It is frequently also the duty of the banker to explain to the business man the conditions under which he may obtain credit to better advantage from some other source. With certain types of concerns there is always the question whether better results can be obtained by seeking credit in the open market, than by obtaining it at the local bank. The notes of the borrower are thus sold on a competitive basis, which is supposed to correspond broadly with the going rate of interest which exists generally at that time. The home bank may be too small to extend so large an amount of credit, or it may be in the habit of charging a high figure simply because it can get that from other borrowers. Perhaps, therefore, the business man may think it well to obtain a wider sale for his paper by offering it in the way just sketched. If he does so, competition is established, and the result has been to divide his credit line between his own bank and the general banking and investment field. If his banker is kept advised of the amount of such open-market advances, no harm is done from the credit standpoint, but the banker is able to regulate his own extensions of credit accordingly. Sometimes it may be well for him to advise the borrower to place his financing in the open market, through the aid of a commercial-paper house. As previously mentioned, this type of banking institution acts as an intermediary between borrowers and lenders. It purchases outright the obligations of business houses in need of funds and sells them to individuals and institutions seeking employment for surplus funds. Firms which thus borrow on the open market must possess large resources in order to attract buyers for their paper, and so their capitalization is seldom less than $200,000 when money is easy, and $500,000 or so when there is stringency. Their paper is bought largely by banks. The commercial-paper firm thus serves as an agency for the distribution of liquid capital from places where there is a surplus to other localities where there is a need.

The commercial-paper business is organized on a national scale. The bulk of the business is done by about fifteen large houses having branches or correspondents in important money centers, each with a local force of salesmen. A large commercial-paper house thus has a turnover amounting to hundreds of millions of dollars every year, and must possess much the same characteristics as are found in a strong bank. The firm needs adequate financial worth in order to carry large blocks of paper until sold. For this purpose credit is also needed, and so it is important for a commercial-paper house to establish good banking connections. As it is lending vast sums of money to borrowers on their credit alone and without any collateral, the commercial-paper house must maintain an efficient credit department to analyze the statements and reports of firms who wish to place their obligations on the market. Also a trained selling force is essential in order to dispose of the paper which the house is handling.

The open-market paper usually takes the form of a straight single-name promissory note which is uncol-lateraled. It differs somewhat from the ordinary promissory note in that the maker is at the same time the payee of the obligation, which usually reads, "Pay to the order of ourselves." The note is then indorsed in blank on the reverse side by the maker himself. At times it is further indorsed by officers, who thus strengthens the obligation by adding their personal liability to the paper. The maturity of these notes is usually six months, but the time may be as short as three months. These notes are issued in even denominations of $2,500, $5,000, and $10,000, the proportions depending upon whether larger city or smaller country banks are buying the paper. The commercial-paper house imposes a charge of one-fourth of one per cent of the face value of the note, irrespective of maturity, which it deducts from the amount it pays the borrower. In all cases the borrower receives the funds at once, regardless of when the commercial-paper house sells the paper, but in some cases the rate is "left open," and the charge to the borrower represents the rate at which the paper is actually sold plus the commission.

The commercial-paper market is an essential factor in the financial structure of the United States, where the independent banking system by itself would tend merely toward local use of funds. Because of government regulations a large borrower at the same time cannot receive sufficient accommodation from a single bank, and it is, therefore, necessary to tap outside sources of credit.

The open market also presents distinct advantages to the thousands of small banks throughout the United States. They thus possess a means of investing funds for which there is no demand in the immediate locality. By holding the obligations of firms in outside localities they are not dependent on the prosperity of home industries.