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is usually charged to the mills, constitutes 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.

[Illustration: _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 quantities are charged for at a relatively low figure,
while fancy goods, sold in smaller quantities 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 principal 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 assured stream of merchandise which
must eventually, when sold, pay him a commission. Thus the securing of a
good account means an assured 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 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.


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 accumulated 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.

[Illustration: "_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 quantities 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 assisting the local bank, must now assist
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.


Warehousemen 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.

[Illustration: _Weighing gin bales in a ginnery yard_]

[Illustration: _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 assistance.

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

When the burden is assumed by the selling agent, or factor, he in turn
may shift it to the bank, either by indorsing the note of the mill, or by
indorsing the note of the purchaser of the cloth or by borrowing directly
from the bank on his own paper.

The converter, as a rule, is not a factor, but a merchant pure and
simple, seeking accommodations from a factor or a bank as his needs may
require it. Inasmuch as he usually buys for cash or on short-term notes,
and sells to jobbers or retailers upon more extended terms, his needs are
frequently heavy. His relation with his factor may be, and frequently is,
upon the basis of accounts receivable, or he may borrow upon his own
collateral, or, if he is counted an "A1" risk, upon his unsecured note.

These, in brief are the financial steps in the progress of cotton from
the grower to the jobber. A cursory view is all that is possible, because
in the words of a textile banker of standing "every textile banking
transaction is a law unto itself." Yet enough has been said to show the
all-important part which banking plays in the cotton industry, and to
indicate how dependent are the turning of wheels and the distribution of
cotton and of cloth upon the credit which banks and bankers are able to
provide.


Factors and Their Wide
Financial Service

Frequent use has been made of the word factor, and no adequate definition
of its meaning has yet been given. The factor is, briefly, the commercial
banker of the industry, and his duty is to provide, at any stage of the
cotton process, the financial assistance which may be necessary, either
from his own resources or through his affiliations with some large bank.
It is true, of course, that some factors work only with those dealing in
raw stock, and some confine their services to mills. Some factors are
cotton buyers, some are selling agents, some deal with buyers and some
deal with selling agents. Some are employed only by the mills. Recently,
however, the tendency has been to develop under one roof a unit
institution capable of handling every textile banking transaction. It
will be interesting to enumerate here, briefly, the various functions and
facilities of one such institution:

1. It makes loans to cotton buyers and to mills
on cotton held in warehouses or in transit.

2. It checks the credit of the mill's prospective
customers.

3. It cashes accounts receivable.

4. It makes advances against merchandise for
the account of mill, converter, or jobber.

5. It finances merchandise and raw material requirements,
and current operations.

6. It deals in acceptances, specializing, of course,
upon paper arising out of transactions in the
textile industry.

7. It maintains an Industrial Department, which
includes:

(a) the services of a consulting architect, expert
in mill construction.

(b) the services of a production engineer,
skilled in the laying out of plants in the line
of greatest efficiency, and in diagnosing
and correcting the production mistakes
of an inefficient mill.

(c) information as to the newest mill practice,
which it is ready to provide for its
clients and others.

(d) readiness to assist customers in the expansion
of their business either by financing
new mill construction or by providing
sales representatives in other countries.

(e) maintenance offices abroad, either for the
buying or selling of textiles or equipment,
or raw materials, or for the complete and
direct financing of such transactions.




CHAPTER VI

American Cloth in Foreign Markets


We have seen that the American cotton grower supplies more than half of
the world's demand for raw cotton. The cotton manufacturer in the United
States is in no such position. This is not to say that American cotton
goods are not exported in very considerable amounts. From the inception
of the industry in this country varying percentages of the total product
have been sent abroad. The following table, taken from the United States
Statistical Abstract (1910) shows the average annual exports of cotton
goods for the five year periods named, expressed in millions of dollars:

_Uncolored _Colored
_Total_ Cloth_ Cloth_ _Other_
1856-60 $7.5 $2.4 $2.3 $2.8
1861-65 3.7 .4 .9 2.4
1866-70 4.1 .9 .3 2.8
1871-75 3.1 1.7 .6 .7
1876-80 10.0 6.1 2.6 1.2
1881-85 13.0 8.0 2.9 2.1
1886-90 12.4 7.4 3.2 1.6
1891-95 13.3 7.7 3.0 2.5
1896-1900 20.4 11.6 4.4 4.3
1901-05 31.3 17.2 7.0 7.0
1906-10 35.1 16.8 7.2 11.0

The irregularity of the export trade, as shown by these figures, has been
explained on several grounds, the chief factors being, apparently, the
fluctuations in the prosperity and consequently in the buying power of
the home market, and the pressure upon the home market exerted by the
rapid growth of cotton manufacturing in the South.

The normal position of the United States as an exporter of cotton goods
is shown by the following table, which gives the exports of the chief
manufacturing countries in the year before the war (the figures for 1915
are also given because they show the changes which had already begun):

1913 1915

United Kingdom $618,000,000 $418,000,000
Germany 117,000,000 30,100,000
France 78,000,000 60,000,000
Japan 58,000,000 95,800,000
United States 55,500,000 60,200,000
Switzerland 50,300,000 65,800,000
Italy 47,800,000 30,500,000
India 38,900,000 27,300,000
Holland 30,900,000
Austria Hungary 27,800,000
Belgium 23,700,000
Russia 22,500,000 19,700,000[B]
Spain 8,300,000 17,400,000
China 1,400,000 2,100,000

- - -
[B] Eleven months.

Thus, despite the very remarkable growth which had taken place between
1910 and 1913, the United States ranked fifth among the nations exporting
cotton goods. The reasons for this might be summed up in almost a word.
The attractiveness and rapid growth of the home market provided an outlet
for practically the whole output of American mills. With high prices
prevailing in the home market, the manufacturer was not called upon to
exert himself to stimulate sales in regions where competition would
inevitably be keen and profits small.


Minor Handicaps to
Trade Development

Supporting this main objection there have been others. Until recently the
banking facilities abroad were insufficient to the needs of a greater
commerce; and shipping facilities, in pre-war days, were not such as to
make regular shipments possible to many foreign markets. Over these
conditions manufacturers had not direct control, but there were other
matters in which their own short-comings were all too evident. There is
little need to list again the familiar complaints, known to every reader
of Commerce Reports and the export magazines. Faulty packing and
insufficient attention to orders were the most frequent. The former was
undoubtedly due to inexperience, and the latter to the tendency of the
manufacturer or merchant to consider the foreign market as a place for
disposing of a surplus unsalable at home. To this attitude may also be
attributed the frequency with which shipments for which orders had been


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Online LibraryGuaranty Trust Company of New YorkThe Fabric of Civilization → online text (page 4 of 7)