The Boston bank notifies the Galveston cotton 

 dealer that it will 'accept' his draft drawn at ninety days' sight, 

 for $50,000, provided bills of lading and other documents are 

 attached to the draft when presented. The Galveston dealer 

 then delivers the cotton to a transportation company and se- 

 cures a bill of lading for the shipment, which he attaches with 

 invoice and other documents to a draft on the Boston bank. 

 Taking this draft and documents to his own bank at Galveston 

 he discoimts it and receives payment for his cotton. The draft 

 and documents arc then forwarded to Boston by the Galveston 

 bank for 'acceptance.' After acceptance the draft is returned 

 to the Galveston bank, or may be sold in the open market and 

 the amount placed to credit of its account. The Boston bank 

 retains title to the cotton until its customer provides for the pay- 

 ment of the draft through resale of the cotton.'' 



All of the above is based upon the fact of the warehousing 

 of cotton under conditions now e.xisting. 



STANDARDIZED WAREHOUSES RECOMMENDED. 



But let us inject a new feature into the transaction, namely, 

 a standardized chain of cotton warehouses covering all important 

 concentration centers of the South and consumption centers of 

 the North, owned by one company and operated as a business 

 proposition. The idea of such an organization has long been 

 the dream of almost every one connected with cotton, no matter 

 from what angle — and it goes without saying that every bank 

 in the land would welcome it. 



Such an organization should place itself in so strong a posi- 

 tion financially that every bank in the country would recognize 

 it at sight as being sound, dependable, and independent of the 

 "trade." It should provide itself with a form of warehouse 

 receipt that will be recognized as universal the country over 

 so that a banker in, say, Cleveland, Ohio, or Bangor, Maine, 

 will be as familiar with it as he is with the universal form of 

 railroad bill-of-lading that now passes current the country over. 



THE UNITED STATES WAREHOUSE ACT OF 1916. 



Recognizing the need of innovation in cotton warehousing and 

 in order to provide the machinery necessary for its accomplish- 

 ment, Congress passed in .August, 1916, the United States Ware- 

 house .Act. .Amended in July, 1919, this act now offers to pros- 

 pective warehousemen as well as to those already engaged in 

 the business, an opportunity for standardizing their operations 

 under the supervision of Uncle Sam and his Department of 

 -Agriculture, and many companies are already availing them- 

 selves of the provisions and privileges so offered. 



There is nothing compulsory contained in the -Act, but it pro- 

 vides for a permissive system of warehouses licensed by and 

 bonded to the United States Government and operated under 

 a system of government inspection and supervision. The .Act 

 also provides for the licensing of competent weighers and graders 

 upon application. 



The purpose of the Warehouse .Act is to create a warehouse 

 receipt of unquestioned value, and one which will be acceptable 

 to all bankers as security for obtaining loans, regardless of thtf 

 location of the warehouse. . In this way, warehousemen will 

 furnish a receipt to their customers which will be of the ut- 



