ECONOMICS OF BUSINESS THE MACMILLAN COMPANY NEW YORK • BOSTON • CHICAGO • DALLAS . ATLANTA • SAN FRANCISCO MACMILLAN & CO., Limited LONDON • BOMBAY • CALCUTTA MELBOURNE THE MACMILLAN CO. OF CANADA, Ltd. TORONTO ECONOMICS OF BUSINESS BY NORRIS A. BRISCO, Ph.D., F.R.H.S. FELLOW OF THE ROYAL ECONOMIC SOCIETY, SOMETIME FELLOW IN ECONOMICS COLUMBIA UNIVERSITY, AUTHOR OF " THE ECONOMIC POLICY OF ROBERT WALPOLE," DEPARTMENTAL EDITOR FOR CANADA " BOOK OF KNOWLEDGE," DEPARTMENT OF POLITICAL SCIENCE, COLLEGE OF THE CITY OF NEW YORK THE MACMILLAN COMPANY 1913 All rights reserved Copyright, i913» By the MACMILLAN COMPANY. Set up and ekctrotyped. Published June, 1913. '6^ NorfaootJ ^re«» J. S. Gushing Co. — Berwick «fc Smith Co. Norwood, Mass., U.S.A. MY WIFE 267361 Digitized by tine Internet Archive in 2007 with funding from IVIicrosoft Corporation http://www.archive.org/details/economicsofbusinOObrisrich PREFACE During the past twenty-five years, American indus- trial and business life has undergone many changes. Increased competition cut profits to a narrow margin, and in order to lower costs, the entrepreneur has been driven to a study of factory conditions. The factory, therefore, is to-day the center of investigation and study. The wastes of time, energy and materials revealed by this study amazed even the most successful entrepre- neurs. Efficiency, the modern watchword, demands organization, system, cost accounting, cooperation and coordination and touches business activities outside the factory, as advertising, buying and selling. No branch of industry has escaped investigation, and the result is a great awakening to the lack of method and system. This study of the various kinds of business activities has produced a literature treating different phases of business. Of all such contributions, the most signifi- cant are those made by successful business men who recounted their own experiences, pointed out the broad principles to be derived therefrom and explained the methods by which these principles may be specifically applied. From an analysis of such data, and from a study of the methods of many successful business en- terprises have been deduced the fundamental principles underlying business. To express these principles in clear and simple language is the purpose of this book. viii PREFACE The author has endeavored to produce a book which will assist business men in their efforts to obtain greater efficiency, and in which business principles are pre- sented in such clear, non-technical language, that they may be successfully taught in the class room. NORRIS A. BRISCO. New York, May, 1913. CONTENTS CHAPTER I ECONOMIC BASIS OF BUSINESS FAGK Business in Early Times — The Early Merchant Trader — Sys- tems of Production — Family — Handicraft — Domestic — Factory — Effects of Factory System — Division of Labor — Effects — Business in Its Limited Meaning — Business Units — Branches of Production — Extractive Industries — Manu- facture — Commerce — Transportation — Market — Its Early Meaning — Its Modern Meaning — Kinds of Markets — Fac- tors of Production — Land — Labor — Capital — Kinds of Capital — Managerial Ability — Methods of Conducting a Business — Public Ownership — Cooperation — Entrepre- neurship 1 CHAPTER II TYPES OF BUSINESS ORGANIZATIONS Types of Business Organizations — Single Entrepreneurship — Partnership — Unlimited Liability — Special Partners — Dis- i solution — Joint Stock Company — Characteristics — Advan- tages of Partnership — Articles of Copartnership — Essentials ; — Corporation — Public — Private — Classes of Private — Non-stock — Stock — Characteristics — Classes of Stock — Industrial — Commercial — Public Service — Financial — Cor- porations Formed by Special Statute — General Laws — Ad- vantages of a Corporation — Disadvantages — Charter — Essentials — Incorporators — Qualifications — Foreign Cor- poration — Its Regulations — By-laws — Capital Stock — Stockholder — Methods of Issuing Stock .... 25 CHAPTER HI INTERIOR ORGANIZATION Dividends — Rights of Stockholders to Profits — Powers of Stock- holders — Directors — Agents of the Corporation — Liability CONTENTS PAGE — Duties — Dummy Directors — Cumulative Voting — Offi- cers of a Corporation — Chairman of Board of Directors — President — Vice President — Secretary — Treasurer — Gen- eral Manager — Auditor — Counsel — Bonds — Varieties — Mortgage — Income — Convertible — Collateral — Trust — Debenture — Rights of Bondholders — Capitalization — Wa- tered Stock— Promoter — Underwriter — Holding Company — Insolvency — Bankruptcy — Receivership — Receiver — Duties — Reorganization .52 CHAPTER IV PRINCIPLES OF MANAGEMENT Business Organization — Object — Selection of Men and Superin- tendents — ^Discipline — Responsibility Clearly Defined — System — Proper Method of Installation — Red Tape — Re- sults of Lack of System — Advantages of System — Coopera- tion — Means of Obtaining — Coordination — Effects of Poor Coordination — Essentials for Proper Coordination — Effi- ciency — Standard for Efficiency — Efficiency not Modern — Determination of Efficiency — An Efficient Factory — Per- sonaHty in Business — Proper Relationship between Em- ployer and Employee — Confidence — Loyalty — Enthusiasm 75 CHAPTER V THE ENTREPRENEUR The Rise of Managerial Ability — Duties of Entrepreneur — Diffi- culties in Forecasting the Future — Assumes Risks of Busi- ness — Risks Shifted to Specialists — ■Qualities Needed for a Successful Entrepreneur — Stockholders the Risk Takers — Directors the Managers— Elimination of Details — Delegate Work to Subordinates — Reports — Selection of Assistants — Discipline — 'Aims of Entrepreneur — Profits — Factors Affecting Profits — Wages of Management — Compensation for Risk Taking — Profits Depend upon Successfully Taking Risks — Luck a Factor in Business 97 CONTENTS xi CHAPTER VI ANALYSIS OF COST ACCOUNTING PAGE Costs of Production — Materials — Labor — Overhead Expenses — Division — Evolution of Cost Accounting — Cost Records — Essentials — Importance of a Filing System — Value of Direct Materials, how Ascertained — Computing Costs of Direct Labor — Methods — Diffusion of Overhead Expenses — Methods — Machine Hour Method — The Successful Cost System — Developed for Each Factory — Bookkeeping vs. Cost Accounting — Requisites for a Successful Cost Expert — Assistance Given by Cost Accounting — Care in Installa- tion of System 121 CHAPTER VII FACTORY EFFICIENCY Study of Factory Conditions — Factors Affecting Factory Loca- tion — Store Location — Factory Buildings — Requirements — Factory Equipment — Care of Machinery — Tool Room — Functions — -Materials — Store Room — System in Handling Materials — Permanent Inventory — Dispatching System — Efficiency in Moving Materials — Quality in Goods Purchased — Quality in Goods Produced — Inspection of Materials — Business Failures Often Due to Neglect of Quality — Eco- nomical Use of Materials — -Use of Waste Products — Effi- , ciency in Retail and in Wholesale Enterprises . . . 140 CHAPTER VIII EFFICIENT BUSINESS METHODS The Shipping Clerk — Duties — System Necessary — Waste in^ Buying Materials — In Using Materials — Waste of Time — • Various Ways of Wasting Time — Energy — Inventory' — Old Method — Modern Method — Value Depends upon Ac- curacy — Pricing of Goods — Standardization — Standard Products — Advantages — Standard Quality — Importance — Standard Tools and Machines — Standard Methods — Depre- ciation — Maintenance — Conditions Affecting Durability — xii CONTENTS PAGE Obsolescence — Depreciation of Buildings — Methods for Charging Depreciation — The Cole Method — Necessity for Properly Charging Depreciation 166 CHAPTER IX LABOR EFFICIENCY Specialization the Watchword — Attitude of Employer toward Em- ployee — Apprenticeship System — Old m. Modern Method — Technical vs. Factory Schools — Driving vs. Leading — Contentment — Permanency — Importance — Promotion from Ranks — Seniority, when Recognized — Health of Workmen — Medical Care and Inspection — Air and Humidity — Tem- perature — Dust — Light — Proper Nourishment — Personal Safety — Prompt Attention to the Injured — Tardiness — Ir- regularity — Attendance — Wage Question — Time Wages — Piece Rate — Antagonism to Piece Rate — Proper Method of Fixing Rate — Profit Sharing — Fatigue — Soldiering — Reasons — Demands of Labor Efficiency .... 187 CHAPTER X BUYING Buying Important Factor m Business — Amount of Stock to Carry — Overstocking — Understocking — Stock Records — Per- petual Inventory — Knowledge of Goods — Knowledge of Costs — Quality — Knowledge of Markets — Forecasting Sup- ply and Demand — Promptness in Filling Orders — Do Firms Keep Promises ? — Care in Filling Orders — Knowledge of Inventions and Improvements — Staples and Non-staples — Buying Non-staples — Resist Temptation of Low Prices and Large Discounts — Guide in Buying Staples — Future Deliv- ery — Buying to Suit Customers — Goods to Carry in Stock 218 CHAPTER XI SELLING Good Selling Important in Business — Classes of Customers — Jobber— Methods to Reach Retailer— Methods to Reach CONTENTS xiii PACK Actual Consumer — Retail Merchant — Methods Used by Manufacturers to Sell Direct to Consumer — Mail Order Busi- ness — Disadvantages of Buying through the Mails — Why are Customers Attracted to Stores? — Value — Service — Style — Making the First Sale — Viewpoint of Customers — Knowledge of Markets — Selection of Salesmen — Training — Qualities Necessary to Make Successful Salesmen . . 236 CHAPTER XII PRINCIPLES OF ADVERTISING Growth of Advertising — A Creative Force — Two Classes, Gen- eral and Direct — No Rigid Rules — Chief Aims in Adver- tising — To Attract — To Interest — To Cause a Desire to Possess — To Decide to Possess — Methods Used to Attract — Essentials of a Good Illustration — Head Line — Copy — Essentials for a Good Copy — Confusion — Repetition, Im- portance — Merit in Article — Continuity — Knowledge of Goods — Drawing Points — Methods for Stimulating Desire to Possess — Direct Command 260 CHAPTER XIII MEDIUMS OF ADVERTISING Medium — Varieties — Each Distinct Value in Itself — Choice Demands Sound Judgment — Magazines — Characteristics of Magazine Advertising — Newspaper — When Profitable — Writing Advertisement for Paper — Trade Journal — When Used — Booklet — Essentials in Writing — House Organ — Classes — Important Features — Mail Order — Follow-up System — Catalogue — Calendar — Essentials — Blotter — Handbill — Poster — Painted Sign — Electric Sign — Essen- tials — Streetcar — Novelty Advertising .... 282 CHAPTER XIV MONEY AND CREDIT Barter — Materials Used as Money — Functions of Money — Free Coinage — Restricted Coinage — Standard Money — Redemp- xiv CONTENTS PAGB tion — Charges for Coinage — Right to Coin Money — Gold Coins — Silver Dollar — Bland- Allison Act — Sherman Act — Subsidiary Silver Coins — Minor Coins — Greenbacks — Gold Certificates — Silver Certificates — Bank Notes — Legal Tender — Credit — Basic Fundamentals of Credit — Charac- ter — Capacity — Capital — -Gathering of Credit Information — Salesmen — Attorneys — Bankers — Mercantile Agencies — Credit Associations — Traveling Credit Men — Refer- ences — Statements — Oral Information . . . . 307 CHAPTER XV TRADE MARKS AND COPYRIGHTS Trade Mark, its Meaning — Points out Origin — Not the Creation of Statute — Protected by Common Law — Essentials of an Application — Interference — Restrictions — Cannot Extend Monopoly — Infringement — Two Legal Meanings of Copy- right — Congress, Power over Copyrights — Privileges Con- ferred — Productions Subject to Copyright — Steps Neces- sary to Obtain — Form of Notice — Restrictions — Ad Interim Copyright — Facts Necessary in Application — Affidavit — Requirements — Periodicals — Contributions to Periodicals — Copyright Mail — Assignment — Time — Piratical Books — Infringement 334 CHAPTER XVI PATENTS, TRADE NAMES, AND TRADE SECRETS Trade Name — When Protected by Court — Valid Trade Names — Goodwill — Characteristics — Trade Secret — When Pro- tected — Congress, Power over Patents — Patent a Reward for Ingenuity — Conceived Invention — Requirements for a Pdtent — Claims of Inventor — Persons Who May Acquire Patents — Essentials for Application — Interference — For- eign Patents — Infringement — United States Courts' Juris- diction — Patent Suits — Procedure in Infringement — Fraudulent Patent Marking — Patent is Property — Aban- donment — Joint Inventors — Design Patents . . . 361 ECONOMICS OF BUSINESS ECONOMICS OF BUSINESS CHAPTER I ECONOMIC BASIS OF BUSINESS • The age of the Greek and the Roman was one of prowess and conquest and a man's reputation depended largely upon his deeds of valor. Business During was considered unworthy of a gentleman and «"iy ^^^^> business an was carried on only by the lowly. Later, unworthy arts and sciences gained in prominence and occupation, more respect was paid to business as a vocation. This was followed by an age of discovery, opening up new lands to civilization and giving great impetus to trade and commerce. Still, a business career was not con- sidered a worthy occupation for a gentleman. As time advanced, business received more respect, until to-day, a business career is considered a worthy occupation. Business has never before occupied such an im- changed portant place in the world's history. As a ^^^^g vocation, it attracts the noble, the rich, the business, lowly and the ambitious. It gives opportunity to exercise the greatest talents and to the successful, a reward surpassed in no other field of action. A business man has need for drink, food, cloth- ing and shelter, and directs his efforts to Economic satisfy these needs. As a man develops, activities, his wants become more numerous and more diversified. 2 '.:?•?>:*',. tiGONOMICS OF BUSINESS He puts forth greater efforts to satisfy his increasing needs. These efforts to obtain the means for the satis- faction of wants are known as economic activities. Economic activities are directed toward accomplishing different ends and are of many varied forms. Business is the name given to many of these forms. At first, it simply meant those activities directed toward provid- ing a livelihood, but later the idea of making a profit Business: was added, and to-day business is any form its meaning, ^f economic activity for the purpose of secur- ing profits. Business of any importance in early modern times took the form of banking or merchant trading. The latter, including shipping, was tEe" only important enterprise involving large investments or any degree of manage- ment. The successful outcome of the ventures of the early traders was less a matter of shrewd foresight than The early ^^ ^^^ ^^ good fortune in having favorable merchant weather conditions. The work of the business business man under these conditions was simply to take activities. advantage of the seasons and the fluctuations of supply and demand. He was a speculative buyer and seller and paid no heed to production or the proc- esses of industry. But with the discoveries and in- ventions which ushered in the present industrial sys- tem, the risk of trade not only almost disappeared, but the absorbing interest of the business man was no longer that of speculative trade. Production in all its manifold phases has taken its place and to-day is the center of business activity. Commodities have been produced under the present ECONOMIC BASIS OF BUSINESS 3 industrial system for a period of about one hundred and fifty years. For hundreds of years previous, HistoncaUy, • manufacturing took place either in the house- (e^s^^f " hold or in simple workshops adjacent thereto, production. ( Historically, four systems have been employed to supply the wants of man. The first and simplest form is the family system. It is found in antiquity and extended as far as the first period of the Middle AgeS. The peo- ple were divided into small groups or families. The term family included not only the members FamUy of the family but also the slaves or serfs be- system, longing to it. The Roman lord with his army of slaves and the feudal baron with his serfs are good examples of this economic period. Each family was practically self- sufiicient. Goods were rarely produced for outside con- sumption and consumption was usually confined to home production. With the breaking down of th$i feudal system, the family gave way to the handicraft system. The trades were separated and the workers, independent. Handicraft no longer toiled in the houses of the consumers, system. The worker or artisan as he was now called bought his raw material, worked it up in his own house, used his own tools and sold the finished product to the consumer. Everything was finished by hand and this gave the name to the system. The custom was to produce only those goods ordered in advance. Custom tailors and cobblers of to-day are survivals of this early system. The rapid rise of an independent class of artisans who conducted business enterprises followed. These formed themselves into associations for mutual assistance and defense, and 4 ECONOMICS OF BUSINESS under the name of guilds played a very important part in the history of the Middle Ages. One weakness of the handicraft system was the un- certainty of selling the product. Few workmen took any Weakness ^^^ ^^^ Confined themselves to making those of the goods that were ordered. During the latter ^^ ^ * part of the handicraft period, merchants began to play an important role in industry. They bought the finished goods and took the risk of selUng them at a profitable price. This was an improvement because it relieved the artisan of the work that he was least pre- pared to perform. From this custom, it was only a short step to the practice in the domestic system where the middleman owned the raw material as well as sold the finished product. During the latter part of the Middle Ages, the guilds lost control of trade. The handicraft system slowly Domestic decayed and was succeeded by the domestic system. system which prevailed in England from the middle of the fifteenth to the middle of the eighteenth century. The finished goods were not only sold to the middleman, but from him, the raw product was re- ceived. The ownership of each remained with the middleman, and the workman was relieved of the trouble of bujdng as well as of selling. The artisan was no longer independent but became dependent on the middleman, who as early as the seventeenth century began to call himself *' manufacturer." The workman still owned his own tools and worked at home with the aid of his family. He usually lived in the country and devoted a part of his time to tilling the small plot of ground which surroimded his cottage. ECONOMIC BASIS OF BUSINESS $ The production oi goods was divided between two classes, the one buying the raw material and selling the product, and the other furnishing labor, tools ^^^ classes and workshop. This division of the indus- of pro- trial system into two distinct classes, capi- talists and laborers, marks the beginning of a bitter struggle. Early in the eighteenth century, the first strikes for higher piece-rates took place, and by the middle of the century, strikes were common and were often accompanied by violence and destruction of prop- erty. The great mechanical inventions and the application of steam power to manufacturing during the latter half of the eighteenth century, introduced many Factory far-reaching changes in the industrial sys- system, tem. The workmen no longer owned their own tools but simply provided the labor which was applied through machines and in workshops owned by the employer. The grouping of laborers and machinery in buildings for the purpose of production is known as the factory system. The factory in place of the home became the unit of production. This necessitated a gathering of laborers into centers and there began a drifting from the country to the city, which has continued with in- creasing proportions to the present time. Those supplying the different factors of production became more and more separated. It was ^^^^^^^ only a short time, until it became the custom factory for one set of persons to furnish capital, an- ^^* ®°^* other labor, and still a third, land. With the increase of capital and the improvement of machinery, the factory 6 ECONOMICS OF BUSINESS made it possible to manufacture goods in larger quan- tities and of a more varied nature. New improvements in facilities of transportation opened larger markets and to meet the increased demand, production on a larger scale followed. The development of the factory system made the mo dern bu siness enter prise p ossible. Each system did not entirely do away with its pred- ecessor but each in turn was the predominating method The factory ^^ production. In our present industrial sys- system, the tem the factory is the chief method of manu- chief type of our Indus- facture, yet examples of the domestic system trial system. ^^^ found in swcatshops and of the handicraft in small workshops of custom tailors and cobblers. The factory system is nevertheless the prevailing type and is the center of our present industrial system. It is the key of our industrial development and the cause of many of our industrial conditions, such as the labor and trust problems. The factory system with its extensive use of machinery, power and capital, combined with extensive division of labor, introduced new problems of administration. The small business enterprise, with its simple organization and methods, so characteristic of the domestic system, gave way to the large business unit with its complicated organization and complex methods. Intensive organiza- tion became a necessity. The independent manager, a workman of the two former systems became newo ci . pai-i^ Qf an organization under the guidance of a new official, the manager. A clear and definite line was gradually drawn between managerial ability and labor. A growing demand began for this new type of workman ECONOMIC BASIS OF BUSINESS 7 who assumed all responsibility of organization and management. On the other hand, the laborer became a specialist and was deprived of all responsibility except in doing efficiently the work assigned to him. The development of machinery and cheaper facilities for transportation made possible production on a large scale and in its turn, a greater division of labor Division of to meet the increasing industrial needs. Divi- ^*^°'- sion of labor means the division of the processes of the making of a commodity into a number of separate proc- esses and intrusting a laborer with the performance of one or two of these. A visit to any large factory shows a score or more separate processes in the making of a single commodity which in former times was entirely made by a single individual. For instance, in making a ready-made coat, there are thirty-nine distinct proc- esses and in the making of a pair of man's brogan shoes, no less than eighty-four. A distinction must be made between division of labor and division of employments where each one devotes his entire time to following one branch of production, as shoemaking, tailoring, etc. Division of labor greatly increased the number of occupations but at the same time, it restricted the range of work of each workman. Labor was reduced more and more to identical routine. This fostered invention because as soon as a process became automatic, a ma- chine was invented which did the work better E^g^ts of and more rapidly than human hands. Ma- division of chinery did not entirely supersede labor be- cause it required operating and attending and this gave constant demand for skilled and unskilled labor. Labor- 8 ECONOMICS OF BUSINESS saving machinery in displacing labor has not caused so much suffering as many would have us believe. Produc- tion increased at a very rapid rate and this caused a new demand for labor. Those displaced who could easily adapt themselves to the new conditions were soon receiving better wages than they did under the old methods. Nevertheless, it cannot be denied that there was much suffering on the part of those who on account of age or other causes could not meet the demands of the new industrial system. Adam Smith, during the dawn of the factory system, declared that division of labor was limited by the ex- Importance ^^^^ ^^ ^^^ market. It is quite evident that of the the number of articles that a person would care to produce at any one time depends upon the opportunity to dispose of them. The average tailor would not turn out more coats than it is possible for him to sell within his range of sale. To divide the making of a coat between the fitter, the pocket maker, the lining maker, etc., is not advisable unless as many coats can be sold as the combined number produce. The mod- ern ready-made clothing factory turns out thousands of suits daily which would not be the case unless there was market for the output. The chief question is to get sale for the product at a price that covers expenses of production and leaves a margin of profit. As the market of a product is limited so must necessarily be its production. In every case, the limit to which pro- duction can be carried depends upon the extent of the market. Business in the broadest sense includes all forms of ECONOMIC BASIS OF BUSINESS 9 economic activity directed to the making of profits. This includes the production of immaterial Business, economic goods as well as material. The its broadest lawyer's or the doctor's practice must be con- ™®*°*°^' sidered as business in the same sense as a factory produc- ing material goods or a grocery store selling groceries. In the business world, it is customary to give to its limited business a narrower meaning and to confine meaning. it to those economic activities directed to the creation of utilities in material economic goods. Some combination of land, labor and capital or labor and capital, is necessary in the production of economic goods. Such a combination whether it con- Business sists of the fisherman with his crude home- ^^^ctw-*' made net catching fish for the market or the istics. milUon-doUar corporation is a business unit. The business world is made up of these profit-seeking units, each differing from the other in size, in complexity, in permanence and in the character of the work which it performs. In less progressive countries like China or Russia, a large part of the business is still conducted in small workshops and stores, and even in the most progressive, there are still many units of small size. Business units ranging in size from the single worker using simple tools to the gigantic corporation emplo3dng thousands of workmen attending machinery worth mil- lions of dollars and all united under a central head by a complicated organization are found in every branch of our industrial system. The business unit may be more or less of a temporary nature, as in individual proprie- torship or partnership where the existence of the lo ECONOMICS OF BUSINESS unit depends entirely upon the lives and the wishes of those interested ; or it may be permanent, as in the corporation which continues its existence uninterrupted by the dissatisfaction, death or retirement of its stock- holders. The advantages of a permanent organization are so great that the corporation is favored as the best type of business organization. An interesting classification of business units is made by grouping together those engaged in each of the differ- Extractive ^nt branches of production, as extractive, industries, manufacturing, commercial and transport- ing of goods. Extractive business enterprises are those engaged in getting the raw material from nature, as agriculture, fishing, lumbering and mining. All later processes of production depend on these enterprises for their supply of raw material. In agriculture and in the catching of fish, the business unit is usually small. The prevailing type of organization is individual pro- prietorship, but partnership and corporation are grad- ually gaining in prominence. Lumbering which requires more capital has a larger unit and partnership and cor- poration prevail. Mining with its need of a large amount of capital is conducted almost entirely under the corporate form. The process of changing the form of a commodity and thereby increasing its value is called manufacturing. Manufac- According to its origin, *' manufacture" means *^*^^- ^' to make by hand," but at present, machinery plays such an important part in production, that the word has come to mean almost the opposite. The word ** manufacturer" has, under the factory system, assumed ECONOMIC BASIS OF BUSINESS ii a new meaning, changing from hand worker to the in- dividual who employs others to work for him. Manufac- As we have seen, goods when first made for ^^new sale were made to order. During the latter meaning, part of the handicraft period the producer first took an interest in markets. An important change took place and goods were chiefly made to be sold to merchants, who found the necessary markets. Finally, under the factory system, the limits of the market increased and it became world-wide rather than local. The business unit increased in size from the little shop of the cus- tom worker to that of the milhonaire corporation. Manufacturing ends with the completion of the form- changing process. Theoretically, it is not concerned with the production of raw material or sale Manufac- of the finished product. Yet the manu- t^^^ng r 1 1 . . 1 1 n 1 • includes facturer buys his raw material and sells his commercial product, but in so doing, he is engaged in com- *<^*^^*y- mercial activity in addition to manufacturing. Some large enterprises like the Standard Oil Company go still further and extract the raw material, manufacture the finished product, carry their goods by their own trans- portation Hnes and sell them to the actual consumer. Many changes of ownership take place from the time the raw material is extracted from mother earth until the finished product is placed in possession of, , 1 A • r 1 • Commerce, the actual consumer. A great variety of busi- ness units are necessary in making the various exchanges and employment is given to hundreds of thousands of people. The transferring of ownership in various com- modities is called commerce. It includes all eco- 12 ECONOMICS OF BUSINESS nomic activities which assist in facilitating exchanges. Commercial Commercial undertakings may therefore be ^g! " divided into two great classes, — those en- dasses. gaged in the buying and the selling of com- modities and those assisting in bringing about the exchange. The exchange of commodities is not confined to raw ma- terials and finished product but in the various stages Stream of ^^ production there is a constant change of modem ownership from one person to another. *" "* * A farmer sells a hickory log to a village sawyer. From the time the first exchange takes place until the log becomes spokes in a buggy, it changes hands a dozen or more times. The modern industrial system furnishes a buyer for the raw material in a local center, and by him, it is forwarded to the consumption center. There it passes into possession of wholesalers, ware- house owners or commission merchants to await further distribution. Finally, the raw material reaches the manufacturer who changes its form in a way to meet the demands of the consuming public. After the raw material has been carried through a series of processes and is made ready for consumption, it is bought and sold by wholesale merchants to retailers who take the finished product to the consumer. Such is the stream of in- dustry, carrying the products of mother earth from the producer to the consumer. The second class of commercial activity including Financial banking, brokerage, the whole machinery of commercial credit investment and insurance, constitutes en erpnses. ^j^^ financial side of commerce. The present ECONOMIC BASIS OF BUSINESS 13 industrial system, with its gigantic producing plants, its immense trading establishments and its splendid facili- ties for transportation, demanded instruments of credit which would make the transfer of goods or Develop- rather the transfer of titles, easy and effi- ^e^t**^*^* cient. An intricate and extensive credit system, system resulted, and this dominates the whole business world. Banks assist in providing depositories for cash, and needed loans, and in trading in credit instruments. Produce exchanges, by more accurately forecasting the future, help manufacturers to ehminate risks. Broker- ages of all kinds give valuable assistance either in the buying and in the selling of commodities or in dealing in various credit instruments. The insurance companies aid in assuming in return for a consideration, many risks of production. All these institutions aid the exchange of commodities in numerous ways and are very helpful to our industrial system. Finally, transportation or the carrying of goods and persons from one place to another must be considered. Transportation increases the value of a com- xranspor- modity by taking it from place to place. It t^^on. extends the market and assists speciaHzation. In the great industrial countries, the most important factor in transportation is the railroad. The modern railroad is the most complex of all modern enterprises and is an example of the best organized business undertaking of modem industry. The business unit is large with a growing tendency to greater concentration. The first and oldest method of transportation was by water. Canals were operated long before the steam 14 ECONOMICS OF BUSINESS engine was invented. Great improvements cheapening Methods of ^^ ^^^^ ^^ transportation followed the applica- transporta- lion of steam power to boats. After the per- fecting of the steam engine and the beginning of railroad construction, little attention was paid to canals. New inter- "^^^ during the past decade, the urgent need est in for Conservation of natural resources has re- waterways. * suited m a great interest being taken not only in canal construction, but in the dredging of rivers and waterways. Finally, pipe lines, pneumatic tubes and transfer businesses must not be omitted, as they play an important part in industry. Besides the various methods of transportation, it is necessary to note transmission of intelligence. The Trans- great improvements in the telegraph and the mission of telephone have made these instruments al- in e igence. j^^g^ indispensable in modern business. The railroad, the steamship, the telegraph and the telephone have accomplished the task of greatly extending the market. They have made possible, greater specialization and the production of conunodities on a larger scale. Good facilities and cheapness in transportation and transmission of intelligence are very important factors in every business enterprise. The market originally meant the public place in a town where provisions and other articles were offered for sale. Buyers and sellers were confined to the immediate vicinity. This idea is preserved in the local markets of many small towns. It was some time before the outside trader was allowed to take part. With the changes introduced in industrial life under the ECONOMIC BASIS OF BUSINESS 15 industrial system, the boundaries of the markets were ex- tended and became international. The actual E^gnsion presence of buyers and sellers is no longer of needed to constitute a market. The post office, the telegraph and the telephone have made this unneces- sary. The place where prices are determined by com- petition is a market. It is immaterial whether j^^rket • goods are actually exposed for sale or bought its modern and sold on the basis of telegraph or tele- °^®"^^' phone orders. ' A market in the modern sense is the bringing together of offers and demands which result in the exchange of definite quantities of goods. A market is not any particular place for buying and selling, but the general field through which the forces which deter- mine the price of a commodity operate. Supply and demand are two terms which are con- stantly used in markets as well as in other forms of busi- ness activity. The supply of goods on the supply and market does not mean the total stock in exist- demand, ence but the amount which the sellers are willing to sell at a given price. It is distinguished from stock which is an absolute amount independent of price. Demand in a market means the amount of goods which will be taken at a certain price. It must not be confused with desire which lacks the ability to buy goods at the stated price. Desire may lead to demand, but it is different from it, and the two terms must not be used in- terchangeably. Each commodity has a separate market, as wheat market, cotton market, coffee market, etc., and for each there is a wholesale as well as a retail market. i6 ECONOMICS OF BUSINESS The wholesale is more extensive and with the staple Kinds of ^nd more durable commodities is world-wide markets. ^j^^j international. The wholesale market for staples in New York responds very quickly to changes in price in English or French markets. The retail market is usually confined to a particular locality. In large cities, there are many retail markets for the same commodity. Retail prices vary between different locaUties and frequently from one retail store to an- other. Markets for goods may be local, national or inter- national. Cheap bulky substances like ordinary build- Local, ^^S brick and stone, and perishable commod- nationai, ities like milk and cream have local markets, ternationai Due to excellent facilities of transportation, markets. most goods have country-wide, and staple articles, like wheat, cotton, coffee, etc., international or world markets. Many commodities which a few years ago had only a local market, have, by the dis- covery of the refrigerating process and cheaper costs of transportation obtained access to national and in some instances, to world markets, as for example, meat, butter, cheese, eggs, fruit and vegetables. Securities Markets possess similar Umitations as to markets. for securi- Bonds of governments as well as bonds and stocks of large, well-known corporations have international markets. They are sold and held in all parts of the world. The market for bonds of municipalities and less-known corporations is confined to the countries where they are situated, while bonds and stocks of small local corporations find sale only in the immediate vicinity. ECONOMIC BASIS OF BUSINESS 17 The question of the market is at present very important to every business man. The extension of our markets in order to allow a further extension of our industries is to-day one of the most important economic problems confronting the American people. In the organization and the working of every busi- ness enterprise, there is a cooperation of many economic elements. A factory needs land, buildings, machinery, tools, raw materials, money, goods in process Factors of of production, finished goods awaiting sale, production, labor and management, and a grocery store, land, build- ings, fixtures, stock, money, labor, and management. So with every business undertaking, certain economic elements are needed for its operation. Generally speak- ing, each economic element which enters into industry is a factor but it is customary to group the numerous fac- tors into four classes, — land, labor, capital and manage- ment, and to subdivide each into nimierous divisions. The term land includes not only the surface of the earth, materials above and beneath it, bodies of water and what they contain, but physical and nat- j^^^ ural forces which assist man in his economic activities, as climate, winds, tides, and rainfall. Land assists man in a great many ways : First, its aid in a certain amount of the earth's surface is production, necessary for man to stand upon and more is needed to support the buildings which are necessary to conduct business enterprises. Secondly, inorganic substances as well as plant and animal life on land and in water fur- nish industry with its supply of raw materials. Thirdly, the various bodies of water furnish means of carry- c i8 ECONOMICS OF BUSINESS ing commodities and persons from place to place. The rivers and waterfalls provide motor power for many of our industries. Fourthly, natural forces assist man Natural ^^ many ways. Without them, no element of forces. lifg could exist upon earth. The adaptability of climatic conditions is very necessary to the pursuit of certain business enterprises. In the spinning of fine fabrics, a moist atmosphere is needed. On the other hand, in order to preserve the aroma of tobacco, a dry climate is required in the manufacture of cigars and cigarettes. Some fruits like oranges and pineapples require heat, moisture and little cold and only flourish where these cUmatic conditions prevail. Excessive heat checks industry and enterprise and only in temperate regions are energetic and enterprising people found. The second factor in business and of co-equal impor- tance with the first is man. By his efforts, the raw materials are taken from mother earth and Man. , ... • r 1 converted mto utihties to satisfy human wants. UtiHties are capacities or qualities in goods to satisfy UtiUties. human wants and their creation is production. The efforts of man directed toward the creation of utilities are called labor. Labor includes not only the efforts of persons engaged in the creation of utilities of a material form but services that yield utilities of an im- material nature as those of a doctor, lawyer or domestic servant. Some err by making a division of labor into physical „^ . , and mental. The labor of the most unskilled Physical t_m i and mental workman requires some mental effort while the **^**'"* mental efforts of the high-salaried manager ECONOMIC BASIS OF BUSINESS 19 are associated with a certain amount of physical ex- ercise. All kinds of labor involve both physical and mental efforts and dififer from one another only in the degree in which the physical and the mental efforts predominate. Land and man are the two primary factors of business. Man alone can accomplish Uttle without the assistance of a third factor, capital. Capital consists of ^ . , economic goods produced in the past and used for further production. The capital of a country there- fore consists of buildings used for industrial purposes, tools, machinery, transportation systems, Kinds of money, raw material, finished goods awaiting capital, sale, etc. Capital is not like land and labor an independ- ent factor in production but is obtained from the ap- plication of human efforts to land and is therefore secondary. The use of capital in its various concrete forms greatly assists production, makes possible great specialization, economizes labor and permits extensive utilization of natural materials and forces. In an ordinary business undertaking, it is the practice for one class of persons to supply land, another capi- tal, and still another labor. The task of co- The operating these factors is a very important ^separate one. The business manager or entrepreneur factor, who performs this work has come to occupy such an important place in modem business, that it is necessary to regard him as a separate factor, distinct from other classes of labor. The entrepreneur has charge of all the industrial forces and upon him depends, in a large meas- ure, the success or failure of a business undertaking. y 20 ECONOMICS OF BUSINESS From the standpoint of management and reward, there are three different methods of conducting a busi- Methodsof ^^^^ enterprise, namely, public ownership, conducting cooperation and entrepreneurship. The first includes all business undertakings owned and managed by the government whether federal, state or PubUc local, and in which the government obtains the ownership, profits or suffers the losses, as the electric Hght and gas plants in many cities and towns, telegraph, tele- phone and railway systems in many foreign countries, the post office in the United States and the tobacco in- dustry in France. The second class includes all cooperative undertakings. The aim is to dispense with the entrepreneur and leave the Co5 era- management of a business to workmen. The tive enter- workmen elect one or more of their number pnses. ^^ manage the business and divide among themselves the profits. The success of a business depends as much if not more upon able management as upon Barriers to faithful workmen. Laborers are rarely able coopera^ to find among themselves a man capable of tion. managing a business. If there is a man of un- usual ability, jealousy of his superiority usually excludes him. If the laborers be successful in securing a man of managerial ability, the pay is so low that soon higher pay will induce him to go elsewhere. Cooperative en- terprises have trouble in obtaining capital. It is im- possible to run a business without capital and the larger the business the more is needed. Laborers seldom have sufficient for the need and in such undertakings it is hard to raise money on credit. Laborers as a rule are ECONOMIC BASIS OF BUSINESS 21 extremely jealous of one another. There is always the fear that one might obtain a slight advantage over another. This jealousy or mutual distrust prevents the proper cooperative spirit, and is often the cause of failure. There is always the danger that in case of suc- cess a change will be made from cooperative form to en trepr eneur ship . Cooperation exists in many forms and instances of its operation are found in all civiUzed countries. The greatest success has been in distributive co- ^^^^^f operation which consists of the sale of finished coepera- products. The customers form a stock com- pany, subscribe for the shares, select one of their num- ber to do the managing or hire a mana- Distnbu- ger from the outside, and start business. **^®* Such cooperative stores are frequent in Great Britain but are not a success in America due to the fact that they cannot compete with large departmental stores. The second form is productive cooperation or where workmen combine to carry on a produc- . . , . . rrn Productive. tive enterprise on their own account. They elect one or more of their own number to man- age the business and share among themselves the profits. Cooperative production has met with Httle success in England, some in France and a few decided successes in America. There are a great many obstacles in the way of its general adoption as a substitute for competition. The third class is cooperative credit in- stitutions and takes the form of banks, loaning credit in- companies and building associations. Such stitutions. enterprises have made a wonderful advance during the 22 ECONOMICS OF BUSINESS last few years. Their greatest success has been in Germany but many individual instances are found in the United States. Finally, we have cooperative mar- keting or where producers form associations Marketing. ^ ^ for the purpose of marketing their produce. This in the form of fruit growers' associations and cooperative orange companies has been a success in America. Cooperation, where possible, is the ideal sys- tem but the difficulties in the path of its success are so great that no great development can be looked for in the near future. The last form, entrepreneurship, is the prevailing method in our complex industrial system. The en- Entrepre- trcprencur organizes and manages the busi- neurship. ^^53 enterprise, receiving his reward from profits or what is left after all expenses have been paid. Individual proprietorship, partnership and corporation are the three forms through which entre- Varieties. _ rr^, . c r preneurship operates. There is no fear of the entrepreneur losing his place in the modern indus- trial system as a result of either state ownership or co- operation. He will continue to organize and man- age business enterprises because in him the greatest efficiency can be obtained. The development of industry from the narrow sphere of the home to world-wide scope has completely revolu- Effect of tionized every branch of business. The busi- industriai ness unit has increased from the simple work- develop- , . . . . 1 . . ment on shop to the gigantic corporation with intricate business. ^^^ complex organization. Inventions and improvements in endless succession have everywhere in- ECONOMIC BASIS OF BUSINESS 23 creased the effectiveness of all business enterprise until to-day the world is progressing at a greater speed than ever before. This is an age of business. Business is done on a gigantic scale. This has increased the impor- tance of the entrepreneur and on him depends the succces or failure of our industrial system. QUESTIONS 1. Account for the difference between the present and the former attitude towards a business vocation. 2. Chronologically, what are the foiu: systems of pro- duction ? Give characteristics of each. 3. What have been the effects of capital and division of labor upon the development of our present industrial system ? 4. What do business men mean by business ? 5. What is a market ? Why is production said to be lim- ited by the extent of the market ? 6. What is the difference between (a) supply and stock ? (b) demand and desire ? 7. "WTiat is a business unit ? Give its chief characteristics. 8. Why should managerial ability be placed in a class separate from labor ? 9. Name and explain the different methods of undertak- ing a business. 10. What are the chief causes for failure of cooperative enterprises ? 11. What are the different factors of production? How does each assist in production ? 12. Name the different branches of production. Give the characteristics of each. 13. Name and explain the different varieties of cooperation. 14. Account for the difference between the present mean- ing of the word manufacturer and its former meaning. 15. Trace the evolution of (a) entrepreneur ; (b) merchant. 24 ECONOMICS OF BUSINESS REFERENCES E. R. A. Seligman, "Principles of Economics," Chs. V, VI, XVni, XXI; H. R. Seager, "Introduction to Economics," Chs. I, III; F. W. Taussig, "Principles of Economics," Vol. I, Ch. X; J. A. Hobson, "The Evolution of Modern Capitalism," Chs. I-VII inc. ; C. J. Bullock, "Introduction to the Study of Economics," Chs. V, VI; R. T. Ely, "Out- lines of Economics," Chs. II, III, IV, DC; R. T. Ely, "Evolution of Industrial Society," Ch. Ill; C. Bucher, "Industrial Evolution," Ch. IV; A. Marshall, "Principles of Economics," Bk. V, Ch. I; J. A. Hobson, "The In- dustrial System," Chs. I, II; T. Veblen, "The Theory of Business Enterprise," Chs. II, III; C. B. Going, "Prin- ciples of Industrial Engineering," Chs. I, II; S. E. Spar- Img, "Business Organization," Ch. I; F. T. Cariton, "The History and Problems of Organized Labor," Ch. VIII; F. L. McVey, "Modern Industrialism," Part II; J. A. Hobson, " The Science of Wealth," Chs. I-IV; J. T. Lincoln, " The Factory." CHAPTER II TYPES OF BUSINESS ORGANIZATIONS The entrepreneur's task of coordinating land, labor and capital, and of assuming all responsibilities and risks of business is the bone and sinew of every Types of business enterprise. The functions of the o^ganS- entrepreneur may be performed by a single tions. person or by several, according to the form of business organization. Three types of business organization, single entrepreneurship, partnership and corporation, give scope for the exercise of the entrepreneur's functions. * The simplest form of business organization is that in which a single person controls the whole enterprise/' Any individual may start himself in business g.^^ j^ without any legal formality except in some entrepre- cases where payment of a license fee is re- ^^"^^ ^* quired. He may do his own work and use his own capital, as the carpenters, doctors and lawyers usually do, or he may employ hired workmen and borrowed capital. A person may engage in any kind of business unless forbidden by law or when necessary fulfilling certain legal requirements. In the United States, Limitations a business man cannot engage in carrying the ^dert^-^^ mails or coining money because these are i»gs. monopolies of the government ; cannot conduct a pubhc lottery because it is forbidden on the groimds of public 25 26 ECONOMICS OF BUSINESS policy ; and cannot engage in certain enterprises Hke the liquor trade without first obtaining a special license. The obligations of single entrepreneurship are the personal obligations of the proprietor. All his possessions are at the mercy of his business risks. If a business man possesses considerable property which has no connection with his business undertaking and should fail every dollar that he owns can be taken to meet his obligations. Few men have the capital to con- duct a large enterprise, and if they have, few wish to stake their whole fortune on a single business undertaking. Single entrepreneurship is obviously only adapted to a limited number of business undertakings : those Type where the capital required for the enterprise few^enter- ^^ ^^^^^ 5 ^^^^^ where the risks of the business prises. are shght ; those where the credit and capital of the individual are adequate ; and those where operation and management are not too intricate or onerous for the average business man. These requirements are suitable in agriculture, the retail trade and local manu- facturing industries, and in these fields, this form of organization still predominates. The simplest form of organization in which two or more persons are associated for the purpose of carrying on business is a partnership. "A partnership Partnership. . , . . ^. t- x- x- IS a combmation of two or more persons who agree to conduct a business enterprise for their common benefit," and are jointly and severally responsible for its management. It is formed by the agree- Formatioii. ment of the parties interested. The agreement is usually written, but it may be oral or even implied from TYPES OF BUSINESS ORGANIZATIONS 27 the actions of two or more persons. Any lawful business may be carried on and a change may, at any time, be made from one kind of business to another. The partners are all on an equal basis in the management of an enter- prise. Each represents the partnership fully and can make contracts for it without consulting the other partners, and any contracts so made are binding on all. Each partner is personally liable to the full extent of his wealth for all debts contracted by the partnership, as well as for those contracted by any mem- unUmited ber in the ordinary course of business. This HabUity ; is known as unlimited liability and is one of the great drawbacks of this form of business organization. An exception to unlimited liability is made in certain states, where laws provide for limited partnership, in which certain partners called "special" are respon- special sible for only the amount that they have in- pawners, vested, but are not allowed any active part in the manage- ment of the business. Partners may have written agreements among them- selves concerning the amount of money each should invest, the division of profits and losses, and Agreements the various duties each should perform. Such jea^e^from agreements do not release a member from Uabmty. debts incurred by a firm or its members in the ordinary course of business. They only give a basis for recovery by legal action of personal loss from other members of a firm. The partnership is not recognized as a legal business unit, and hence in every legal action ^ot a legal the name of every partner must appear. A ""**• partner cannot make a contract with his firm, or bring 28 ECONOMICS OF BUSINESS suit against it, or be sued by it, any more than he can act for or against himself. A partner cannot assign his partnership to another. He must call for a distribution of assets and retire. This ^. , . dissolves the partnership, and if the remain- Dissolubon. , . . . , , . mg partners wish to contmue the busmess, a new partnership must be formed. Frequently a new partnership continues business under the old name. When a partner wishes to retire, and a basis of settlement cannot be reached, he must ask the court to Methods. . . ' . , , , . appoint a receiver to wind up the business. A new member cannot be taken into a partnership with- out the consent of all the members, in which case, a new partnership is formed. A partnership may be dissolved at any time at the will of any partner. The date of ter- mination may be written in the contract. A partnership comes to an end by the death or insolvency of a member, by mutual agreement, by court action, by the retiring of a partner, or by the admission of a new member. Partnerships, from the character of the business con- ducted, may be divided into two classes, — general and special. A general partnership is one created Genersl. for the purpose of conducting some general line of business, while a special is one formed for a special ^ . business transaction. Ordinary commercial Speciftl. and professional partnerships are of the first t3^e, while those formed for the purpose of improving a plot of real estate or perfecting a patent are examples of the second class. According to the laws of many states, a joint stock company is a partnership authorized by law to act under TYPES OF BUSINESS ORGANIZATIONS 29 a corporate name, to be subject to certain con- joint stock ditions, and to issue stock to its members. It company, is continuous and any member may transfer his stock. A new partner may be introduced with or without the consent of the members, and without dissolving the previous organization. The stock represents the in- terest of the members in the profits and character- property of the business. A board of directors *^*^*^®- or trustees is elected to control the business and no member has the power to act for the company as a whole. A joint stock company sues and defends in the name of an officer empowered for that purpose. It is formed hke an ordinary partnership by the agreement of members among themselves. The members are like joint partners in that they are individually liable for debts of the company. A joint stock company lacks the attractive features of a corporation and is an infrequent form of business organization. The partnership, until fifty years ago, was the pre- vailing type of business organization, but with the in- crease in size of the business unit and the use of Advantages large sums of capital in business enterprises, the of partner- unlimited liabiHty of the partnership proved ^ ^* a drawback and the corporation, with limited liability, came into prominence. The partnership nevertheless has certain advantages. It can be easily organized and dissolved. It escapes many of the taxes levied upon corporations. It possesses elasticity, that is, the ease with which the relations of the partners among them- selves may be determined and altered to meet changing conditions. Partnership is a favorite form of organiza- 30 ECONOMICS OF BUSINESS tion among professional men. It still holds a prom- inent place in the mercantile business and in small local manufacturing enterprises. But wherever the business unit is large, and a large amount of capital is involved, it has given place to the corporation. The written agreement by which parties enter into a partnership is usually called articles of copartnership. Articles of ^^ ^^ necessary that the parties forming copartner- a partnership should have a distinct under- ship. standing of all important matters concerning the undertaking, and consequently, the articles are of the utmost importance and the greatest care should be ex- ercised in drawing them. When once drawn and signed, no changes can be made unless assented to by all members of the partnership. The articles differ with the nature of the business and the character of the work to be per- formed but some things are common to all partnerships, and with these, extreme care should be taken to have everything clear and definite. The articles should first contain the names of the con- tracting parties with their addresses, followed by a statement that the parties do by this instru- Essentials. . ^ i . t^ t ment enter mto a partnership. Persons le- gally capable of making a contract, partnerships and in some cases corporations can enter into partnership. The date of commencement, the duration and the name of the firm should be stated. The nature of the business should be carefully specified and the name of the place where it is to be conducted should be given. The amount and the kind of capital that each one invests should be stated and the apportionment of profits and losses should . TYPES OF BUSINESS ORGANIZATIONS 31 be provided for. The duties and rights of each partner should be carefully outlined because this frequently pre- vents later misunderstandings. Lastly, provision should be made for the final settlement of the affairs of the partnership. * A corporation is an association of two or more persons formed and authorized by statute to act as a single person in the conduct of a specified business.'^ Corporation. An exception to this definition may be made where a single person is made a corporate body in order to obtain certain legal capacities, especially that of per- petuity, which, as a natural person, he would soie cor- not have. A king and bishop are in Eng- potation, land examples of sole corporation, as it is called, but in the United States, very rare instances are found. Members of a corporation are not the corporation. They compose it, but the corporation is a separate, dis- tinct, artificial person, possessing an entity and -, ^ existence of its own, entirely apart from that of a separate its members. A corporation's property, con- ®" ^* tracts and debts belong to the corporation itself and not to the members. Under its corporate name, a corpora- tion may buy and sell, may contract debts, may sue and be sued and may enter into all kinds of legal contracts just as individuals may do. Corporations may be divided into two distinct classes, — public and private. ^^PubHc corporations are those formed by the people of a community for governmental purposes, as the municipal cor- porations of cities, towns and villages. AH , . . . Public, other corporations are private corporations.'* 32 ECONOMICS OF BUSINESS Public-service corporations, such as railroads, tele- phone and telegraph systems, electric light and gas com- panics, are frequently called quasi-pubhc but as they are conducted for profit, must be classed as private corporations. Private corporations may be divided into two classes, — non-stock and stock. Non-stock or membership Classes of Corporations are corporations created either private for the conmion benefit of all members, or for corpora on. ^^^ purpose of serving the public at large. Nearly all churches, church clubs, educational, charitable, and social organizations belong to this class, as well as mutual insurance companies, stock exchanges and other similar organizations. There is no capital stock, consequently no stock certificates, but Character- usually Certificates of membership are issued to istics. members. The members share equally in all privileges of membership irrespective of the amount that each has invested. The average business man pays little heed to this type of organization, but is concerned with stock corporations. Stock corporations are created for the purpose of con- ducting business enterprises. They have capital stock divided into transferable shares. The shares are obtained either by purchase from the cor- poration, or by transfer from a stockholder. Stock corporations are conducted for profit and the profits are divided and distributed among the stockholders in Character- proportion to the number of shares that each istics. possesses. The control of a corporation lies with the stockholders who act in meetings and by vote. TYPES OF BUSINESS ORGANIZATIONS 33 With few exceptions, each share of stock entitles the owner to a vote in the stockholder's meeting. Hence, those who own or control the majority of the shares control the corporation. Stock corporations, according to the character of the work that they perform, may be divided into four classes, — industrial, commercial, public service and stock cor- financial. The first class includes manufac- 5?^.^,**^°.^ . oiviaea into turing and mining companies, and the second, four classes, wholesale and retail corporations. The two include the greater number of business corporations. industrial: Corporations which control railroads, tele- commercial, graph and telephone systems, electric light, water, gas and power enterprises, form the third class. pubUc serv- Under certain restrictions, these are allowed ^*^®- to exercise the right of eminent domain and frequently are given special and exclusive privileges on the public highways. The last class includes banks, in- . . , 1 Financial. surance companies, trust companies and other similar institutions handhng the funds and investments of the public and with the exception of national b^nks, which are under federal control, is subject in each state to special statutory legislation and some form of governmental supervision. In all cases of management and control not regulated by special statutes, financial corporations are subject to the general laws governing ordinary stock corporations. A corporation is a creature of the law. The power to form a corporation may be given by special Corpora- statute of the legislature for a particular b^speci^'*^ corporation or by a general act covering statute. 34 ECONOMICS OF BUSINESS the formation of all corporations. Formerly, the first method prevailed, but the granting of powers to cor- porations was made a legislative favor, and much abuse resulted. To abolish the abuses, all states have passed general laws governing the formation of corporations. By general The Statutes prescribe the conditions upon laws. which a charter may be obtained, and dele- gate to a state official the work of passing upon each ap- plication and granting it if the legislative requirements are fulfilled. These statutes are alike in their general scope, but vary in detail from state to state. The corporation at the present time is the favorite type of business organization. This is largely due to the fact that it possesses many advantages over other t3^es. The corporation con- tinues uninterrupted by the dissatisfaction, the insol- Perma- vency, the death, or the retirement of its nence. stockholders. The stockholders may change from time to time but this does not affect the cor- poration. A corporation is a separate unit apart from the persons who own it. The death of a stockholder simply means the transfer of stock to some one else. The control is vested in the offi- cers and the death of one simply means finding an- other to take his place. Charters are granted in some states for only a limited period of years, and on ex- piration must be renewed or the corporations^ cease to exist. Sometimes, the period of existence is stipulated in the charter; if so, the corporation comes to an end when the time limit expires. Some states reserve the right to forfeit charters for misuse, non-use, or abuse of TYPES OF BUSINESS ORGANIZATIONS 35 power. Unless there is a time limit by charter or by statute, or unless the right of forfeiture is reserved, the duration of a corporation is perpetual. The existence of a corporation is terminated by four legal ^^ methods : by expiration of the time for terminating which the charter is granted ; by voluntary dissolution; by insolvency and by forfeiture of the charter for misuse, non-use, or abuse of powers. The liability of stockholders i^ limited by the amount of money invested for stock in a corporation. The enterprise may prove a failure and incur Limitation great indebtedness, yet the stockholders will ofiiai>aity- lose only their investment. This is quite a contrast to a partnership, where a partner, in such a case, would lose not only what he had invested but would be personally liable for all unpaid debts of the partnership. There is also a subscription liability. Subscribers for „ , Subscnp- stock are Kable to the corporation for the full tion liabU- par value of the subscribed stock. If subscrip- ^^' tions have not been paid, the corporation or its creditors can force payment for the unpaid part due the company. Again, if a corporation without the consent of its stock- holders sells stock at less than par, the creditors can force extra payment to make the stock full paid at par. There are a few exceptions to the general principles of hmited liability, where special Habilities have been granted by statute. Stockholders of national Double banks, in case of failure, are Hable not only for ^^^'^^y- their investment, but for an additional sum equal to the par value of the stock that they own. Many states impose this extra liability, or double liability as it is 36 ECONOMICS OF BUSINESS called, on banking and insurance corporations, while Minnesota and California exact it from all corporations. In New York State, stockholders are liable to employees and servants for all wages due by the corporation. The limitation of liability has been, in many cases, the chief cause for formation of corporations and in impor- recent years has led many partnerships to Umited^ become corporations. Every enterprise in- Uabiuty. volves a Certain amoimt of risk. If every indi- vidual who bought shares in a corporation were liable to the full extent of his wealth, investment would be checked. It is an easy matter to get a person to buy a few shares in a venture where his liability is limited by his investment. Limited liabihty has been a boon to industry, and has largely been the cause of the en- trepreneur finding ready capital for investment. The ease with which stock may be transferred from one person to another is a decided advantage of a corpora- tion. It allows the investing of varying abiuty of amounts and gives a proportionate share in shares. ^^^ control and profits of a business enterprise. If a person buys stock, and wishes to dispose of it, he can easily find a buyer. This is a decided advantage over a partnership where a partner frequently has great diffi- culty in disposing of his interest in an enterprise. The corporation has greatly stimulated the develop- The draw- ^^^^ ^^ industry through the ease of invest- "ig of ment, and the consequent inducement to save Smy ^°°^ and bring into existence new forms of capital, sources. During the eighteenth and the early part of the nineteenth century, the range of investment for TYPES OF BUSINESS ORGANIZATIONS 37 the public was almost entirely confined to dealing in governmental obligations. In fact, the early stock ex- changes traded only in these forms of securi- ^.^j ^^^^^ ties. The merchants and traders had outlet of invest- for their surplus capital in the extension of business and trade, but if an ordinary investor did not care to buy government securities, the only other outlet for investment of his savings was buying and improv- ing real estate. The large amount usually needed for buying government securities or real estate left no form of investment open to the small investor. The cor- poration, with its transferable shares in small amounts, filled a much needed want and soon won favor with the small investor. It allows the investment of capital in small as well as large amounts. A man with a hundred dollars has an opportunity to invest it and to draw a good rate of interest thereon, potation On the other hand, transferable shares greatly yestoeSs increase the sources from which corporations of smau amounts, both large and small draw their capital. The average corporation draws its capital from many thousands of investors, comprising frequently not only the humble workman, but the wealthy aristocrat. The United States Steel Corporation has upwards of a hundred and twenty thousand shareholders, composing all classes from the ordinary laborer to the millionaire, and scattered not only through all parts of the United States, but also in many foreign countries. Many an entrepreneur in- corporates a venture and raises the needed money by selling the stock in small quantities to his relatives and acquaintances. 38 ECONOMICS OF BUSINESS The control of a corporation rests with its stockholders, who act at regular meetings and by vote. Business can be transacted only by duly appointed officers and each officer has his duties clearly defined. An inefficient officer may be dismissed, or an entire change of management be made, simply by the process of election at the regular meeting. From the foregoing, it is seen that the advantages of corporation over partner- ship and single entrepreneurship are great. Where the non-corporate forms of organization have proved dangerous in large enterprises, the corporation, Corporfl— tion popular with its Hmited HabiUty, its ease in transferring biSiess stock, and its flexible business administration, organiza- has met the demands of the business world and has become the most popular form of business organization. In contrast with the advantages, certain disadvantages are found. Most states charge fees from a small nominal ^. , sum to an amount that is almost a tax on in- Disadvan- tagesto dustry. The organization fee of the United corporation, g^^^^^ g^^^j Corporation, if it had taken out its charter in Pennsylvania where most of its mills are located. Increased would have been several times greater than its expense. fgg fQj- incorporation in New Jersey. Many states have lower fees than New Jersey, but other dis- advantages more than offset the lower initial cost. Most states also charge an annual franchise tax or a charge for the privilege of doing business as a corporation. Special taxes are sometimes levied on corporations, as the federal corporation tax, which requires that corporations doing business in the United States pay annually into TYPES OF BUSINESS ORGANIZATIONS 39 the federal treasury one per cent of their net profits over and above five thousand dollars. There are other additional expenses incidental to the making out of reports required of corporations in most states, to the holding of annual meetings of stockholders, etc. These expenses in a large corporation receive Httle considera- tion, but with small enterprises they may be of sufficient importance to prevent corporate formation. A corporation is limited in its business operations to the powers given in its charter, or allowed in statute. Formerly most of the states allowed corpora- Limited tions to conduct only one Hne of business, powers. This often proved a serious drawback and prevented the undertaking of business ventures that would be prof- itable. The majority of the states have, during recent years, become more liberal in this respect, and little or no restraint is at present placed upon corporate organ- izations as to the kinds of business enterprise that may be named in the charter and undertaken. The credit of a corporation depends upon the capital or resources of the business, while in a partnership it is dependent upon the entire wealth of the Limitation partners. Many corporations with doubtful o^ credit, business resources find it difficult to obtain credit. Frequently, the creditors in case a partnership is changed to a corporation are reluctant about extending credit as freely as they had previously done. This disadvan- tage often proves a handicap in small enterprises, but it is of Httle consequence with large business undertakings. Corporations are compelled to make annual or more frequent reports of their business operations and finan- 40 ECONOMICS OF BUSINESS cial standing to state or federal officers. This gives ^ ^,. . a certain amount of publicity to business Publicity. . . , . operations. Sometimes business men, m order to avoid this publicity, retain the partnership form of organization. The advantages of the average corporation greatly outweigh the disadvantages. This accounts for the Advantages popularity of the corporate form and the con- dTsadvan- stant change of partnerships into corpora- tages. tions. The corporation is indispensable to our industrial system. The increasing size of the business unit with its greater complexity brings the corporation into greater favor because it is the only form of or- ganization constituted for conducting business under- takings on a large scale. The charter, the instrument which creates a cor- poration, is, in form, merely an appHcation for a charter. The incorporators or their attorney draw the application complying with the provisions of the general incorporating law of the state and present it How to with the required fee to the proper state official, obtain. 'pj^g official, usually the secretary of state, has not the authority to withhold his signature from any in- strument properly drawn and complying with the statutory requirements. The filed application immedi- ately becomes the charter of the new corporation, and the incorporators are then fully authorized to perfect the organization and proceed with its bus- Generai iness. A charter is special when a special act of legislature creates the corporation. It is general when it is formed under a general corporation TYPES OF BUSINESS ORGANIZATIONS 41 act by filing an application for charter with the prescribed public authority. It is a common practice to put in the body of a general charter the important features of the corporation act. The general corporation laws of a state apply to corporations with special charter only so far as the former are consistent with the latter. The work of incorporating ordinary business cor- porations is left entirely with the states. The federal government charters national banks, and there incorpora- are instances of federal charters for railroads ^^^ ®**^®' state or doing interstate business. It is possible for federal, the federal government to grant charters for other under- takings. A federal incorporation act would be very advantageous in making uniform the requirements for incorporation, which differ in detail in the various states. Some charters are brief, while others contain a mass of details. Charters, nevertheless, must contain many essential facts. The name must be given and charter considerable freedom is allowed in the choice essentials, of a corporation name. The chief restriction is the for- biddiner of the choice of a name like or nearly iM 1 ^ . , , .1. Name. like that of a corporation already transactmg business in the state. Some states compel the corporate name to begin with ^' The " and end with " Company,*' while in others, the name must be followed by ^'Lim- „ ^ ,. ' '' II. Location ited or * * Incorporated. ' ' The location of the of principal principal office of the corporation must be ^ ^®* stated. This does not mean the chief operating office which may be in another state. The purposes in. Fur- or objects of the corporation must be clearly ?ects^7in?' and definitely stated. Ordinary business cor- corporation. 42 ECONOMICS OF BUSINESS porations have the greatest freedom in their choice of busi- ness ventures ; the only restriction is the prohibition of undertaking those enterprises which are allowed to be con- ducted only by corporations fulfilling special legal require- ments. As the corporation can engage only in those business activities mentioned in its charter, the purpose clause should be broad enough to include all enterprises that the corporation may wish to conduct during any future time. The object clause in the charter of the United States Steel Corporation contains eleven para- graphs, each of which is a grant of extensive powers in itself. For fear that some future activities might 'be prohibited on account of lack of authority, the follow- ing is a part of the last paragraph : " to do anything and all other acts and things, and to exer- cise any and all other powers which a copartnership or any natural person could do and exercise, and which now or here- after may be authorized by law." The amount of capital stock must be given and can be changed only by an amendment of the charter. IV. Amount Many states have no limitation upon the of capital. amount, but some have a minimum, and a few a maximmn. If the capital stock is of differ- ent kinds, not only must the classes into which it is divided be clearly defined, but the rights and privi- leges enjoyed by each. The number of shares into which the capital stock is divided must be stated, as v. Number ^cll as the par value of each share. Some of shares of , . . im.ii stock. states have a mmimum, while others have a maximimi Hmitation upon par value. For a business corporation the usual par value is one hundred dollars. TYPES OF BUSINESS ORGANIZATIONS . 43 Mining companies frequently issue shares as low as one dollar and shares with a par value of ten dollars are very common. It is customary to state the duration of a charter, or the term for which a corporation is formed. Some states permit corporations to be incorporated in yj j^^^, perpetuity. Others fix a maximum of twenty tion of or fifty years. In the majority of states, while a corporation may be Hmited in its charter to any period, it is permitted to express its duration as perpetual. When the time specified in the charter or ^^^ ^^^ ^ fixed by law expires, the corporation comes and post- to an end and its charter must be renewed ad^esses or extended, or its business must be closed, o^*^- corpo- A charter must contain the names and post- rators. office addresses of the incorporators. Incorporators or parties applying for a charter must be persons legally competent to make a contract, and a certain number must be citizens of the state incorpo- where the charter is to be granted. Minors, '**°'^- partnerships and corporations cannot be incorporators, yet may hold stock after a corporation comes into exist- ence. The minimum number of incorpo- Quaiifica- rators is in most states three, but some have **°°- five. Each incorporator must ordinarily subscribe for one or more shares of stock. A corporation is domestic in the state where it ob- tains its charter. In all other states it is foreign, and in foreign countries, ahen. The admission Domestic of a foreign corporation into a state for the corporation, transaction of intra-state business is a matter entirely 44 ECONOMICS OF BUSINESS within the state's discretion. A state may entirely Foreign exclude a foreign corporation or restrict its busi- corporation. j^^gg ^q ^ particular locality, or exact security for the privilege of trading with its citizens, but a state cannot interfere with the inter-state commerce of a for- its reguia- ^ign Corporation. A foreign corporation has ^°^* no rights except through courtesy or such as may be granted by the legislatures of the states. It must strictly comply with the terms or conditions im- posed. All states have passed laws differing in detail, but generally providing that a foreign corporation can- not enter and do business without first obtaining a Ucense. A foreign corporation is usually required to keep a local office with an authorized agent in charge, upon whom legal papers may be served. Frequently, a copy of the charter must be filed with the proper state official. Some states demand the payment of fees based usually upon the amount of capital which the cor- poration employs in the state. Incorporation gives to a corporate body all powers properly specified in the charter or expressly stated in Powers of ^^^ Statutes of the state where the charter is corporation, obtained. Besides this, other powers, called *p^®ss® • general or impHed, are conferred simply by the act of incorporation, and are enjoyed by all corporations. Implied powers are those which naturally Implied. arise from the nature of the business. They are not limited to those powers which are indispensable, but include all which are appropriate and suitable for carrying out the expressed powers of the charter and the statutes. Of the implied powers, the most important TYPES OF BUSINESS ORGANIZATIONS 45 are that the corporation may sue and be sued, incur debts, enter into contracts, use a seal, buy, sell charter and hold property, appoint directors, officers ^^^J^ P®* and agents, make by-laws, dissolve itself and pUed do all proper things necessary to carry out p*^^®"* its business undertakings. Many charters fully state the imphed as well as the expressed powers, but the men- tion of the former is unnecessary, as they are recognized by law as incidental to the carrying out of the purposes of incorporation. There are certain special powers that, if not men- tioned in the charter, the corporation does not possess. The purpose of incorporation is a special special power and the corporation is confined to the po^®"- conducting of those business enterprises mentioned in its charter. In most states, many other powers, if specified, are allowed, as the issue of various kinds of stock, power to hold stock in other corporations, lim- itation upon the salary paid officers and restrictions upon the power to mortgage the property of the cor- poration. These powers must be conferred by statute, and then, in order to be enjoyed by statute by a corporation, must be stated in the charter, fiid stated ^ , in charter. There are a few instances where statutes have made special powers general and then they are en- joyed by all corporations, such as cumulative voting in California and Ilhnois. By-laws are permanent rules for conducting a busi- ness undertaking, framed and adopted by the stockholders or their representatives, the ^" *^ ' directors. A by-law differs from a resolution in that the 46 ECONOMICS OF BUSINESS latter applies to a single act of a corporation, whereas the former is permanent and is applied on all occa- sions imtil repealed. It is not only necessary, but very Necessity of desirable for a corporation to have carefully by-laws. framed by-laws. They must be confined to the limitations of the charter and must conform to the corporation laws of the state. Strictly speaking, the stockholders alone have the power to enact by-laws, but in many cases, by charter provision, or by vote of the stockholders themselves, this power is delegated to the board of directors. It is true that stockholders have the charter and corporation laws of the state to guide them, but they do not provide for any of the details of organiza- tion, administration and business routine for which by- laws are necessary. By-laws must be carefully drawn, properly adopted and contain provisions for the issue and transfer of stock, the meetings of stock- holders and directors, the election of direc- tors and officers and their respective powers and duties, the general care and management of the corporation property, the care of the finances, the payment of divi- dends and the method of by-law repeal and amendment. The capital stock of a corporation is the amount of its authorized stock. It need not be large, because Capital a large business enterprise, as in the case of ^^^ the Equitable Life Insurance Company, may be carried on with a small amount of capital stock. For the sake of convenience in estimating the interests of stockholders and in facilitating transfer of ownership, capital stock is divided into equal parts called shares TYPES OF BUSINESS ORGANIZATIONS 47 of stock. A person owning one or more shares of stock is a stockholder. As evidence of own- stock- ership, he is entitled to a stock certifi- ^o^^®'- Gate. A certificate signed by the president and sec- retary or president and treasurer and bearing the cor- poration seal states the number of shares stock cer- owned and the special conditions, if any, ^ficate. governing the stock in question. A share of stock gives the owner a voice in the management, an interest in the profits and a proportionate share in the ultimate assets of a corporation. A stockholder has an un- divided interest in the business. He is not entitled to any particular part, but owns a proportionate share in all assets combined. Many states allow with proper charter provisions the issuing of stock without voting power. Unless it is allowed by statute and provided for in the charter, every owner of record enjoys the usual voting power and may exercise it in person or by proxy. Four methods are used in issuing stock. First, stock may be issued on subscription payable in cash, j^g^ij^^jg ^f This is the siriiplest and safest method of issu- issuing ing stock. The subscription is usually made in writing and signed, then the future payment may be en- forced by law. Secondly, stock may be issued on sub- for labor, property, or any valuable considera- scription. tion other than money. This method must first be au- thorized by statute, and care should be taken that whatever is given for stock is not over- valued. Thirdly, stock may be issued as a stock dividend. A certain amount of stock is declared by the stock directors as a free gift to the holders of the d^^dend. 48 ECONOMICS OF BUSINESS stock. This is possible only when the whole amount of capital stock is not issued, or when it is in- creased. In every case, the increased issue should be supported by the proper earning power. This practice is prohibited by statute in some states. Lastly, it is a _ common practice with industrial corpora- Common . .^ ^ stock: a tions to issue common and preferred stock and to give a certain percentage of the com- mon as a bonus to the original buyers of the preferred. There are many instances, especially in the case of rail- roads and in some public service corporations, where all or part of the stock issued is given as a bonus to the original bondholders. Capital stock is divided into two general classes, preferred and common, although many corporations Preferred issue only the latter. Preferred stock is that stock. which is granted certain specific privileges by a corporation. It is usually secured by special provisions in the charter, but some states allow it by by-law provision. The preference usually consists in Cumuia- giving a dividend on the preferred stock before tive. any payment is made on the common. The dividend may be either cumulative or non-cumulative. Dividends on cumulative preferred stock, if not paid in full each year, accumulate from year to year and must be paid before any payment is made on the common stock. Non-cumu- Non-cumulative preferred stock is where the lative. profits, Usually including those accumulated from the past, are insufficient to pay the preferred stock dividends ; the unpaid part is lost, it matters not how great the profits are for the years following. Stock TYPES OF BUSINESS ORGANIZATIONS 49 may be preferred as to assets, as well as dividends, or both. There may be grades of preferred, as first pre- ferred, second preferred, third, etc. If profits after payment of the preferred dividends, warrant Distribution other dividends, various methods are in prac- ^^ profits, tice for their distribution. First, the preferred may share equally with the common as to further dividends. Secondly, the common may receive equal dividends; if the profits warrant further distribution, each share alike. Thirdly, the preferred may receive a fixed dividend and the common a fixed dividend ; further distribu- tion, all go to the preferred. Lastly, the customary arrangement is for the preferred to get a fixed dividend and no more and all extra profits to go to the common stock. Common stock is that which does not possess any special privileges or restrictions. If privileges are granted, or restrictions placed on a portion of common the stock, such is no longer common stock, ^*°^^* and only what remains is so classed. In many corpora- tions, all of the stock is common and each share possesses equal rights in the earnings and assets. The ordinary practice in industrials is to have preferred and common, the preferred representing the tangible assets and the common the intangible, as trade-marks, good will, patent, franchises, and economies resulting from produc- ing on a large scale. 50 ECONOMICS OF BUSINESS QUESTIONS 1. What are the chief objections to single entrepreneurship as a form of business enterprise ? 2. Why is the joint stock company not a favorite type of business organization ? 3. What essential facts should the articles of copartner- ship contain ? 4. What is meant by saying that a corporation is a separate entity ? 5. State and explain the advantages and disadvantages of partnerships and corporations. 6. Name the different kinds of stock corporations, and give the characteristics of each. 7. What is the difference between (o) partnership and cor- poration, (b) public and private corporations, (c) non- stock and stock corporations, (d) domestic and foreign cor- porations ? 8. Why has the corporation become the popular type of business organization ? 9. What are the different forms of business liability ? 10. What is a charter and how is it granted ? 11. What essential facts should a charter contain? 12. What are the limitations placed upon a foreign cor- poration doing business in a state ? 13. Name and explain the powers of a corporation. 14. What should the by-laws contain ? 15. What is preferred stock? What is the difference be- tween cumulative and non-cumulative preferred stock ? TYPES OF BUSINESS ORGANIZATIONS 51 REFERENCES W. H. Lough, Jr., "Corporation Finance" ; W. A. Wood, "Modern Business Corporations"; H. R. Seager, "In- troduction to Economics," Ch. VIII; R. J. Frank, " Science of Organization and Business Development " ; J. J. Sullivan, "American Corporations"; T. Conyngton, "Cor- porate Organization," Chs. XII, XIII, XIV; Burch and Nearing, "Elements of Economics," Chs. X, XII; Nearing and Watson, " Economics," Ch. XXXV ; " Business Adminis- tration," edited by W. D. Moody, Vol. X, Ch. XIII; J.J. Sullivan, "American Business Law," Part II ; T. Conyng- ton, " Corporate Management," Chs. I, II, III. CHAPTER III INTERIOR ORGANIZATION The management of a business corporation is in the hands of a board of directors elected annually by the Board of Stockholders from their own number. The directors. details of management are usually assigned to officers chosen by the directors. The directors are the agents of a corporation and as such are responsible for the corporate care of its property, and for its proper management. If the annual meeting of stockholders Directors : is not held, or if the election of directors does a^oM^ra- ^^^ ^^^^ place, the old board remains with tion. all its powers until successors are elected. Many states fix the minimum number of the board at three, others at five members, but usually there is no maximum limit. Directors, acting as agents of a corporation, must man- age it as carefully as a business man conducts his busi- ~ ness. They are held liable for acts which themselves are wrong or fraudulent, such as causing loss to a company through neglect or wrongdoing on their part, issuing stock as fully paid when it is not, allowing dividends to be paid out of capital, or perform- ing any act forbidden by the statutes of a state. In addition to these liabilities, special laws have been passed by many states making directors liable criminally as well 52 INTERIOR ORGANIZATION 53 as civilly for certain acts, as making false reports, loans to stockholders out of funds of the corporation, etc. But so long as directors keep within the law and ex- ercise care in management, no liability attaches to them in the discharge of their duties. The by-laws fix the number of directors, their qualifi- cations, method of election, term of office, method of filling vacancies, meetings, and compensation for serv- ices. For the average corporation, a small board is more efficient than a large one. States usually require directors to be stockholders, and at least one Quaiifica- or more resident of the state of incorporation. **°°^' In such cases, when a director ceases to be a stockholder, he vacates his office. Some states allow the stock- owning requirement to be set aside by provision in the charter or by-laws. As to other requirements, the general rule is that a person legally qualified to make a contract may be elected a director. When once elected, a director unless he is disqualified by his acts, is entitled to hold office until the expiration of his term, and cannot be removed by stockholders, directors, or court. An exception is made in one or two states, where stockholders have the power to Dijgj.tQ„ remove directors at any time. A single direc- must act as tor has no power to contract or do business for ^ ° ^' the corporation. Directors can contract and act only as a board duly notified and assembled* A majority must be present, and a majority of that majority acts and binds a corporation. A board of directors may delegate to an agent power to make a contract or do business, and this agent may be a director or a third party. The 54 ECONOMICS OF BUSINESS board of directors has supreme power in management, and all acts and contracts which the corporation enters into must be by or through it. Sometimes, one or two men wish to get control of a board of directors, which they do, through the creation Dummy oi dummy directors. A dummy director is one director. ^j^q follows the bidding of some other person, or votes as he is told. He may be a stockholder, and outside interests are depended upon to make him vote as desired, or he may be an outsider and one Purpose. or more shares of stock are given him so that he qualifies for office. In the latter case, if any doubt How con- exists about his voting, he is compelled to re- troUed. ^^.j^ ^q ^jjg (^onor the indorsed stock certificate, which represents the stock which has been given or trans- ferred to his name. Any time he fails to obey brders, the actual owner has the stock transferred again to his own name, and the director, not being qualified, loses his office. A stockholder who controls a majority of shares may through dummy directors direct and control a cor- poration and yet not be a director. Under the ordinary system of voting, parties control- ling 51 per cent of stock elect the board of directors. The minority interests, not having a representative on the board, very frequently have their rights imposed upon, and have just ground for complaint. To give the minority interests protection, and make it possible, if Cumulative their holdings are of any size, to elect one or voting. more representatives on the board, a cumu- lative system of voting was introduced. Under the ordinary system, if a stockholder owns ten shares of INTERIOR ORGANIZATION 55 stock and there are ten directors to be elected, he casts ten votes for each director, and if all his votes are to be cast, he is forced to give ten to each of the ten candidates. Under the cumulative system, q^^^^^ each share has a vote for each director, but the system vs. stockholder may vote for each or cast all his ^"™^ votes for one. If a stockholder has ten votes, and there are ten directors to be elected, he may cast his hundred votes for one director, or distribute them among the ten. With any showing of strength, the minority very seldom fails to elect one or more of their number and Advantage, instances are known where the majority, by scattering their votes, lost entire control of a board. Cumulative voting is used only in the election of direc- tors. It is allowed in a large majority of states, and some have gone so far as to compel its use, declaring it to be the only proper system for the election of di- rectors. The individual stockholder has few rights and few duties to perform. He receives notice of, and has a right to attend all stockholders' meetings in person p or by proxy, and to cast votes for his stock. stock- Stockholders assembled together in corporate meetings have power to elect directors, make by-laws, un- less this power is delegated to directors, provide for increase or decrease in capital stock, authorize amendment to char- ter, give their assent in certain states to the sale or mort- gaging of the company's property, and sanction the dis- solution of the corporation. The board of directors for whom a majority of votes is cast at the annual meeting has active control of an enterprise and the stock- $6 ECONOMICS OF BUSINESS holders have little to do until the next annual meeting. A stockholder has the right to inspect the accounts of a corporation, but the courts and the legislatures have placed various restrictions upon this right. The chief officers of a corporation are the president, secretary, and treasurer. Two of the offices may be Q^ held by the same person. In large corpora- a corpora- tions, the number is increased by one or more vice-presidents, assistant secretaries, assistant treasurers, a general manager, auditor, general counsel, and a chairman of the board of directors. The chair- man and the president are always members of the board, but the others may or may not be directors. The officers are usually chosen by the board, but a few states permit them to be elected by the stockholders. The by-laws usually name the different officers, their mode of ap- pointment, and clearly define the duties of each. Some large corporations have a chairman of the board of directors, who presides at all their meetings. Chairman , of board of He is usually a former president and contmues directors. ^^ perform a few of his old duties. The chief executive is the president. He presides at all meetings of stockholders, and, if there is not a chairman of the board, at meetings of directors. His office alone does not give him any power to buy, sell, or contract for the corporation, nor control its private funds or management. What power he possesses must be specified by the by-laws or resolutions of the board. The board usually authorizes him to sign all stock certificates, deeds, and other important in- struments. The president binds a corporation by his INTERIOR ORGANIZATION 57 acts or contracts when he is expressly authorized to act or contract, when he is permitted by a corpora- tion for some time to act or contract for it, and when a corporation ratifies or accepts the benefits of a contract after it is made. He makes an annual re- port to the board and presents the same at the annual meeting of the stockholders. A vice-president is often appointed to assist the presi- dent in the performance of his duties. He takes the place of the president in case of his absence, vice- disability, or refusal to act. The office of vice- President, president does not in itself carry any powers. The duties and powers must be clearly specified and au- thorized by by-laws or resolutions of the board. If a corporation's business requires it, more than one vice-president may be appointed. Certain ex- ecutive duties are assigned to each, and, in the absence of the president, they in order of precedence perform his duties. The secretary is an important officer of a corporation, and many states by statute require the appoint- Secret&ry. ment of such an official, and specify his more important duties. Among his many and varied duties may be mentioned the following: He must keep the minutes of the meetings of the board of directors and the stockholders, serve all notices for the corporation, sign and countersign all contracts au- thorized by the board of directors or finance committee and affix thereto the corporate seal, keep a record of stock and stockholders, and keep all instruments and records that are not assigned to other officials. He is a mere 58 ECONOMICS OF BUSINESS servant and has to do as he is told. He has no author- ity to represent the corporation, but the board may ex- pressly authorize him to contract for it, and may accept or ratify his contracts after they are made. In large companies, the secretary has one or more assistants, whose duties are defined in the by-laws or determined by order of the board. The treasurer is the custodian of all funds and se- curities of a corporation. It is customary for him to give a bond for the faithful discharge of his Treasurer. ' duties. The amount of the bond, and the securities that will be accepted, are usually stated in the by-laws. The treasurer not only keeps his own books, but ordinarily has charge of the bookkeeping Duties. of the company. He, like the secretary, has no power to represent the corporation, and what powers he possesses must be expressly delegated to him. He is usually authorized to sign all checks (but these are in large corporations counter- signed by the president or some official assigned for the purpose) and indorse all negotiable instruments. Like the secretary, he may have one or more assistant treasurers, to assist him in his work. The president in a small corporation is usually delegated all managerial powers, and personally directs and super- General vises the business enterprise. In large cor- manager. porations, the managerial duties are so nu- merous and important, that it is the custom to appoint a general manager to assist in these. The by-laws usually provide for this official, as well as define his powers, duties, term of office, and INTERIOR ORGANIZATION 59 compensation, but if such is not done, the board of directors possesses the power to do so. With the increase in the size of the business unit and the growing complexity of business organization, the problem of the systematic keeping of accoimts j^^^^^j. is an important one. It introduced in the industrial field a new official, the auditor. To-day, with our large business undertakings, this official is indispensable, and an absolute necessity. His duties are to supervise and take charge of the whole . system of corporation accounts, and he fre- quently has under him a large clerical force. As in the case of the general manager, if the by-laws do not provide for the office, the board of directors may do so. The counsel is the legal adviser of a corporation. He has no authority to act except as expressly given in the by-laws or by the board of direc- tors. His duties consist in giving legal advice whenever necessary, drawing all contracts and impor- tant instruments, and representing the com- pany in case of litigation. Dividends are profits declared and ordered by the directors to be paid to shareholders on demand at a fixed time. The directors alone have the Dividends, power to declare dividends from the earnings of a cor- poration and fix the amount, time, and manner of pay- ment. Until a dividend is declared, profits stock- belong to the corporation and are Hable for 5°^"*^° corporation indebtedness. Stockholders have right to no definite rights, but only potential rights, p^°^*^* to share in the net profits of a corporation according 6o ECONOMICS OF BUSINESS to their respective interests, but where the stockholders are notified that a dividend has been declared, an amount sufficient to pay it is, in the eyes of the law, separated from the assets and held by the company in trust for the stockholders. When dividends have been properly declared out of the net profits and time comes for pay- ment, there is a debt due by the corporation to the stockholders and, can be collected by due process of law. U The directors determine whether or not a dividend is to be declared. When they refuse to do so, the stock- Granting holders must prove to a court of equity, that of dividends, there is a clear abuse of power before it will in- terfere, and compel the directors to declare and pay a dividend. The directors may in fair exercise of their discretion invest profits to extend and develop a busi- ness. They may set profits aside to pay indebtedness, that is not due until some time in the future. Dividends must be paid out of net earnings. If all stockholders assent, it is legal to distribute part or even all of the profits in salaries. Capital is a very important factor in all business enter- prises. Without large amounts of it, the business world would be severely handicapped. The ability A corpora- ,. . , ^ • i <• • tion draws to get an unhmited amount of capital for m- fro^^ vestment has made the United States the classes of greatest industrial country in the world. A peop e. corporation possesses the advantage of being able to draw its funds through the sale of stocks and bonds from all classes of people. A share of stock rep- resents a proportionate part of assets, while a bond INTERIOR ORGANIZATION 6i j ^ to be taken All goods affected by exposure to weather or the in storage, gigj^g^ts should be protected by covers. Care should be taken to keep goods from the ground, and with many materials, to pile so that currents of air can freely circulate, as, for example, green lumber, if not properly piled, decays qidckly. Goods Hke lime, salt, etc.. FACTORY EFFICIENCY 157 should be kept in dry places, while others should be kept exposed to plenty of air, and sometimes to a certain amount of moisture. Extra precautions against fire should be taken with all inflammable substances. The storeroom is just as important, and as prof- itable as space used for machinery. The room should be centrally located and permit easy access, storeroom. In a large factory, there is usually a central Location, storeroom, and branches for many or all of the depart- ments. In many factories, stores are scattered over the whole place, in the greatest confusion, xheoid and in the way of workmen and machinery, method of tr r • 1 r 1 • handling Very often, mstead of promptly removmg stores and finished goods to the stock room, they are ®*°*^^' thrown together in confusion, and scattered everywhere throughout the place. This not only handicaps the workmen, and causes loss of time, but frequently causes stoppage of machinery. The foremen frequently have no idea where material is, when needed, and often men and machines are idle, while it is being found. Stores run short, causing ^ idleness for hours, frequently for days, until the old goods can be obtained. Stores collected, and °^® ° ' carefully arranged in proper places not only save time, but economize space. Frequently a larger amount, than needed, is kept on hand, and a greater amount of capital is invested than is necessary. Factories, either large or small, should reserve proper and sufficient space ^j^ for stores. It is just as necessary in small as in room a large factories. In the former, the owner him- ^^^^^^ ^' self may take active charge, or he may assign it, as part of 158 ECONOMICS OF BUSINESS the work of a trusted employee, while in the latter, a spe- cial person is assigned to take charge, and frequently it is necessary to have a large clerical force to assist him. In large factories, each department has its storeroom, con- Systemin taining the supplies needed for that depart- arrange- ment, each in charge of a competent person. The arrangement of the storeroom should be of such a nature as to allow the greatest possible dispatch in filling orders. Each article should have its own place, suited in arrangement, capacity, and location to the re- quirements of efficient use. Bins, shelves, racks, etc., should have easy access, and be carefully marked. Noth- ing pays so well as arrangement in a storeroom. There should not only be system in the arrangement of material, but also in recording the issue, so that the Recording quantity remaining on hand, may always be issue*of*° known. The latter requirement is every day goods. more recognized, as necessary to prevent over- stocking, loss of time arising from shortages, and search- ing for mislaid goods, and deterioration of stock from age. The greatest care should be taken in the issuing and proper recording of the receipt of goods. A competent, capable man should be placed in charge, and all goods should be issued only through him, or by his orders. Again, goods should be issued only through requisition Permanent cards, signed by the proper factory foreman, inventory. Careful records should be kept of all goods re- ceived, and the goods should, as soon as possible, be dis- tributed to their proper places. A record or permanent inventory should be kept of all receipts and issues of goods. This shows at any time the amount of each FACTORY EFFICIENCY 159 kind of goods in stock. The simplest method is to at- tach a card or ticket to each stock bin or shelf, on which all receipts and issues are recorded. _ , . r . . 1 1 How kept? The practice m many factories is to keep the permanent inventory in a loose-leaf ledger. It is not necessary to have a store or stock room, but it is ad- visable. A good stock system is a safeguard against waste of material, theft by employees, and losses from other causes. Through a careful study of the amount of goods used in the past, it is possible to place a maximum as well as a minimum limit, upon the quantity of goods otOCK K6pt "necessary to keep on hand. These limits between should be carefully watched, and the stock of ^^"*"™ goods should be kept between the two ex- minimum tremes. This proves a valuable safeguard against overstocking, and failure to carry sufficient goods to meet demand. Dispatching, which is ab- solutely necessary in running trains, is also of Dispatch- service in a factory. Every requisition slip i»g system, should contain the material wanted, the department to which it is to be deHvered, and the date to be de- livered. A dispatching system guarantees the prompt delivery of all goods wanted, and may be extended to the systematic collecting, and storing of finished goods. In every factory, workmen and machines should always be supplied with the proper amount of the necessary ma- terials. Dispatching assures this, and prevents loss of time and idleness from shortage of goods. Dis- .... . Importance. patching is a time saver, and cost reducer m every factory, and particularly so, in the assembling room. i6o ECONOMICS OF BUSINESS In one machine shop, a force of thirteen men was able to assemble twenty machines per month, having a gross value of ten thousand dollars. The introduction of a dispatching system reduced this force to six men, who made a record in assembling in one month, one hundred somewhat smaller machines, having a gross value of thirty-five thousand dollars. In all factories, Emergency -^ ' dispatching it is found advantageous to have an emergency system. dispatching system, to rush stores to any quar- ter where sudden need arises. Time can be saved, and cost lessened by using efiicient facilities for moving goods. Goods are usually moved Movement several times during the process of production, of To move goods, in and about the place of storage, °" *" ^* from storeroom to shop, or different shops, from one machine to another, frequently from one department to another, and the finished articles to the stock room are Effidenc movements needed in every factory. Modern in moving methods, whenever possible, should be used in conveying goods. In one factory, the carrying of cans was done by hand ; the introduction of a convey- ing belt saved considerable money, and gave better and more prompt service. Space will not permit the mention of the many hundred different devices in use, for moving materials ; but even to-day, conveying in many factories is carried on by obsolete methods. The expenditure of a few dollars for the introduction of a modern method would, in the course of a year, save hundreds of dollars. Particular attention should be paid to quality of goods purchased. Careful investigation should be made to dis- FACTORY EFFICIENCY i6i cover the grade that will result in the best product. Many large factories have finely equipped laboratories Q^gu^y for testing the quality of goods, and experiments of goods are constantly being carried on, to discover ^^*^ if different materials or grades can be more economically used. The question is to find out in any good, Labora- the quality of the part that is utiUzed, as in d^e"en^e wood pulp, it is the fiber, in coal, the heat quaUty. unit, in sugar cane, the sugar, etc. There are varying quahties, as well as varying amounts, of the desired quality per imit ; for example, a lot of sugar cane may carry a certain amount of sugar, of a certain quality, per ton of cane ; a second lot may not carry half the amount of sugar, but of the same grade, while a third may carry more sugar, but of a lower grade. What a manufacturer wishes to know is the good which contains not only the best quality, but also the greatest amount per imit of that quality. The same care should be exercised in buying repairs. A flaw in steel may not only cause loss to machinery, but additional loss through the stop- page of machinery and idleness of men. In every in- stance, too great attention cannot be given to the quality of goods used in every process of production. From the point of view of the finished article, quality is an important consideration. Every manufacturing firm should strive to turn out goods of the highest q„^^ j^ quality, and none except these, should be al- goods pro- lowed to leave the premises. Nothing so reacts upon a firm, as to let the consuming public learn, that goods of a low grade are allowed to go- on the market. Let a manufacturer convince the public that only goods of i62 ECONOMICS OF BUSINESS the highest quality are produced, and his success is usually assured. Precautions should be taken to assure that only goods of the highest grade are produced. Competent and trustworthy inspectors should be chosen, and the raw material should be not only carefully inspected, but a separate inspection should be made during each process of production, and finally the finished article should pass most rigid tests. Quality in goods cannot be overlooked, and should receive the closest attention in buying materials and in the production of the finished product. Business failures are frequently due to neglect in care- fully examining the quality of the goods purchased, and carelessness in putting goods of low quality on the market. The economical use of materials is a matter which requires careful consideration. The ignorance of em- E n micai P^^Y^^^ as to how to properly care for goods use of is often the cause of loss. Exposure to light, maten s. nioisture, or dryness causes loss which care in handling would prevent. Many manufactures never give a thought to instructing their employees in the eco- instruction nomical use of materials. The management usfS should instruct all employees in the proper materials. use of materials and insist that instruc- tions be followed. A few lessons in planning prevent waste in the cutting out of garments, leather goods, etc. A few instructions in proper firing, and keeping boilers in proper shape frequently saves hundreds of dollars in fuel. Proper oiling and the careful use of oils will, during the course of a year, add many dollars to profits. The use of waste products deserves some attention. FACTORY EFFICIENCY 163 Formerly factories sent to the dumping grounds, odds and ends, which are now utilized in some form or other. Consideration should in every factory be given ^^^ ^^ to waste material, in order to find, if some eco- waste prod- nomical use cannot be made of it. Many large factories have greatly added to their profits by the eco- nomical use of factory wastes. Scores of plants have saved hundreds of dollars in fuel, by the expenditure of a few dollars to provide equipment for the obtaining of power by burning of sawdust, shavings, or other waste products. Every one knows of the vast sums made by the large packing houses, and oil refineries from by-products. Savings can be made in small factories, as well as large, by attention to odds and ends. Scores of devices are in use, throughout the country for the utilization of wastes, and this is an item, which in a factory cannot be overlooked, and should receive careful consideration. While more or less attention has of late been paid to factories, retail and wholesale stores have usually passed unnoticed. In the storing, moving, and Efficiency handling of goods, what has been said of in retail f ^ . ,. „ ., and whole- lactories, appnes as well to mercantile enter- sale enter- prises. Attention to quahty is equally, if not p"^®^* more important, in the latter case, than in the former. Many stores take the greatest precautions to assure the handling of goods of the highest grade. When a firm's name becomes associated with goods of a high grade, it becomes a valuable business asset. Quahty in goods is one of the fundamentals of business success. The problem of the economical use of materials, and the i64 ECONOMICS OF BUSINESS utilization of waste products applies to a limited extent to a mercantile enterprise. In all mercantile estab- lishments losses can often be lessened, and even prevented by following many of the practices of efficient factories. QUESTIONS 1. In locating a factory, what factors must be considered ? Give the importance of each. 2. What are the chief considerations in the location of a retail or a wholesale establishment ? 3. What phases of the labor problem must be considered before deciding upon a factory location ? 4. What advantages has a suburban over a country loca- tion? 5. What important points must be considered in designing buildings for a factory ? 6. What savings are effected by the proper arrangement of factory equipment ? 7. What method do entrepreneurs pursue in order to keep their factories always equipped with the most efficient ma- chines and tools ? 8. Compare the old method of caring for, and providing tools, with the modern. What savings are effected by the latter? 9. Why is the tool room so often described as the heart of the factory ? What are its important functions ? 10. Plan a system for storage of tools and also one for keeping track of tools as to whether they are in store, or in use. 11. What precautions must be taken in the storage of materials? Mention several ways in which waste may be prevented by proper storing. FACTORY EFFICIENCY 165 12. Compare the old methods of handling stores, while in workshop, with the modern. 13. In what way may costs be lowered by paying attention to quality of goods purchased? From the point of view of the finished produce, why is quality an essential of success ? 14. What is meant by the economical use of materials? Mention several ways of attaining it. 15. How may profits be increased by paying attention to waste products ? Mention several ways of utilizing wastes. REFERENCES J. C. Duncan, "The Principles of Industrial Management," Chs. I, II, III, IV, XVII; S. E. Sparling, "Business Organi- zation," Ch. V; W. D. Ennis, "Works Management," Ch. V; H. Diemer, "Factory Organization and Administration," Chs. II, III, XIII, XVI ; C. U. Carpenter, "Profit Making in Shop and Factory Management," Ch. V ; C. B. Going, "Prin- ciples of Industrial Engineering," Ch. IX; F. E. Webner, "Factory Costs," Chs. V, VI; F. W. Taylor, "The Principles of Scientific Management," Ch. II; A. H. Church, "Produc- tion Factors," Ch. Ill; 0. E. Perrigo, "Modern Machine Shop," Chs. XVIII, XXIX; S. Kirschbaum, "Business Organization and Administration," Chs. I-V. Twelfth Census of the United States, Report on Manufactures, Part I, Ch. XXXIX. CHAPTER VIII EFFICIENT BUSINESS METHODS The shipping of goods in every factory requires careful attention and consideration. The shipping department The ship- ^^ often badly neglected, and large losses an- pingde- nually occur through lack of system. The shipping clerk or person in charge of outgoing goods is an important member of every office staff. One The ship- person, in small factories, usually has charge ping clerk, ^f receiving and shipping goods, but in large plants, it takes a large number of employees under a chief clerk to look after the shipping. All finished products, with the exception of large, bulky articles, should go, on completion, to the stock room to await orders for shipment. No goods should leave the factory unless they go through the shipping room, or are shipped on instructions from the ship- inspectors. . ping clerk. An order, when filled, should be inspected by the proper official, who verifies to the ship- ping clerk that only articles ordered are being shipped, and that they are goods of high standard, and what were ordered by the customer. Inspectors should . be trustworthy employees. Every inspection should be carefully made ; if so, a company will be saved much expense in shipping goods not ordered or i66 EFFICIENT BUSINESS METHODS 167 of a different grade. The goods, after inspection, should be turned over to the shipping clerk to be packed under his direction, and shipped under his instructions. Many factories lose annually hundreds of dollars by not having a proper shipping system. Carelessness allows goods to leave the factory without gj^ .^ invoices, and this usually means absolute loss, system Goods are frequently allowed to go the wrong ^®*^®^^^y* route, and sometimes to the wrong destination. It should be an absolute rule, that no goods be allowed to leave the factory without careful inspection, and proper ship- ping instructions. The question of packing and routing goods is of the utmost importance. It is a special study of the shipping clerk, but in large factories, the work is usually Packing and assigned to experts. Railroads classify goods 'o^^i^s- and fix rates according to classifications. Frequently a little different crating or packing, puts goods in an- other classification, and at a lower rate. A light crate or the removal of projecting parts frequently allows an article to go at a lower rate. Sometimes it is cheaper to ship parts and assemble at destination. Care should be taken to properly describe goods, as damaged parts shipped as scrap pay a lesser rate. The classification affecting the goods of a particular factory should be carefully studied, and the goods packed so as to obtain the lowest rates. Whenever possible, advantage should be taken of the lower rates for car lots. The minimum weight for a carload should be ascertained over shipping by all railroads over which goods are shipped. A carload, consignment of minimum carload weight can be shipped i68 ECONOMICS OF BUSINESS at a saving as a carload than less than carload. Roads vary in their limit of minimum carload weights, so goods may be shipped part wa.y at carload rates, and to destina- tion at less than carload rates, or vice versa. Many consignments to neighboring towns may make a carload, so it will pay to ship as carload to a central point and then reship to destination. In the shipping of a large con- signment of goods to Omaha, several dollars are saved by shipping via New Orleans rather than directly by rail. Water com- Water competition has a great bearing on petition. rates, and whenever possible, advantage should be taken of it. An expert on routing saves a large factory hundreds of dollars annually, and proper routing means a saving even to a small factory, yet this is a part of factory management which has been very much neglected. LiabiHty and expense can often be saved by selling goods, "free on board cars at factory, freight allowed „ , . , to destination." Transportation charges are Method of . ^ , . . . shipping to deducted by consignee from his invoice, and shipper amounts in costs to the same thing as ship- fromUabU- ping the goods prepaid. But it is often of great advantage to the consignor, as it re- lieves him from liability for delays or damages, after the goods are in the transportation company's possession. In no Hne of business is there greater waste than in factories. Time, energy, and materials are wasted in an infinite number of ways. Waste is the differ- ^^aste. ence between what is, and what should be. In raw materials, there are frequent wastes in buying and using. In buying, waste is the difference between what EFFICIENT BUSINESS METHODS 169 it should cost to secure the raw material, which is deter- mined by scientific test to be best adapted to the needs of producing the best results, and what -^^5^^ is actually paid. Thousands of dollars are an- in buying nually wasted through carelessness in buying ^^ ^" coal. In place of carefully testing and determining the grade of coal, that gives the greatest number of heat units per ton, and making certain that such is obtained, it is customary, to order without any attention to quality. Poor qual- ity is discovered only through complaints of -^^5^^ j^ firemen or increased coal costs. Waste is the use of most common in the use of materials. It is the difference between what should be necessary to pro- duce a given product under most favorable conditions, and what is actually used. Under old methods, Modern it was absolutely impossible to discover the ^^- f^^, . . . . methods in extent of waste m buying or usmg materials, discovering Its presence, if detected, was largely a mat- ^*^*®' ter of accident, and it was never given serious con- sideration. Modern methods are more scientific. Many manufacturers pay particular attention to the deter- mining and obtaining of materials, not only of the best quahty, but those best adapted for the making of the desired product. The amount of materials that should be used in the making of a certain product is de- termined by careful investigation. This decides not only the existence, but the extent of waste. It also gives the basis for a rigid investigation, which, if properly and scientifically conducted, results in the elimination of much waste and the saving of many dollars. Time is an important element in production. More I70 ECONOMICS OF BUSINESS wastes occur through lost time than from any other source. Lost time means a decrease in the output and Waste of an increase in the expenses of production. **™®- Wasted time is the difference between the time taken to produce an article under the most favorable Various condition, and the time actually consumed. wastiM Time is lost in many ways, some of the chief of time. which are : waiting for suppHes or materials ; waiting for other parts of the plant ; breakdowns ; not starting machines on time; stopping before the end of the working day ; not running machines to capacity ; nmning machines in bad repair; using tools in bad re- pair ; not using best methods for production of goods ; soldiering on the part of the workmen. By keeping the equipment always in the best repair, by running machines to full capacity and to the full extent of the working day, by efficient handling of all materials and supplies, by efficient methods and the help of an efficient working force, much of the wasted time of old factories is eUm- inated. There is much waste in the common operations of industry through lost "energies. The best method for Waste of performing a piece of work, and obtaining the energy. desired result with the least expenditure of ef- fort, should be discovered by careful study and experi- mentation. Train the men in this method, and make How to certain of its adoption. This is a decided prevent? contrast to the old method of allowing every employee to use his own method of doing a piece of work, and giving no thought as to whether or not unnecessary movements were taken. The problem of lowering costs EFFICIENT BUSINESS METHODS 171 through elimination of waste energy is of recent date. The greatest factory experts in America and in other countries have accomplished much in this field, and the next few years promise still greater developments. Small wastes present the hardest problems in the management of stores as well as factories. The de- tection of waste and its elimination is a xhe de- subject that deserves the closest attention of tection of every entrepreneur. The closest scrutiny and quires close investigation should be constantly carried *"®^*io°- on in every branch of a factory. The aim in every fac- tory should be to produce with the greatest economy in the use of materials, and with the least possible waste of energy or loss of time to either man or machine. Inventory, or finding the amount and value of goods on hand, confronts a business man at least once a year. In- ventory taking in a mercantile establishment is . , . , t . 1 1 Inventory. comparatively simple as compared with that in a large factory. In the former case, the stock consists of goods with a definite market value, while in the latter, a large amount consists of partly finished prod- lyjercantUe uct. In a factory, it is easy enough to find the stores vs. value of raw material and finished goods, but frequently trouble arises with partly finished product. A reliable cost system permits the valuation of the latter with Uttle difficulty, but without one, it depends usually on the judgment of the foremen of the various departments, and is more or less a matter of guess. If an appraisal of factory and equipment is required, a more difficult task of finding the present value of all parts arises. 172 ECONOMICS OF BUSINESS The value of an inventory depends largely upon its ac- curacy. The greatest care should be exercised to assure Value of exactness in counting, measuring, weighing, aninyen- ^nd listing the amounts. Only reliable and tory de- pendsonits trustworthy clerks should be chosen for the accuracy. ^^^j^ Every one engaged in taking the in- ventory should be impressed with the fact that accu- racy is the watchword. The old method of going around with pencil and paper, listing the articles and placing a more or less random valuation on them is past. Such an inventory Old method. is of little value, as it is filled with inaccuracies. In place of pieces of white paper, printed tags are used. They are numbered, and contain places for name of arti- cle, amount on hand, size, condition, place, price, and a space for the initials of helper or checker. In factories, three different colored tags are generally used, one for raw materials, one for partly finished goods, and the other for finished product. The whole establishment is divided into divisions. Sometimes a department represents one division and Prepara- Sometimes two or more. A checker and sev- tions for eral helpers are assigned to each division and xnvenory. ^^^ head of the department assists whenever necessary. Checkers and helpers are usually chosen some time before inventory starts, and during the interval re- ceive instructions as to the proper use of the tags, proper method to inspect, weigh, count, and measure the goods, and in giving proper description on the tags. The first stage of an inventory is to find the amount of goods on hand. The prices are later added in the office EFFICIENT BUSINESS METHODS 173 and there valuation is made. When a stock system is in operation, an inventory is for the purpose of finding if the stock records are correct, and should be inventory as carefully taken as when no stock system ^^^^e a. exists. If any differences are found, the system stock records should be made correct. Many ®^^*^* manufacturers examine only lots here and there for the purpose of comparison with the stock records, and do not make a careful examination. The checker is charged with all cards given him and every one must later be accounted for. He records the information given by the helpers on each card, inventory and after the count, fastens the tag to the "i progress, particular lot or piece. This procedure continues until everything has been counted and tagged. Business continues, and when it is necessary to remove goods from a lot tagged, the employee notes on the back of the tag the amount taken. But while inventory is in progress, no goods should be removed from one depart- ment to another. Extreme care should be ustingof taken in listing goods in process of manufac- S!^essof ture, so as to show the last operation. This is manu- very important in valuing the product, and if not done, inaccurate results will follow. It is advisable to leave a space on the tags for the stage of production of partly finished goods, and the checker should take pains to fill out correctly. In a few cases, it may not be con- sidered necessary to weigh or count the material, as an estimate is considered sufficient ; but the head of the de- partment and the checker should be agreed upon the amount. The tag should be marked "Estimate" and 174 ECONOMICS OF BUSINESS signed by the head of the department, and the checker. After counting has been completed, and all goods are tagged, a second force of men is sent through to collect Inspectors ^^^ ^^^S- These act as inspectors, and at and tag random test the accuracy of the tags, and care- fully inspect the shelves, bins, etc., to see if any materials have not been counted. While this process is in operation, many factories close, but such is rarely the case with mercantile establishments. The work is now transferred to the office and is placed in charge of a force of inventory clerks under a compe- Arrange- ^^^^ chief. The cards are carefully inspected ment of to see that none are missing. Various arrange- ments of cards are usually made to assist in valuation. The cards having been arranged, the inven- tory is ready for pricing. All staple materials, whether raw materials or finished Pricing of goods, should be priced at market value. Care goods. should be taken in pricing damaged goods, and goods although new, yet for which, there is no de- mand. The latter class includes all goods out of fashion, and often although as good as new, yet they are practically valueless, and the only Goods out suitable place for them is the scrap heap, of fashion, jj^ order not to mislead, sound judgment should be exercised in the pricing of all goods. Buildings, machinery, and other equipment are valued at their oridnal cost, less a certain sum for Buildings .... and equip- depreciation. This is based upon the number ™*°** of years the good has been in service, and its EFFICIENT BUSINESS METHODS 175 probable future life. In estimating future life, it should be borne in mind, that it depends to a certain extent upon progress of invention. A new invention has often con- signed to the scrap heap, a machine that otherwise would have had many more years of service. The estimates in each case should be made by shop experts, and should always be conservative. The total value of the various goods is obtained, and the amounts entered on a summary sheet. The cards or tags form an itemized inventory of all goods ^ ^^ on hand, and should be filed away for future itemized reference. The inventory not only furnishes "^^^° °^' an accurate state of business, but records for careful study. It shows whether or not departments importance are over or under stocked. It draws the at ten- of an in- tion of the entrepreneur to the presence of ^^^°'^' imdesirable stock, which should be sold at any price, and its place occupied by salable goods. Without a stock system, an inventory is of invaluable service, and with it, it tests the accuracy of the stock records. One of the important changes introduced in modern industry has been the adoption of standards of various kinds. A standard is that by which size, standard- form, quantity, quality, or method is fixed or i^ation. regulated. Standardization is the setting up and the rigidly following such standards. Manufacturers who produce in large quantities for the market it is the find it absolutely necessary to adopt standard starting ... , f , point for Sizes, weights, shapes, and sometimes stand- cheaper ard quality for their products. In introducing Production, standardized products, the operations are reduced to 176 ECONOMICS OF BUSINESS a routine and as a result, the repetition allows cheaper production. Standardization is therefore the starting point in producing goods cheaply, and in large quantities for a competitive market. In making standardized products, it is possible and advantageous to spend large sums for special machinery Advantages and equipment, which not only reduces the ked^o"**" cost of production, but greatly increases its ««*»• rapidity. The sizes, shapes, and weights which are best adapted for general use are selected as standard, and these are turned out in large quantities. Frequently, where quick delivery is essential, it allows the filling of an urgent demand. The Egyptian govern- ment desired at short notice, the erection of a bridge from Atbara to La Salle. Thirty-eight English firms competed, but none could make delivery on time. The contract was given to an American company, and within twenty- seven days after its receipt, the bridge was ready for shipment. The task was possible because the bridge con- struction parts were standardized. The determination of a standard quality in product, and taking rigid measures to prevent any goods below standard ^^^ Standard from going on the market, gives quauty:its a decided advantage to any manufacturing unpo ance. ^^^ ^^^^ Consuming public soon learns of the high quality of goods, and demands them in preference to others. There is no asset so valuable to any firm as the confidence of the people in the goods that it produces, and nothing wins it more quickly than the constant sell- ing of goods of the highest grade. This is made possible by the adoption of a high standard of quality and care that it is rigidly enforced. EFFICIENT BUSINESS METHODS 177 As important as standardization is in the product and its quality, it is of equal importance in a factory. There should be standard machines, standard tools, standard- standard methods of using and caring for them, ne^ggary in and, in fact, standard methods for every opera- ^^ factory, tion. Few factories have reached this stage, but great advancement has been made during the last few years, and the time is not far distant when the larger portion of the factories will be highly standardized. The adoption of standard tools and machines should be made only after careful investigation. Experts should closely examine the details of the work, and de- standard cide upon shapes, sizes, and kinds of machines tools and and tools most conducive to efficient produc- tion. The adoption of standards does not mean the doing away with change. Experts should at all times carefully study the standard tools and machines as well as others, and if another tool or machine, shape or size, is better suited to the operation, the former standard should be discarded and the new one adopted. Changes should not take place except after careful investigation by experts, and their decision that the new standard is advantageous and advisable. The adoption of standards for methods of doing work and using machines is daily attracting more attention. The method adopted as standard should be standard that decided upon by men who are best quali- "methods, fied to pass upon the subject. The standard, when adopted, should be rigidly enforced and its use the only one allowed in a factory. Experts should carefully study the standards, and as soon as a better method 178 ECONOMICS OF BUSINESS is discovered, the old standard should be discarded for the new. Care should be exercised and proof ascer- tained that the new method is an improvement over the old before a change is made. Standards should be the result of careful investigation and should represent the best possible. They should Modern ^^ obtainable imder ordinary conditions as tendency ^ell as practical. Standardization stands for towards standard- one kind of equipment, uniform methods "***®^ and materials, which means a great source of economy. The tendency of the modem industrial world is toward standardization in product and every part of its production. Every manufacturer knows that buildings and equip- ment cannot be used without deterioration. Deteriora- Every busi- ^^^^j ^^ ^^^ provided for, in time impairs the ness enter- earning power of any factory, and eventually ject to de- forces it into bankruptcy. If the working tenoration. efficiency of a factory is not to decrease, its buildings and equipment should perpetuate themselves by repairs, improvements, and replacement. While build- ings and equipment are passing from the state of newness and excellence to age and uselessness, a sum should be set aside to provide for replacement when the day of uselessness arrives. This is done by making a yearly Deprecia- allowance for depreciation. Depreciation is a *>o^- decrease in the value of buildings and equip- ment due to wear and tear, effect of the elements, course of trade, or new inventions. Some form of depreciation is found in every factory. Few things require more careful attention and sounder judgment, than the fixing EFFICIENT BUSINESS METHODS 179 of the annual amount of depreciation to be charged to the general expense of a factory. The proper account- ing of depreciation is absolutely necessary in every plant, yet in many, little attention is paid to it. Dis- Mainte- tinction should be made between maintenance ^^*^*^®* and depreciation. The terms are essentially different, yet many look upon them as synonymous. Maintenance is the amount necessary for keeping a plant and its equipment in the best state of repair. The gradual wearing away due to age cannot be remedied by repairs, nor can repairs prevent machinery from be- Deprecia- coming obsolete. No matter how great care ^°ever?^^* is taken to maintain a plant in the best factory, possible condition, there is a gradual and an inevitable depreciation. In a new plant, this may not at first be noticeable, but it is nevertheless present, and the loss it incurs, should be provided for from the first. Proper maintenance increases the durabihty and Hfe of a ma- chine or building and should be given due consideration in estimating the annual charge due to depreciation. The durabihty and Hfe of equipment depends in a great measure upon its use. Nothing is so impor- Proper care tant in determining depreciation as a careful o?tqm>^^ consideration of the conditions governing the ment. use of the particular machine or appHance. The constant keeping of every part of an equipment in best repair adds greatly to the length of service. A loose shaft, nut, or bolt may, in a short time, do more damage than would result from six months' or a year's use. Keeping all parts free from dust and properly lubricated with the best grade of oil adds to the durability of any equipment. i8o ECONOMICS OF BUSINESS Extreme care should be taken in the installation of all machinery. This is one of the important points to be Conditions Considered in estimating the life of any ma- d^abmty chine. Careful installation is particularly of machines, necessary wherever a machine is run at great velocity, or subject to shocks, concussions or constant strain. The framework should be of sufficient weight to withstand as much of the strain as possible; if not, the constant strain will affect the life of the machine. Piece work gives greater strain and greater wear and tear than time work. The number of hours of work affects the durability of any machine. Machines kept at utmost capacity are under greater strain than those which are not, and this affects their durability. No factory is free from its machinery becoming obso- lete. A machine is useless when a more efficient one is invented, which does not make it economical to con- Obso- tinue the use of the old machine. Inventions lescence. jj^ machinery are constantly taking place. No manufacturer can tell when an invention will force him to discard his old and install more improved machines in order to keep pace with competition. A machine which imder ordinary conditions would have a life of fifteen years might, at the end of three, be assigned to the scrap heap, as a result of a new invention. No manu- facturer can tell when his machines will become obsolete, Greater in as no one can foretell what the future will dSsfriM' bring forth. Some machines have a greater than others, tendency towards obsolescence than others, because invention works more rapidly in some lines of industry than others. In some industries, few improve- EFFICIENT BUSINESS METHODS i8i ments have during the last few years taken place, while in others many machines had been in use only a short time when as a result of new inventions they had to be replaced by more improved machines. The tendency towards obsolescence on account of new inventions should receive careful consideration in fixing depreciation. A second form of obsolescence is found in many lines of production. Machinery may become obsolete not as a result of new inventions, but because there is no longer sale for the goods for which it is used in Q|,gj,jgg. producing. This applies more particularly to cence machinery used in making goods affected demand Tor by changes in style and fashion. A ma- machinery, chine that can be used only in making an article of a particular style should necessarily have a high rate of depreciation, because its assignment to scrap de- pends upon the change in the whims of the people. Manufacturers should be very careful to provide for con- tingencies of the future as well as for wear and tear. Depreciation for buildings should be considered as well as for machinery and equipment. Many consider build- ings kept in good repair as permanent. Such ^^ j^_ is not true, because at the end of some period tionof in the future, perhaps long, or it may be short, *°^^' a building used for industrial purposes becomes unsuit- able for the original use, and when this time comes, it is greatly decreased in value and often is Conditions valueless. The Hfe of a building depends ^J^^T?^ upon many conditions of which the most im- bmiding. portant are: nature of the building; character of its construction; conditions under which it is used; its i82 ECONOMICS OF BUSINESS care and protection; and changes in methods of pro- duction. Brick and stone buildings have a life from three to four times that of frame or wooden structures. The qual- n w. ity of materials used as well as the care exer- Construc- -^ tion and cised in construction are important factors in "*** durability. A building poorly constructed and made of poor materials requires a depreciation two or three times as great as one properly built of the best quaHty materials. Buildings used as foundries or smithies, as well as those which bear the strain of shafting, heavy cranes, machinery moving at high speed, and concussions have usually comparatively short lives. A very neces- sary factor in determining the Ufe of any building is Promptness promptness in repairing. Carelessness in not in repairing, promptly repairing the roof of a building may take ten years off its period of usefulness. Occasional painting helps to preserve both wood and iron. Repair- ing a broken sill, beam, or rafter saves other parts of Changes in ^ building from extra strain. Changes in method. methods of production may take away the usefulness of a building for its original purpose. A few years ago, the erection of large tanneries made it unprof- itable for small tanneries to operate, and hundreds of buildings, not being suitable for other purposes, became almost valueless. Formerly manufacturers paid little heed to deprecia- _ , . tion. The plants were maintained in good con- Detenmna- ^ ° tion of de- dition, and no sum was set aside for loss of cap- preaation. .^j ^^^ ^^ ^^^^ ^^^ ^^^^ To-day, more at- tention is paid to it, and its importance as an item of cost is EFFICIENT BUSINESS METHODS 183 recognized. At first, the estimating of depreciation was merely a matter of guess. An arbitrary sum was set aside to cover wear and tear, and obsolescence. Later, it was recognized that depreciation could only be deter- mined by estimating the useful life of buildings and equipment, and their value at the end of the period, and spreading the difference between the original cost and the scrap value, over the period of life. Scrap value varies in amount. Some machines contain many pounds of valuable metal, while others, it will not pay to cart away. Some may be repaired and sold for other purposes, while others have no value except for the metal they contain. The same is true regarding buildings. Some may be remodeled and used for other purposes, while others represent only an expense for removal. Buildings and machines vary in the length of their lives of usefulness. The Hfe of the same kind of ma- chines varies in two factories, because in no „ , , ' No standard two factories are the local conditions exactly life can be the same. No standard hfe can be given for ^^gr nL- any machine or building, but each case must chines or ., , , buildings. be judged on its merits, and the estimate of life of service be made by one able not only to judge local conditions, but also the possibility of obsolescence. Many different ways have been devised for charging expense with the proper amount of depreciation. The simplest, and the one most commonly used, is Methods to divide the difference between the original ?^gd^pr|"_ cost of the machine or building, and its scrap ciation. value, by the estimated number of years of service. The quotient is the annual amount to charge to expense. A i84 ECONOMICS OF BUSINESS second method is to provide a sinking fund which, at the expiration of the life of plant or building, provides for its replacement. A third is one that to-day is attracting special attention. It is to charge a high rate when a machine or building is new, and then gradually reduce it. Several plans have been devised for doing this, but Cole's method seems the most satisfactory. He first estimates Cole's the life of the machine or building. Then he method. takes the difference between the cost and scrap, and depreciates each year, a fraction comprising the number of years of life as a numerator, and the sum of the years as a denominator. If the life of a machine is seven years, add, 7, 6, 5, 4, 3, 2, i, or 28; for the first year, the depreciation would be 2V, for the second ^^, and for the last ^V* Buildings are often taken as a whole and a certain yearly depreciation fixed, but they vary in their depre- ciation, and should be considered separately. Inventory . r i • a should be The same is also true of machmes. A com- Sd^gs Pl^^^ inventory should be kept of all build- and ma- ings and equipment. A convenient way is to have a card for each building and machine. This card should show the cost of the building or machine, the date of erection or installation, years of life, use and previous yearly depreciation. At the end of each year, the depreciation for the year should be noted. The cards carefully indexed should at any time show the present value of any building or machine. The depre- ciation burden would be distributed to those parts where it rightly belongs. Small tools and small articles of equipment cannot be EFFICIENT BUSINESS METHODS 185 treated separately like machines. They usually wear out quickly, and have short lives, frequently Charging not more than three or four days. Two ^J^^^^^' methods are used in their case. The first smau tools, is to value every year ; the second is to maintain and renew as required, and value only occasionally. The first method is more accurate and preferable. Depreciation is present in every factory. It is a nec- essary expense of production, and as such, should be ac- counted for and properly charged. In every Deprecia- business, depreciation is a factor which must be^roperiy receive its due amount of attention. It is an charged, expense item which should not be neglected, and to charge properly requires careful thought and sound judgment. QUESTIONS 1. What are the duties of a shipping clerk? Why is his position important ? 2. What is routing? How can expenses be reduced through routing? 3. What is waste ? Name different ways in which waste occurs. 4. Name the different ways of wasting time. How may they be eliminated ? 5. What is waste of energy ? How may it be prevented ? 6. What is an inventory ? Upon what does its importance depend ? 7. Outline a practical system for inventory taking. 8. What precautions should be taken in valuing stock in inventory ? How are buildings and machinery appraised ? 9. Why is standardization said to be the starting point for cheaper production ? i86 ECONOMICS OF BUSINESS 10. What are the advantages arising from (i) standard products ; (2) standard quality ; (3) standard machines and tools ; (4) standard methods ? 11. What is depreciation ? How does it differ from main- tenance ? 12. What are the conditions affecting the length of service of buildings and materials ? 13. What is obsolescence? Why is it greater in some in- dustries than in others ? 14. What are the different methods for charging deprecia- tion ? What is the Cole method ? 15. Why is it essential to distribute depreciation burden to where it belongs ? Give methods for charging deprecia- tion expense for small tools. REFERENCES J. C. Duncan, "The Principles of Industrial Management," Ch. XVII ; J. L. Nicholson, "Nicholson on Factory Organiza- tion and Costs," Ch. XXXII ; S. H. Bunnell, " Cost Keeping for Manufacturing Plants," Chs. XII, XIII, XIV; H. Emer- son, "Efficiency," Chs. V, VI, VIII; W. D. Ennis, "Works Management," Ch. VII; H. Diemer, " Factory Organization and Administration," Chs. XVII, XX; C. U. Carpenter, "Profit Making in Shop and Factory Management," Chs. VI, VIII, IX, X; F. E. Webner, "Factory Costs," Ch. XIV; H. Evans, "Cost Keeping and Scientific Management," Ch. X; E. Matheson, "The Depreciation of Factories"; P. D. Leake, "Depreciation and Wasting Assets." CHAPTER K LABOR EFFICIENCY American industries have during the past twenty-five years developed very rapidly, and their character has undergone many changes. Increased compe- speciaiiza- tition has made necessary the large producing pr**e^ *nt, the plant, and specialization has become in indus- watchword, try the watchword. Machinery, materials, and methods have been carefully studied, but labor has long passed unnoticed. It is only recently that employers recognized the importance of the human factor in the mak- Labor ing and marketing of goods. The human head i^o^^neg- and hands which operate the machines are im- lected. portant factors in our industrial system. The study of the employee to understand the various elements that affect his working power is a most important and seri- ous problem for a business man. The employer should understand that he has to deal with the workman as he is, and that deaUng with theories and ideals can never result in efficiency. The workman should thoroughly know his machine to obtain the best re- sults from its working. This has been recognized since the introduction of machinery, but the employer has not grasped the necessity of understanding and know- ing his workman in order to obtain the best results from 187 i88 ECONOMICS OF BUSINESS his labor. It is surprising how long the employer has overlooked this essential. Until the dawn of the twen- Attitudeof tieth century, the average employer in his toward*^ deaHngs with his working force was heartless employees, and cruel. He treated them rather as inani- mate objects, than as human beings with feehngs. The laborer was looked upon as part of the factory equipment, rather than a man with rights and privileges. Present labor conditions, unions, and employers' associations are the natural and necessary result of methods of handling workmen. The small factory which a few years ago was the pre- vailing type in our industrial system gave way under Revival of competition to the large plant, employing Uce^p^^' thousands of workmen. Invention kept pace system. with industrial growth, and more compH- cated machines took the place of the rather simple ones of the small factory. The large plant with its intricate machinery demanded expert machine hands and the result was a rapidly diminishing supply of properly trained men. A few years ago, it looked as though the scarcity of skilled workmen would be a serious drawback to our industrial development. Necessity drove employ- ers individually to make provision to provide for and maintain a supply of skilled workmen. The result was a revival of the apprenticeship system, but one differ- ing in every detail from that which dominated industry for several hundred years. ■" The old system of apprenticeship served its purpose under the domestic system, but the rapid changes in industrial conditions under the factory system soon made LABOR EFFICIENCY 189 it antiquated. A boy was apprenticed to a journeyman until he became a skilled mechanic. The mechanic skilled in all parts of a trade has been supplanted by the speciaHst skilled in one operation. Educa- Principles tion did not keep pace with industrial prog- apprentice- ress, and employers were forced to train ship, their own men. To-day many factory apprenticeship systems are in practice. Two types may be given. The one is where school instruction is given during working hours, and the other where it is given in evening school. The various systems differ in detail, but the general principles of putting the apprentice under a competent instructor, whose duty it is to see that proper instruction is given, that the apprentice is advanced from one kind of work to another, and that his mental develop- ment keeps pace with his acquired skill, are the same for all. Many technical schools have recently been established for the purpose of training skilled mechanics. Experi- ence has proven that they cannot satisfacto- Technical rily take the place of the factory apprenticeship '^^' ^ac- 11 -f-.! 1.11 1. *o^ appren- scnools. Employers admit that trade techm- ticeship cal schools give good training and are valuable, ^^^°°^^' but they declare that they cannot give the training under actual working conditions which the factory school gives. The graduate of a trade school is given credit for his work, and his apprenticeship is shortened. The factory apprenticeship school is increasing in favor, and is des- tined to play an important part in our industrial devel- opment. The large factory demands a number of skilled mechanics, and the best means to obtain a supply I90 ECONOMICS OF BUSINESS and maintain it, seems to be, for employers to train their own men. Shop instruction is by no means philanthropic in its nature. It is good business, and business motives guide Reward of c^iployers in the installation of factory schools, factory in- The schools supply a better class of workmen, struction. , . , . . ^ , and permanency m employment is greatly strengthened. Personal contact with instructors and training in the shop give a friendly attitude towards employers, environment, and working conditions. It arouses personal interest and enthusiasm, and assists in obtaining hearty cooperation in the work. The spirit of cooperation which it arouses is a most valu- able asset, and one which in itself fully repays the cost of training. The nineteenth century was characterized by a lack of interest of employers in their employees. There were exceptions where employees were treated as treatment though they were human, but the average em- caused^by ploy^r looked upon his laboring force, as part business of his factory equipment, and had as much feeling for the laborer as he had for a cog in one of his machines. The twentieth century awakened in the employer a new interest. He realized that an important factor in production and distribution is the human factor, and this aroused an interest in thev hu- man element in industry. It is not charity or philan- thropy, but pure business. Skill rather than brawn and muscle is needed, and to obtain skilled men with brains, and to get them to do their best work, they should be treated as human beings. America, with its splendid LABOR EFFICIENCY 191 educational system, and the general high intelligence of the skilled mechanic, is no place to treat men like bits of machinery. The handling of men is a problem which tests the abil- ity of the employer, and is one which is a great factor in the success of an enterprise. Two methods are Driving in practice for the handling of men. The one ^^' leading, typical of the last century is driving, while the other, which we trust will be typical of the twentieth, is leading. The ignorant workman may be Effects of driven to his task, but with the skilled me- ^^^«- chanic driving is a failure. Driving produces discontent, fosters antagonism, and banishes loyalty and enthusiasm. To understand the workman is a most serious problem for the employer. The employer should be a close student of human nature, and should know his men as they are, and not as they are supposed to be. Business building re- quires the cooperation of employers and employees, and this demands that the employee be led through self- interest. The question of arousing self-interest is the great problem of the future, and its successful solution assures enthusiasm, cooperation, and success, the goals of industrial activity. A workman to do his best work should have his mind on what he is doing. This freedom of mind arises largely from contentment. Contentment has causes of a great influence upon the quality of work as inefficiency, well as upon the output. Working amidst gloomy and dismal surroundings, with improper equipment, in fear of losing position, or imder constant nagging by a rough and surly boss, causes men to have their thoughts on 192 ECONOMICS OF BUSINESS everything except their work, and their interests else- where than on what they are doing. The worst frame of mind for good work is one of continual brooding over being underpaid. In how many enterprises, do we find one or more of these conditions prevailing? How many enterprises have failed as a result of their presence ? Employers wonder why they do not succeed. They have well-equipped factories, modern machinery, but there is lacking the contented workman whose interests are centered with those of the employer in the success of the undertaking. The contented employee has a positive money value. Contentment binds employer and employee closely Content- together, and leads to their cooperation for the Sctorln success of the enterprise. Employers as a efficiency, body are at present recognizing the value of contentment in the working force. Workmen have benefited by various improvements made largely on the initiative of employers. These are all business invest- ments, and the contented mind obtained, more than re- pays in quahty of work and output. Efficiency is a great factor working towards the lessening of costs of produc- tion, but it cannot exist without contentment in the working force. The industrial struggle is one for profits, and the em- ployer who can produce at the lowest cost wins. Em- ployers have learned that a very important menting factor in lowering costs is permanence in the "* ^* laboring force. The one basic principle un- derlying efficiency is continuity in service. Nothing so works against efficiency as continuous change in the LABOR EFFICIENCY 193 working force. Men, when they know that they are likely to be discharged at any moment, do not have the interests of the enterprise at heart, and do not give their best service. Experimenting with men is very costly, and the less an employer is compelled to experi- ment, the greater are his chances of success. During the past century, machines were carefully nurtured and preserved, but little attention was paid to keeping men in the organization. The employer failed to realize the loss resulting from constant hiring and dis- missing. A large manufacturer declares that for every dollar paid a new employee for the first few weeks, he is out two for breaking him in. Another states that the breaking in of a new employee to a position of any importance costs two months of his time before he is seasoned. Employers have recently recognized the great im- portance of holding men in their organization. This is found expressed in the various profit-sharing plans, wel- fare movements, and pension systems of many importance railroads and industrial plants. These are ^ency hf" simply inducements to attract the best labor service, and hold it. All money spent in these various schemes is good investment, and the return coming from con- tinuity of service, peace of mind, and coopera- i^duce- tion repays the employer a hundred fold. If an °^ents to employer nnds that his men are leaving, some- good in- thing is wrong, and an investigation should vestments, at once be made. If there is a reason for a man leaving, it should be found out as soon as possible, because it will likely drive away his successor. No efficient work- 194 ECONOMICS OF BUSINESS man should be allowed to leave, if reasonable measures will keep him. In a laboring force, continuity of service is the ideal, and employers should bear in mind that permanency and efficiency go hand in hand. A method of equal importance with permanency, in working toward efficiency, is the policy of making Promotion promotions from the ranks. Hope for the from the future is the chief incentive for giving best ranks m- . creases ejfforts to the work, and the hope which appeals effiaency. most Strongly, and which gives loyalty and self-interest is advancement. Every organization should make provision for filling any vacancy which may occur from its own ranks, and the laboring force should be given to understand that vacancies will be filled from their niunbers. Promotion should not be based upon seniority, but wholly upon ability. Preference to seniority is only justified, when the senior in service is of equal ability and efficiency with others qualified for promo- tion to a vacancy. The assurance that promotion will Seniority, be made from the ranks fosters ambition, ^o^iSd^be gives hope of advancement, and greater satis- recognized, faction with present wages. It encourages employees in their work and arouses loyalty and coopera- tion. Promotion from the ranks has been adopted by many large railroads and industrial enterprises. Marshall Field and Company has only two managers who were not promoted from the ranks. The Pennsyl- vania Railroad Company rigidly follows this policy and one hundred and fifty of its one hundred and sixty chief officials started in humble positions. Mr. P. R. Butler, a leading manufacturer, will not put an outsider LABOR EFFICIENCY 195 in a responsible position. The importance of the poHcy is becoming more recognized, and its extension is spread- ing to all fields of industrial activity. Health is one of the first steps toward efficiency, and modern industry demands workmen of good physique and health. Work requiring strength, dex- Efficiency terity, or brain power cannot be efficiently heS^^y^ performed in the absence of good health, workmen. The employer of the old school regarded as useless expense, any outlay to improve the conditions under which his employees worked, while the progressive employer of to-day, recognizes that money spent to maintain sanitary and healthful conditions is a profit- able investment. It is recognized that whatever pro- motes and assures health increases the efficiency of the working force. Efficiency demands that work be per- formed under the best sanitary conditions and amidst the most healthful environments. Sickness is one of the greatest enemies of the em- ployer, and its prevention is an important question which demands careful consideration. Every int^^gst ^f cause, whether in factory or out, that leads theem- to ill-health demands close investigation. tendTto^" Light, heat, atmospheric conditions, drinking the homes water, nutrition, sanitary conditions in work- pioyees. shop or home influence health. Home as well as fac- tory conditions should be studied. Lack of proper nourishment, bad housing, and of proper sanitation in the home prevents physical efficiency and intel- lectual keenness. Many cases of illness would be im- possible if the workman were not devitalized by mal- 196 ECONOMICS OF BUSINESS nutrition or lack of proper home surroundings. The employer should extend his care from the workshop to the homes of his employees. Every dollar so spent is an investment which will give good returns. Proper medical inspection for new employees should be rigidly enforced. Many slight ailments may be „ ^. , foimd which with care can be easily remedied. Medical •* care and All employees should go under medical in- a^necessUy spection at least once or twice a year. Em- in factory ployers with many employees find it profitable and home. , , , ^ r -. . to have nurses and a doctor, not only for their workmen, but also for their families. Sickness in the family detracts attention from work. Nurses should visit the homes of employees to see if there exists whole- some and sanitary surroundings, and if proper nourishing food is obtained. Frequently sickness may be pre- vented by giving advice to well employees or immediate attention to slight ailments. Headaches, colds, and like ailments prevent efficient work. Simple treatment often cures a cold which otherwise would linger for some time. In case of sickness, proper treatment reduces the time of recovery. Proper precautions and care in looking after the health of employees insure a healthy working force, a valuable asset in itself as well as the cause of a decrease in the loss of time due to illness. Employers usually have a serious problem in filling vacancies caused by the illness and death of employees. Proper medical care lessens the number of vacancies, and the loss arising from the introduction of new men into the organization. Employees for some time were suspicious of the interest taken in them by employers, LABOR EFFICIENCY 197 and it was hard for them to realize that such interest was guided solely by business motives, and that they were also benefited. One of the chief elements working toward efl&ciency, is conditioning the air so that an individual may work under the most favorable conditions. The Air and fact that there is an intimate relation between humidity demand the conditions that surround employees and special their eJOSiciency is becoming more generally ***®^**°^- recognized. High humidity and temperature, un- pleasant odors, fumes, and dust cause discomfort, detract from interest in work, and are the cause of low efficiency. The question of industrial ventilation is a factor which has been sadly neglected in the past, but it is one, which should be carefully considered by those who are endeavor- ing to increase the efficiency of their laboring forces. The two chief elements of ventilation are heat and humidity. Heat combined with excessive Elements of humidity causes listlessness, discomfort, and ve^tUation. inefficiency. If the air, on the other hand, is dry, it is stimulating, and produces nervousness and discomfort. A factory should be kept at a moderate temperature and a low humidity to produce the best atmospheric conditions for good work. Employers forget that a workman does more in the morning not only because he is physically fresh, but because the air which he breathes is fresh and Tempera- exhilarating. There is no reason why the air ^rtanTcon- in the afternoon should not be as fresh as it is sideration. in the morning, and the employer who solves the problem obtains greater efficiency from his men. An employer 198 ECONOMICS OF BUSINESS in a large factory could not get the same efficiency from his men in the summer as in the cooler months. A few thousand dollars installed a system of electric fans and the efficiency was raised to that of the cooler months. The additional output paid for the fans the first two months of service. A hot, sultry factory causes a listless, half-hearted working force, and as a result, the output is decreased, a direct loss to employers in the case of day work and also a loss in the case of piece work. In cool months, the workman passes from the overheated workrooms to the cool air outside. His vitaUty is lowered, and he becomes an easy prey to colds and dif- ferent maladies. The result is frequent absences, and this adds to inefficiency. A cool, moderate temperature is what should be striven for, in either summer or win- ter, and it is an important essential for efficiency. Dust, bad odors, and fumes are factors causing dis- comfort and low efficiency. The air in a factory should Dust, a ^^ ^^ ^^^^ irom du3t and as odorless as the cause of low air outside. Proper hoods and fans can be aency. ^^^^ ^^ Carry away dust, while odors and fumes can be abolished with httle expense. Dust is a germ carrier, and in factories where it is present, there is always great danger from colds and minor illnesses, that influence the working efficiency of the laboring force. Good Ught in a factory has a direct and important bearing upon the health and efficiency of the laboring Li ht • its force. Light has an important effect upon pro- influence on duction. It should be suitable to the work pro uc on. pgj.fQj.jj^g(j^ g^^^j sq placed as not to cause an extra strain to the eye. Experts have declared that the LABOR EFFICIENCY 199 normal capacity of factory workers may vary twenty per cent under proper and improper lighting conditions. Good light gives greater output, better quahty, lessens liability of accidents, causes fewer mistakes, makes more cheerful surroundings, and tends to a better disposition on the part of workmen. Many factors have a bearing upon efhciency, and of these, the general conditions under which a man works are of the greatest importance. Bad heating, ventilation, and lighting cause not only physical discomfort, but affect the disposition, energy, and interest of the men in their work. These all have a greater bearing on a man's efficiency than the average employer thinks. The employer in the future should give due consideration to all, because they are important cost-saving factors in production. A workman to do justice to the work which he is doing should have proper nourishment. Many em- ployers give free lunches to their employees, while others give good wholesome food at cost. Some find it necessary to have their own boarding houses, p^^^^^ to insure that their men get good wholesome nounsh- food. A small item like furnishing workmen with plenty of fresh, cool water repays the cost mani- fold. A workman should have good health and the two chief essentials are nourishment and rest. Many em- ployees consider the interest taken by employers in their mode of living, as so much meddhng, and do not reaHze that it is a business proposition, and at the same time, greatly benefits them by serving as a guar- antee against sickness and loss of time. An important consideration in every factory is that 200 ECONOMICS OF BUSINESS of personal safety. All machines should be carefully Personal protected, and rigid measures taken to pro- pro%t*at- ^^^t against accident. There should be proper tention to provision for immediate treatment in the case of injury. Many employers find a nurse and a house surgeon necessities, while many find it profit- able to equip and maintain an emergency hospital. It is not imusual to find the best mechanics not working because they are suffering from an infection from slight bruises which would have caused no trouble if proper treatment had been received at the time of injury. The loss to an employer from the temporary idleness of his best mechanics is hard to estimate. Frequently it de- lays an order, and this in turn causes delays in other parts of a factory. Personal safety and provision for immediate treatment in case of injury are necessities in every factory. Ejficiency methods have directed attention to saving, wherever possible, the energy of employees. All energy Efficiency unnecessarily expended in a factory has a dis- sa^of ^^^^^ bearing upon possible output. Sitting energy. at work was formerly regarded as a sign of laziness, but at present, it is encouraged wherever it does not interfere with the performance of work. Chairs and seats have made their appearance in many factories. Elevators and escalators are now frequently used to carry employees to and from work. They cost little, conserve much energy, and are not only sources of com- fort, but are the means of increasing output. Improvements, whether sanitary, educational, or social in their nature, are good for employer as well as LABOR EFFICIENCY 201 employee. If an employer wishes intelligent and effi- cient men, he should provide the most inviting working conditions. Good washrooms, lockers, clean , ' . ' Improve- and cheery working rooms are highly valued ments by all employees. Libraries, reading rooms, pfoyersa?" and free lectures give an employee an opportu- weu as em- . ,,. , ^ . ployees. mty to become more mtelligent. Gymnasiums, amusement halls, music rooms, bowling alleys, rest and recreation rooms give the employee good, whole- some amusement, which rests him and gives satis- faction and contentment. All conditions which affect thought, interest, attention, and concentration have a direct bearing upon efficiency. Working under im- perfect conditions produces inattention, inaccuracy, and neglect. The employer forces the employee into these faults through the bad conditions under which work is done. Blame and criticism fall upon the employee and not on the employer where they rightfully belong. Labor efficiency demands, among other things, health, proper working conditions, peace of mind and con- tentment in factory and out. The employee should be contented and satisfied when not working, or his efficiency in the factory suffers. Protection, the main- tenance of health, best sanitary conditions, and welfare movements aiming at satisfaction and contentment have, in recent years, become important Demands factors of successful management. Efficiency °^ efficiency, demands their presence in a factory. Employers are realizing their bearing upon production and costs, and are taking greater interest in the health and welfare of the human element in industry. 202 ECONOMICS OF BUSINESS Tardiness in attendance is a factor of inefficiency which every employer should strive to reduce to a minimum. Efficiency demands not only faithfulness in work, but also regularity and pimctuality in attendance. The problem of dealing with tardiness is a difficult one, and Tardiness sound judgment should be exercised in work- a cause of ing out a systcm. Experience has proven that ine ciency. ^g^j-^^^gg cannot be overlooked, and the best way to deal with it, is to make it unprofitable. Fines are the commonest means of enforcing promptness. Not paying for time lost, the loss of a day's pay if occurring a Methods of ^^^^^^ number of times, suspension, and abso- deaUngwith lute discharge are among the methods found tardiness. . ^. x^ • i ^ • c m practice. Punishment m some form is absolutely necessary in deahng with certain classes of men. No one method can be given as practicable and workable in all estabhshments. One which gives com- plete satisfaction in one factory might be a failure, and the cause of driving good workmen away in another. The employer should remember that factory organiza- tion, working conditions, and employees are never the same in two places. In deciding upon a method, due consideration should be given to the character of the employees, whether men or women, skilled or unskilled, salaried or working by the piece. If fines are imposed, the employer should make it clear to the employees, that the purpose of the fines is punishment, do with and that they are not a money-making prop- osition. The only safe way to deal with fines collected is to devote them to some welfare move- ment for the employees. If fines are kept by the em- LABOR EFFICIENCY 203 ployer, it inevitably leads to antagonism, and works against loyalty and cooperation. Every employer finds it imperative to adopt some method of ascertaining whether or not an employee is punctual in attendance. The time clock seems to be the favorite method. Metal or wooden checks, Methods of timekeepers, individual tickets punched at check^on entrance, the matter left to the direct employees, supervision of the foreman, and daily work cards are among the methods found in practice. Many claim that a check upon the time, when a workman appears at work is not necessary, and only antagonizes him. In our industrial system, some method is absolutely im- perative, and if any trouble arises, it is usually on account of the poor judgment exercised in fixing the punishment, or in the use of the fines collected. Many employers find it profitable to encourage promptness by a system of rewards. A very effective method is to take promptness into consider- p^ ation in advancement. Some give cash premi- encouraged ums and prizes at the end of the year to all who ^ '®^" ^* have not been tardy, while some base vacations on the timekeeper's records, and take account of promptness in awarding time of vacation with full pay. Those employers who have adopted the award system find it imperative to have a system for punishing tardiness. If an employee were tardy once or twice, with no chance of obtaining a reward, he has a tendency to be careless in attendance in the future. Irregularity in attendance is a serious problem for every employer, and thorough investigation should be 204 ECONOMICS OF BUSINESS made into its cause. The chief cause of irregularity , .^ is sickness, and the question to be answered Irregularity ' ^ in attend- is, Who is responsible ? The employer "^^^' may be the cause in not having proper working conditions; if so, the employee is not to blame, and the cause should at once be Causes. remedied. On the part of the employee, the cause may be lack of nourishment, improper sani- tary home surroundings, careless exposure, or intem- perance. The employer should insist upon proper nourish- Methods of ment and proper sanitary surroundings. Care- treatment, less exposure should be warned against, and intemperance should not be tolerated. The reasons for absence from work are many, and each individual case should be dealt with separately. The method should vary with cases, and punishment is only advisable where the cause is due to negligence, carelessness, or intemper- ance on the part of the employee. Any of these should not be tolerated, and dismissal should be the punishment for the second or third offense. The great safeguard against irregularity is a healthy laboring force working under sanitary and wholesome conditions. Wages or remuneration for work performed is the most serious question of our industrial system. The interest of the laborer has always been and Importance -' of wage is to-day centered in wages. To discover and question. ^dopt a system of wages, which appeals to both employer and employee as fair and just, assures cooperation, contentment, and enthusiasm, three valuable factors working toward efficiency. If employees are dis- satisfied with their wages and feel that they are underpaid, LABOR EFFICIENCY 205 it causes antagonism, friction, and lack of interest, three of the chief causes of inefficiency. The great problem is to get a satisfied and contented laboring force, and no factor assists more in its solution, than to have em- ployees satisfied with their wages. The old system of wage payment is to pay an em- ployee a certain fixed sum for the time that he is em- ployed in an enterprise. It was origi- Time nally the only method, and is still the most ^*8«s. common in actual practice. The wages are fixed by bargaining between employer and employee, and the bargaining is done either collectively with labor unions, or by the individual employee fixing his wages with the employer. In small factories, where few men are employed, and where the employer himself or his foreman super- vises the work, the time wage is not so objectionable, but in the average factory employing hundreds of workers, with no close supervision, and little knowledge ry a _ of what a worker produces, the system is a tagesof failure. With no incentive to diligence in work, ® wages, and no account taken of what is done, the laborer simply thinks of putting in his time, and has Httle or no interest in what he is doing. Why should a man working for time wages do more than just sufficient to hold his place ? The good workman receives the same pay as the man who wastes his time, so the workman has little to gain by putting his heart into his work, and really exerting himself. Time wages encourage the laborer either to save his strength for other things, or curtail the output so as not to exhaust the market for his labor. The fact that extra effort, greater care, or more interest is not 2o6 ECONOMICS OF BUSINESS recognized or regarded stifles ambition, and destroys the interest of the workman in his work. The present interest in efficiency will displace, wherever possible, one of its enemies, the time-wage system, by one more in harmony with its attainment. Time wages cannot be ehminated altogether, because there are many forms of labor where it is impossible to use any other method of paying an employee, necessary Certam conditions arise in every enter- Ten^^ prise that demand time wages, but where the kinds of results of labor may be measured in units pro- duced, time wages are usually unsatisfactory, and work against efficiency. Bookkeepers, stenog- raphers, firemen, and engineers are employees who must be paid according to time. The demands for dili- gent work are good supervision, proper working condi- tions, and a wage, fair and just to both employer and employee. The piece-rate system was introduced to overcome the disadvantages of time wages. The system antedates Piece-rate the factory system, but the development of the system. factory system gave opportunity for its more extensive use. Piece rate includes all schemes for pay- ing men for what they do, instead of the time they work. The method is not adapted to all kinds of labor, but only where work is such, as admits of measuring individual performance. Piece rate, to be successful, should be J. . . accompanied by certain requisites. The re- fer success muneration should be fair and just, and the sys em. ^j^ployee Supplied with proper materials, tools, and equipment. The working conditions should LABOR EFFICIENCY 207 be of such a nature that the employee can work to best advantage. If employers were fair, and employees reasonable, the system would form the most efficient method of rewarding labor. The antagonism to piece rate on the part of the laboring force is not the fault of the system, but is due to carelessness, and stupidity of employers. Reasons for The ordinary method for introduction of the f prevent goods under normal conditions, but a reason- short of able length of time allowed for unexpected ^°^^^' delays. A buyer should not unnecessarily delay in placing an order. When the order is placed, the goods 220 ECONOMICS OF BUSINESS should be followed until they are delivered to the store or factory. When the stock is getting low, and has been ordered, the storekeeper should make daily reports to the buyer. Frequently an abnormal demand arises and goods must be obtained at short notice. Labor troubles or other unforeseen delays may occur, and prevent goods from being delivered on schedule time. The buyer should be ready for such emergencies, and always know where he can get his goods on short notice. Running short of materials frequently causes idleness, and the shrewd buyer should ever be ready to meet such emergencies. In a small business enterprise, the bu}dng is usually done by one person, the proprietor. A perpetual inventory to guide in buying is just as important as in a large enterprise. Large establish- ments usually have several buyers, each a specialist in buying a particular kind of goods. The buyer in a large enterprise must, to a certain extent, depend upon the storekeeper. With a reliable perpetual inventory, and care in giving sufficient time for deliveries, supplies of materials should rarely be insufficient to meet all demands. A buyer must possess a thorough knowledge of his goods. If his goods are finished articles, he should be Knowledge acquainted with the quality of raw materials of goods. ^^Q^ [j^ |-jjg making, and with every process in their production. An excellent training is to spend some time in factories producing the goods. The buyer is able to study the character of the raw product used, and the good as it passes through stages of production and is thereby better able to judge of the BUYING 221 character of the j&nished article. Tact in drawing infor- mation from workmen, cleverness in testing samples at different stages of production, and close obser- ^jethojjs of vation of the finished article assist in giving obtaining the buyer a thorough knowledge of his goods. °^ ^ ^^* Some find it profitable to work short periods in different factories producing the same kind of goods. Afterwards, frequent visits should be made to the factory, so that the buyer may be kept informed of any changes in the production of his goods. Those factories should be patronized that take the greatest pains in selecting raw materials, and give the greatest attention and care to the different processes of production. If .the goods purchased are raw materials, the buyer should be ac- quainted with their mode of production, and the dif- ferent qualities of goods in the market. A thorough knowledge of goods is necessary as one of the important essentials of good buying. A buyer must know the costs of production of his goods. This knowledge is frequently difficult to ob- tain, as many manufacturers carefully guard Knowledge their costs from buyers. A buyer can usually °^ *^°^*^* secure the costs in some factory, and these can serve as a standard for those unwilling to make known their costs, but producing under similar circumstances. A knowledge of costs is essential to protect the buyer from paying too high prices. He knows whether or not quoted prices are too high, and the possibility of obtaining better quotations. When buying without knowing costs, many a buyer pays a higher price than if he had known costs. A knowledge of 222 ECONOMICS OF BUSINESS costs is a valuable asset, and essential in judicious buying. Every buyer must pay particular attention to quality. How to get that quality which is best adapted, and ^^ most economical for the particular purpose is a very important question. In large enter- prises, it is best to have laboratories for the purpose of finding out the quahty best suited, to order according to specification, and carefully test all deliveries to see Precautions that the ordered quality or grade is obtained. ^^*° An entrepreneur in a small establishment may, quality. at the cost of a few dollars, equip himself with a small laboratory. Under no circumstances should the careful testing of goods on delivery be neglected, for it is the only guarantee that the quality ordered is obtained. The same precautions should be taken by wholesale and retail establishments. More and more attention is being paid to ordering goods according to quality. Many establishments have a testing laboratory where goods delivered are tested as to quality, before they are allowed to go to the storeroom. If care is not exercised in receiving goods, a poorer grade may be substituted. An inspecting and testing system is absolutely necessary, and pays for itself several times during a year. A buyer must thoroughly know the markets which he enters. This demands careful and constant study of Knowledge everything, which may directly or indirectly of markets, affect the supply and demand for his goods. The relation of employers and employees in the factories producing his particular line should be carefully studied. Are trade unions active, are employees properly paid, well BUYING 223 « treated and satisfied, is there any likelihood of a strike, — these are some of the local questions which should be answered. Are there pohtical dissensions in any part of the world which may result in war ? If so, would it directly or indirectly affect the market for his goods? Do raw materials, grown annually, or minerals form a large item in the cost of production ? If true in the first instance, an intimate knowledge should be obtained of the acreage, conditions while growing, and crops in the producing countries of the world, and how the pro- duction affects the world's market. If true in the second case, what circumstances might arise to affect the supply and demand, and so react on the price of the buyer's particular goods ? This is not necessary where the raw materials form only a small item in the expense of production, as, for example, the price of steel for making the works of watches. Records may be obtained from reKable trade and financial journals as well as from numerous reports appearing from time to time. These should be read and studied. Every buyer should not only carefully read reliable trade journals, but also the leading financial papers to keep in touch with the general trend of markets. An intimate knowledge of all the circumstances affecting the market price of his goods is essential for every buyer. A buyer in many instances must have an intimate knowledge of conditions affecting markets of other goods than those which he buys. This is par- Knowledge ticularly true when the raw product forms ofSdi^ert^ a large part of the finished article. The goods, buyer of flour should have as intimate a knowledge of the 224 ECONOMICS OF BUSINESS wheat market as he has of the flour market. A change in the price of wheat soon affects the price of flour. Frequently study must be given to more than one addi- tional market. The buyer of shoes should not only have an intimate knowledge of the leather market, but also that of raw hides, whereas the buyer of hams should pay particular attention not only to live hogs, but also grain. Frequently through an intimate knowledge of the market of an article used in making the finished product, a buyer is able to forecast a change in price of his particular good which enables him to purchase more judiciously, and increase profits. An intimate knowledge of market conditions allows the forecasting of future supply and demand. If prices are high, and there is every indication of an extra supply, Forecasting ^ buyer Can profit by buying in such quantities, of supply as are just necessary to meet demand, and order frequently. If prices are low, and there is indication that demand over supply will increase in the near future, a buyer can take advantage and buy large quantities of staples, but extra precaution should be taken in buying non-staples. The ability of a buyer to forecast future prices is a very valuable asset and may lead in the course of a year to valuable additions to profits. The management of an enterprise should at all times keep the buyer informed of the condition of its finances. J , It is necessary for a buyer to know whether of firm's he is required to buy everything on time, or ^*^*"*^®^* part on time and part for cash . D uring certain months, a firm maybe able to allow its buyer to buy a large BUYING 225 part for cash. The buyer should be so informed, because he may be able to place his orders where more favorable discounts may be obtained. Many firms make a serious mistake in withholding from the buyer the true state of finances. With low prices, the buyer should know how much can be bought without embarrassing his firm. Frequently he overbuys, beHeving that finances warrant it, and when payments come due, embarrass- ment arises, and it would have been better to have kept the stock within normal limits. Promptness in filling orders is an important question for a buyer to consider. Some firms are more prompt than others in filling orders and shipping ^^^ ^^^^^ goods. The buyer in making his study of the in filling different firms offering his goods should pay at- tention to promptness. The fact that a firm is punc- tual in filling orders, or lax is valuable information. Whether goods are to be received within reasonable time, or only when the shipper feels Hke shipping is important for the buyer to know. Frequently it is necessary to place an emergency order, and it is important to know whether or not a firm can be reHed upon to rush the order. In most cases, time of deHvery is an im- portant consideration. Too great tardiness in filling orders may lead to idleness of factory, or lack of stock on the shelves. The buyer should not, unless absolutely necessary, patronize a firm where lax methods exist in filling orders, or shipping goods. The buyer must know the location of the business estabHshments of the different sellers which he pat- ronizes. Some are located at a distance, while others Q 226 ECONOMICS OF BUSINESS are near his business enterprise. What are the means Knowledge of transportation, water, rail, or part by one, goods are ^nd part by the other, should be considered, shipped. Water transportation takes more time and is more subject to delays than rail. In the case of rail, do goods come through or is it neces- sary to reship? In the latter case, delays frequently occur. The different roads over which goods are shipped should be considered. Some roads are careful in handling freight, while others are careless about side-tracking cars and causing unnecessary delays. Firms differ in keeping their word. One may be depended upon How firms ^^ ^^ ^^ ^^ ^^y^' while another pays little keep prom- heed to its promises. A buyer should know the reliability of a firm, and to what extent, it may be depended upon to keep its word. A buyer knows what dependence can be placed upon the word of firms from whom he has done buying. If it becomes advisable to give an order to a new firm, he can easily find customers, and a few questions will suffice to ascer- tain what dependence can be placed upon its promises. Occasions frequently arise, where a buyer finds it very important to know what reliance can be placed upon a firm's word. Firms differ in their carefulness in filling orders. Some have a rigid inspection system, insuring that efuiness ^^^^ goods ordered are sent, and that these infilling are of the highest quality. Others have °' ®'^* lax or no inspection methods, and a buyer cannot rely upon getting the goods ordered, and only knows what he will get when the goods are actually BUYING 227 delivered. Delays are frequent from having the wrong goods or qualities sent. It pays a buyer to visit the establishments of as many as possible of those he patronizes, and among other things, to carefully note the care taken in fiUing orders, and the means adopted to see that only goods ordered are sent. Patronage should be given only to firms who pay particular attention to the filling of orders, and who possess a rigid inspection system. A buyer must follow inventions and improvements affecting the making of his goods. New machines may be invented or new processes discovered Knowledge which produce a better srrade of goods. A ofinven- , -, , , . , . , , tionsand buyer can profit by placmg his orders where improve- new machines or new processes are in operation. ™®°*^- One firm may make an improvement in putting a partic- ular good in a more attractive form. This a buyer should know, because such a form may be the means of increasing the demand for and sale of the good. A buyer should carefully follow the methods of producers of goods that he buys, to see that they are alert to the introduction of new machines and processes for improving the quality of their product. Buyers of particular goods, especially those confined to style, as clothing and millinery, usually make periodi- cal visits to style centers. They carefully Buying of study the various styles, and select those pending^" which they consider suited to their customers, ^poii style. The better a buyer knows the tastes of his customers, the better able is he to make selections which will readily sell. Profits in such cases largely depend upon judicious 228 ECONOMICS OF BUSINESS buying. Judicious buying, in its turn, is based upon the buyer's knowledge of his customers, and his ability to choose styles that will suit their taste. With com- petition so keen, misjudgment as to style, and quantity needed may, at the end of the season, show few sales and quantities of out-of -season goods on hand. This means loss. The successful buyer is the one, who is able to judge what styles sell best, and his success depends upon his forecasting as nearly as possible the demand, and being out of stock, when the season is over. The buy- ing of goods depending for their demand upon style is the most difficult task in buying. The only rule which can be laid down is to suit the customers, and try to read their tastes. The success of many firms depends upon ability to read human nature, and sound judg- ment in choosing what will sell. Goods may be divided into two classes, — staples and non-staples. Staples are those goods which are in con- stapies and stant use and which possess a continual de- non-stapies. mand. Non-staples are those depending for their demand upon whims, fads or fashion. The de- mand for such goods is very fluctuating. It often in- creases in a short time from nothing to a large amount, and frequently declines as rapidly as it came into ex- istence. Goods, like Christmas and Easter decorations, possessing only a seasonal demand, should be classed as non-staples. The skill of a buyer is tested in buying non-staples. Buying non- Nowhere does financial success depend so much staples. upon good buying. To have goods on hand when a fad starts, and be sold out when the fad goes is BUYING 229 the goal of every buyer. The nearer a buyer reaches this goal, the greater are his profits. When a fad disappears, if many of the articles are on hand, it represents a loss. These must be sold at a discount, and frequently at only a fraction of their original cost. It must be admitted that there is considerable guesswork, and also that luck plays a very important part. Nevertheless, a careful study of the customers, their wants, desires and wishes, materially assists a buyer in forecasting demand. A great temptation open to all buyers, and one which many are not able to resist, is overbuying. The over- buying habit is dangerous, and frequently leads to bankruptcy. The buyer of staples may, over- through the inducement of low prices, buy ^"y»^g- more than necessary to meet present needs. Precaution should be exercised, and it is not even safe to greatly overstock, it matters not how great the temptation to do so may be. The carrying of stock entails ex- penses, and there is also danger of deterioration. Many staples must be disposed of within a certain time, or they deteriorate in value. The question of possible de- terioration with time is a very important one Liniitations to consider, and one which is frequently neg- on over- lected. The time for payment for goods always comes. Many buyers do not consider this and hardships frequently arise in raising the payments for surplus stock. The question of the extent of overstocking through the temptation of low prices is a difficult one. In every case, it is speculation, and extreme care should be exercised in extending stock beyond that which can be disposed of in a certain period. The question of overbuying should 230 ECONOMICS OF BUSINESS not be undertaken at haphazard, but careful study should be made of the nature of the good, its liability to deterio- rate, and the financial means of the firm. These ques- tions should be carefully considered by the buyer, and he should weigh each one separately before he is too strongly tempted by low prices. Goods which are not subject to deterioration with time may, if finances warrant, be bought in large quan- When over- ^^^^^ when prices are low. Many business buying is men, using large quantities of such staples, JUS a e. ^^ .^ profitable to build special storehouses for storing surplus stock. Though an article may not deteriorate, yet with all articles there is more or less expense in carrying. The question of the ability of the entrepreneur to successfully finance overstocking is an important problem. Many a buyer in his eager- ness to overstock, and take advantage of what he considers a favorable time to make profits, buys such quantities that he later faces financial difficulties in paying for them. The question of funds should always be kept in the foreground, and no buyer is justified in buying beyond the financial means of his firm. Many staples, as wheat, cotton, barley, etc., may be bought for delivery any month in the year. This Buyin on saves the buyer the expense of carrying, but future in studying the prices for future delivery, such ^ ^*'^* expense should be given careful consideration. In buying for future delivery, too much emphasis cannot be placed upon a careful study of all conditions that might affect the market. To estimate the influence of future happenings upon the relation between supply BUYING 231 and demand is the chief business of brokers. Buyers also find it profitable to carefully follow all conditions that might possibly affect the market of their goods, and esti- mate their influence. Careful study and sound judgment in forecasting the future often enables a buyer to increase his profits by judicious buying. Every buyer should be a careful student of sources of supply, and able to analyze all conditions that might affect supply or demand. If care should be exercised in overbuying staples, extreme care must be taken with non-staples. Low prices are, as a rule, traps to ensnare the un- overbuying wary. If large discounts and low prices are i^on-stapies. offered, it is well to be cautious, because these inducements are usually for the purpose of selling stock for which the demand will Hkely fall in the near future. When the style of shoes changed a few years ago from the narrow toe to the broad, manufacturers having a large quantity of narrow shoes in stock, and foreseeing the change in style, offered inducements at low prices and more favor- able discounts. Many merchants were ensnared, and bought large quantities. Before the goods were de- livered the new style came in, and when the goods were received, many were offering them on bargain counters at far less than what was paid for them. Many paid dearly for their experience, of being too easily tempted by low prices. With all goods except staples, it is always the greatest kind of risk to overbuy. No one can tell when demand will change, and sometimes it only takes a short time for it to almost cease. Good buyers of non-staples are never tempted to overbuy by low prices 232 ECONOMICS OF BUSINESS or large discounts. They have the demand for their goods carefully forecasted, and they stand rigidly to it. Low prices are only a trap for the young and untrained buyer, and few escape without paying dearly for their lesson. Every retail business caters to a different class of customers. It will not do to study the wishes of one Retail busi- class, and draw conclusions for others. Each ness caters ^lass should be Separately studied, because the to different , , r- j j ^ classes of demands of all are not the same. Some busi- customers. ^^^^ enterprises cater only to the well-to-do and wealthy, while others obtain their trade chiefly from the middle classes and laborers. The quality and grade of goods should in each case suit the class of customers served. In a haberdashery serving only wealthy people, it may not pay to keep neckties of a quality that sell for less than seventy-five cents, while in another store, it may not pay to keep such expensive ties. The important question is what class of customers is served, and every effort should be made to cater to their desires, wishes and sometimes, even whims. A buyer for the retail trade should buy to suit his cus- tomers and not to please himself. Many buyers are Buyers hampered in their success by paying heed to to^s^t^eir ^^^^^ ^^^^ ^^^s ^^^ dislikes, and neglecting customers, those of their customers. A buyer should always remember that the customer is the one to be pleased and satisfied, and to bear that in mind in bu3dng. Buying that which will not sell is loss, and in order to sell, a good must satisfy and please, not the buyer, but the customer. Some buyers mingle with their customers BUYING 233 and by questions learn their desires, while others rely upon clerks to learn their likes and dislikes. Some method should be adopted and carefully followed, because no buyer can rely upon guesswork to guide him in buying. The problem of deciding what goods to carry in stock is an important one. If sound judgment is not exercised, the shelves may soon be filled with unsalable ^^^^ ^^^^ goods. Clerks are usually required to note to carry in goods asked for and not in stock. It does not always pay to add every article asked for. Before an addition is made, sound judgment should be exercised and careful study made of conditions in order to forecast the demand. In forecasting the demand, assistance is given by knowing the number asking for an article during a certain period. A buyer should be sufficiently acquainted with his class of customers to judge the possibility of their buying any new article or brand, if kept in stock. A particular article or brand may be asked for and wanted by only a few customers. The small amount sold will not pay for the expense of carrjdng the stock. Again, there may be an article, at present, asked for by only a few, but by growing in favor may in a short time be in great demand. The wis- dom of the buyer in deciding this question may often result in greatly increasing profits. The presence of an article or brand in a store may be the means of attracting people to the store to buy other goods. It may not pay to carry it, but goods sold through its presence may pay to keep it on the shelves. If careful study is not made as to future demand, and articles are added with- 234 ECONOMICS OF BUSINESS out thought, great losses may arise. New articles are added, called for by a few, and the demand ceases. The remainder must be disposed of at the bargain counter. Go into any store, look over the bargain counters, and you will see hundreds of instances of bad judgment in forecasting future demand. Each mistake in forecasting, and adding unsalable goods adds to costs and lessens profits. The success of many retail stores depends far more upon careful and judicious buying than upon selling. QUESTIONS 1. What place has bu)dng in our industrial system ? Men- tion the ways in which buying may assist in lowering costs. 2. What is the purpose of cost records? Give the impor- tance of maximum and minimum limits. 3. What expenses are incurred in carrying stock ? When are these to be considered by the buyer ? 4. What precaution should be taken to assure sufl&cient stock to meet demands ? What losses arise when stock runs short ? 5. What knowledge of goods is necessary in buying ? How is it acquired ? 6. Give the advantages arising from knowledge of costs of goods. How may costs be obtained ? 7. What savings arise from buying goods according to quality? What precaution should be taken to assure that the quality ordered is obtained ? 8. Explain why it is necessary for a buyer to know the market in which he buys. Mention several conditions which affect markets. 9. What is the basis for forecasting supply and demand ? In what way may forecasting be of service to the buyer ? BUYING 235 10. What knowledge of his firm should a buyer possess? Mention the advantages that may arise from such knowledge. 11. Why is it important to know promptness in filling orders, route of shipment of goods, and the keeping of prom- ises by the seller ? 12. What advantages arise from a buyer keeping himself informed of new inventions, methods and processes in the making of his goods ? 13. What is the difference between staples and non-staples ? Mention considerations that assist in buying non-staples. 14. What inducements lead to overbuying ? What limit should be placed on overbuying ? 15. Mention the advantages arising from a careful study of customers. What should decide the goods to carry in stock ? REFERENCES W. D. Ennis, "Works Management," Ch. V; H. Diemer, "Factory Organization and Administration," Ch. XII; F. Farrington, "Store Management," Ch. IV; "Buying," Business Man's Library, Vol. V; S. C. C. Parson, "Business Administration," Ch. XI. CHAPTER XI SELLING Goods are produced in order that human wants may be satisfied, directly or indirectly, through their con- -, . sumption. People engage in their production, produced either for home consumption, or for disposal to others. A hundred years ago, the common custom was to produce in the homes a large part of the goods needed for home use, but the past century has introduced such industrial changes, that to-day people depend on others for goods to satisfy their wants. The production of goods for sale is the fimdamental purpose of our industrial system, and the basic structure of all business activity. Men engage in business for profit-making. Profits depend upon careful buying, low cost of production, and Importance good Selling. Carelessness or bad judgment of selling. ^ q^q jg sufficient to eliminate profits, and force an enterprise into bankruptcy. The materials used may be carefully bought, and the finished article produced at low cost, but in order that profits may exist, the finished article must be sold at a price greater than the cost of production. The manufacturer of a new article should decide before he builds his factory the possible demand for his goods, and if sufficient can be sold to pay for production. It is nonsense to produce 236 SELLING 237 an article which cannot be sold. If a manufacturer wishes to enlarge his plant, he should carefully consider the demand for his goods and find out if the demand can be increased to take the increased production at a profitable price. The existence of every enterprise depends upon the abihty of the entrepreneur to dispose of his product. Selling is a very important factor in every business. Too great emphasis cannot be placed upon its importance, for upon it, frequently depends not only the success, but the very existence of an enterprise. An important problem for every manufacturer is the disposal of his product. Buyers must be found, and in reaching them various means may be used, as Methods of salesmen, letters or circulars, advertising, selling, retail stores owned by the manufacturer, and independ- ent agents. Careful study should be made of the article to be sold, and the method adopted should be the one best adapted to the article, the most economical, and at the same time sufficiently extensive to dispose of the product of the factory. Customers may be divided into three general classes, — jobbers, retailers and consumers. Manufacturers may sell to one, two or all three classes. A classes of jobber is one who buys in large quantities, customers, in order to sell to the retailer in smaller quantities. His business is not concerned with selling directly to consumers. When he does, he is engaged in the retail as well as the wholesale business. Jobbers are known under various names, as wholesale merchants, commission merchants, commission brokers, and exclusive agents. Many manufacturers sell only to 238 ECONOMICS OF BUSINESS jobbers, and trust to them to dispose of their goods. They do not compete with them, by selling to retailers or to consumers. Jobbers usually handle the products of many firms, and are supposed to give equal support to all products, but they frequently fail to do so. Some goods carry larger profits, and the less paying are neg- lected for these. The development of the departmental store, and the extensive use of advertising has increased the number of manufacturers selling directly to retailers and con- . sumers. The jobber has in many instances a necessity been eliminated, but nevertheless he still con- MtdisS^" tiiiu^s to be an important factor in business, utingsys- As long as small retail stores continue to do business, the jobber will thrive. He replen- ishes the merchant's small stock and saves ordering directly from the manufacturer. As a rule, the pur- chases are not large enough to buy direct, and if the man- ufacturer is some distance away, the merchant does not wish to wait for his goods when he can obtain them at short notice, and as cheaply from a jobber. In the city of New York, departmental stores have not les- sened the number of small retail stores, and the jobber continues to be an important link between retailer and producer. He performs an important work and is a necessity in the present distributing system. Retail merchants are those who buy in order to sell di- rectly to consumers. They may purchase their goods RetaU fromeither jobbers or manufacturers. Thesize merchants Qf thefr estabhshments varies from the small grocery stand to the large departmental store. The re- SELLING 239 toiler is the most important link in the general distribu- tion of goods from the manufacturer to the actual con- sumer. To-day nearly 90 per cent of all groceries, clothing and drugs are distributed through retail stores. Many jobbers conduct a retail as well as a wholesale business, but sell to retailers at a cheaper rate than to actual consumers. Retailers do not care for the competition of jobbers in their field, and whenever possible, refuse to patronize those who retail their goods. This keeps many jobbers strictly in their own field. The retailer is reached by the jobber or the manufac- turer in three different ways, — traveling salesmen, advertising, letter or circular. Each has a distinctive field in selling and requires careful considera- Methods of tion. In deciding upon the method, careful H^ ^^ study should be made of the product to be merchants, sold, and that which is best adapted should be used. Some goods may be easily sold by letter, others by ad- vertising in trade journals, while others demand pres- entation to the prospective buyer by competent sales- men. The most common method is that of salesmen, yet buyers are often attracted by letter or advertising. Frequently a prospective buyer is introduced to the goods by letter or circular in order to prepare him for the travel- ing salesman. Many find the use of all three necessary, and make special use of the letter to introduce the goods before the visit of the salesman. During the past few years, many manufacturers have eliminated the services of the middleman and sell their product directly to the actual consumers. Salesmen or agents, branch stores, and the post office are the chief 240 ECONOMICS OF BUSINESS means used in direct distribution of goods. Many goods, as pianos, agricultural implements, automobiles and Methods of Carriages, are especially adapted for distribu- direcf to ^^^^ through agents. There is a growing tend- consumers. ency for manufacturers of certain goods, as boots, shoes, hats, etc., to distribute them through their own retail stores. The great increase in the factory-to- consumer business has largely resulted from develop- ment in advertising. Advertising has been an im- portant factor in making possible our industrial and economic development. The mail-order business is of recent origin and every year is assuming greater proportions. Many large es- tablishments do only a mail-order business, while many Maa-order retail stores have made it a special depart- business. ment. It depends for its success upon advertising, which is the very life of the business. It is difficult and expensive to obtain a clientele. Extreme care and sound judgment should be exercised in choosing mediums for advertising so as to reach the class of people who will buy the goods offered for sale. The mail-order business has many advantages over ordinary retailing. The field of selling in the latter case Advantages is limited to a locality more or less restricted, ordtr bSS." ^^^^ ^ ^^^ former, the limit is the American ness. continent. Sears, Roebuck and Company have customers in every state in the Union, as well as in nearly every province of Canada. The mail-order department of Best and Company, New York, operates in all parts of the United States, as well as Canada. Local conditions frequently react upon business, but the mail-order busi- SELLING 241 ness escapes such influences. The expenses of conducting such a business, when once established, are far less than the retail business. A large stock is not needed, and ex- pensive floor space is saved. A loft will serve as head- quarters, as well as an expensive store. The expenses of selling are largely confined to advertising, whereas in a retail business a selling as well as an advertising force must be maintained. The business is strictly cash and the risks of credit are ehminated. The expenses saved in selling are sufficient to allow the sale of goods at lower prices. Competition can be keenly carried on with local merchants, and many believe the time is not far distant when local competition will be greatly increased by mail- order houses with headquarters in distant cities. In buying through the mails, time is necessary for delivery. This varies with the distance, and the promptness of the selling establishment in Disadvan- filling orders and in shipping goods. In many mau-order* cases, purchasers take decided risks in buying business, from catalogues. These risks are almost eliminated with staples or known brands, but with goods where style is a requisite, the chances of dissatisfaction are great. An article may look very attractive in a picture, but when it is seen, it may be unbecoming and unsatis- factory. Where dissatisfaction occurs, it is quite a different matter from taking the article down to a store or to a neighboring town to have it changed or altered. It must be sent back, and frequently considerable trouble arises in making the exchange. The mail-order business is not very satisfactory for articles depending upon style for their sale. 242 ECONOMICS OF BUSINESS Retail stores, although keenly feeling in many ways, the competition of the mail-order business, will continue for years to be the chief factor in the distribution of goods to the actual consumer. Several advantages arise in Advantages buying from retail stores. There is no wait- and disad- i^g, as goods are delivered within a few hours vantages of " , ,., retail after purchase. Many people like to see business. goods before they are bought. If dissatisfac- tion or error arise, correction can easily be made. The retailer has a good opportunity to study the tastes of the consumer, and can keep in stock goods that readily sell. He can, if he is a careful observer and possesses good judgment, adapt his stock to local needs. The selling field of the retailer is more or less restricted. In small places, it does not extend beyond the village or town, and a few miles of surrounding country. The area is nevertheless greatly extended as the city of location increases in size. In small cities and towns, the question of credit demands careful consideration. It is Credit. difficult to run a strictly cash business. Some competitor, in order to attract trade, gives credit, and very often forces others to do the same. Every inducement is used to attract trade, and in the eyes of many farmers and artisans, credit is very great. Credit is a serious handicap to many retail enterprises. In large cities, a retail store can be run on a cash basis, yet frequently it is necessary to give the extra inducement of credit. To refuse credit may often lose a customer, and to give may mean a loss of money. The retailer should use his discretion, and not handicap his business by being too liberal in granting credit. SELLING 243 Two primary reasons, value and service, may be given, why buyers are attracted to particular stores for their goods. A third, style, is added in the case of Reasons clothing, millinery and other goods, in which ^^y *^"s- °' '' 1.1 tomers are it is a requisite. The average buyer wishes to attracted get the best value for his money, and the most *° stores, important consideration underlying value is quaUty. When a firm has gained the confidence of the consuming public, and estabHshed its business name as standing only for goods of the highest quality, it has acquired a valuable asset in attracting trade. It takes years, thousands of dollars in advertising, and a most rigid inspection system to acquire this reputation, but when obtained, it repays a hundred fold every cent spent. The best value for the price is what attracts. The seller who can convince the pubHc that he is giving the best value for the price has Httle difficulty Honggty in selling his goods. When the confidence of m price and the people is once secured, every precaution should be taken to keep it, and this can be done by pre- venting inferior goods from getting on the market. Many sellers believe that if confidence is once secured, then the people can be duped by poorer grades. It will not take the pubHc long to know that they are being deceived, and once that is realized, the old es- tabHshed standard may not be regained. Give people the best value for their money, and the seller need not fear the inroads of competition. A seller should give most careful attention to the services rendered by his establishment. Good service makes many demands, the most important of which are 244 ECONOMICS OF BUSINESS as follows: prompt attention to orders; prompt and courteous attention to customers; prompt delivery of Service and goods ; promising nothing which cannot be its demands, (jone ; rigidly carrying out all promises; delivering goods only in the grades ordered; taking every precaution that mistakes are not made, and if made, prompt attention to their correction; prompt attention to all dissatisfaction and settlement of the difficulty without arousing the enmity of the customer ; and, lastly, attention, especially in a retail business, to the comfort of customers. Attention to all these de- mands assists in building up trade and estabhshing a firm's name with the public. The successful business man finds it profitable to pay particular attention to service, and to see that all its demands are strictly carried out. Style is a necessary requisite in many goods. People wish to have their clothes, hats, and shoes of the latest style as a Style. Progressive merchants should carefully factor in study their goods and carry only those of the selling. latest style. The connection of a merchant's name with that of always carrying the latest styles, is a valuable asset not only in getting trade, but in holding it. A purchaser buys where he can get the best value, best service and latest style, at the lowest price. The customer is the objective point in all selling. Customers must be obtained before goods are sold. An Obtaining important problem is to get a customer to and holding make his first purchase, and a second, more cus omers. jjjiportant perhaps than the first, is to retain his trade in the future. The first sale oftentimes comes SELLING 245 through chance. A person wishes goods and goes to the first store to get them. A salesman frequently gets his first order in the same way. A storekeeper needs goods, a salesman offers them, and if his price is satisfactory, the sale is easily made. The first sale is ordinarily a more difficult task. The first step is to attract people to the goods. This may be done by advertising, displays or salesmen. The second, and more difficult, is to arouse interest and to create a desire to possess, culminat- ing in a sale. A serious problem is to get people, after making the first purchase, to come back for future pur- chases. If a merchant solves this, he adds a valuable asset to his business. It is still better to so please a customer that he will not only return, but will induce his friends to come to trade. Success in selling consists in getting new customers and in making them so well pleased, that they will not only become permanent, but act as solicitors for new trade. Satisfaction is a great power in holding customers. It rests on the relation of merchant or manufacturer with those who buy. Satisfaction depends satisfaction, upon services rendered, goods sold, value re- the chief . ^ o 7 power in ceived, and the feeling that goods are not mis- holding represented, that all errors will be corrected customers, and that goods, if unsatisfactory, will be exchanged, or money refunded. Satisfied customers are a valuable asset to a business. Good will, which is often valued at large sums, consists of satisfied customers. An im- portant factor in business building, and one greater than present profits, is the confidence and good will of cus- tomers, as they assure the profits and success of the future. 246 ECONOMICS OF BUSINESS What is the view point of customers ? This is a ques- tion which manufacturers and traders frequently neg- im rtance ^^^^ ^^ Consider. It is a serious one in sup- of view- plying foreign as well as domestic markets, customers 1"^^ Germans were the first to adopt scien- in foreign ^ific methods in studying the wants of the markets. , . people with whom they wished to trade, or with whom they were trading. The kind, the brand and the style of goods which the people demanded were manu- factured and sent to their markets. The result was that the Germans were soon leading other countries in com- petition in foreign markets. The Americans were the last to learn the necessity of studying the wants of customers, and much has been done in this respect during the past few years. They have learned that people know what kind of goods they want, and that with competition so keen, the grade of goods needed must be supphed to get a market. Many traders in foreign markets find it profitable to send representatives to carefully study the wants of the people, and to find out the kind of goods they need. At the present time, the consuls in differents parts of the world assist Amer- ican manufacturers by making reports from time to time as to what are the needs of the people in their terri- tories, and the kind of goods they will buy. The man- ufacturer for the domestic trade, as well as for the foreign, cannot neglect paying careful attention to the wants of his prospective buyers. A study of customers in a retail business is a very important essential. This is done in small establish- ments by the manager, but in large establishments clerks SELLING 247 assist in the work. The wishes, wants, likes and dis- likes are obtained in a way that does not offend cus- tomers. The manager finds out what his study of customers want. This is important, because customers essential in it enables him to keep m stock goods which retau readily sell. Every retail merchant should ^^^"^®^^* make it his aim to know the wants of his customers, and to meet their demands. The four elements in successful retaihng may be summarized as : buying at right prices ; selling at a profit; successfully forecasting demand so that when out of season few goods will be left for bargain coimters ; and satisfying customers. A knowledge of markets, which, as we have seen, is very essential in buying, is equally so in the selling of many products. Conditions that in any way Knowledge affect the prices of goods should be studied. condSdons Demand increasing and supply normal, a essential, seller may increase his profits by an early increase in price. Many sellers, not aware of an increased demand, do not raise prices as early as they could, and thus lose profits. Supply may increase and demand be Forecasting normal, or the supply remain steady and the ^^^^^ demand decrease. The shrewd seller, by supply and studying market conditions, foresees this ^^°^^^' changed relation between supply and demand, and if he is forced to dispose of a supply of goods, a slight decrease in price before others in the market, enables him to dis- pose of his goods to better advantage than he could by waiting for some other trader to lower the price. Sellers find it to their advantage to thoroughly know market conditions so as to forecast future changes in supply and demand for their goods. 248 ECONOMICS OF BUSINESS Selling was, until quite recently, looked upon as an art, and it was thought that it could not be reduced to Sales scientific principles, but the increased interest Ss^iSi- which has, during the past few years, been ties. given to conducting business has brought sell- ing imder consideration, and it is gradually being re- duced to principles and to a science. In the success of every manufacturing and mercantile enterprise, great responsibihty rests upon the seUing department. It should be in charge of a competent sales manager, and upon his ability frequently depends the financial success of the business. The successful sales manager is usually a graduate from the ranks of salesmen. Ex- perience and success as a salesman are prerequisites. He should be thoroughly acquainted with the policies and methods of his firm. His knowledge of goods, competitors in the field and market conditions affecting supply and demand, should be accurate and thorough. The sales manger should be a good student of human nature, able to read character quickly and accurately, . and a good judge of men. Much of the sue- in selecting cess of a salcs force depends upon the ability °*®^ to select men. In selHng, more depends per- haps upon the men than upon the goods. The selection of new men should be careful, deliberate, and not hasty. Care should be exercised in ascertaining many facts regarding applicants, as for example, infirmities that might affect health, health for the past few years, habits, educational training, care about person and dress, suc- cess or failure in previous work, ease in meeting people, control of self, and honesty, integrity and sincerity in work. SELLING 249 Proper selection should be followed by efiicient methods in training. No salesman is ready to represent a firm and sell immediately upon selection. Even ^^^g^^^ ^f if experienced and successful as a salesman, salesmen a some time should be spent in getting acquainted "®*^®^®* ^' with the business methods of the firm, the character of the goods to be sold and a knowledge of their manufacture. For years, business men beHeved that experience was the sole means of developing a salesman. As in many vocations, success largely depends upon natural endow- ments, but it is also due to the development of these gifts. Careful training preceding selling is an absolute necessity. The untrained and inexperienced man must necessarily make mistakes, and every mistake is more or less costly to a business. Training better prepares salesmen for their work, and a large number of the mis- takes of the inexperienced are avoided. Training is a business proposition for every manufacturer or merchant, and as such should be given careful consideration. A growing practice is to have a rigid course of training, and to insist that all quaUfy by making a certain stand- ard before they are sent on the road, or behind the counter. Every salesman should be carefully and thoroughly trained in the fundamental principles of salesmanship. How to express himself in correct English, punda- dress properly, approach a customer, attract mental attention, arouse interest, and bring a cus- ofsaies- t(. -ner to action in a sale, are some of the fun- "^"^^ ^* damentals necessary in salesmanship. The methods used in training depend largely upon the goods to be 250 ECONOMICS OF BUSINESS sold, and upon the past experience of the men. Al- though the general principles are the same, yet their application varies in every instance, with the kind of product sold. The method used in selling harvesting machinery is different from that used in selling dress- goods. If the article to be sold is simple, the training is different from that used, if it is a compUcated piece of machinery. In every instance, the training should be along practical business lines. A salesman, if trained, gives better service, and increases his value to himself, as well as to the firm. Training is not complete unless it includes a thorough knowledge of the character of the goods, the raw materials which enter into their manu- facture and the processes of their production. A new salesman with successful experience should be carefully examined in the principles, and if satisfactory, the elementary training may be omitted. Competition is so keen at present that thorough training is absolutely necessary. A salesman should be able to talk intelligently. Bad English reflects not only upon the salesman, but upon - the house which he represents. A salesman EngUsha should be able to express his ideas clearly, necessity. ga,sily and forcefully in good and correct Eng- Ush. If a prospective salesman has not had a thorough training in English, he should receive one. This should be insisted upon as a necessary prerequisite. The question of dress is an important one, and it is a Dress an necessity to be well dressed. The salesman is essential. ^]^g representative of the house, and it is through him that many form their opinion concerning the SELLING 251 . firm. People like to do business with a prosperous firm and the sign of prosperity that many see is a well-dressed representative. Dress can be overdone. All manner- isms and extremely noticeable features in dress should be avoided, as customers' attention is attracted to them and not to the goods offered for sale. Good taste in dress must in many cases be cultivated. Many sales managers take special pains to instruct their men to dress properly. A strong, robust, good-looking, well- dressed salesman always attracts attention. Good dress often smoothes the way for conversation, which frequently leads to arousing interest in goods, when it would otherwise have been difficult to approach a pro- spective customer. Not only to be well dressed, but to be clean, neat and tidy in person are requisites ^o be which must be scrupulously followed out. ^®^ dressed Physique and health as well as care of self brings and dress are essentials of success, and spe- ^"s*^®^^. cial attention should be paid to the acquiring and de- velopment of these quaHties. The manner of approaching a customer is impor- tant and frequently a sale depends upon it. Few cus- tomers like to do business with strangers. A ^^^^^ f salesman should meet his customer as an equal, approaching and make him feel as though he were talk- * ^^^ °™®'* ing with an acquaintance. Many customers Hke to be called by name and many have particular likes and dislikes. Learn the name and something about a customer before calling. This assists in knowing how to approach him. Some are won by a hearty handshake while others con- sider it too familiar. A salesman should closely follow 252 ECONOMICS OF BUSINESS the expression of his customer's face and be able to tell the proper way to greet him. The first greeting often means a great deal. Every precaution should be taken to greet a customer in such a way that he will not be offended, and this demands that a salesman be a close student of human nature. A salesman should first get the attention of a customer ; secondly, arouse his interest; thirdly, create a desire Factors to possess, and fourthly, convince him to ciose^a^ *** possess or make the sale. Interest if properly sale. retained often develops into desire without further effort of the salesman. The desire for goods must be brought to a chmax in a sale. Many salesmen can lead customers to the point of closing but are unable to make the sale. The power to close is a valuable asset in any salesman. In selling, there is a time when the buyer is ready to close, but few salesmen are able to recognize this. They lead the buyer to the point, but they do not know the proper moment for decisive action, and the sale is lost. Frequently it is necessary to send a special salesman to assist in closing. The factors necessary in closing are, knowledge of human nature, attention to everything a buyer says, judicious offering of suggestions, talking only when necessary, meeting all criticism, knowing when desire is created and when the buyer is ready to act, and lastly, the ability to convert the resolution into a sale. Training in the requisites for making a sale is the most diffi- Training. 7 i • . . r i i • a cult task in traimng for salesmanship. A successful method is to place the prospective salesman in charge of a thoroughly competent man. Mock sales SELLING 253 should be made under the supervision of the instructor ; the student taking first, the part of the customer, and then that of the salesman. This part of the training should be as practical as possible, and continued until a certain standard has been reached. An essential part of training is the mastery of the making, and uses of the goods to be sold. A sales- man before being allowed to represent a firm in sell- ing goods should be acquainted with every de- Thorough tail concerning them, not only their making, ^goods^* but the materials of which they are made. If necessary, possible, he should be acquainted with the materials used in the making of competitors' goods. This is essential and important for purposes of comparison, and proving the quality of his own goods over those of competitors. It is advisable for a salesman to spend some time in a factory, where goods are made, so as to thoroughly master every detail of their making. Know- ing thoroughly the materials and quahties out of which goods are made, the processes of manufacture, the special care taken to insure the quaHty of the finished product, causes of cost, and competitors' goods, are essentials for every salesman. Many sales managers think it is necessary to have standard selHng talks. They prepare and put in set form, the introduction and all arguments to be used in selling goods. Sometimes, answers to possi- standard ble objections and criticisms are prepared, seiung These talks are memorized by the salesmen. The serious objection is that a set talk will not do for all customers. No two customers are the same, and what 254 ECONOMICS OF BUSINESS will persuade in one case, will not in another. A more satisfactory method is to carefully train salesmen, and leave to them the language and the arguments to be used, in approaching and presenting goods to a cus- tomer. Suggestion is a great force when leading from desire to sale. A salesman should be able to assist a customer Importance ^^ suitable suggestions. These should be of sugges- made at the right time, and in the proper way, so as to lead a customer to believe that the sug- gestions are his own. A valuable quaUty is that of being able to decide for a customer, and at the same time make him feel as you do without his knowing it. Many sales are actually made by salesmen, yet the customers firmly beHeve that they alone made the decision to pur- chase, and would be offended, if told that they simply followed the suggestions of the salesman. A salesman should not force goods upon a customer, or appear too anxious to make a sale. He should pay par- ticular attention to the quality, style and service of his goods, and leave the price in the background. It is always unwise to argue with a customer. Openly dis- puting what a customer has to say often loses a sale. A salesman should know what arguments to advance, and be quick to perceive when he has said enough. He should be able accurately to read at a glance what pleases or displeases his customer. Wherever possible, the cus- tomer should be allowed to do the talking. The sales- man should listen attentively and assist in making the decision by occasional suggestions. A salesman should have absolute command of himself, SELLING 25s and it matters not what circumstances arise, or what a customer says, he should not lose his temper, ^^^^ ^ but be calm, cool and dehberate. Frequently tact and when a customer finds that his outbursts of tem- ^^^^ ^^^^* per are calmly met, he is gradually won over to^s in , success, and often makes a purchase. Tact is a neces- sity for the successful salesman. It is that, which enables a man to adapt himself to circumstances, and allows him to see when he is using the wrong method and to change to meet a customer. A salesman should be temperate, never be seen in bad company, in disreputable places, or under the influence of liquor. These things lower the dignity of a salesman and reflect upon the house which he represents. He should have confidence in the goods which he is selHng. Knowledge of his goods, and faith in their qualities are essential for enthusiasm and work. Enthusiasm is valuable as frequently it is the force which attracts, and holds the attention of the cus- tomer. The one great essential is confidence in himself. With this lacking, success is doubtful. This should be associated with confidence in employer and the goods sold. In conversation with a customer, a salesman should never use the name of a competitor unless it cannot be avoided. Under no circumstances should he speak weu speak disparagingly of a competitor's goods ^^^il^^^d nor abuse or slander a competitor or his his goods, representative. If a customer brings into conversation a competitor's name, a salesman should frankly admit whatever merit his goods possess and be at all times ready to draw the attention of the customer to some 256 ECONOMICS OF BUSINESS greater merit in his own. Few things detract so much from the dignity of a salesman, or the house which he represents, as to hear him abuse or slander a competi- tor or his representative, and stamp as not worthy of consideration, goods in competition with his own. Some salesmen find it profitable to collect and keep in- formation about customers. Every customer has usually Importance Strong points or special likings. These can tionlbout " ^^ ascertained from time to time by salesmen, customers, collected and kept on record for use, when customers are approached for sale. A salesman consults the records before he goes to a customer. John Brown is a golf enthusiast. A salesman looks up some points about the game, and often gains confidence which it would otherwise be difficult to acquire. Information concerning customers is always of great service to sales- men. It frequently allows the making of an easy approach and forming an acquaintance, which materially assists in making sales. In a retail store, a salesman should be carefully studied and placed in a position suited to his inchnation. He Choice of should believe in what he is selling. A sales- place im- man was given a particular style of goods to sell and failed. On investigation, it was learned that he did not believe in the style, and was not in sympathy with it. He was changed to selling a style which he Uked and was at once successful. Considerable harm is frequently done by putting men in wrong places. Salesmen may be divided into the following classes, — traveling, city and store. Traveling salesmen call on customers out of the town or city where the enterprise SELLING 257 is situated. City salesmen sell in the city, while store salesmen wait upon customers over the classes of counter. They differ only with respect to the salesmen, class of customers which they reach. The general prin- ciples of salesmanship are essential in all classes, but the application varies with the goods sold. A sales manager should have a thorough knowledge of trade conditions. These maybe divided into general and local. The former is treated imder Market, knowledge The latter demands careful study of buyers of trade and competitors in the field. The most effec- tive source for obtaining such information is through salesmen. A salesman should always be on the alert for information that might be of service to his em- ployer. Competitors' goods in the field should be care- fully studied. What is their quality? In what form are they sold ? Are they more attractive than those you sell ? What are the views of consumers ? What is the character of the advertising of the competitor? What suggestions can be made to increase demand? Are any changes made in competitors' prices ? Is there likelihood of any change in demand ? These are some of the questions which a salesman should be able to answer. The information is of the greatest importance in making changes to meet customers' wishes, and competitors in the field. A sales manager should have some means of keeping in touch with his salesmen. This is done by reports. There are usually two kinds, daily and weekly. rr^t 1 M 11 . ; Reports. The daily are generally sent m on post cards, but at the end of the week, a carefully detailed report of 2s8 ECONOMICS OF BUSINESS the week's work is sent. Reports keep sales managers always in touch with the work of their men. They are essential, and a properly arranged system adds very much to the efficiency of a business. QUESTIONS 1. Why is selling an important factor in the success of every enterprise ? 2. Mention the different methods of selling. What care should be exercised in the choice of a method ? 3. Why is the jobber a necessity in our distributing sys- tem ? What efforts have been made to eliminate him ? 4. Give the advantages and disadvantages of the mail order business. Give the reasons for its rapid growth. 5. Why are value, service and style three important factors in selling? What are the requirements for good service ? 6. What methods may be used for making the first sale ? Give the importance of satisfaction in holding customers. 7. What is the importance of the viewpoint of customers in (a) foreign markets, (b) domestic markets (c) in a retail business ? How may the viewpoint be obtained ? 8. Why is a knowledge of market conditions essential ? What advantages arise therefrom ? • 9. What qualities are necessary for a successful sales man- ager? Mention the requisites necessary in selecting sales- men. 10. What are the fundamental principles of salesman- ship ? How may they be acquired ? 11. What part has education, dress and enthusiasm in the making of sales? Why should a salesman have confidence in self, his employer and the goods which he sells ? SELLING 259 12. Why is the power to close a sale so important in selling ? Mention the factors necessary to close. 13. What is the importance of suggestion in selling ? Why are control, tact and confidence three factors in success ? 14. How should a competitor or his goods be treated? Mention some of the methods of obtaining an advantage over a competitor. 15. What advantages arise from a knowledge of trade conditions? What local information is it necessary to col- lect and how is it obtained ? REFERENCES B. R. Vardaman, "The Master Salesman"; A. L. Mac- bain, "Selling"; N. C. Fowler, "Practical Salesmanship"; W. Atkinson, "Psychology of Salesmanship" ; N. G. Lening- ton, "Seven Principles of Successful Salesmanship"; D. Hirshchler, "Art of Retail Selling"; C. H. Pierce, "Scien- tific Salesmanship"; W. A. Corbion, "The Principles of Salesmanship, Deportment and System"; J. S. Knox, "Salesmanship and Business Efficiency"; C. U. Carpenter, "Profit Making in Shop and Factory Management," Ch. XIII; S. E. Sparling, "Business Organization," Chs. X, XI, XII; J. H. Collins, "Human Nature in Selling Goods"; W. D. Moody, "Men Who Sell Things "; " Business Admin- istration," edited by W. D. Moody, Vol. Ill ; A. K. Sheldon, "The Art of Selling"; C. Lindgren, "The New Salesman- ship " ; H. C. Lawrence, " Making Him Buy." CHAPTER XII PRINCIPLES OF ADVERTISING The increase in the size of the business unit, and the production of goods on a larger scale increased Advertising Competition in every branch of our industrial a necessity system. Increased competition compelled in our in- . . . , r dustriai manufacturers to make a close study of every expansion, (jg^ail of manufacturing from the raw materials to the finished product. This resulted on the one hand in lowering costs through elimination of wastes and the use of more efficient methods, and on the other, in new methods of increasing demand through attracting the attention of the consuming public. The former evolved cost accounting and various efficiency methods, reaching a climax in scientific management, and the latter made advertising a powerful factor in business, and reduced its study almost to a science. Fifty years ago, the average manufacturer produced few articles for the local market. He personally knew many of his customers, and public advertising of his goods was sel- dom thought necessary. Markets were later extended, and the small factory gave way to the large plant. The increased production had to be sold and new demands created. The developing of the industrial system de- manded new methods of advertising and it, in its turn, proved a powerful factor in the extension of markets. 260 PRINCIPLES OF ADVERTISING 261 Formerly, advertising was chiefly speculative. It re- ceived little attention and was not thought worthy of study. The last twenty-five years have Advertising completely revolutionized advertising, and re- formerly , , speculative duced it to fundamental principles, the mas- but now tery of which requires careful study. Adver- * ^^^cessity. tising has passed from the speculative stage to that where it is an absolute necessity, and, like anything else, may be good or bad. Bad is simply a waste of money, while good is one of the most potent factors in business success. A few years ago, many business men did not consider advertising important, but it has increased in impor- tance until to-day, it would be difficult to find any business of ordinary size which does not advertise. Advertising is a powerful creative force in business. It causes new needs, multipKes human wants, and creates new demands. The creating of a new demand is its primary object, yet its results are more far-reaching. To-day, it is realized that it is the strongest possible factor for assuring business stability. The solid, stable business is largely maintained through its use. Ad- vertising has accordingly a twofold purpose. Twofold to create a demand for goods, and to main- l^^^^^tis- tain the demand already created. ing- Advertising may be divided into two classes, gen- eral and direct. The former is to create or maintain a general demand for a good, while the latter is for the purpose of selling direct to the consumer, classes of Manufacturers constitute the great body of advertising, general advertisers, while merchants and manufacturers who sell direct to consumers form the latter class. Com- 262 ECONOMICS OF BUSINESS petition has frequently forced manufacturers to tell Genend P^ople the good qualities of their goods in order to create a demand for them. Manu- facturers, through advertising, have often caused a de- mand to arise for their goods, and forced retailers to place their goods on their shelves. General advertising is national in scope, and requires careful study to obtain results. Direct advertising was, imtil the last decade, chiefly local, but the introduction of the mail-order business, and ^. selling direct to consumer has made its field Direct. . ° m many cases national. Mail-order advertis- ing is the most difficult of direct advertising, and requires careful study and skill to write successfully. Local National Competition has forced the local merchant to and local. advertise, and to him advertising is a necessity. Local advertising is simple as compared with general or mail order. Advertising has recently assmned the more dignified name of publicity. It has been defined as the art of • . creating a new want. This is not exclusive, me mean- ^ ' ing of ad- because it has an extensive use in keeping be- sing. ^^^^ people goods, that they are either using or have used. Advertising reminds them of the goods, and often prevents the using of others. The human mind must be jogged from time to time, or it will forget. Much advertising is thus used for assuring the continual use of a good. It has far-reaching results, and many a manufacturer maintains his trade through effective advertising. A function of advertising is to make wants where there are none existing, and to re- PRINCIPLES OF ADVERTISING 263 awaken desires which lie dormant. People wish to be told what will give them pleasure, provide more com- fort, and bring health, wealth and happiness. Adver- tising is well defined as the art of acquainting people with the name, nature and uses of a salable com- modity. No hard and fast rules can be formed to be rigidly fol- lowed in writing advertisements, or in methods of adver- tising. Form and methods vary with me- jj^^gid diums, goods to be advertised, and the public rules for to be reached. An advertisement suitable * ^^ ^^^^* for a local paper would frequently be of little value in a magazine. Nevertheless, underlying all advertising, there are certain fundamental principles, which should be known, given due consideration and carefullv heeded. The first thought of an advertiser is to present his advertisement in a way to attract attention. The problem of attracting the eye is important, jhe chief and one which requires careful study. Mere aim of - advertising. attraction is not enough. No value results from an advertisement which possesses only the power to make people look. The attraction should be followed by an arousing of interest. How to present To attract, an advertisment in a way to arouse the in- To interest, terest of the reader is the business of the writer. It requires careful study and is not work for an ama- teur. Formerly people thought any one who could write EngHsh could write advertising matter. It is surprising how the development of the past twenty-five years has changed this view. This accounts for the poor opinion which people formerly had of advertising. 264 ECONOMICS OF BUSINESS Now advertising is approaching a profession and re- quires careful training and study. The interest aroused should be intensified and pro- longed so that it is converted into a desire to possess. To arouse ^^^ ^^^^^ great problem is to present an ad- desire to vertisement in such a way that it will arouse possess. ^ ^^^ reader a desire to possess. Many advertisements attract and interest but do not go further, while many carry the reader to a desire to pos- sess, but do not convince that it is beneficial to possess. When this has been done, the purpose of the advertise- ment is accomphshed. To attract, to interest, to cause a desire to possess, to decide to possess are the chief aims of advertising. To have all present is the test of a good advertisement and of a good advertisement writer. Many try to write advertisements but few succeed. Advertisements must sell goods or they are of no value to the person advertising. To sell as many goods as possible is the ambition of the advertisement writer. That measures his worth in the eyes of the business world, and decides the salary that he is to receive. To make an advertisement of the greatest possible value, the aforementioned quaUties must be developed to the highest possible degree. Advertising is ineffective unless it influences the reader. Before an advertisement influences, it must be seen. A good display of some kind is of the first importance, Different because unless an advertisement catches the S^w°ting°' reader's eye, as he hastily scans a paper, all attention. may be lost. The problem is to attract the attention of those likely to be interested and not mere PRINCIPLES OF ADVERTISING 265 curiosity seekers. Various methods are used to attract, but the adoption of one depends largely upon the char- acter of the goods to be advertised and the class of readers which it is desired to reach. The chief methods are as follows : illustrations ; strong headlines ; strong, forcible sentences at the opening; colors; oirnaments; spaces; preferred positions; and type. The most common method employed is the use of pictures. Most people are attracted by pictures which serve to quickly catch the eye. Pictures may be divided into two classes, those which illustrate the product advertised, and those which are not related, but are used simply to attract, and in no way explain the character or uses of the product. The first class is called illustrations, and the second, pictures. An illustration is that by which an object is elucidated or explained. It should be designed so as clearly to present the article and directly reach the in- terests of the people. Anything which catches of a good the eye does not necessarily produce buy- "^'* °°' ing convictions. The illustration should show some ad- vantages of the good or the good as it is. When an article can be shown in use, the illustration becomes much stronger. An illustration is useless without selling value, for without it, it ceases to be an advertising illustration, and falls short of its main purpose. An illustration should explain itself. When it requires the text to make the meaning clear, it places an imfair burden on the text. It should be plain, well-executed, artistic and not freakish, because if so, it detracts from the copy. A simple, plain illustration, properly chosen, allows the eye to 266 ECONOMICS OF BUSINESS read rapidly, and the mind to easily comprehend. The choice depends largely upon the nature of the product to be advertised, and the people to be reached. Some products, like automobiles, should always be advertised, with illustrations. The eye is critical and to be at- tracted so as to leave a favorable impression demands something pleasing. A repulsive picture frequently at- An iUus- tracts but fails to arouse interest in the adver- tration tiscment of which it is a part. An illustration should be pleasing should be pleasing to the eye and should not to the eye. qQqj^^ the feeHngs even of sensitive people. Everybody likes to be reminded of what is pleasing and agreeable, while many turn away from what dis- gusts. Good taste should be exercised in the choice. Those which suggest action are better than those which do not. An illustration should never mislead, misrepre- sent, or send the thoughts in a wrong direction. It should draw and yet be free from deceit. Not only must an illustration be carefully selected, but there should be harmony in arrangement, spacing, and in the type used. The following are a few effective illustra- Various tions: the article; the article in the package good^iiius- ^^ offered for sale; the package alone; a trations. dainty dish made from the article; the source of the article ; processes in making ; and effect of use. A harmonious and artistic arrangement with a pleasing illustration connected in some way with a good copy has valuable drawing powers in an advertise- ment. It must be admitted that pictures interest every one, young or old. Formerly many believed that any kind PRINCIPLES OF ADVERTISING 267 of a picture was suitable, and that the only require- ment for attraction was a picture, irrespec- _ r t . ^ r. l • • PictUTCS. tive of what it portrayed. Something more is needed than mere attraction. Many beheve that all a picture has to do is to attract ; if this were so, pictures would often be better suited than illustrations. A picture which simply attracts may serve to objec- detract from the copy. This is frequently the tions to case, and such a picture lessens the value of an advertisement. A picture for a picture's sake is non- sensical. An illustration and not a picture constitutes a very fundamental part of advertising. The picture must be an illustration connecting the copy, and the article ad- vertised in some striking manner. It must be interesting for the purpose of leading the reader to the contents of the copy. An illustration should assist the text in making the appeal stronger. It requires skill to properly combine the illustration with the text in order to make both as- sist in selling. Pictures which are not illustrations are of little value in advertising. Successful advertising de- mands a good illustration to attract, and the use of meaningless pictures should be avoided. A third method frequently employed for catching the eye is the use of attractive headlines. This is the use of words at the head of the copy of such a nature and form as to attract attention. The average eye cannot easily take in at a glance more than four words, so it is advisable not to have the headline contain more than this number. The words should be simple, Headlines, forcible and suggest some quality of the Essentials, article advertised. They should easily catch the eye, 268 ECONOMICS OF BUSINESS and hold the attention for a sufficient time to allow it to read that which follows. The type used should be sufficiently large so that it can be read at a distance. Meaningless words, which have no connection with the rest of the copy, should never be used as they are of no value to the copy. The best headhne is one of not more than four forcible words, closely connected with that which follows, and suggestive of some of the quahties of the article advertised. In many cases, neither headlines nor pictures are used. The opening sentences serve as the attracting Opening force. They should be short, simple, clear sentences and forcible. Plain, forcible statements about as means ^ > i ■, ^ • of attrac- the article are best, but m every case a good ^°^' suggestive illustration or headline greatly in- creases the attracting power of an advertisement. Formerly, but not frequently at present, writers thought that decorations of various forms and shapes, even at times grotesque, attracted the eye. Decorations. _,, . i i i i ^ * r ■» There is no doubt but what anything out of the ordinary, or freakish, obtains a passing glance, but the eye as a rule sees only the decorated part, and passes over that, which it was intended, it should see and read. Decoration if not flashy or grotesque possesses some attracting power, but it is advisable to find other means of attracting attention. Attraction to a copy is increased by its place in the newspaper or magazine. Certain places are more Preferred likely to be noticed than others, and in con- positions, sequence command much higher prices. In magazines, the standard or preferred positions are as PRINCIPLES OF ADVERTISING 269 follows : back cover page ; first inside cover page, front ; first inside cover page, back; first page facing reading matter ; and page facing last page of reading matter. In every case, the choice of position and its relative impor- tance depends upon the character of the goods to be ad- vertised, and the kind of copy that is used. Preferred positions are found in every medium of advertising, and in every case, the positions which have the greatest chance of being seen by the largest number of people command the higher prices. The advisability of paying large sums for such places depends in a great measure upon the product advertised, and the selling results largely depend upon the form of copy. Attraction may be increased by making copy plain and not crowded, by using carefully selectjed type, and plenty of white spaces. Some advertisers have ^^^^ a particular style of type used only in their copy, means of and this gives an individuality which often at- tracts. Absence of counter attractions increases the chances of a copy to be seen. Care should be exercised in choice of a place, that is, as free as possible from counter attractions. If inartistic pictures, freakish cuts, or illus- trated copies are near, they detract from the attention, that would be paid to a copy if these were missing. Few articles are suited to be advertised in colors. Colors are usually to be avoided, as they detract from the copy, and lessen the value of the advertisement. The display adopted to attract should do more than merely catch a glance of the eye. It should hold the eye long enough to get an interest and read the part of the copy which immediately follows. This is the test of 270 ECONOMICS OF BUSINESS a good display. It emphasizes the importance of having Demands ^ ^^^^^ ^^^ ^^^^^ Connection between it, and of good the rest of the copy. Attraction has no value * ^ ^' unless it holds the eye long enough to arouse in- terest and read what the copy has to say. The display which holds and arouses sufficient interest to read, is the one which tests the abihty of the writer, and is the one which is the most valuable to the advertiser. After attention is gained, the most vital part of ad- vertising is the copy. Copy is a technical name given to the text-matter of an advertisement. Many make the mistake of making the illustration do all the work, and pay little heed to the copy. A good illustration attracts the attention long enough for the eye to read the copy which contains the selling points expressed in a way to convince the reader to buy the Close reia- article. There should be a close connection tion be- between the idea brought out by the illustra- tweencopy . ^ ■, ^ ■, ^ > ^ anduius- tion, and the thought expressed m the copy, tration. ^ g^^^ advertisement is not one that people talk about, but one that they act upon. This demands a good copy, assisted by a good illustration in making the appeal. The chief preparation in the writing of copy is to pick out the selling points of the article to be advertised. Importance ^^^ple wish to know facts, and the informa- of selling tion given should be confined to plain facts, poms. Brevity is a virtue in advertising, but it should not be such as to omit vital information. A copy should always be interesting and never tiresome. Facts should be put in proper logical order, but if care is not PRINCIPLES OF ADVERTISING 271 exercised, there is likely to be a hard, metalHc ring. A copy should be written in a natural, informal and col- loquial style, and full of human interest, jj^j^^^^ The writer who can put into his copy a interest in soothing, personal touch, and make the ap- ^^^^' peal human has a valuable quality. The copy should be written in clear and simple lan- guage. Arguments should be confined to facts about the article, forcible, clear and convincing. Essentials Unsupported and unconnected statements for a good have no place in a copy. Sentences should be short, concise and pointed. Long words and long sentences should in every instance be avoided. Every- thing told in copy should be so simple, and in such clear language, as not to require either time or study to be easily understood by the average reader. The selling points should be so forcibly expressed, and so clearly stated, that their full import can be immediately grasped. Everything should be specific, as nothing is more tiresome than wordy generalities. People are not interested in a pretty picture or novel combination of words, but want to know how to get value for their money. If a writer pays heed to this, and makes his advertisement answer the following questions, he will be successful in making his advertisement sell goods. Does the advertisement create a need and desire for the article ? Does the ad- vertisement convince the reader that the article ad- vertised is the one to buy? Are the special merits so forcibly told as to become strongly fixed in the mind of the reader ? The copy is good in proportion as it makes a terse, reasonable appeal to the reader, and makes him decide to buy. 272 ECONOMICS OF BUSINESS An advertisement which entertains the eye, and does not make an impression will not make sales. The mind The adver- ^^^ ^^^ peculiar faculty of seeing things with- tisement out Spending any thought upon them. A per- should not 11^ 11 r only enter- son can look at a crowd, and see many faces, tain the eye ^^^ j^^g mind may be far away. The advertise- but must . -^ -^ make an ment which Only gets attention, but does not impression, pg^etrate the reasoning powers, has httle value. The average person when he sees an advertisement is in a more or less indifferent mood, and his thoughts are as a rule on other things. He may give it a casual glance, but does not vacate his mind to the thought which it suggests. The arguments must penetrate and make a favorable impression, or the purpose of the ad- vertisement is lost. One weakness of many advertisements is lack of ap- peal to the senses, and the reasons for this defect are An adver- twofold. An appeal to any sense except tisement sight is not easily made in type. Secondly, should ° . '' ,,. . , .. appeal to many writers are lacking in descriptive the senses. pQ^gj-g^ ^nd Cannot describe articles in a way to appeal to the senses. The chief quality of an article of food is taste. Many never think of this, and pay no attention to taste, but describe a food product as though it had none. How much more impressive would it be to make the advertisement bespeak some superb quality or daintiness, and impart such a zest, that it makes the mouth water, and one feel as though he must stop on the way home and buy the article. Few advertisers appreciate the weakness of the ordinary man and woman for good things to eat. Writers PRINCIPLES OF ADVERTISING 273 should describe foods in such a way that readers im- mediately want what they describe. Every adver- tisement of food, to make a strong appeal, should emphasize taste. Pianos are frequently advertised as though they had no tone, perfumery as though no smell, and shoes as though no comfort in the wearing. Where- ever possible, an advertisement should appeal directly to the senses, and when a writer is able to do this, the selling powers of the advertisement are greatly increased. Many copies are written in such a way that the state- ments made may apply to many articles. The copy should possess personality. The statements individual- made about an article should individualize **y *° *^®py- the article, and be of such a nature, that they cannot be used for any other. This requires a mastery of English, and abihty to express the salient points of an article in a way which is restricted to it. The power to do so is a valuable asset to a copy writer. Confusion frequently arises between advertisements which advertise different kinds of goods. It is sur- prising how many people confuse adjacent copies. Many writers, to avoid confusion, mark their . advertisements by borders. Plain borders, inadver- if not too decorative, may be used advanta- geously, but wide spaces serve the same purpose. If the writer would take special pains to individuahze his copy, and make it, and the display distinctive, so that it would be difficult to interpret it in any way except as the writer desired, it would avoid a considerable part of the confu- sion. The name and address of the advertiser should be clearly and plainly given. Many advertisers fail to recog- 274 ECONOMICS OF BUSINESS nize this and others gain from their advertisements. Those who fail to put their names in larger type or Prominence . ,... . iti given to m some distinctive form would be surprised, adSes^*^ if they knew how many possible buyers read of adver- their advertisements, and fail to notice the advertiser's name. Too great emphasis can- not be placed upon making the advertisement distinctive, and having the name of the advertiser prominently and conspicuously given. These are the two great factors to observe in order to prevent confusion and loss by readers not noticing the names of advertisers. Many writers try to crowd too much into a copy. It is advisable to advertise one article or a few Crowding should be allied articles at a time. A crowded copy printed in small type is very often not read. Repetition is an important factor in advertising, as interest in an article is often aroused by the number of Value of times it comes to the attention of a prospective repetition, buyer. To exactly repeat the copy every time makes it lacking in interest; nevertheless the re- taining of one or more prominent features serves as a connecting link, and emphasizes the fact, that the same firm is placing the article upon the market. A trade name or trade-mark emblem is good in an advertisement, as it gives something concrete around which the popular conception of the advertising institution can be built. As people become acquainted with a constantly adver- tised emblem, it becomes a valuable asset. Different arguments or different goods should be emphasized in every advertisement. The advertisement which retains some recognizable features, but varies in detail from time PRINCIPLES OF ADVERTISING 275 to time serves as the best drawing one. There is a similarity which shows that the seUing firm is the same, but at the same time, there is a sufficient change from time to time to avoid monotony. An article to be successfully sold through advertising should contain some merit. Advertising cannot make merit where it does not exist. Misrepresenta- j^^^^ tion and falsehood rebound with triple force necessary in upon the advertising firm. The average Ameri- ^^ can buyer is a good judge of values, and knows if what is said about an article is true or false. The Truth is public may be fooled once, but it does not for- essential, get. Every statement made concerning an article should be positive information and plain truth. Truth is the foundation of confidence, and over 90 per cent of the world's trade is done on confidence. Anything but the truth lowers the dignity of a firm, and lessens one of the most valuable assets of a business house, — the con- fidence of the people. Space in a medium is costly and should be used to the best advantage. Advertising is a waste of money unless some positive returns follow. The Space, amount of space to be used should be decided by the business man advertising. Decision depends upon the goods to be sold, the public to be reached, and the kind of medium used. The size of space varies according to the means of the advertiser. It is seldom advisable to go to either extreme, but to be uniform in the amount of space used. Size of space does not sell goods, but that depends entirely upon what the space contains. Judgment should be exercised in the selec- 276 ECONOMICS OF BUSINESS tion of space, and skill should be used in filling the space with suitable copy. In advertising a new arti- Essentiais ^^^' ^^ ^^ frequently advisable to make a for seiec- big display, and then reduce to smaller copy. With a certain amount for publicity, it is far better to have a small copy continuously than a large display occasionally. The buying public is always prejudiced against spas- modic advertising. It usually arouses the suspicion that the purpose of the advertiser is to deceive. Con- Advertising fidence, on the other hand, is aroused by con- shouidbe tinuity in advertising. It gives the impres- continuous ...... . and not sion of stabihty and permanence, and people spasmodic, j-gspgct these qualities in a business house. Are seasonal goods to have only seasonal advertising? This depends upon the character of the goods. It would be folly to advertise Christmas and Easter novelties except in season. Again, it is a waste of money to adver- tise skates and sleds in summer, or swimming suits and straw hats in winter. With goods like summer under- wear, it is advisable to advertise the year roimd. It keeps the goods, and the name of the sellers before the public, and the continual reminding bears fruit, when the season arrives. The advertising of such goods when not in season carries considerable weight with the public, and gives the idea of value in the goods, and permanency in business. If such is not the case, people think that it would not pay to advertise. It is poor advertising to use large copy one day and none the next, as a product should be kept continually before the public. Successful advertising is continuous and not spasmodic. PRINCIPLES OF ADVERTISING 277 A copy writer should thoroughly know the goods to be advertised, as a careful knowledge of goods is as necessary as it is in selling. A salesman should Knowledge know good selling points of his goods, so that °^ 2°°**^* he may be efficient in seUing. A copy writer should be master of the selling points of his goods, and be able to express them in good, plain, forcible words, so that they arouse interest and attention, and make the public decide to buy. Many writers serve some time in the factory producing the goods to be advertised. Some occasionally visit factories making the same kind of goods as well as make frequent visits to their own. A copy writer should be a close student of human nature. He should know the classes whe^ buy his goods. This is absolutely necessary because an advertisement which will appeal to one class will not to Knowledge another. A writer should know the likes and ®^ buyers, dislikes of his buyers. This enables him to select those selling points which appeal, and to present them in a way to interest and convince. A copy writer should not for- get that he is presenting the selling qualities to convince the buyer. This is important because frequently space is taken in flattering the president, or some member of the firm. Space so taken represents so much loss. The sole consideration is the article advertised, and the aim is to present it to buyers in the most attractive and most convincing manner so that goods will be sold. A person is judged by the company he keeps, and the same is true of advertising. An advertisement fuses more or less with the medium in which it appears. Many me- diums advertise only cheap inferior goods, while others 278 ECONOMICS OF BUSINESS advertise those of the highest grade. Suspicion is at Quality of once cast upon the quaHty of diamonds if STd !l^de advertised in a medium filled with advertise- ^se. ments of cheap jewelry. A person advertising an article should select the medium where articles of the same quality are advertised. It is a waste of money for a seller of cheap jewelry to advertise in The Ladies* Home Journal or a seller of diamonds in Comfort. The question often arises as to what are the best draw- ing points of an article. The selection of the drawing Drawing points varies to a certain extent with the arti- advertise- ^^^ advertised. Those for one article may ment. not be possible for another. The selection should be left to the discretion and judgment of the copy- writer. A number of good drawing points as arranged by a well known authority is as follows: wholesome- ness ; durability ; reliability of firm ; pleasure connected with use of article ; and popularity of use. The following used by many copy writers are examples of bad taste : boasting; letters of recommendation; accounts of the prosperity of the firm ; and the extent of the plant. One of the first class tends to increase the confidence of the people, and this assists in making a decision to buy, while one of the second, arouses suspicion and de- creases the value of an advertisement. A command upon the reader to use the article adver- tised can frequently be made advantageously in the Direct com- ^^Py* ^ person ordinarily resents receiving mand: its a command to do an act. Nevertheless, he unpo ce. Q£|.gj^ refuses to obey the command, and yet later does the very thing refused, forgetting that the com- PRINCIPLES OF ADVERTISING 279 mand to act had been previously received, and now believ- ing that he is acting upon his own initiative. Many- people can suggest the doing of an act in such a way, that the person commanded, does so without realizing that he is following the command of another. If a writer can in a few, simple, direct, suggestive words force his command upon a reader, so that he acts unconsciously, he possesses a valuable power. A command so worded can frequently be used advantageously and increases the drawing power of a copy. Advertisers have always found it difficult to measure results from advertisements in various publications. ''Please mention this magazine" was formerly j^^^g ^^ the only method, and is still extensively i^ed. measuring Later, the person answering the advertisement ^" " ^* was asked to cut it out, and send to the advertiser. Finally it was discovered that the name was suflScient, so a blank in the advertisement was left for name and ad- dress with directions to send this. This is the origin of the return coupon, which was originally intended - , . . . -. . , , The coupon. as a means of obtammg mformation about the extent of the publicity of advertisements. The adver- tiser soon discovered that the coupon possessed great value in obtaining inquiries. Frequently a coupon makes an appeal, and induces the reader to answer an advertisement, and if it were not present, many would not trouble themselves about answering. The dotted lines marking off a coupon attract attention, and the coupon, at the same time, makes it easy to answer an advertisement. The return coupon is an important factor in advertising and deserves careful consideration. 28o ECONOMICS OF BUSINESS QUESTIONS 1. What is the function of advertising in our industrial system ? Account for its rapid growth. 2. What are the differences between national and direct advertising ? Give the essentials of each. 3. In what way is advertising a creative force in business ? How is it used to maintain the stability of a business ? 4. What are the aims in advertising ? Give the essentials necessary for each. 5. Name the different methods to attract attention. What are the essentials in the choice of a method ? 6. What is the function of an illustration? Why are illustrations preferred to pictures? Why are mere pictures objectionable ? 7. What is a copy ? What are the fundamentals in copy writing ? 8. Why does appealing to the senses increase the drawing power of an advertisement ? 9. What is individuality in a copy ? Give its importance. How is it obtained ? 10. Give the value of repetition in advertising. How can it best be obtained ? 11. Why is continuity in advertising important? What are the objections to spasmodic advertising ? 12. Why is a knowledge of the goods essential to the copy writer ? How is it best obtained ? 13. What are good drawing points? Mention several mistakes made in the selection of drawing points. 14. What is direct command? When can it be advan- tageously used ? What care should be taken in its use ? 15. What is the function of the coupon in advertising? Give its evolution. How does it assist in making the appeal ? PRINCIPLES OF ADVERTISING 281 REFERENCES W. D. Scott, "The Theory of Advertising"; T. A. De- Weese, ''The Principles of Practical PubUcity"; H. N. Casson, "Ads and Sales"; A. P. Johnson, "Library of Ad- vertising"; William A. Shryer, "Analytical Advertising"; S. E. Sparling, "Business Organization," Ch. XIII; H. Bridgewater, "Advertising," Chs. I-IX; T. D. MacGregor, "Pushing Your Business," Ch. I; F. A. Parsons, "The Prin- ciples of Advertising Arrangement"; "Business Administra- tion," edited by W. D. Moody, Vol. Ill; N. C. Fowler, "Building Business," Chs. I-IX; G. French, "Art and Science of Advertising"; W. D. Scott, "The Psy- chology of Advertising"; Calkins and Holden, "Modern Advertising"; E. T. Page, "Advertising"; G. H. Powell, "Powell's Practical Advertiser"; E. BalraTer, "The Science of Advertising"; E. W. Coleman, "Advertising Develop- ment"; P. T. Cherington, "Advertising as a Business Force" ; D. Starch, "Principles of Advertising." CHAPTER XIII MEDIUMS OF ADVERTISING An advertisement should not only be properly written, but be displayed where prospective buyers can read it. Anything used to display an advertisement is a medium. Mediums are of many varieties and include magazines, catalogues, newspapers, trade journals, booklets, house organs, letters, calendars, blot- ters, handbills, billboards, electric displays, street cars and novelties. Each has a distinctive value Varieties. in itself. One may be especially adapted for the presenting to the public of one article and not be suited to another. The medium chosen should be one which will be read by the people from whom future buyers can be obtained. Success in advertising depends not only upon the writing of the advertisement, but also upon the choice of the medium to reach prospective buyers. The choice of a medium demands a thorough study of the article to be advertised and the people to be reached. Essentials The method of distributing goods to be ad- choice of a vertised demands careful attention. Goods medium. distributed directly to consumers require dif- ferent mediums from those sold to jobbers. Advertise- ments for the purpose of creating or maintaining a general demand require different mediums from those used to 282 MEDIUMS OF ADVERTISING 283 cause direct demand. Another important consideration is the class of people to be reached. An article should be advertised in the medium read by the people to whom sales are expected to be made. To decide upon the proper medium, careful attention should be paid to the method of distribution, the character of the article to be advertised, and the classes of people to be reached. Some people call monthly pubHcations magazines, and weekly, periodicals. A weekly with a nation-wide circulation, Kke the Saturday Evening Post, „ • t» ^ Magazine. has, as far as advertising is concerned, the chief characteristics of a magazine, while the local weekly paper has those of a daily newspaper. Periodicals may be dismissed with the mention that ^hose possessing a wide circulation will be classed as magazines, and those with a local circulation as newspapers. The maga- zine offers a distinct field for advertising. It is the chief medium used for creating demand and, as such, is the favorite one with manufacturers. With the recent development of the mail-order business, the characteris- magazine has come into favor as especially magazine adapted to it. The magazine has a wide cir- advertising, culation, and is of service in advertising those articles for which it is intended to create a general demand or to sell over a large area. The average life of a magazine is from three to twelve weeks. People usually read it at their leisure, and if anything attracts them, take time to carefully read and reflect. Magazines are printed on better paper than newspapers and as such offer oppor- tunities for higher grade illustrations. One disadvantage is the time required to have copy ready in advance for 284 ECONOMICS OF BUSINESS appearance in the following issue. If the goods adver- tised are subject to sudden changes, as a result of trade or other conditions, a serious change may take place be- tween the time the advertisement is presented, and the date of its appearance. Magazines vary in quality and standard from Comfort to The Ladies^ Home Journal, Between these two extremes, there are many grades which are read by different classes of people. The charges in each vary with the circulation and the standard of the classes who read the magazine. The newspaper and the magazine are the two chief mediums in advertising. The newspaper is a very profitable medium when the article advertised has a local demand. Local merchants find it indispensable in giving publicity to their goods. The average newspaper has a life of a day and it is read by people in a hurry and those who do not take time to Character- reflect. The advertisement should be simple, !f™JlL. clear and direct. Too many articles should newspaper -^ advertising, not be advertised at once as it is advisable to make daily specialties. If advertising a single article, too many arguments should not be used in one issue, because it is better to confine each issue to one or two. Small type should always be avoided. The type used should be of sufficient size to allow the copy to be easily read. Cuts of specialties are very desirable. A very important factor, and one which should be especially em- phasized, is the price. Price is often a great drawing power. Merchants make a practice of having one or more leaders, with reductions in price to induce people^ to come to their store to buy. An easily readable ad- MEDIUMS OF ADVERTISING 285 vertisement and attractive prices are the two important features of local advertising. The character of a newspaper is determined by finding out the class of people who read it. The newspaper is read by large and varied classes. As there standards are many different classes of people, so there of news- are different standards of papers. In large ^^^^^^' cities, there is no absolute rule to be followed in the choice between morning and afternoon papers. A decision can be made only after a study of the habits of the people and of the goods to be advertised. Advertising that is to be quickly effective must include daily papers. News- papers fill a distinctive demand for local advertising, and extreme care should be taken in selecting a paper which is read by the people to whom the advertiser wishes to sell the goods advertised. The trade journal, as the name implies, is a paper pub- lished in the interests of a particular trade, or line of business. Every trade or business of impor- Trade tance has its distinctive trade journal. The Journal, circulation is small as compared with magazines or news- papers. The readers are interested in everything con- nected with the trade or business which the paper repre- sents. If advertising is confined to goods of its limited the trade, the advertiser can be certain that an ^®^^* appeal will be made to persons interested in them. The trade paper reaches probable buyers, and as such, forms a valuable medium for advertising. Manufacturers ad- vertise extensively to reach the consumer and increase the demand for their products. They in turn use the trade journal to reach dealers and jobbers in order to 286 ECONOMICS OF BUSINESS interest and convince them to carry the goods. Trade journals are receiving greater prominence as advertising mediums, and are being more extensively used by manu- facturers and jobbers. In selling by mail, the booklet has a special field and is a necessity. As the name implies, it is a little book of usually not more than ten thousand words Booklet. nor less than two thousand, published by a manufacturer, jobber, or retailer to assist in selling his goods. Booklets differ in shape, size and form. Oddity in size may with certain goods possess some attractive features, but business men usually find the simple book form preferable. The average customer wishes to learn facts about goods, and is attracted by having them pre- sented in a simple, businessUke way. The present tend- ency in advertising is toward simplicity in presentation. Simple, forceful business methods, stating facts and giv- ing arguments why goods should be purchased, give the best results, and should be strictly followed in booklets. The outward appearance deserves attention, and frequently decides whether or nSt a booklet is to be read before being discarded to the waste-paper basket. A booklet should be made of a fine quaUty of paper, and neat in appearance. Good paper, workmanship and taste tiais ^ selecting illustrations make a booklet refined for in appearance and attractive. Elaborate de- appearance, coigns, flashy colors, and freakish pictures should in every instance be avoided. Many prefer to have the cover contain a good half-tone picture illustrat- ing in some way the good to be sold. Many, however, prefer a plain colored cover with gilt lettering and edges. MEDIUMS OF ADVERTISING 287 A booklet should attract, interest, arouse desire to possess, and convince the reader to buy. The greater part of the selling must be borne by it. Many ggg^j^^j^g booklets miss this main purpose, and are dry, in writing uninteresting, rambling, and obscure, and as * °® ®** such, are a waste of money. Short interesting stories should be written explaining something about the arti- cle in the making or in use. Every story should be woven around the article and bring out some important quality or selling point. The story should be told in a conversa- tional, simple, interesting and direct way. Two or three such stories may be included in a booklet. Every pur- chaser is interested in knowing facts, and the presentation of these in a story requires considerable ability. The story should be supplemented with good half-tone illustrations, illustrating in some way the article. Book- lets connected with the sale of food products may give uses and illustrations of dishes made therefrom. This increases their importance to the housewife and insures their preservation. The booklet if properly written is a strong force in sciHng. Many advertisers make use of a serial booklet, that is, instead of making the appeal in one booklet, three or four are used. Each should present in an interesting way important selling points of the good, and should follow one another at short intervals. They should be sufficiently attractive and interesting to be read, and should be of such a nature as to bring out in logical order, the chief selling points of the goods. The book- lets should be accompanied by good personal letters, and if such are used, the serial booklet may possess greater draw- ing power, and carry more conviction than the single one. 288 ECONOMICS OF BUSINESS There are three classes of persons to whom booklets are sent: first, those who use the goods advertised Classes to and are always ready to buy ; secondly, those whom sent, ^j^q ggj^^j £qj. q^q ^^^ ^^^ interested ; thirdly, those who are only Kkely to buy and are sent a copy with a view to arousing interest. The first class will be always more or less interested in the booklet as long as it presents facts in an interesting way. Persons who send for a booklet will likely send for those of competitors, comparison will be made and each must hold its own Demands of not only in appearance, but in the presenta- bookiet. ^[q^ q£ £^(,|.g g^j^jj arguments, as to why its article should be purchased in preference to all others. An attractive, interesting and forceful presentation of the selling points of an article should be the characteris- tic of a booklet, in order that it may serve its purpose to attract, arouse and convince. Booklets should not be distributed promiscuously, but care should be taken to reach prospective buyers. A too free distribution lessens their force with the public. Good judgment and ex- treme care not only in preparation, but distribution adds to the selling force of every booklet. One of the recent developments in advertising is the The house house Organ. It is a publication, usually is- organ. g^g^j monthly by a manufacturer, jobber or retailer in the interest of his particular business. The ordinary newspaper or magazine form is best to attract and hold the attention of the people. The latter seems to be preferred but the size is usually much smaller than the ordinary magazine. The house organ has proved profitable and is a popular method of advertising. MEDIUMS OF ADVERTISING 289 Thousands of these little magazines are published monthly and are issued in every state in the union. House organs may be divided into three distinct classes: for agents, salesmen and branches; for con- sumers; and for dealers. The first class is Q^ssesof distinct in itself, and is not nearly so diffi- house 1 . 11 -r • • organs. cult to write as the other two. It gives m- structions, offers suggestions, and discusses new ideas and matters pertaining to the business in general. In- terest is maintained by articles on salesmanship, advertis- ing and other subjects closely allied to the particular busi- ness. Frequently important information of a general nature is found. The hardest task comes in writing a publication that will appeal to consumers and j^gggggj^ dealers. First, it must have an attractive ap- of good pearance, or it will often pass to the waste- *pp®*'*°^®- basket without being read. The chief consideration is to have the little magazine read. The cover, quality of paper, character of the work and quality of the pic- tures should attract and arouse interest. Many people judge a house by the quaKty and style of its printed matter. A poorly printed paper, poor quality of paper, unattractive and cheap in appearance, lowers the prestige of a house, and is not only injurious to business but a waste of money. The subject-matter should be carefully selected, well written and interesting. Articles on subjects related to the business, telling how materials are pur- Subject- chased, made or shipped, arouse interest in JJ,^e'° the average reader. The articles should organs, give information and facts to attract and hold interest. 290 ECONOMICS OF BUSINESS Sometimes items of a general nature may be used, but care should be exercised in not making their use too extensive. Everything should be written in a simple, conversational way, and should be so simply told as to be understood by the average reader. All technical terms should be avoided. The articles should be liberally sprinkled with good half-tone pictures relating to the Important Contents of the magazine. It is not advisable features. ^q burden the little publication with direct ad- vertising matter, so keep the publisher's business in the background. The house organ to dealers should keep them posted concerning new ideas about the goods made or handled. A serious mistake is often found in always trying to sell. On the other hand, the dealer should be given advice and suggestions as to how to sell his goods. It is as important to the manufacturer as it is to the dealer to remove the goods from the shelves. Interesting articles by well-known men on management, Character- salesmanship, advertising and topics of general rea^^g interest to dealers arouse interest, and insure matter. the reading of the magazine. Good judg- ment should be exercised in selecting a mailing list. House organs are sent to regular customers as well as to prospective buyers. They should not be scattered broad- cast or given out promiscuously. The house organ offers an opportunity to present in interesting form, facts and illustrations which educate prospective buyers to an imderstanding of the goods and of the house. A good house organ is an important factor in establishing con- fidence and getting new business. It is a new factor in advertising and its use is being daily extended. MEDIUMS OF ADVERTISING 291 A new demand for advertising has recently developed as the result of the increase of selling by mail. The mail- order business has proved a new source of Mail-order profit for magazine and newspaper. The writ- advertising, ing of advertisements to sell goods by mail tests the ability of the copy-writer. Advertising space is costly and every superfluous word means so much loss. A copy- writer should be a close student of human nature, know thoroughly the class of people to whom he is Buyer's to make an appeal, and be able to put himself viewpoint, in their position and see the advertisement as they would see it. If he can do this, it will assist him in the choice of selling points, and the presentation of these in the most attractive manner. If an advertiser is the seller of many articles, one of the purposes of the advertise- ment is to get the reader sufficiently interested to send for a catalogue. A new article should be specialized in each issue. This is far better than attempt- ^ f^ Essentials Ing to crowd many articles into one advertise- of adver- ment as nothing is so bad as crowding or confu- ^™^° ' sion in copy. The advertiser should pay particular atten- tion to the type, and see that it is of sufficient size to be easily read. One of the chief demands of a copy- writer in writing copy to sell goods by mail is that he be a master of the EngHsh language. It requires considerable skill and ability to express the selling points of an article in a con- vincing manner. The essentials of a good mail-order ad- vertisement are the cut, the price, a few statements about the article, a few arguments why a person should buy the article, clear readable type, no crowding, no superfluous words, the name and address of the advertiser em- 292 ECONOMICS OF BUSINESS phasized by having more prominent t3^e, and every- thing told in simple, clear and forceful English. The copy should bring results, directly or indirectly, through selling goods; if not, the advertisement does not pay for the money expended, and the copy-writer is a failure. If the advertisement arouses interest and brings an in- quiry by mail, the important problem is to convert FoUow-up the aroused interest into desire and determi- system. nation to buy the article. The following up of the inquiry or the follow-up system is daily receiving more attention. Many advertisements are for the purpose of obtaining inquiries. If an efifective follow- up system is in operation, many inquiries may be con- verted into sales. A letter should open the Importance. i . , i . / way, and m each letter some prmted matter should be inclosed. Extreme care should be exercised in the selection of what is to be inclosed; it may be either a folder, circular or booklet. The inclosure should carry a description and the chief selling points of the article. It should be carefully prepared and give specific reasons why the article should be adopted in ^ . preference to others. If no answer, it is not Require- ^ mentsfor advisable to send more than three letters, inc osure. ^^^j^ containing a different inclosure. All in- closures should aim at presenting in a clear, logical manner the selling points of the article and not more than one should be sent at a time. The letter is the vital part of the follow-up system. It is the connecting link between the individual and the goods. It should eliminate all business talk and serve MEDIUMS OF ADVERTISING 295 as an introduction. The main purpose is to put the prospective buyer in a responsive mood, and pave the way for the printed matter. The letter should draw at- tention to the inclosure. Good stationery Require. should be used. A letter on cheap stationery, ments of n . letter, gotten out m a slovenly manner, reflects upon the sender and has little value in getting business. The signature should not be typewritten, but signed with pen and ink, as it adds to the sincerity and purpose of the letter. Everything should be done to make the letter personal and as little formal as possible. The sending of a letter with a two-cent stamp arouses curiosity, as to whether or not, it contains something of importance, and invariably causes it to be read. A large majority of letters are sent with a one-cent stamp, and that very fact causes a great many to be cast into the waste-basket without as much as a glance. Booklets, catalogues, and letters without magazine or newspaper advertising are sometimes used to arouse interest, but the usual way is to use maga- zine or newspaper or both. In the former case, obtaining lists of names of prospective purchasers are "*^^**"®^- obtained and to them personal letters and inclosures are sent. Letters with booklets or catalogues are used alone and to advantage in selling single articles, but when many are offered for sale, they should be used as supplementary to magazine and newspaper advertising. The follow-up system is of equal importance with the advertisement in the mail-order business, and the two cannot be sepa- rated. Where many articles are offered for sale, the catalogue 294 ECONOMICS OF BUSINESS is a necessary prerequisite of the mail-order business. The cata- Where only one or two articles are advertised, logue. i-jjg booklet is sometimes semi-catalogue in form. The old-fashioned catalogue was usually filled with lists of conundrums, popular recipes, meaning of dreams, and generalities about goods adver- Old ionn» tised. The book was usually cheap in ap- pearance, poorly printed and unattractive. The increase in the mail-order business has revolutionized the cata- logue. Many mail-order advertisements have for their chief purpose, the getting of the catalogue into the hands Prepara- oi buyers. Mail-order firms frequently tion. j.giy upon the catalogue not only to interest but to sell goods, and such being the case, too great emphasis cannot be placed upon its preparation. It should not be cheap in appearance, Appearance. , , . have an attractive cover and contam many illustrations of goods. The catalogue should interest, convince and sell goods, and great care should be taken in the preparation of its contents. Technical terms should not be used because they are not un- derstood by the average reader and generalities should in every instance be avoided. Goods should be ex- plained in a way to arouse interest, to show their superiority over others and why they should be purchased. Illustrations should be well executed and show the goods as they really are. People Contents. , ^ , / "^ , . ^ , prefer to see what they are buying, and if they are not able to do so, the only other way is to see an illustration. The price should not be too much in the foreground because it will be found no MEDIUMS OF ADVERTISING 295 matter where it is placed. The catalogue often decides the success of a firm yet many pay little attention to it. Colunms of figures, numerous dimensions and prices are dry, and do not make a catalogue attractive, interesting or convincing. Facts brought out in a clear, concise form are what arouse interest and convince. The one goal should be to convince the reader that the goods adver- tised should be purchased in preference to others. This should be borne in mind because it is the chief considera- tion in selling. The catalogue is the great force in selling by mail, and the greatest pains should be taken in its preparation. A medium which has recently increased in importance and use is the calendar. Calendars are universally distributed and are seen everywhere. For- 11 - - . 1.1 Calendar. merly they were confined almost exclusively to the insurance business, later they were extended to rail- roads and banks, while at present, they are used by manufacturers, jobbers and retailers. They are generally used to advertise a firm rather than a product. Calen- dars may be divided into two classes, olSice and home. The mounting of an office calendar should be plain and simple, without pictures or illustra- tions, and with the. days and numbers displayed in large t3^e so as to be easily seen across a "^ Essentials. large room. The wording should be hmited to the name of the advertiser, and one or two simple for- cible statements about the high standard of his business methods, or the goods made or distributed. The calendar for home use is of a different character. The mounting is more or less artistic and fre- 296 ECONOMICS OF BUSINESS quently coloring effects are used to advantage. Many exaggerate the display and by so doing decrease the value of the calendar for advertising. It should always be born in mind that the chief value of the calendar is its mission to serve as such. The display should be at- Essentials. , . i i i it . /^ tractive with the days and numbers in suffi- ciently large type to be read at a distance. Many calendars lose a large part of their advertising value by having the calendar in small type, and in an inconspicuous place. Many of those so made are not preserved, and at an early date, find their way to the waste-paper basket. The calendar which is kept and serves as a valuable advertising medium is one having a mounting containing a design suitable to the business or a pleasing one of a general nature, the calendar displayed in clear prominent type, the address of the advertiser, and one or two simple statements concerning the firm advertised. The blotter is used in various shapes, sizes and quan- tities for advertising. It is a cheap medium, but never- theless proper judgment should be given to Blotter. , . Ill 1 • its use. The advertiser should present his blotter in a form that will be used and not discarded. Care should be taken in the use of colors, as flashy colors detract, and decrease the value of the medium. A Require- blotter attached to a good quality of paper and ^nts for a ^^^^ ^^ ^ blotter on one side gives the best blotter. results. A neatly and artistically designed cover, consisting of a picture, the name and address of the advertiser, one or two forcible arguments in behalf of the firm or product advertised, and attached to a good quality of blotting paper gives the best value as a blotter. MEDIUMS OF ADVERTISING 297 The service of the blotter is increased by having the calendar of the month in large, clear type. Such blotters should be distributed at the end of each month. Blotters serve only as a supplementary medium, and if properly designed, give good returns for the money ex- pended. Retail merchants find handbills a valuable advertising medium. Price and value are the important factors to be considered. Handbills are used to at- „ ,, .„ ,,.,.. , HandbiUs. tract people to stores, and their chief value con- sists in offering such attractions as induce customers to go to the advertising stores to buy. The chief attrac- tion is the price. A few articles in constant _ . Pnce. demand should be selected, and advertised at a sufficient reduction in price to induce people to come to buy. The bargain advertised should be real and not fake. The average American buyer has a good idea of values, and knows when an advertisement is deceiving. Many advertisers lose a great part of the value of their adver- tising by trying to deceive the buying public. A mer- chant should remember that the most valuable asset of his business is the confidence of the people in his importance methods and in his goods. He should be care- °^ ^^"®' ful to do nothing to shake this confidence. Advertising fake values is more costly than no advertising. The service in the store, and the value given should be such as to induce a new customer to return and become a regular one. This is the great value of adver- „^ , , . . ,T r 1 ^ , , Effects of tismg. How often have we heard a buyer re- advertising mark on reading a handbill, "I will not go **^«^^"«s- because before he advertised fakes.'' Merchants should 298 ECONOMICS OF BUSINESS advertise and give real values, and handbill advertising will be profitable. Many know they are deceiving, but make the mistake of thinking others do not. Merchants should remember that every fake, or deception is a boomerang which reboimds with double force on the ad- vertiser. The giving of samples is one of the oldest methods in advertising, and one which is still extensively used. Free- Free sample advertising was originally confined to samples. ^-j^g ^jj-^g ^^^^ patent medicine business, but re- cently manufacturers of food products are making use of it. The sample should be well packed in attractive covers and contain sufficient to give a person an idea of Essentials the quality of the contents, and make him wish of^s^*^^ for more. Advertising by free samples is method. limited to certain products. Interest in some articles can be aroused by samples, while it is a waste of money with others. The advertiser should carefully study his product, and the people to be reached, before deciding upon the adoption of this method of advertising. The free-sample method should not be used Risks. . imless the article is adapted to its use. The great risk is obtaining honest distribution. Many manufacturers send out their own employees, and others distribute through reliable distributing agencies. The success of samples depends largely upon their method of distribution. Those given away promiscu- ously at fairs, or upon the street, do not have the value that they would if properly distributed. Out-door advertising in its various forms occupies a very important place in advertising. Many manufac- MEDIUMS OF ADVERTISING 299 turers and jobbers spend yearly large sums on this kind of publicity. It makes possible the reaching of classes of people which other mediums do not. Necessity of out-door Magazines and newspapers are read by the advertising, educated and intelligent classes, but many in this enHghtened country very seldom read either. Again, many people are so occupied in their business affairs, that they do not take time to read or give thought to advertising matter. To these classes, the out-door ad- vertiser displays illustrations or short sentences along railroads, country highways, or city streets where these people pass. Out-door advertising can be divided into four classes, — posters, painted signs, electrical displays and Kinds of miscellaneous. The first class consists of dis- advertising, plays of painted bills or posters. These are displayed on buildings, fences, or specially constructed stands. Illustrations are invariably used as a means of attracting attention. Coloring is used to a greater extent than in any other medium of advertising, as frequently many colors are used in an illustration. Posters are measured in terms of the unit sheet, twenty-eight by . . , , . \ , . Posters. forty-two mches and a smgle advertisement usually varies in size from three to twenty-eight of these sheets. The prices vary with the kind of illus- tration used, the size of the poster, the location of the stand, and the quantity ordered. Recently a new development of bill-posting has come into prominence. The billboard is illuminated at night by electricity, and this makes the advertisement more valuable at night than during the day. 300 ECONOMICS OF BUSINESS The designing of a poster, and the writing of the copy require considerable skill and decide its value as an ad- Essentiais vertising medium. The illustration should be iK)st*er^a4- Connected with the goods advertised in such a vertisement. way as to familiarize the public with their form as offered for sale, or with their good qualities. People read signs while passing, and consequently the whole message should be read at a glance. Crowding is a serious fault in a copy. People fail to grasp crowded copy at a glance, and few succeed in getting the message. Strong arguments in favor of the goods, or forcible sug- gestions should be given in a few chosen words. To make a poster simply a reminder is poor advertising. It should emphasize strong selling points or offer forcible suggestions. A poster should be well printed, have a good illustration and a carefully worded copy. The painted sign on a fence, rock or the side of a build- ing has long been familiar in most civilized coimtries, but The painted only within recent years has its use as an ad- sign, vertising medium been reduced to a business basis. Signs may be divided into two classes, regu- lar and chance. The regular is usually painted on a stand built and maintained for the purpose. Ex- amples may be seen along public thorough- fares, and the streets of towns and cities. The chance sign is painted on fences, rocks or buildings. It is of a more temporary nature than the former, as the fence or building may be taken down, de- stroyed, or its painted area hidden by the erection of buildings. The same skill and care in choosing the illustration, and MEDIUMS OF ADVERTISING 301 in writing the copy is required as with posters. The price is based upon the square foot, or the run- Require- . r r 'lA 1 ' 1 nients of a nmg foot of space occupied. A stand or a side sign. of a building is usually charged by the square foot and a fence by the running foot. The price varies with location, and many choice locations are sold Pnce for to the highest bidder. The price for fences "^ns. around buildings or vacant lots usually runs from twenty- five to fifty cents per running foot per month. This price is based upon yearly contracts, and includes the original painting, and repainting at the end of six months. The charge for town and city stands averages about five dollars a month for fifty square feet with an increase if elaborate pictorial illustrations are required. Contracts are usu- ally made for a year, and few are taken for less than six months. Electricity has been an important factor in our recent industrial development, and its influence has been felt in every field of industrial activity. Its use in jhe electric advertising has been so increased that the elec- ^*^- trie sign is recognized as an important medium of pub- licity. Less than twenty years ago, the first electric sign made its appearance on Broadway, and within its recent these two decades, electric advertising has be- srowth. come an established business, representing an invest- ment of millions of dollars, and in use in every part of the civilized world. The sign should not fail to attract and draw attention to the article advertised. It matters not how attractive a sign may be, it is of little commercial value if it does not rivet the observer's attention on the article. 302 ECONOMICS OF BUSINESS The Chariot Race, the most attractive sign on Broadway, has Uttle commercial value, as not one per cent of the Essentials people who See it notice the names of the attoactive advertisers. The choice of an illustration for sign. an electric sign is one of the most impor- tant tasks in advertising. It demands the skill and abiUty of an expert. It should assist the copy in riveting attention on some selling point of the article. The commercial value of every electric sign depends upon the convincing manner in which the selling points of the article are forced upon the observer. Many advertisers fail to reahze this, and as a result, a great part of the drawing power and value of an electric sign is lost. The wording of a copy demands careful study and abiHty. The whole sign must be received at a glance, so the copy should not be crowded but con- Essentials -^ ^ for a good sist of a few well-chosen words. The words ^^^' should tell the selHng story convincingly and forcibly. The choice depends entirely upon the article advertised. No one set of words can be used for two different articles. The article to be advertised should be carefully studied, its strongest selUng points discovered, and a few words chosen to forcibly draw the attention of the observer to one or more of these. An electric sign is not a primary source of advertising, but should be used as an auxiliary to magazine and newspaper. It is not adapted to all articles but only to those in constant demand and everyday use. Manufacturers and jobbers find the electric sign a valuable auxiliary in national advertising, while it is being more extensively used in retail publicity. MEDIUMS OF ADVERTISING 303 The fourth class of out-door advertising cannot be easily defined as it is limited only by human ingenuity. It includes the use of advertising vehicles, j^jsj^guj^^g, motor cars, floats, banners and persons. This ous adver- class occupies quite a prominent place in ^^^^' advertising. Thousands of manufacturers, jobbers and retailers use one or another of these novel _. ^ Kinds, methods for gaining publicity. The modern street car has proven of service not only for carrying passengers, but as a medium for advertising. A large percentage of the population of a town j^^ street- or city rides daily in the street cars. Many of c" as a medium the passengers have nothing to engage their foradver- attention other than the people in the car. *^®"^^* Advantage was taken of this enforced idleness, and from a meager beginning a few years ago, street-car advertising has developed into a well-organized business, bringing in a yearly revenue of several milHon dollars. Street-car signs are daily read by people of every class from the poorest to the wealthiest. They reach not only consumers, but jobbers and retailers, classes Street-car signs, in serving as a national as '®*^^®<^- well as a local advertising medium, place manufacturers, jobbers and retailers on an equal footing. Street-car ad- vertising, however, is not of sufficient force to stand alone, but should be used supplementary to magazine or newspaper. It is not adapted to all classes of goods and judgment should be used in its adoption. The article to be advertised should be considered, and if an article of popular consumption and in daily demand, the street car will prove a valuable supplementary medium. 304 ECONOMICS OF BUSINESS The size of a street-car card is eleven by twenty-one inches, and this gives a limited space for advertising Requisites matter. The first consideration is to attract advertise^ attention, and the best attraction is a good ment. illustration of the article or one of its uses. The copy should not be crowded nor should meaning- less words be used. The copy should consist of a few well-chosen words giving a reason why the article should be purchased, or offering a suggestion why the article would be of service to the user. No more than one selling point should be used in a single copy. The copy should be changed frequently, the illustration remaining, but a different selling point used each time. If the advertisement is for local publicity, the name of the advertiser should be emphasized by being placed in larger type. The copy must be read at a distance so it should be in large clear type. A street-car advertisement is more than a reminder. It should carry a strong direct appeal to purchase the article advertised. As much, if not more skill is required in writing copy for street-car cards as for magazine advertising. Novelties play an important role in advertising. Everything used in advertising outside of that prepared by a printing press may be classed under the term advertising novelties. Advertising novel- ties comprise everything of a manufactured nature, such as clocks, penholders, pencils, paper weights, inkstands, rulers, articles of paper, wood pulp, bone, in novelty wood, tin, copper and brass. A novelty may advertising. ^^ ^^^^lev something of practical use to the prospective customer or of value as an ornament. It is MEDIUMS OF ADVERTISING 305 absurd to have for an advertising novelty an article of no use to the receiver. It should have a use or it will not be preserved. The name of the advertising firm should be distinct and plain, but not too conspicuous. A novelty which is so covered with advertising as to be of no practical use to the receiver is worse than none. A novelty should have sufficient interest or usefulness to be attractive. Novelties should not be given away pro- miscuously but should be distributed with judgment. They may be of considerable value as an advertising medium, or represent a loss. Everything depends upon the judgment of the advertiser in the choice of the article, its attraction or usefulness, and its method of dis- tribution. QUESTIONS 1. What is a medium? Name the different varieties. What are the essentials in the choice of a medium ? 2. When are magazines to be used in advertising ? What are the characteristics of magazine advertising ? 3. What is the function of the newspaper in advertising? What are the fundamentals of newspaper advertising ? 4. Why is the field of the trade journal limited in adver- tising ? 5. Why is good appearance important in a booklet? What are the essentials in writing a booklet ? 6. What is the purpose of a house organ ? Name the differ- ent kinds, and give the essentials of each. What are the essentials of text-matter for a house organ ? 7. What are the essentials for advertising to sell by mail ? Why is it necessary for a copy-writer to be a student of human nature ? 8. What is the purpose of the follow-up system? Why should the inclosure receive careful attention ? 3o6 ECONOMICS OF BUSINESS 9. What are the chief requirements for a letter ? Why is the letter an important factor in advertising ? 10. What is the function of the catalogue in advertising? What are the fundamentals for a catalogue ? 11. When may calendars and blotters be advantageously used in advertising? What are the requirements for a calendar ? What for a blotter ? 12. What are the chief factors in handbill advertising? What is free sample advertising ? 13. Account for the growing importance of poster adver- tising. Name varieties and give characteristics of each. 14. What are the essentials for an effective electric sign ? What goods may be advertised in this way ? 15. What are the advantages of street-car advertising? What are the requisites for a good car sign ? REFERENCES T. A. De Weese, "The Principles of Practical PubHcity"; H. N. Casson, "Ads and Sales"; G. H. Powell, "Powell's Practical Advertiser"; G. H. E. Hawkins, "Poster Adver- tising"; Calkins and Holden, "Modern Advertising"; H. Bridgewater, "Advertising, " Chs. X,XIII ; T. D. MacGregor, "Pushing your Business," Chs. II, III, XI; S. Grayden, " Some Notes on Catalog Making" ; System Company, "How to Write Letters that Win"; C. Moran, "The Business of Advertising," Chs. Ill, V, VI; N. C. Fowler, "Building Business," Chs. X-XLIII; "Business Administration," edited by W. D. Moody, Vol. Ill ; F. Bellamy, "Effective Magazine Advertising" ; H. Bunting, "Specialty Advertising" ; F. Far- rington, "Retail Advertising"; E. T. Page, "Advertising"; E. Balmer, "The Science of Advertising"; P. T. Chering- ton, " Advertising as a Business Force," Ch. IV ; J. A. Mac- Donald, " Successful Advertising ; How to Accomplish it." CHAPTER XIV MONEY AND CREDIT Exchangeability is one of the most important essen- tials of our industrial system. Its early form, or the trading of one article for another, is known Evolution as barter, and is found among all primitive o^ money, people. The barter system, in the earHest stages of civi- lization, caused great inconvenience to primitive people. If a native had a spear to dispose of, he had to wait until he met another who wanted a spear, and at the same time, had a hatchet to give which he wanted. Should the spear and hatchet come together, exchange or barter might be prevented because one of the natives thought his article worth more than the other. The inconven- iencies connected with barter soon led to the selection of an article acceptable to the people, and freely receivable in exchange for all articles. This article chosen to serve as the medium of exchange is called money, no matter what its material or form. The commodity chosen to serve as money during the early days of economic development, was usually one of general demand. It is claimed that the i^^tenais earHest money consisted of articles used for used as personal adornment. Shells, beads, beaver ™°°®y* skins, dried fish, cattle, tea, salt, cocoanuts, slug shots, corn and wheat are a few of the articles which have been at dif- 307 3o8 ECONOMICS OF BUSINESS ferent times and in different places used as money. Metals were gradually introduced, and they soon took the place of other commodities. As communities progressed, and exchanges increased, the base metals, lead, tin, iron, copper and bronze, were supplanted by silver and gold. Gold is the best adapted of all metals to serve as a medium of exchange, and this explains its universal adoption as money. Money performs several functions in industrial society. The first and earliest function to develop was to serve as Functions a medium of exchange. With the develop- of money, ment of this function, other articles began to be measured in terms of the medium, and this gave Medium of US the second function, namely, to serve as a exchange, standard of value. The beginning of the practice of hoarding precious metals introduced a third function, a store of value. People when they hoarded standard of their wealth wanted some assurance that when value. ijjey wished it, its value would not be materi- ally changed. Money to-day is not as a rule kept by the average man long enough to make its function as store of 2, store of value very important. Neverthe- ^"®* less in business, a great deal depends upon faith in the safety of the value stored in gold, and this is the quality which gives gold its strength as a reserve fund to sustain credit instruments and credit currency, standard When the ownership of property became more f erred" secure, loaning took the place of hoarding, and payments, the Contracting of debts introduced the ques- tion of the value of the money in which debts were in the futiire to be paid. Debts may be made payable MONEY AND CREDIT 309 in any commodity but they are usually payable in money which becomes the standard for deferred payments. Credit did not assume any importance until money had acquired the four preceding functions. The develop- ment of credit increased the importance of the store of value function, and at the same time, introduced the fifth and last function, to serve as a reserve for . ^ . , A basis for credit operations. The amount of money credit necessary to maintain credit varies in dijBferent °p®^***<*°s- countries, and in the same country at different times, but it should be sufficient to maintain confidence, which is the basis of credit transactions. Many years elapsed between the first use of metals as money and the introduction of coinage. Coinage is the stamping of a piece of metal for use as money so as to make known its denomination, value, ^"^ ** weight and fineness. Gold and silver are too soft in their pure state to stand the wear of ordinary usage. In order to make the coins more durable, the pure standard metal is hardened by being mixed with copper. ™®*^* The hardened metal is called standard to distinguish it from pure metal. The practice in the United States and in many foreign countries is to use nine parts pure metal to one part copper alloy, and coins made from this compound are said to be nine tenths fine. The value of alloy in this country is not coimted in the value of the coins, so the amoimt of pure metal is the only truth of importance to be associated with a coin, as for instance, the ten-dollar gold piece should be known as containing 232.2 grains of pure and not 258 grains of standard gold. 3IO ECONOMICS OF BUSINESS Free coinage implies a right to take metal to the mint in unlimited quantities and have it converted into coins. The government frequently restricts to itself the right of coinage. It buys pure metal, converts Free and ^^ ^^^^ coins, and does not allow the people to restricted exchange the metal at the mint for coins. In the United States, there is free coinage of gold, but the government restricts to itself the coinage of all other coins. Standard money is money of which the value depends upon the value of the material contained, the stamp serving merely as a guarantee of the quantity of pure metal. Such coins are received everywhere, because Standard they contain their face value in the pure metal s^^y^" of which they are made. Gold coins are the coins. only examples of standard money in our country. Token or subsidiary money consists of coins whose bullion value is less than their face. All coins except gold in the United States are subsidiary. Current subsidiary coins may be divided into three classes : the silver dollar ; subsidiary silver consisting of dimes, quarters, and half dollars ; and minor coins consisting of cents and nickels. The redemption of subsidiary coins in standard money is one of the chief ways of adjusting the amount „ J ^ coined to the actual needs of the people. The Redemption '^ ^ of sUver only way to adjust the supply to the demand is to allow all who wish subsidiary coins to obtain them in exchange for lawful money, and to be given lawful money whenever they present them in suitable sums for redemption. The Treasurer of the United States redeems in lawful money on demand, all subsidiary MONEY AND CREDIT 311 coins except silver dollars when presented in sums of twenty dollars or any multiple thereof. The silver dollar is not kept at a parity with gold by means of the existing system of redemption. There is no law requiring the Treasurer, in express terms, The sUver to redeem silver dollars in gold. Several at- ^**^*^- tempts have been made to obtain such a law, but the silver followers have always been strong enough to defeat it. The method of removing an oversupply of silver dollars from circulation may be called indirect redemption. The Treasury in all payments to itself receives silver dollars on an equality with gold, and in making payments does not give silver dollars to any one not wishing them. As long as the Treasury receives silver dollars on an equahty with gold, and pays out only gold, there is a complete system of redemption although it is indirect. The Treasury is duty-bound and forced by statute to maintain the silver dollar at a parity with gold. The indirect system is not perfect, and the only way of ward- ing off emergencies which might destroy it, is to pass a law providing for the redemption of silver dollars in gold. When individuals are allowed to take gold or silver bullion to the mint and have it coined without charge, coinage is gratuitous. The expenses in- charges for volved are charged upon the nation in the coinage, same way as ordinary pubHc expenditures. The govern- ment sometimes asks a fee just sufficient to cover the expense of coinage, and sometimes makes a charge so that a profit remains after paying the mintage charges. The former method is known as 312 ECONOMICS OF BUSINESS brassage, and the latter as seigniorage. In this country, Brassage. the term seigniorage is used to designate the Seigniorage, profits obtained by the government from the coining of subsidiary and minor coins. This profit, which has in recent years amounted to many milHon dollars, would disappear if the government were called upon to redeem these coins in gold. Actual profits result only with coins put in circulation and later lost or destroyed, so that they are not presented for redemption. The Constitution gives to Congress the sole right to coin money and to regulate its value. It forbids the Right to states to coin money or make anything coin money, except gold or silver coin legal tender in pay- ment of debts. Our present coinage system was in- troduced by the Mint Act of 1792. This act author- ized the establishment of the mint and the use of the decimal system in the keeping of accounts. The chief gold piece was the eagle weighing 247.5 grains pure and 270 standard. Half and quarter eagles containing proportionate amounts of gold were also provided for. The fineness of metal in the coins was copied after that of England, and made eleven twelfths. The mint in 1795 coined a number of half eagles, the first gold coined under the Constitution. The fineness in 1837 was changed to nine tenths, and at the same time, a change was made in the weights of the coins. The eagles were changed to 232.2 grains pure metal and 258 standard, while the half and quarter eagles were changed proportionately. The double eagle and gold dollar were introduced in 1849, ^^^ the three-dollar piece four years later. The coinage of the last two MONEY AND CREDIT 313 coins was suspended by an act in 1890. Gold coins are accepted, at their face value, the world over, and as a result, more than half the gold minted in the United State is held in foreign countries. During the early part of the sixteenth century, a lucrative trade was carried on between many of the colonies and the West Indies. Many Spanish coins foimd their way into the colonies, and soon became the current coins in circulation. The best known of these was the Spanish dollar, and many suver colonies passed laws regulating its legal doUars. tender powers. The original American silver dollar, as provided by the Act of 1792, was modeled after the Spanish dollar, and weighed 371.25 grains of pure and 416 of standard silver. The standard weight of the dollar was changed in 1837 to 412.5 grains but the amount of pure silver was left unchanged. This change fixed the fineness at nine tenths, and both weight and fineness are the same to-day. From 1837 to the passage of the coinage act in 1873, 371.25 grains of pure silver were worth more as bullion than coined into silver dollars, and as a result, few dollars were coined, and practically none found their way into cir- culation. The government did not think it ^ . . , *=* Omission of necessary to have the silver dollar among the sUver authorized coins of the country, and in the ° "^' Mint Act of 1873 which revised the list of coins, it was omitted. The same act, in order to assist the American trade in the East, authorized the minting of a Trade silver dollar weighing 420 grains standard ^°"^* and 378 pure silver. By accident, the new silver dollar, or 314 ECONOMICS OF BUSINESS trade dollar as it was called, was given the same legal tender power as subsidiary silver coins and soon confusion arose. The coinage of these dollars was discontinued in 1878, and in 1887 an act was passed authorizing the Treasurer to redeem in silver dollars or subsidiary coin all presented within a period of six months. Those not redeemed are only worth the value of the pure silver which they contain. Soon after the passage of the act of 1873, silver became cheaper. The following year the silver bullion in the stand- ard dollar could be purchased for 98.8 cents, and in 1876 for 89.4 cents. The friends of silver started a movement for the restoration of the old silver dollar, and in 1878 were successful in obtaining the passage of the Bland- Bland- AlHson Act. This act restored the minting Allison Act. of the old Standard dollar but Hmited its coinage to the government. The government was au- thorized to purchase not less than two milHon dollars' nor more than four million dollars' worth of silver monthly and to coin the same into standard silver dollars as authorized by the Act of 1837. The Bland- Allison Act remained in force until 1890, and during that time 378,166,793 silver dollars were coined. The friends of silver obtained further concessions under the Sherman Sherman Act in 1890, when the Treasurer was com- ^*** pelled to purchase four and a half million ounces of silver a month, and to issue Treasury notes in payment for the same. The silver purchased was to be minted into standard silver dollars at the rate of not more than two million ounces monthly until June i, 1891, and after that date, the minting should be limited to MONEY AND CREDIT 31^ the amount needed to redeem the Treasury notes issued under the act. The Sherman Act was repealed in 1893, but silver dollars continued to be minted in small quantities until the end of 1904, and none have since been minted. The mint has coined 578,353,848 silver dollars, and of this amount, nearly 90 per cent is at present stored in the Treasury vaults at Washington. The Mint Act of 1792 authorized the issue of silver half dollars, quarters, dimes and half dimes, propor- tionate in weight to the silver dollar. The Act subsidiary of 1837 reduced their weights in proportion to ®*^^®' ^^^^' the new standard weight of the silver dollar, and made their fineness nine tenths. The first important change was made by the Act of 1853. The high price of silver as compared with gold made the silver in the coins worth more as bullion than coined. The result was that the silver coins were taken from circulation either for melting purposes or for export to foreign coun- tries, where they were sold at their bullion value. The coins disappeared from circulation, and in order to cause their return the Mint Act of 1853 reduced by nearly 7 per cent the weight of silver in the silver coins less than one dollar. This would make it unprofitable to melt or export the coins, and it was thought that they would return to circulation. A three-cent silver piece was provided by an act of 185 1, and it and the five-cent piece were discontinued by the Act of 1873. In 1875, a twenty-cent piece was authorized but its coinage was discontinued three years later. The half dollar, quarter and dime are minted in sufiicient quantities 3i6 ECONOMICS OF BUSINESS to meet the demands of business, and the amount of each annually coined is decided by the Treasury Department. A copper cent and half cent were authorized in 1792. An act in 1857 discontinued the latter, and provided that the former should be reduced in size, and in future be Cents and made out of a compound of copper and nickels. nickel. The three-cent nickel piece was au- thorized in 1863, and our present nickel in 1866. An act in 1864, introduced our present cent piece and also a two-cent piece of the same metal.' The Mint Act of 1873 discontinued the two-cent and that of 1890 the three-cent nickel piece. Minor coins are furnished free of transportation charge from the Mint at Philadelphia and are obtainable in exchange at any subtreasury. In order to raise funds to carry on the Civil War, the government in February, 1862, passed an act authoriz- United ing the Secretary of the Treasury to issue or*ir*een-*^^ $150,000,000 in treasury notes on the credit of backs. the United States, not bearing interest and payable to bearer. In the following June, another issue of the same amount was authorized and in January, 1863, $100,000,000 more, bringing the total to $400,000,000. In June, 1864, Congress authorized a temporary issue of $50,000,000, and as soon as these notes were canceled, the maximum circulation should be fixed at $400,000,000. United States notes or greenbacks, as they were later called, soon won many friends. After the war, when the question of their redemption arose, there was tionof much opposition. Nevertheless in 1866, an greenbacks. ^^^ ^^^ passed authorizing cancellation to the amount of $10,000,000 for the first six months, and not MONEY AND CREDIT 317 more than $4,000,000 a month thereafter. The friends of greenbacks eventually won, and the act was repealed in 1868, but during its enforcement, $44,000,000 were canceled, which reduced the maximum to $356,000,000. The Secretary of the Treasury, to reUeve the panic of 1873, issued $26,000,000 of the $44,000,000 which had been previously canceled. This increase was legalized ^ by special act of Congress the following year, and brought the maximum to $382,000,000. Many believed that the time had arrived for the redemption of greenbacks with gold, and in December, 1874, a measure later known as the Redemp- Redemption tion Act passed the Senate, was agreed to by baSsln" the House, and became a law on January 14, gold- 1875, It authorized the redemption of greenbacks in coin on and after the first of January, 1879, when pre- sented at the Assistant Treasurer's office in New York, in sums of not less than fifty dollars. The Secretary of the Treasury, in order to raise the necessary funds, was authorized to use any surplus in the Treasury not otherwise appropriated, and to issue and sell for coin at not less than par. United States bonds. Certain re- strictions were removed from the issue of national bank notes and in order to prevent inflation of paper currency, the Secretary of the Treasury was authorized by the act to cancel United States notes to a sum not exceeding 80 per cent of the increased bank-note issue and at the same time not to exceed $82,000,000. Cancellation slowly proceeded until an act was passed May 31, 1878, which forbade the further cancellation of greenbacks, and at the same time, authorized the reissue of any 3i8 ECONOMICS OF BUSINESS redeemed. When the act went into force, the amount in circulation was $346,681,016 and this arbitrary sum is to-day the maximum Umitation on the issue of greenbacks. Since the first of January, 1879, the govern- ment has redeemed in gold all greenbacks presented for redemption. The Currency Act of igcx) provided a reserve of $i5o,ooo,cxx) in gold coin and bulHon for the sole purpose of redeeming legal tender notes on demand in gold. A gold certificate is a warehouse receipt for gold coin or bullion on deposit at the United States Treasury at Wash- Gold certifi- ington. Gold certificates were authorized in cates. j352 but the first were not issued until two years later. The smallest denomination is ten dollars and the largest ten thousand. Gold certificates are a favorite currency with the people, as is shown by the fact that nearly $950,000,000 are in circulation. The silver certificate is a warehouse receipt issued by the government for silver dollars on deposit in the SUver cer- Treasury vaults at Washington. They were tificates. authorized by the Bland-Allison Act. The lowest denomination at first was ten dollars, but in 1886 one-, two-, and five-dollar certificates were authorized. During recent years, it has been the policy of the govern- ment to confine all currency under five dollars to silver certificates. The Secretary of the Treasury was authorized to issue treasury notes of not less than one dollar or more Treasury ^^^^ ^^^ thousand dollars to pay for the notes. silver bullion purchased under the Sherman Act of 1890. These notes were redeemable in coin, MONEY AND CREDIT 319 and could be reissued. As the silver bullion was coined into silver dollars, the treasury notes were canceled, the silver dollars placed in the Treasury, and silver certiiBicates issued in their stead. Nearly $156,000,000 of these notes were issued but all have been redeemed and canceled except between two and three millions, so they are at present rarely seen in circulation. In the United States, bank note circulation is confined to national banks. State banks are not prohibited from issuing notes but do not do so, on account of a Bank prohibitory tax of 10 per cent, authorized in *^°*®^- 1865 and levied on all notes used for circulation as money except those of national banks. National banks are com- pelled by law to keep on deposit with the United States Treasury at Washington, United States bonds, dollar for dollar, for all bank notes issued, and are not allowed to issue an amount greater than their paid-up capital. The ordinary denominations in circulation are five, ten, twenty, fifty, and one hundred. Denominations of one and two were issued imtil the redemption of green- backs in gold, and five-hundred and thousand-dollar notes are authorized, but none of the former and only a few of the latter are in circulation. Only one third of the notes issued by any bank can be of the denomina- tion of five dollars. Each bank must redeem its own notes on demand, not only over its own coimter but also at the Treasury Department in Washington. To provide for redemption at Washington, each must keep on deposit at the Treasury in lawful money a sum equal to 5 per cent of its circulation, to be held for the redemption of bank notes, when presented in sums of one thousand 320 ECONOMICS OF BUSINESS dollars or any multiple thereof. Bank notes are printed by the government at the expense of the banks. De- faced or mutilated notes received at the Treasury are replaced by new ones at the expense of issuing banks. Legal tender is money which a creditor must accept in payment of debt. Gold is the only money in the Legti United States which possesses full unlimited tender. jggg^j tender power. Silver dollars possessed full legal tender power until the Revision Act of June 20, 1874, when by error their legal tender was Gold coins. limited to five dollars. The Bland- Allison Act in restoring the silver dollar, stipulated that it should saver possess full legal-tender power, for all debts doUars. public and private except where otherwise stipulated in contract. Half dollars, quarters, and dimes until 1853 possessed full legal tender power, but the coinage act in that year Subsidiary limited their legal tender to sums notexceed- sUver coins, jj^g ^yg doUars in any one payment. This re- mained in force until the act of June 9, 1879, declared that these coins should be legal tender in all sums not Minor exceeding ten dollars in payment of all debts, coins. public and private. The legal tender power of nickels and pennies was by the Mint Act of 1873 fixed at twenty-five cents in any one payment. The acts authorizing the issue of greenbacks de- clared that they should be legal tender for all debts public and private, except custom duties and interest on the public debt. Later, the Supreme Court declared that they were not legal tender for taxes nor where any other money was specifically MONEY AND CREDIT 321 mentioned in contract. Since greenbacks are redeemable on demand in gold, very little attention is paid to these restrictions upon their legal tender power. Gold and silver certificates are receivable for customs, taxes, and all public dues, but are not legal tender for private debts. The treasury notes of 1890 are receivable for all public dues and are Gold and legal tender unless otherwise stipulated in con- tificates. tract. National bank notes are receivable at par in all parts of the United States in payment of taxes, excise, and all other dues to the United States, except for duties on imports, and must be accepted for all salaries _ , . ... Bank notes. and debts owed by the United States to individ- uals, corporations, and associations within the United States, except interest on the pubHc debt, and the re- demption of national currency. The notes must be accepted at par in payments between national banks, but are not legal tender for private debts. Credit is the greatest economic factor in our indus- trial system and our progress would have been impossible without it. It does not arise until security importance and authority are thoroughly estabUshed. o^ credit. Modern credit did not assume any importance until the dawn of the industrial revolution. The great progress of the nineteenth century was due more to credit than to any other factor. To-day there is not a large enter- prise that does not owe a large part of its success to credit. By far the greater part of business is done through it, and its place in the industrial system is assuming greater and greater importance. Destroy the average 322 ECONOMICS OF BUSINESS man's credit, and you destroy the possibility of his mak- ing a success. Blot out credit in general; ruin and destruction immediately follow. Daniel Webster once remarked that credit had done more a thousand times to enrich nations than all the mines of the world. Credit may be defined as the power to obtain money, merchandise, or other consideration on the promise of future payment. The delivery of economic goods and Credit : its the acceptance of a promise to pay depend upon meaning. |.j^g confidence, which the person making the delivery has in the person receiving, to meet the future obligation. Confidence in each other's honesty is accord- ingly the basis of credit. Remove that confidence and you destroy credit. The granting of too Hberal credit has in the past been the cause of bankruptcy and failure, and to-day is too freely practiced. The lowering of margins of profit demanded a careful study of credit, and the possi- Reasons for bility of eliminating losses by discrimination teres? in " ^ ^^^ ^^^' Discrimination in giving credit has credit. become a necessity in business, and has re- sulted in a careful study of the fundamentals on which it is based. The importance of the credit branch of a business is to-day recognized as one of the essential factors of business success. The special attention paid to credit has resulted in the formulation of certain prin- ciples which are profitable for business men to know. Business men recognize that character, ability and capital are the three basic fimdamentals of credit. These essentials should be considered in determining credit, but it is not necessary to have all present before MONEY AND CREDIT 323 credit is granted. If all three are found, there is no hesitation in giving credit but they are rarely found in one case, and this demands a careful analysis Basic of those found to determine the possibiUty of ,^nt^s of the person seeking credit failing to keep his credit, promise. Good character and abihty are often con- sidered sufficient without the presence of capital. Good character, capital and no abihty are considered poor risks, as well as ability and capital without char- acter. No hard and fast rules can be laid down, but discrimination in granting credit is necessary, and depends largely upon the good judgment of the credit man. A man's character is an important consideration in considering the acceptance of a future promise to pay. A reputation for honesty is a valuable business Character, asset. Where this quahty is lacking, few chances should be taken in giving credit. Moral habits, manners, associations, inclination to extravagance, estimate by business associates, and honesty, make up a man's character or business reputation. A careful knowledge of each attribute is necessary to estimate a man's charac- ter. A man with a good character can be depended upon to keep his promise when it comes due or as soon as he is able. Character is so essential in grant- ing credit that many consider it the chief element. Character alone is very seldom a sufficient requisite, as in a business enterprise,the noblest character on earth without executive ability would be a very poor risk, but character and capacity seldom fail to obtain credit. It is true that a man without a good character 324 ECONOMICS OF BUSINESS has no claim to credit and the granting of such by busi- ness men is always a great risk. Next to character, ability or capacity attracts the most attention. The ability to successfully carry on one's special business is a question which demands careful consideration. A grocer may be successful in his business and command good credit, but should he sell out and engage in a manufacturing busi- ness, the problem of credit becomes a serious one. He was a good grocer, but it does not follow that he will make a good manufacturer. Business done, profits, methods of management, contentment and efficiency of laboring Tests of force, all should be considered in measuring abUity. man's capacity. The foregoing are tests of efficient management in a going concern, and apply to corporations and partnerships seeking credit as well as to single entrepreneurs. Credit is frequently asked by men to open new enterprises. Many have not had the experience of in- dependently conducting a business undertaking, do ^ ^. , not possess more than a few hundred dollars Credit for . ^. , . , ,. ^ new under- m capital yet Wish credit for many times what takings. ^^^^ possess. Such requests should not all be discarded, for many prove good risks. Many of our most successful merchants and manufacturers had Uttie capital to start, and had to rely on the credit given by those who beheved in them. The decision when to give credit under such circumstances tests the ability of the credit man. The first consideration is the character of the applicant and too great emphasis cannot be placed upon the absolute necessity of a thorough MONEY AND CREDIT 325 investigation into his character. If his character is not beyond reproach, the question of granting credit should not be any further considered. Being satisfied as to character how can abiHty be judged ? In the United States, about twenty-five per cent of the failures are due to lack of ability. What expe- rience has the applicant for credit had in execu- judge tive work ? What knowledge has he of the busi- * ^ ness he wishes to undertake ? Has he managed men, and if so, what has been his success ? Is he thoroughly ac- quainted with the requirements of his proposed business ? Is he a good judge of business conditions, resourceful, and industrious ? These are some of the questions which should be considered. Usually the applicant has little capital, and his obtaining of credit depends almost solely upon character and ability. The picking out of risks that are good from those that are bad, demands sound judgment, and the ability to correctly read human character. The third fundamental is capital, but it is secondary to the other two. In this country, about one third of the total failures results from lack of capital, and the largest percentage is in business enterprises 1 f ,. , .,7 . , , ^ ^ Capital. where the liabmties are less than $10,000. Many, to get trade, are willing to take excessive risks, and do not consider any of the fundamentals. Many business men furnish a full business outfit on credit, trusting to the customer's honesty and abihty to make the concern a success. These exces- sive risks occur almost entirely in enterprises of small capital, and as we have seen, it is here that the greatest 326 ECONOMICS OF BUSINESS number of failures occur. There is the greatest need for discrimination in the granting of credit to small enter- prises. The amoimt of capital needed in any concern depends upon the size and kind of enterprise. No ab- solute rule can be given as to the amount of capital necessary before credit is given. Any one fundamental does not give sufficient basis for confidence, and credit should not be granted in such cases. The ideal risk, of course, is where character, abiUty and capital are present. In established enterprises, many considerations con- nected with capital enter into the granting of credit. Considera- What is the amount of insurance carried? tions related . , -^ t • • r ■, to capital. What stock IS carried ? Is it excessive for the amount of business ? Is business conducted on a cash basis? If credit is given, what is its extent? What amount is carried on books ? What is the percentage of bad debts? These are a few of the questions which demand consideration in all kinds of business enterprises. Each question has a certain bearing on the possibility of a man, firm, or corporation meeting promises, and should not be overlooked by the credit man. Many methods are in use for the gathering of data and information of importance to the credit man. During the Salesmen last few years, a great improvement has taken of credir place in the systematizing of information gather- infonnation. ing. Salesmen may perform an important service by carefully studying the business habits, repu- tation and methods of customers. Tact, care and discre- tion should be exercised in gathering the desired informa- tion so as not to be objectionable or repulsive. What do MONEY AND CREDIT 327 associates think of customers ? Are customers lavish in expenditures? Do they spend beyond their means? Are they intemperate? What are their business _ . -' ^ ^ ^ ^ Information, methods ? What is the condition of stock ? salesmen What is the feeling of employees toward ^^^"s**^®'"- the business ? Is the business cash or credit ? What is the amount of sales ? What are the expenses ? What rent is paid ? What are the net earnings ? This is in- formation which a salesman is able to collect. Every salesman should make use of a card system and care- fully index all information. It will not take long to gather important credit data which will be of invaluable service in the granting of credit. Attorneys have been found valuable sources for the col- lection of credit information. In their business relations with men, they have an excellent opportunity ^^^^^ ^f for getting valuable information without attorneys to 1 • 1 • c • 1 J -K /r 1 credit men. disclosing professional secrets. Many lawyers are making a specialty of collecting credit data. The trouble in the past has been that credit men have ex- pected lawyers to answer questions and furnish informa- tion without remuneration. Little attention was paid to giving information and little dependence could be placed upon facts received. A little system and the proper tabulation of information on cards give in a short time a valuable information bureau. The only incentive to collect and keep reliable information is proper remuneration. This induces lawyers to pay careful attention to facts, and makes them effective and rehable sources for gathering information for credit men. 328 ECONOMICS OF BUSINESS Credit men have for years made an extensive use of banks in seeking facts about persons wishing credit. Bankers Bankers usually look upon credit letters of should not • • • i < i • . » ^ i be used by Inquiry as a nmsance, and they are justified credit men. in so doing. Many such letters find their way at once to the wastebasket, and if answered, it is usually with information of such general nature that little reUance can be placed upon it. The questions asked are usu- ally concerning deposits, indebtedness, payment of bills, notes and drafts; such matters are private, and should not be disclosed. If a merchant discovers that his bank is giving information concerning his private affairs, he would be justified in at once changing his bank. Credit men should find other sources for information, as bankers cannot be expected to disclose private matters, and if they do, they are disloyal to their depositors. The best known source for collecting credit informa- tion is the mercantile agency. Dun and Bradstreet are the two great agencies, and they are sought for informa- Mercantue tion in every part of Canada and the United agencies. States. Numerous small agencies are found in all parts of the coimtry, and many people think that the work of the agencies is indispensable to business. The usual practice in obtaining information is to collect periodical reports. Frequently business men Methods. t i /--n i -i • -n are rehed upon to fill out the reports, and m all such cases, a certain amount of uncertainty as to authen- ticity exists. The information given is usually based upon these reports, and as a result cannot always be relied upon. MONEY AND CREDIT 329 A recent development in credit economy is credit interchange, which is an exchange of information between merchants concerning customers. The prac- credit in- tice is to have local credit associations. Credit terchanges. men are called upon to give from ledgers, the methods and promptness of customers in meeting their promises. The carefully arranged information is for the use of V members, and exchange for credit data with other credit associations. Efficient credit associations are recognized as reliable sources for information. Their efficiency depends upon the questions asked, care in answering, the arranging and the filing of answers. Credit-association bureaus have a very important place in credit economy, and their extension to efficient state and national associations, will take over much of the work of the mercantile agencies. Many business houses have traveling credit men visit their customers and gather necessary informa- Traveling tion. The traveling credit man talks overbusi- *^'®^^* °^®°- ness affairs with customers, observes methods of doing business, inspects factory or stock, examines books, and gathers all possible facts bearing upon the character and ability of the customer. He may also gather much valu- able information by reading local papers, and through conversations with the business acquaintances of cus- tomers. A good traveling credit man can perform valuable service, but tact, abiHty to read human character, and sound judgment are required to obtain the most reliable information. Business men frequently ask the person seeking credit for references, and these are consulted personally 330 ECONOMICS OF BUSINESS or by letter. The practice is very common throughout the commercial countries of the world. This source is not rehable, and credit men who depend References. . . ■, -, solely upon it take many poor risks. The names given are usually those of business associates and friends who can be reUed upon to make favor- able reports. Many men consider credit inquiries a nuisance, and if they answer, do so in such a general way that the information given is of little value. This method of obtaining credit information is usually unsatis- factory and is rapidly being replaced by more efi&cient methods. Business men to obtain credit are frequently asked to answer certain questions about business, as assets, liabilities, and methods of doing business. Statements. Carefully prepared printed forms are sent, and the business men are asked to fill them out and return. The reports are not only required when first obtaining credit, but at regular intervals as long as credit is desired. This method with the average business man is reUable and satisfactory. Efficiency depends largely upon the printed blank forms which should clearly state the needed information. Business houses in many cities have special clerks who make investigation concerning persons with whom credit business is done. These clerks interview people Oral in- given as references, places of business, and formation, other places where the persons under inquiry trade. Many make acquaintances with friends, business associates, and clerks, and by adroit questions obtain valuable information. Irregularities are frequently dis' MONEY AND CREDIT 331 covered and the demanding of payment often saves losses. Oral investigations are very helpful, and if properly conducted will yearly save many times the cost. Credit has an important bearing upon every phase of industrial activity. Recent years have introduced many changes in credit giving, and the result has been a working, through the elimination of losses, towards ^ greater business stability. Discrimination in credit giving is a very important business element, and one which if properly exercised often brings success in place of failure. The granting of credit demands not only a thorough knowledge of character, but ability to judge capacity, and the necessity of capital. No branch of business requires greater shrewdness, and has a greater bearing upon success than wisdom in granting credit. QUESTIONS 1. What is money? Mention the materials which have been used as money. 2. Name and explain the functions of money. Explain the different methods of charging for coinage. 3. Define coinage; restricted coinage; standard money; subsidiary money ; standard gold. 4. Explain the system of redemption of coinage. Why is the redemption of the silver dollar indirect ? 5. Give a short history of the silver dollar. What was the trade dollar ? 6. Explain greenbacks; silver certificates; gold certifi- cates ; treasury notes ; bank notes. Mention legislative acts affecting greenbacks, 1862 to 1879. 7. What is legal tender? Give legal-tender powers of different kinds of currency. 332 ECONOMICS OF BUSINESS 8. What is credit ? Give its importance in our industrial system. 9. Name and explain the fundamentals of credit. 10. What should be considered in granting credit to new customers ? What are the tests of ability ? 11. What considerations are related to capital in granting credit ? 12. How may a salesman collect credit information ? What is the place of the attorney in credit economy ? 13. Criticize the following methods of collecting informa- tion: (a) bankers; (b) references; (c) reports and state- ments. 14. What is the place of the mercantile agency in our business activities ? Criticize its methods. 15. What is the function of the credit association? Upon what does its efficiency depend ? REFERENCES H. White, "Money and Banking," Bk. I, Chs. I, II, III, Bk. II, Ch. Ill; W. S. Jevons, "Money and the Mechanism of Exchange," Chs. I to VII (inc.); J. K. Upton, "Money in Politics," Chs. I, III, XII, XIX; J. F. Johnson, "Money and Currency," Chs. I, XIII, XVI ; D. K. Watson, "History of American Coinage"; F. A. Walker, "Money," Chs. I, II, IX, X; D. Kinley, "Money," Chs. II, III, V; J. L. Laugh- lin, "The Principles of Money," Chs. I and II ; C. A. Conant, "The Prmciples of Money and Banking," Vol. I, Bk. I; A. B. Hepburn, "Contest for Sound Money"; W. Aldrich, "Money and Credit," Chs. I, II, V; S. E. Sparling, "Busi- ness Organization," Ch. XIV; W. D. Moody, "Men Who Sell Things," Ch. XIX; I. J. Zimmerman, "Credits and Collections," "Lectures on Commerce," University of Chicago, Vol. I; T. B. Goddard, "Giving and Getting MONEY AND CREDIT 333 Credit," Chs. I, II, IV, V; W. A. Prendergast, "Credit and its Uses," Business Men's Library, Vol. I; E. S. Lewis, "The Credit Man and His Work," J. L. Laughlin, "Credit" ; C. W. Bryan, "Credit, its Meaning and Moment"; P. R. Earling, "Whom to Trust"; S. Colwell, "Ways and Means of Payment"; J. G. Cannon, "Individual Credits"; W. H. Preston, "Credits, Collections and their Management"; H. C. Lawrence, " Turning Him Down." CHAPTER XV TRADE MARKS AND COPYRIGHTS The production of goods after the introduction of the factory system increased at a rapid rate, and soon it The grow- ^as necessary for the manufacturer to seek ing impor- distant markets. He could sell his goods but tance of the . i • rr i • ^ ^ ^^ selling de- experienced great dimculty in holding the partment. trade. Without some means of guaranteeing the sale of his product, he was at the mercy of the jobber and the retailer, who could easily substitute other goods for his. The guarantee and safeguard Trade was found in the trade mark, and its impor- °^^- tance as a factor in the commercial world soon assumed great significance. The ultimate con- sumer, whether he hved in Australia or in Italy, soon learned to call an article by its trade-mark name and could not be deceived by having another article sub- stituted for it. In any part of the world, a Protects 1 •! -I 1 c 1 r the con- child cau be sent to a drug store for a cake oi weu^as*^ Pear's soap and all that it is necessary to do is the pro- to Hsp "Pear's" and the desired article is ob- tained. The trade mark assures the consumer that he gets what he wishes, and at the same time, it serves to protect the manufacturer against the sub- stitution of another article for his. A trade mark is a person's commercial signature to his 334 TRADE MARKS AND COPYRIGHTS 535 goods. It is any device, sign, mark, symbol, word or words, letter, numeral, or any combination its mean- thereof used, or proposed to be used, upon or in "*«• connection with goods for the purpose of indicating their origin. The chief function of a trade mark is to point out origin. It must, when attached to goods Chief on the market, distinguish them as to origin p^nf out*° ^from other goods of the same class, but the origin, origin may be indicated directly or indirectly through association. The manufacturer's or the dealer's name and address may be wholly wanting, and the indication of origin may be the result of an association between the trade mark and the article to which it is attached on the one hand, and the manufacturer or the dealer on the other. It is enough if the mark is of such a character origin may as to indicate to the purchaser that all the ^e "^di- articles bearing it come from one and the directly or same source. Validity in every case depends "^^"■ectiy. upon pointing out the origin of the article to which the trade mark is attached, and this may be accomplished either in its own meaning or by association. Many people beheve that the trade mark is a product of the factory system. Its extensive use is recent, but its existence can be traced back through many . centuries. The practice originally grew out of trade the use of signs which were affixed to dealers' °^ ^* shops, and which were eventually placed on the goods sold from the shops. Water marks on paper, dating from the fourteenth century, are among the oldest trade marks. Throughout the centuries of its existence, the purpose of the trade mark has always remained the same, 336 ECONOMICS OF BUSINESS i.e., to indicate the origin of an article offered in the market. A trade mark stands for a brand of goods, and after many years of use, it often becomes associated with the Trade mark particular quality of the article to which it is a valuable afl&xed. It has frequently taken thousands of asset. dollars and years of hard work to build up the reputation of the goods named by a trade mark. The value of a mark depends entirely upon the popularity of the article which bears its name. A trade mark is attached to the business where it originated, and cannot be transferred without transfer of business. After years of profitable business, a mark often becomes the most valuable asset of a business enterprise. It is difficult to place a definite value upon a trade mark, but in many instances, its estimated worth is placed at large sums. The trade marks of The American Tobacco Company were valued recently at forty-five million dollars, while Royal, as applied to baking powder, Uneeda, Ivory, Pear's, and Coca-Cola are each worth one or more million dollars. Trade marks are not the creation of statute, as the right of the manufacturers to be protected by their N the ^^^ existed long before there was any trade- creation mark legislation . B ef ore trade marks were pro- of statute, iqqx,^^ by special legislation, cases of infringe- ment came under common law. During the eighteenth century, a few scattered cases were decided, but they were almost wholly based on the question of fraud. It is a well-known fact that as soon as a thing becomes valuable or desirable, its regulation and protection become the TRADE MARKS AND COPYRIGHTS 337 subject of legal enactment. The first traces of trade- mark legislation are found at the beginning of the nine- teenth century, but the great mass of trade-mark law is the development of the last fifty years. Trade marks, according to the Act of 1905, are regis- tered in the United States Patent Office. The statute provides a definite procedure for trade-mark procedure registration, lays down rules for vaUdity, and provided by provides that in case of infringement of regis- tered trade marks, the decision rests with the federal courts. Every trade mark, when registered, becomes a part of the pubHc records of the United States. Registration is not necessary in order that a person might receive legal protection for a trade mark's exclusive use, because its right is recognized by common Tra^e law. The Supreme Court of the United States "^arks pro- has declared that the right to adopt and to common use a symbol or device to distinguish the goods ^*^* and property made and sold by the person, whose mark it is, to the exclusion of use by all others, has been long recognized by the common law and by the Chancery Courts of England and the United States. Trade mark is a property right for the violation of which, damages may be recovered in a legal action. Trade marks existing under common law are protected by courts of equity. When litigation arises over the use of a trade mark, the user must prove priority in use and Advantages ownership. If registered, the public records tered^txade establish the first use of the trade mark, but marks, when not registered, the proper evidence is often hard 338 ECONOMICS OF BUSINESS to obtain. In case of infringement of unregistered trade marks, the litigation does not come under federal law unless the parties are citizens of different states. A fee of ten dollars is charged for registration of every trade mark. Registration remains in force for twenty Fee and years, and may be renewed upon expiration for *^*- like periods of twenty years, upon payment of a renewal fee of ten dollars. An individual or a corporation has a right to register a trade mark, provided the appUcant resides within territory imder the jurisdiction of the United to whom States, or in any foreign country which affords *^*^'® by treaty like privileges to citizens of the United States. The trade mark must belong to the ap- pUcant and be used by him in commerce within the state, with foreign nations, with the several states and terri- tories, or with the Indian tribes. An appUcation for registration must be made to the Commissioner of Patents and comprises first, a petition requesting registration signed by the applicant ; secondly, Essentials ^ Statement, giving the name, domicile, loca- of an appU- tion and citizenship of the applicant, and if the cabon. applicant is a corporation or association, the state or nation under the laws of which organized ; thirdly, the class of merchandise according to official classification, and the particular description of goods in such class upon which the trade mark is actually used, or proposed to be used ; fourthly, a statement of the mode in which the trade mark is affixed to the goods and the length of time it has been used upon the goods specified; fifthly, a description of the trade mark if desired by the applicant TRADE MARKS AND COPYRIGHTS 339 or required by the Commissioner ; sixthly, a declaration by the applicant that to the best of his knowledge, no other person, firm, corporation or association has the right to use such trade mark in the United States, either in the identical form or in such near resemblance that it might deceive, that such trade mark is used in lawful commerce and that the description and drawing presented vtruly represents the trade mark sought to be registered ; seventhly, a drawing of the trade mark signed by the appHcant or his attorney which shall be a facsimile of the same as actually used upon the goods ; eighthly, five specimens of the trade mark; and lastly, a fee of ten dollars. The petition, the statement, and the declara- tion must be in the EngKsh language and written on one side of the paper. All petitions are considered by the examiner in charge of trade marks. Careful investigation is made of each application, and if it is decided that the applicant is entitled to the registration of his trade mark, the mark is published at least once in the Official Gazette. Any person who believes that he would be damaged by the registration of a trade mark may file a written notice of opposition stating the grounds thereof within thirty days after the pubHcation of the trade mark. Notice of Any opposition is null and void unless duly opposition, verified by the opposer within reasonable time after fifing. If no notice of opposition is filed within the re- quired thirty days, the appHcant or his at- certificate torney is notified of the allowance of the ap- ofregistra- plication and a certificate of registration is issued. Whenever an appHcation is refused, the appli- 340 ECONOMICS OF BUSINESS cant is notified and given the reasons for refusal and such information as will assist him to judge of the advis- ability of further prosecuting his appHcation. Any person deeming himself injured by the registra- tion of a trade mark may at any time make application CanceUa- ^^ ^^^ Commissioner of Patents for its can- tion of cellation. If, after a hearing before the ex- aminer of interferences, it is decided that the registrant was not entitled to the use of the mark on the date of his application for registration, the Commissioner, unless an appeal be taken within the required time limit, cancels the registration. Whenever an application is made for the registration of a trade mark which is substantially identical with a trade Inter- mark issued previously to another, or for the ferencc. registration of which, another had previously made application, or which so nearly resembles another as, in the opinion of the Commissioner, is likely to be mistaken by the public, an interference is declared. An interference is a proceeding instituted for the purpose of determining the question of priority of a trade mark be- tween two or more parties claiming substantially the same mark. If the examiner of trade marks renders an adverse decision upon an applicant's right to register a trade Appeal mark, or renew the registration of one, or when when inter- ^j^^ examiner in charge of interferences refuses ference is *^ ^ refused. an interference, opposition or cancellation, an appeal may be taken to the Commissioner in person. From an adverse decision by the Commissioner in each of the above-mentioned cases, an appeal may be taken to TRADE MARKS AND COPYRIGHTS 341 the court of appeals of the District of Columbia. A fee of ten dollars must accompany the filing of a notice of opposition and fifteen dollars for each appeal. A trade mark, to be registered, must not come under the following prohibitions : a design or wording identical with the registered or known trade mark Restrictions owned or in use by another or which so closely Ranting of ^resembles as to deceive or cause confusion in trademarks, the minds of purchasers ; the insignia of the American Red Cross Association ; the flag or coat of arms of any foreign nation; any design or picture that has been adopted by any fraternal society as its emblem; the portrait of a living individual except with the consent in writing of the individual; the flag or coat of arms of the United States or of any state or munici- pality, or of any foreign nation, or any insignia thereof; immoral or scandalous matter of any kind; a geographical name or term; a misrepresentation of the quality, composition, character or origin of the article on which it is used; any mark which con- sists merely of the name of an individual, firm, corpora- tion, or association not written, printed, embossed, or woven in some distinct manner, or used in connection with the portrait of an individual; devices which are descriptive of the character or quality of the goods with which they are used. An applicant for a trade mark must be its owner, and use it in lawful trade. A trade mark cannot be ob- tained for future use, but the exposure for sale of a single article with mark attached meets the requirements of the law. A trade mark must be attached either by being 342 ECONOMICS OF BUSINESS printed, pasted, written, stamped, sewed, or woven Trade mark ^pon the article, but where not practicable to must be at- attach to the article, it may be affixed to the tachedto . . ' -^ . , r i goods or contamer. A mark must not be used for ad- containers. yertising purposcs. A device used in circulars or on letter heads cannot be registered, or protected under trade-mark law. The general class of merchandise, as well as the special article of that class for which the trade mark is used, must be stated in the application. The name for one kind of goods may be registered as the trade mark for another imrelated kind. The trade marks ''Ideal," ''Columbia" Notice of and "Eureka" are used for many articles, registration. Notice of registration must be affixed, printed, or embossed upon the trade mark or close to it, so that it can be easily seen. This usually takes the form of the Require- words "Registered in United States Patent ments. Office," or its abbreviated form. Such a notice is necessary because the owner of a trade mark, in legal proceedings arising out of infringement, cannot get damages, unless he can prove that he gave the party formal notice that the mark was his property, and that its imauthorized use was continued after notice. Every man has a right to use his own name as his trade mark, but the court frequently designates the manner A person ^^ ^^^ ^^^- ^ person bearing the same name is restricted as a competitor, or even one which resembles his own it, in such a way as to deceive the average pur- ^°^®* chaser will not be allowed to use it, in the same manner, as the one proving priority. He may, never- theless, use his name but it must be in some distinctive TRADE MARKS AND COPYRIGHTS 343 form, so as not to confuse the buyer of the original article. W. H. Baker, a manufacturer of chocolate, and a compet- itor of Walter Baker & Co., was forbidden to use ''Baker," ''.Baker's" or "W. H. Baker & Co.," but was required to use "W. H. Baker of Winchester, Va.," and also in prominent type the statement, " W. H. Baker is distinct from the old chocolate manufacturer, Walter Baker & Co." Geographical names designating districts of country cannot be protected as vaHd trade marks. They do not point to the origin or ownership of an article, Geographi- but to the place of production, and could they c^i names be appropriated exclusively, would result in trade monopolies. The name of a district belongs to "^"^^• all, and cannot be appropriated to a special use. No one can use the name of a district as a trade mark, and prevent others inhabiting the district, or dealing in similar articles coming from the district, from using it, in the same way. There are some exceptions. If a word in its primary meaning is not geographical, it is not rendered incapable of registration, by the mere fact that it has been adopted as the name of a post-office, railroad station, or even a village or town. A geographic name which has no connection or association with a good may often be chosen as a trade mark, as for example, "Vienna " for bread, "Dublin" for soap, and "Gibraltar" ^ for belting. These names are used to desig- graphic nate no particular locaUty connected with u^ex^er- a business, but as fanciful designations to dis- ^^ <=o^- ditions be tinguish the product from others. No one used as a would believe that the bread was made trademark, in Vienna, the soap in Dublin, or the belting in 344 ECONOMICS OF BUSINESS Gibraltar. Again, a person using a geographic name for ten years previous to the passing of the Act of 1905, may have the same registered to the exckision of all others, as *' Elgin" and "Waltham" as applied to watches, and "Kalamazoo" to underwear. A trade mark to be registered or recognized by the courts must not be a mark, merely descriptive of an Trademark article of trade, its quahties, ingredients, or d'eTcriptive* characteristics. If, however, the primary ob- of article. ject of the mark is to point out the origin, the fact that after long use it has come to stand for high quaUty is not of itself sufficient to debar it from protection. No objection can be raised to a trade mark, that is suggestive of the qualities of an article upon which it is used, if not actually descriptive thereof. Instances of descriptive words not protected under trade- mark laws are "Sweet Caporal," "Snowflake," "Des- iccated Codfish," "Fig Syrup," "Cramp Cure," "Borax Soap," and "Cherry Pectoral." Trade-mark laws will not protect any trade mark even if registered, if it can be proved, that it is deceptive or in Protection ^^y ^^Y ringed with fraud. A trade mark not given must not give a false impression as to the mark tinged qualities, ingredients and characteristics of an with fraud, article. Courts are very strict in refusing aid to any one, who has made misstatements, as to the in- gredients of which an article is composed. If a trade mark represents an article as patented, and it is not, protection will not be granted. False statements in ad- vertisements are as fatal as similar statements made in trade marks. The court will not give its aid to sustain TRx\DE MARKS AND COPYRIGHTS 345 the claim of a trade mark, which is put forth with a misrepresentation, as to its manufacture. Protection is not given when a trade mark is used for articles other than the one for which it is registered. A trade mark will be refused if considered by government officials as contrary to pubHc poHcy. A trade mark apphes to a certain definite article, and not to all produced by the same person, but in Great Britain and Canada, the law allows a general trade mark to be affixed to all the dijffer- ent articles manufactured by one individual, firm or association. A great variety of designs, symbols, words and com- binations of these can be registered as trade marks, as for instance, a common word like ''Star"; a „ . ' . ' Vanous personal word Hke ''Hires" ; a coined word as trade "Cuticura"; a fanciful name as "Sorosis"; °^*^^^- a fanciful phrase as "La Favorita"; letters as "O.K."; numerals as "303 " ; a picture or a symbol as Bull Dur- ham ; and a portrait as Robert Burns. The owner of an article protected by patent cannot extend his monopoly after the expiration of the patent by incorporating into a trade mark the dis- cannot use tinctive name by which his patented article t^^de mark - , 1 ,. 1 . 1 . to extend was known to the public durmg the existence monopoly of the patent. If a trade mark has been in o^p**®^*- use for a patented article, and it has been sold as such, the right to the exclusive name ceases with the termina- tion of the patent. A trade mark cannot be made the guise for extending the monopoly, or preventing the name from becoming, at the expiration of the patent, the property of the pubKc. 546 ECONOMICS OF BUSINESS The owner of a trade mark is entitled to its exclusive use, and the law is strict as to any infringement upon Infringe- that right. An infringement is any imitation ™®°*- of an existing trade mark of such a nature as to deceive the ordinary purchaser buying with usual care. The likeness may be in appearance, wording. Its mean- OT sound. The federal courts hold that the ^- test is the deception of the purchaser exercising the usual care in buying. *'Gold Dust" is infringed by ''Gold Drops," ''Cascarets" by ^'Castorets," ''Sea Foam" by "Soda Foam," "Yusea" by "U-C-A"; but "Cuticle" does not infringe "Cuticura" nor does "Grain Hearts," "Grape Nuts." A similarity in mean- ing is not infringement. " Hurricane " and "Tempest," two trade marks of lanterns, are valid as well as "S. B. " and "B. & S.," two marks for cough drops. Agreement among owners of conflicting devices is not recognized by the Commissioner of Patents. The burden of proof lies with the owner of the trade mark alleged to be infringed. In the federal court, if Punish. the case of infringement is estabHshed, triple ment. damages may be collected, and the offending party is forbidden to use the trade mark. Many states have passed laws making infringement of trade mark a penal offense, but in the federal court only civil action can be brought. The invention of printing made copying easy, and authors demanded protection from theft of their published work. A statute in the reign of Queen Anne is the basis of the present copyright system of England and of the United States. It gave to the author of a work in ex- TRADE MARKS AND COPYRIGHTS 347 istence, the sole right of publication for a period of. twenty-one years, and for works produced in the future, the same right for fourteen years. Queen In the latter case, if the author were Hving at ^^^^^^ the expiration of his term of copyright, it copyright could be extended for a Hke term. Two legal meanings are included in the word copyright. The first is the right which an author has in his copy. This is recognized as property and is pro- tected by common law just Hke any other personal property. The second is the author's exclusive right to the publication of his work, which is j^^ ^^^ not recognized by common law, and protec- legal mean- tion comes only through legislative enactment. "^^^* The Constitution of the United States gives to Congress the power to give authors the exclusive right to their works. Previous to 1790, twelve of the Congress thirteen states passed copyright laws, but oyg/®^®' the federal act in that year made the state copyrights, acts unnecessary. Amendments were made from time to time until 1909, when a law was passed, which repealed all previous legislation and provided for the whole sub- ject of copyright by a new code. Copyright protection is granted to an author if he is: a citizen of the United States; a resident alien domiciled in the United States at the time of the first QuaUfica- pubHcation of his work ; or a subject of any cop^^ght country, which grants to citizens of the United protection. States, the benefit of copyright on substantially the same basis as its own citizens. The same protection is like- wise granted to a proprietor or a person who buys or 348 ECONOMICS OF BUSINESS obtains his title to a work from an author, and to ex- ecutors, administrators or assigns of authors and pro- prietors. According to the provisions of the copyright act any person qualified may have the exclusive right to print, reprint, publish, copy and sell a copyrighted work; Privfleges translate the work into other languages; by copy- dramatize it; convert it into a novel or right. other non-dramatic work if it be a drama; arrange or adapt it, if it be a musical work; com- plete, execute and finish it, if it be a model or design for a work of art; deliver or authorize the delivery of lectures, addresses or sermons; perform or represent a drama publicly; sell any manuscript or any record of a dramatic work if not reproduced for sale or to make or procure the making of any transcription or record of the same by or from which it may in any manner or by any method be exhibited, performed or produced ; ex- hibit, perform or produce any unpublished dramatic work in any manner or by any method; and perform for profit any musical composition or make any ar- rangement, setting or record of the same. The following classes of work are subject to copyright : — all printed Hterary works published in the shape of a Productions ^^^K pamphlet, leaflet, card or single page, subject to This class includes tabulated forms of infor- ^^^ ' mation, tables of figures showing the result of mathematical computation, single poems, songs when pubHshed without music, librettos, descriptions of moving pictures or spectacles, directories, gazetteers, encyclopedias, catalogues, circulars or folders TRADE MARKS AND COPYRIGHTS 349 containing reading matter other than mere price lists, and literary contributions to periodicals or newspapers. It does not include blank books used in busi- , Exceptions. ness, directions on scales, dials or other in- struments, games, labels or wrappers, formulae on boxes or bottles, advertisements or advertising catalogues, prefaces to books not entitled to copyright, or calendars. vlf calendars contain reading matter or pictures subject to copyright, they may be registered either as books or as prints, according to the nature of the matter. Newspapers, magazines, reviews, serial produc- 1 . 1 It .,.,,. Periodicals. tions, and m general, all periodical hterature registered as second-class mail matter. Lectures, ser- mons, addresses or similar productions prepared for oral delivery and dramatic compositions written in Lectures form of dramas, comedies, musical comedies, dramatic ^, . , . and musical operas, or operettas. This does not in- composi- clude dances, ballets, tableaux, moving-picture *^°°^' shows, animal shows, sleight-of-hand performances, acro- batic or circus tricks, descriptions of moving pictures or settings for the same. Musical compositions pub- lished as either vocal or instrumental, with or without words. AH maps produced of a cartographical nature, including marine charts, but exclud- works of ing astrological charts, landscapes, or draw- "** ings of regions which have no real existence. Works usually called fine arts, as paintings, drawings Reproduc- and sculpture. Reproductions of works of art, ^°rks^of as engravings, woodcuts, etchings or casts, pro- art. duced so as to contain in themselves an artistic element distinct from that of the original work of art. All draw- 3SO ECONOMICS OF BUSINESS ings or plastic works of a scientific or a technical nature Drawings produced as diagrams or models of scientific or of a scien- technical works, architect's plans, designs for c na ure. gj^gj-g^y^g ^god, etc. Photographs made from photographic negatives or from moving-picture films, but not photogravures, half-tones or other photo- engravings. All prints and pictorial illus- trations not included in the enumerated classes come imder the law, but not mere ornamental scrolls, bor- Printsand ders, ornamental letters, or forms of type, uiusta^a- Copyright is not granted to puzzles, games, tions. toys, rebuses, badges, buckles, pins, buttons, embroideries, laces, woven fabrics, novelties of any description, or post cards. The pictures on post cards may be registered as prints, pictorial illustrations, or as photographs, while the text matter may Exceptions. , - , , . , be of such a nature, as to be registered as a book. Trade marks cannot be registered in the copy- right office. Works subject to copyright are divided into two classes, unpublished and pubUshed. The first includes all pro- ciassesof ductions which at the time of registration ject^to^"^" ^^2,ve not been printed or reproduced in copies copyrights, for sale or public distribution. It comprises : lectures, sermons and addresses ; dramatic and musical compositions ; photographic prints ; works of art ; and plastic works. In the case of lectures, sermons, ad- dresses, dramatic and musical compositions, one type- written or neatly written manuscript of the entire work, not an outline or epitome bearing the title of the work, must be sent to the copyright oflSce. In the case of TRADE MARKS AND COPYRIGHTS 351 works of art, models or designs, drawings, or plastic works, a photographic reproduction, and with photo- graphs, a copy of a positive print, must be deposited. If an unpublished work is registered, and is later published, it must be again registered in the same manner as a published work. The first step in securing a copyright is the publica- tion of the work with the copyright notice inscribed in every copy. The second is the sending to the steps copyright office of two complete copies of the J)f sec^a best edition of the work accompanied by an copyright, application for registration correctly filled out, and a money order for the legal fee. The law requires the deposit of the copies without unnecessary delay. The usual form of notice is the word "Copyright" or the abbreviation "Copr." accompanied by the name of the copyright proprietor, and if the work Form of be a printed Kterary, musical, or dramatic notice, production, the notice must contain the year in which the copyright is secured. In the case of maps, photo- graphs, reproductions of works of art, prints, etc., the notice may consist of the letter C inclosed in a circle as ©, accompanied by the initials, mark, monogram, or symbol of the proprietor, but it is required that the proprietor's name appear on some accessible part of the work. The notice of copyright must be applied : if a book, upon its title-page or the page immediately fol- lowing; if a periodical, either upon the title-page or upon the first page of text of each separate number or under the title heading; or if a musical work, either upon its title-page or the first page of music. One notice 352 ECONOMICS OF BUSINESS in each volume, or in each number, if a periodical, is sufficient. The copyright law places many restrictions upon the printing of copyrighted works. All books in the Eng- lish language to be copyrighted must be printed from Restrictions ^VP^ ^^^ within the limits of the United upon the States. The same restriction of place is of copy- required: for texts of books produced by nght books, lithographic or photo-engraving processes; for illustrations in books except where the subjects represented in the illustrations are located in foreign countries and illustrate scientific works or reproduce works of art ; and for the binding of all books. Books by foreign authors in any language other than Eng- lish, and books in raised characters for the blind are not required to be printed or bound within the United States. Books printed abroad in the English language, if registered in the copyright office, within thirty days Ad interim after publication, may be granted an "ad copyright, interim" protection of thirty days from date of registration. To extend the period of protection to the full copyright term, an edition of the work must be published in the United States within the prescribed thirty days. Application for registration must state the following facts, without which no registration can be made : the Facts name and address of the claimant of copy- STappU^ right; the nationahty of the author of the cation. work ; the title of the work; the name and address of the person to whom certificate is to be sent ; TRADE MARKS AND COPYRIGHTS 353 and, with a published work, the actual date (year, month, and day) when the work was published. It is very desirable that the appHcation should state for record the name of the author. If the work is pubHshed under a pseudonym or anonymously, the author's name may be omitted. Nationality means citizenship and not race. A subject of England should be described as .English. An alien domiciled in the United States, ap- plying for copyright, should expressly state the fact in his appHcation. The title of the work, the name of the author and the name of the owner of the copyright should be correctly stated in the appHcation and should agree with the same statements made in the work itself. Various appHcation forms are furnished on request by the Copyright Office and should be used when applying for registration. All books by American authors and all books in the EngHsh language must have the appHcation accom- panied by an affidavit showing the following ^^^ . 1 •• tii«i» p Affidavit, facts: that the prmtmg and the bmdmg of the work was performed within the Hmits of the United States, naming in each case the place where the work was done and the estabHshment doing it; Require- that the completion of the printing of the »»ents. work was on a stated day ; and that the work was pub- Hshed on a given date. The afiidavit should be under seal, and may be given before any officer authorized to administer oaths in the United States, and Persons who can aflix his official seal to the instru- ?o^kean ment. It may be made by the person claim- affidavit, ing the copyright, his duly authorized agent or represent- 2 A 354 ECONOMICS OF BUSINESS ative residing in the United States, or the printer who printed the book. The person making the afl&davit must state in what capacity he is acting. A foreign author applying for registration of a book in any lan- guage except English is not required to make any affidavit. An affidavit for a book in the English language printed abroad and registered for thirty days' copyright protec- tion, need not be filed, until the extension to full copyright term is sought. The affidavit appHes only to books. Punish- If any person in order to obtain registration of fafs^affida- ^ Copyright, knowingly makes a false affidavit, ▼its. as to his having comphed with the require- ments of the law, he is guilty of a misdemeanor, and upon conviction, is subject to a fine of not more than one thousand dollars, and the forfeiture of all of his copy- right rights and privileges. Application for registration of periodicals is made in the same manner as for books, but an affidavit is Registra- not required. A separate registration is re- **eri<^- quired for each number of a periodical pub- cais. fished, with a notice of copyright, and cannot be made until after pubfication. If special registration is sought for any contribution to a periodical, one copy of the periodical containing the contribution should on pubfication be deposited in the copyright office. A clip- Re 'stra- P^^S of the contribution does not fulfill the tion of statute requirement. The date of pubfication tions t "" of a periodical should be stated in the appfica- periodicais. ^[q^ a,s the day on which the issue is first placed on sale, or pubficly distributed. This may be earfier or later than the date printed on the title-page. TRADE MARKS AND COPYRIGHTS 355 An ad interim application may be secured by deposit- ing in the copyright office one complete copy of the for- eign edition, with an application containing a request for the reservation, and a money order for one Ad interim dollar. The appKcation should state: the howob*?°°' name and the nationality of the author ; the tained. name and nationahty of the copyright claimant ; and the ^exact date of the original publication abroad. When- ever, within the thirty-day period, an edition is made in the United States, and two copies are deposited, the copyright may be registered like any other book. All mail for the copyright office should be addressed to the ^'Register of Copyrights, Library of Congress, Washington, D.C." Copyright matter for copyright deposit in the copyright office is sent by post- mail sent masters free of charge. Receipts for copy- right matter delivered to postmasters may be secured on request. A fee of one dollar is required for copyright registra- tion, but with photographs when no certificate of regis- tration is required, it is fifty cents. PubHshers for their own convenience often deposit a sum of money in ad- vance against which each registration is charged. A copyright secured under any copyright act of the United States may be assigned, granted or mortgaged by an instrument in writing signed by the propri- ^ggj etor of the copyright. An assignment should ment of be recorded in the copyright office within three ^°^^^ months after its execution in the United States, or within six months after its execution in any foreign country, in default of which it is void as against any later purchaser 356 ECONOMICS OF BUSINESS or mortgagee for a valuable consideration, whose assign- ment has been duly recorded. When an assignment has been recorded, the assignee may substitute his name in the Time of notice of copyright. A copyright is granted for protection. ^ period of twenty-eight years, and is subject Extension, to renewal for a Hke period. The appHcation for renewal and extension should be made to the copyright office, and duly registered within one year prior to the ex- piration of the original term of copyright. If the copies required by law are not promptly deposited, the register of copyrights may at any time after the publication of the Punishment work require the proprietor of the copyright of books*is ^^ deposit them. After the demand has been not made, made, and in default of the deposit of the copies within three months, from any part of the United States except outlying territorial possessions, or within six months from the latter or from a foreign country, the proprietor of the copyright is liable to a fine of one hun- dred dollars, to pay the Library of Congress twice the amount of the retail price of the best edition of the work, and to have his copyright declared null and void. Any person who for fraudulent purposes inserts or im- presses any notice of copyright as required by law, or words of the same purport upon any copyrighted article, Punishment ^^ ^^^ fraudulent intent, removes or alters the for fraudu- copyright notice upon any article duly copy- righted is guilty of a misdemeanor, and subject to a fine of not less than one hundred dollars, nor more than one thousand dollars. Any person who knowingly issues or sells any article bearing a notice of United States TRADE MARKS AND COPYRIGHTS 357 copyright which has not been copyrighted in this country, or who knowingly imports any article bearing such notice or words of the same purport, which has not been copyrighted in this country, is Hable to a fine of one hundred dollars. The importation is prohibited in the United States of any work bearing a false notice of copyright when V there is no existing copyright in this coun- jn^portation try, or of piratical copies of any work copy- of piratical righted in the United States. In the latter case, the prohibition does not apply to works in raised characters for the use of the blind ; to a foreign newspaper or magazine unless the newspaper or magazine contains copyright matter printed or reprinted without the au- thority of the copyright proprietor ; to authorized editions of books in foreign languages ; or to any books published abroad with the sanction of the authors or copyright proprietors, when imported under one of the following circumstances : for individual use and not for sale ; by the authority or for the use of the United States; for the use of educational or religious institutions, „ , , . . iM • 1 1 r Exceptions. learned societies or ubranes ; when they form part of Hbraries purchased abroad for reHgious or educa- tional institutions ; when they are brought in as personal baggage and not intended for sale ; or when the copies are not to be used to violate the copyright law. A copyright proprietor is protected against having his copyrighted work reprinted without his authority. The word piratical is used to designate copies Piratical without proper authorization. The question "^oxks. of infringement, or the unauthorized use of the work of 3S8 ECONOMICS OF BUSINESS another in part or as a whole is forbidden by statute. It Difficult to is uncertain as to the extent that use may be fs^Siringe*** ^^^^ of the work of another, and not infringe, ment. The court generally holds that there must be copying of a large part of the whole. As to the meaning of a large part, it is difficult to say what constitutes an infringement. The court has held that Hteral repeti- tion is not essential, but that infringement includes all the various means in which matter of a publication may be changed or imitated to disguise the original source. Any person who willfully and for profit infringes any copyright, or who knowingly aids such infringement is guilty of a misdemeanor, and upon conviction is subject to imprisonment for a term not exceeding one year, or a fine of not less than one hundred dollars, nor more than one thousand dollars, or both. The circuit or district courts have jurisdiction over all cases arising under copyright law. From the circuit Federal ^^ district court appeals may be taken to the coiirts' circuit court of appeals, and thence to the o^rcopy- supreme court of the United States. No right cases, criminal proceedings can be instituted unless commenced within three years after the causes of action arise. QUESTIONS 1. What is a trade mark? Give its purpose and origin. 2. What are the advantages of registered trade marks? What persons may register trade marks ? 3. What are the requirements for a trade-mark applica- tion? TRADE MARKS AND COPYRIGHTS 359 4. What are the restrictions in granting trade marks? Give the requisites for registration. 5. What is an infringement of trade mark? What is the punishment ? 6. What legal meanings are included in the term copy- right ? What is the basis of our copyright system ? 7. What are the privileges conferred by copyright ? 8. What productions are subject to copyright protection ? ^ What are the exceptions ? 9. What must be done to obtain a copyright for an un- published work ? What for a published work ? 10. What is the usual form of notice? Where should it be applied ? 11. What are the restrictions placed upon the production of copyright books ? 12. What is an ad interim copyright? Give its purpose. How may it be changed to a regular copyright ? 13. What facts must be stated in application for copy- right ? What is an afl&davit ? 14. What is a fraudulent notice? What is the punish- ment? 15. What is an infringement of copyright? What is the punishment ? REFERENCES B. Singer, "Patent and Trade Marks Laws of the World" ; J. Walter Thompson Company, "Things to Know About Trade Marks"; K. R. Swan, "Patents, Designs and Trade Marks"; N. F. Hesseltine, "Law of Trade Marks and Un- fair Trade"; R. J. Frank, "Science of Organization and Business Development," Ch. V; E. R. Newell, "Patents, Copyrights and Trade Marks"; P. T. Cherington, "Ad- vertising as a Business Force," Ch. XI; R. R. Bowker, 36o ECONOMICS OF BUSINESS "Copyright, Its History and Its Law"; Copyright Office Bulletins, Nos. i, 2, 3, 5, 6, 7, 8, 9, 11, 13, 14, 15; E. L. MacGillivray, "Treatise upon the Law of Copyright"; United States Statutes concerning the registration of trade marks with the rules of the Patent Office relating thereto, 1909 ; " Business Administration," edited by W. D. Moody, Vol. X, Ch. XVI. CHAPTER XVI PATENTS, TRADE NAMES, AND TRADE SECRETS The Constitution gives to Congress the power to promote the sciences and useful arts by giving to authors and inventors, for limited terms of Congress years, the exclusive right to their respective oyer^°^®' writings and discoveries. Congress has, in patents, accordance with this power, enacted certain laws and established the Patent Ofl&ce. An inventor has no natural right to the exclusive con- trol of his invention. This is given by law, p . as a reward for his ingenuity, and as an induce- reward for ment to encourage all to make discoveries. "*^®^"**y- There is no doubt, but what the inventive talent in the United States has been stimulated by the hberal reward awaiting the successful. The government in giving a patent enters into a contract with the inventor, that in return for giving his discovery to the public at the end of a certain period, the government gives him the exclu- sive control of his patent during that time, and protects him in this exclusive right against all others. An invention to be protected by a patent must not only be capable of being used but its use must con- invention fer a benefit on mankind. The benefit must be ^^"st confer present but the law is fulfilled if it is indirect on man- and slight. If a discovery is immoral, or its ^°^^' use is only for illegal purposes, it is not subject to patent. 361 362 ECONOMICS OF BUSINESS An invention is not complete until it has been put in actual practice. The thinking out of a discovery in To be com- ^^^ ^^^ details, minutely describing it to another piete must person, or reducing it to a drawing does not actual *° ° make it complete. There is no proof that the practice. discovery is workable, it may prove a decided failure. Until the invention is operative, nothing has been produced that confers a benefit on mankind. The inventive art is complete when an inventor has success- fully put his discovery into operation. When an inventor has carefully thought out all the details of his discovery, and nothing remains, but putting Conceived it into Concrete form, he has conceived the in- invention. yention. It takes some time to reduce a conceived invention to concrete form. The law allows an inventor to take his date of conception, as the date of his invention. But the law insists that the inven- tor shall show that he has not abandoned his idea, and has been diKgent in seeking to put it into practice. The reduction to practice does not mean that the concrete form must be perfect, it may be rudely constructed, but it must accomplish to a reasonable extent, the purpose for which it is intended. If two persons lay claim to the same discovery, the important question for the Commissioner of Patents to decide is that of priority. The date of the conceived invention, if properly verified, will be accepted as necessary proof of priority. It is essential that every inventor not only note the date of his conceived invention, but verify the date, by statement in a diary or a drawing witnessed by a second person. A patent may be obtained by any person who has in- PATENTS, TRADE NAMES, AND SECRETS 363 vented any new and useful art, machine, manufacture, composition of matter, or any new and useful improve- ment of either, provided that it is not known, . used by others, sold, or described in any mentsfor printed pubhcation in this or in any foreign * ^**®^ ' country during a period of two years previous to his application, and that it is not patented in any foreign country on an application filed more than twelve months before his, unless the invention is proved to have been abandoned by the actual discoverer. If it is proven that the inventor at the time of making his application beHeved himself to be the first inventor, a patent will not be refused on account of the importance invention, or any part thereof, having been tion^^fdfs"- known or used in any foreign country before his covery. invention, provided that it was not patented on an application filed more than twelve months before his, or described in any printed publication. The receipt of letters patent from a foreign government will not prevent the inventor from obtaining a patent in the United States unless the application on which the foreign patent was granted was filed more than twelve months prior to the filing of the appHcation in this country. If so, the patent will be refused. The appKcant for a patent must if alive and not insane be the inventor of what is sought to be patented. If a person becomes insane after having made an Persons invention, his guardian or legal representative a^^e*^ may apply for the patent. In case of the death patents, of an inventor, his executor or administrator may make appHcation and obtain the patent. A minor or a married 364 ECONOMICS OF BUSINESS woman may be granted a patent. The protection of the patent law is extended to foreigners as well as to citizens of the United States. An application for a patent must be made to the Commissioner of Patents, and be signed by the inventor, if alive, or his executor or administrator, if dead. A complete application comprises a fee of fifteen dollars, a petition, a specification and oath, drawings, and a specimen when required. The petition, specification and oath must be in the Enghsh Essentials. . . •, , . , , language. All papers which are to become a part of the permanent records of the office must be legibly written or printed in permanent ink. The petition is addressed to the Commissioner of Patents, and must state the name, residence, and post- office address of the petitioner, name by title the invention sought to be patented, make a reference to the specification for a full description of such invention, and be signed by the appHcant. The specification is a written description of the in- vention or discovery, the process of making, constructing or compounding it, and its manner of use. It is required Specifica- to be stated in clear, concise and exact ^^^' terms, so as to enable any person skilled in the art or science to which the invention or the discovery belongs, or with which it is most nearly connected, to make, construct or compound and use it. The speci- fication must clearly and precisely explain the invention for which the patent is sought, and explain it Essentials. , , , i . , . • i • . r m such a manner as to distinguish it from other inventions. If it is an improvement, the specifi- PATENTS, TRADE NAMES AND SECRETS 365 cation must clearly point out the parts to which the improvement relates, and must by explicit language dis- tinguish between what is old and what is claimed as new. The claims of the inventor must be so stated that a broad construction can be placed upon them. A patent is of little value if another person can, in claims of spite of it, by a slight variation of the article inventor patented, make it. The application writer should bear in mind, that a most important matter of consideration, is the interpretation placed upon the wording of the specification by the courts. Fre- quently a patent has been rendered practically value- less by the use of some term which correctly described the invention, but the interpretation of the court narrowed its scope. Extreme care should be taken that the specification so broadly explains the claims that it embodies not only what is claimed in the drawings, but also as many variations as possible. The rights of an inventor depend upon the claims in his patent according to their proper construction, and not upon what he erroneously supposes it to cover. The specifications must clearly disclose every essential element of Every the invention or the patent will be void. Any essential part not disclosed in the application as first must be filed cannot later be legally inserted. But ^ecS'"" matter not completely disclosed may be later *^o^- fully explained by an amendment with a supplemental oath, provided that it was invented by the applicant before his application was filed. A patent is void if the patentee, for the purpose of deceiving the pubHc, discloses more or less than his real invention. 366 ECONOMICS OF BUSINESS The applicant must make oath or affirmation that he does believe himself to be the original or first inventor of that for which he soUcits a patent, and that he does not know and does not beheve that the same was ever before known or used. He must also state of what country he is a citizen, and his place of residence. The applicant must furnish a drawing of his inven- tion whenever it is capable of illustration. The drawing must show every feature of the in- vention covered by the claims. A model is only required when the primary examiner, on examination of the case in its regular order, finds it necessary or useful. In such cases, if a model has not been furnished, the examiner, notifies the appUcant of such requirement. When a model is required, the examination is suspended until it is received and filed. It should clearly exhibit every feature of the machine which forms the subject of a claim of invention, but should not include other matter than that covered by the actual invention or improve- ment, unless it be necessary for exhibition of the in- vention in a working model. The model should be neatly and substantially made of durable material, metal being preferable, but when the material forms an essential feature of the invention, the model should be constructed of that material. The model must not be more than one foot in length, width or height, except in cases where the Commissioner admits working models of complicated machines of larger dimensions. An interference is a proceeding for the purpose of PATENTS, TRADE NAMES AND SECRETS 367 determining the priority of an invention between two parties claiming the right to obtain a patent inter- ior practically the same invention. The Terence, obtaining of a patent on the invention in dispute by one of the parties will not prevent an interference. The Commissioner of Patents has not the right to cancel a patent, but may grant a second patent for the same in- vention, and leave the settlement of the question of priority to the courts. When a notice of interference is received at the Patent Office, the examiner of interferences makes a careful examination. If the issue between the parties procedure is not clearly defined, he refers it to the after notice of interfer- primary examiner who decides whether or not ence is the notice should be amended. When a dis- ^^"i^®*^- agreement arises between the two examiners, the matter is referred to the Commissioner for settlement. During the preliminary proceedings, the primary examiner has jurisdiction of the case. The issue must be clearly defined ; the invention must be decided nary pro- to be patentable; and the claims of the re- <^®®^^^8s. spective parties must be put in such condition, that they will not require alteration after the interference has been finally decided, unless the testimony brought forth in the trial justifies a change. When an interference is found to exist, the examiner of interferences names the time for fifing the preHminary statements and declares the interference by sending notices to the different parties concerned. The jurisdiction of the case now passes to the examiner of interferences. The preHminary state- ment, which must be filed by each party, must set forth 368 ECONOMICS OF BUSINESS under oath the date of the original conception of the invention, when the first drawing was made, when the Preliminary model was made, the date of the disclosure statement, ^f ^j^g invention to others, when it was re- duced to practice, and a statement of the extent to which the invention had been used. After the preliminary statements have been filed and approved, they are open for inspection by the contesting parties. Thirty days are allowed for making motions Parti ^^^ ^^^ filing of amendments. The party who inter- filed his apph'cation is considered to be the first erence. inventor, and is called the senior party or the defendant, while the later applicant is known as the junior party or the plaintiff. Dates are set for the taking of afl&davits, the junior party first, then the senior party, and finally the junior party in rebuttal. The witnesses are examined as in an ordinary court of law. When the testimony is complete, the case is argued before the examiner of interferences, and he gives a decision, giving priority to one or the other of the parties. An appeal may, upon the pay- ment of ten dollars, be taken to the examiners- in-chief, a board of three judges, and an adverse decision by them may, with the payment of twenty dollars, be taken to the Commissioner. An appeal from the Com- missioner's decision may be taken within forty days to the court of appeals of the District of Columbia. The case in this instance is decided upon the record as sent from the Patent Office. The fee for this appeal is fifteen dollars. If the decision of the court is adverse, a bill in equity may be filed to compel the granting of the patent. PATENTS, TRADE NAMES AND SECRETS 369 A patent gives a protection for a period of seventeen years. A person has not the exclusive right to his in- vention until he receives a patent, and con- Time of sequently cannot recover damages for infringe- patent, ment prior to the date of his patent. A patent cannot be extended except by act of Congress. The govern- ment does not guarantee the validity of a patent nor its priority. Such matters are settled by the courts. In this country, taxes are not levied on a patent, Foreign nor is its owner compelled to operate it. It pa*©^*^. is not necessary for the owner of a patent to put it in operation during the period of its existence. The ma- jority of foreign countries levy taxes on all patents, and compel the owners to work or operate them. If the patent is not operated, the owner abandons it, and the people are entitled to its benefit, and are allowed to use it. A patent gives to its owner the exclusive right to make, use and sell the patented invention throughout the United States and territories. The production, use infnnge- and sale of the patented invention without °*®°*- the consent of its owner is an infringement and illegal. The infringement of any part is an infringement of the patented invention. The United States, a state, or a municipaHty cannot infringe a patent. A person owning a patented machine has a right to keep the same in working condition by repairs. If a part wears out or is broken, he may usually make -^^^^ ^^ the part, but cannot construct a new machine. J^^ep No definite rule can be stated dividing legiti- machine in mate repair and illegal construction, but each ^^^^' case must be decided on its particular circumstances. 370 ECONOMICS OF BUSINESS To constitute an infringement, it is not necessary, that the identical device given in the patent drawings be What used. The substitution of anything which an^hSriBge- accomplishes substantially the same result, ment? in practically the same way, and was known as a proper substitute at the time the invention was made, is usually an infringement. Frequently it is advisable to have a search made by a competent person through the patents in the Patent Office to find if an invention infringes any other. This Patent occurs usually when a person wishes to pro- search. ^yj^QQ a. certain invention, and wishes to pro- tect himself against later charges of infringement. The search may assure the manufacturer that his in- vention does not infringe any prior patent, and that he is free from a possible suit for infringement. ^^^' If a patent is found which covers his inven- tion, it may be possible to change his device so that it will not infringe. Upon the failure to do this, the only recourse is to buy the patent, or obtain a license to pro- duce or use it. The Constitution gives to the United States courts jurisdiction in patent suits. As soon as a person learns United that his patent is being infringed, he notifies states j^i^Q infringer in writing to cease violating his jurisdiction . /^ .... - , i . over patent right. If the mfnnger refuses, the complam- ^^*®* ant usually goes to the court, and asks for a preliminary injunction. This is not granted unless the complainant proves to the court's satisfaction, junction. ^^^^ ^^ ^^^ ^^^ ^.^^^ ^^ ^^^ patent, that the patent is valid, and that the defendant has infringed. The PATENTS, TRADE NAMES AND SECRETS 371 injunction if obtained forbids the infringer from using the patent until the decision of the suit. The evidence is usually taken before a master appointed by the court. Witnesses can be subpoenaed to attend. When all the testimony is taken, it is printed. Procedure and the case is argued before the court. If a j^rfnge?^ decision is given in favor of the complainant, nient. the decree usually sustains the vaHdity of the patent and awards a perpetual injunction against the infringer. If the complainant has asked for profits, damages or both, the matter is usually referred to a master who investi- gates and reports to the court, the amount of profits and damages found. The court makes a final decree which may include profits, damages or both, as well as the injunction. The court has the power to increase the amount of damages found to any sum not exceeding three times the amount of the actual damages. If the decision is in favor of the infringer, the case is dismissed. The court uses its discretion in awarding costs. From the final decree, an appeal may be taken to the circuit court of appeals of the District of Columbia. A person seUing a patented article should give due notice to the public that it is patented. This is usually done by attaching to the article, the word nfotjcesfor *' Patented," together with the day and year, patented the patent was granted. Where it is impracti- cable to attach the notice to the article, it may be afiixed by label either to the article, or to a package containing one or more of the articles. In a suit for damages as a result of an infringement, a person faiHng to give notice by properly marking his articles cannot recover damages, 372 ECONOMICS OF BUSINESS unless he gives proof that the defendant was duly noti- fied of the infringement, and continued after such notice to make, use, or sell the article patented. The law is very strict against any fraudulent use of pat- ent marking. It forbids any person marking upon any- thing made, used or sold by him, for which he has not a pat- Fraudulent ent, the name or any imitation of the name of patent ^"^^ pcrson who has a patent therefor, without marking. the consent of the patentee or his legal repre- sentative. The word ''Patent" or "Patented" or the words ** Letters Patent" must not be affixed to any pat- ented article unless by the patentee, or with his consent, or that of his legal representatives. The word " Patent " or any word or words implying that an article is patented must not be afl&xed to any unpatented articles. A per- son guilty of any of the above offenses is subject to a fine of not less than one hundred dollars with costs. A patent is property and can be sold, transferred by gift or bequeathed or mortgaged like any other property. Patent is The assignment of a patent transfers the ex- property, elusive right to it. A person may, by grant, transfer the exclusive right to make, use and sell under the patent within some specified district, as in one state, or he may by Ucense transfer the right to make alone, to make and sell, or to make, use and sell under the patent. The Patent Office notifies an appHcant if his claim is rejected, states fully the reasons for this action, and fur- Rejection nishes such information and references as may of claim. j^g useful in aiding the appHcant to judge of the advisabihty of prosecuting his application, or of altering his specifications. If, after receiving notice. PATENTS, TRADE NAMES AND SECRETS 373 an applicant presents his claim with or without altering his specification, the application is reexamined. If, upon reexamination, the claim is again rejected, the reasons must be fully and precisely stated. The appHcant has the right to amend before or after the first rejection, and may amend as often as the ex- aminer presents new references or reasons for rejection. In an amendment, the apphcant should clearly point out all the patentable novelty, which he thinks the case presents, in view of what is shown by the references cited, or the objections made. He should also show how the amendments avoid such references or objections. When an application has been twice rejected, for the same reasons upon grounds involving the merits of the invention, or when amended, for want of iden- , Appeals. tity with the invention originally disclosed, or because the amendment involves a departure from that originally presented, the applicant may, upon payment of a fee of ten dollars, appeal from the decision of the primary examiner to the examiners-in-chief. Upon the fihng of the appeal, it is submitted to the pri- mary examiner, who will, if it is found regular in form, furnish the examiners-in-chief with a written statement of the grounds for his decision on all points involved in the appeal, with copies of the rejected claim, and with the references appHcable thereto. From their adverse decisions, appeals may, with the payment of proper fees, be taken as in interferences, to the Commissioner, and then to the court of appeals of the District of Columbia. An abandoned application is one which has not been completed, and prepared for examination within one year 374 ECONOMICS OF BUSINESS after the filing of the petition, or which the appKcant has failed to prosecute within one year after the date, when the last official notice of any action of the office was Abandon- mailed to him. An applicant may expressly ™®^*- abandon his apphcation by filing at the office a written declaration of abandonment. The prosecution of an apphcation to save it from abandonment must include such proper action as the condition of the case may require. Before an application abandoned by fail- ure to complete or prosecute can be revived as a pend- ing application it must be shown to the satisfaction of the Commissioner, that the delay in its prosecution was unavoidable. When a new apphcation is filed in place of an abandoned or rejected one, a new petition, speci- fication, oath, drawing and fee are required, but the old model, if suitable, may be used. A forfeited apphcation is one upon which a patent has been withheld for failure to pay the final fee within Forfeited the prescribed time. When a patent has been appUcation. -yj^thheld because of the non-payment of the final fee, any person, whether inventor or assignee who has an interest in the invention, may file a renewal of the apphcation for the same invention. The second ap- phcation must be made within two years after the allow- ance of the original apphcation. Two persons are joint inventors if, by mutually work- ing together and mutually contributing ideas, they make Joint a discovery. They are entitled to a joint inventors, patent. Neither can obtain a patent for an invention jointly invented by them. Independent in- ventors of distinct and independent improvements in PATENTS, TRADE NAMES AND SECRETS 375 the same machine cannot obtain a joint patent for their separate inventions. If one person furnishes the capital and another makes the invention, they cannot make appHcation as joint inventors. In this case, the inventor can make an assignment of an undivided part interest to the one who supplied the capital, and upon request, the patent will be issued jointly to the inventor and the assignee. A design patent may be obtained by any person who, by his own industry, genius and expense, has invented any new and ornamental design for an article Design of manufacture not known, or used by others Patents, before his invention, or patented, or described in any printed pubKcation. The prerequisites for obtaining an ordinary patent usually apply to designs. A design to be patentable must be more than mere mechanical skill. Any person who infringes a patented design is infringe- liable to a fine not exceeding two hundred °^®°** and fifty dollars. If the profits awarded exceed that amount, he is also entitled to the excess. Damages and an injunction may also be awarded. Design patents are given, at the option of the appHcant, for three and a half, seven, or fourteen years. The fee is respectively ten, fifteen, or thirty dollars. The practice as to designs, in general, follows very closely that for patents, and nearly all the regulations and provisions which apply to the latter apply also to the former. A trade name is the name under which a business is carried on, or by which it is known in the trade, xrade People come to regard the name under which ^^ame. a business has been conducted for years, as an assur- 376 ECONOMICS OF BUSINESS ance of the quality of the article bearing it. The name When pro- ^^^^ becomes a valuable asset, and the owner tectedby is entitled to protection from an unfair use of it. Where the name is one which can be exclusively appropriated, the court protects the owner from any infringement, but where the name is descrip- tive or a geographical term, or one which others have an equal right to use, the court only interferes to prevent imfair competition in business. A trade name differs from a trade mark in that it is not afl&xed to a commercial article. A trade name, like Trade name ^^^^ ^^^ Taylor, is applied to a business where vs. hundreds of articles bearing trade marks are sold. The name of a business may at the same time be both a trade name and a trade mark. It may be the name of a business undertaking, or point out the place of business. This makes it a trade name. It may be afl&xed to the article produced by the undertak- ing, and it may then become a trade mark. The simplest form of a trade name is the name of an individual used as the name of a business. The name by which a person conducts a business need not be his christian name or his surname. A person may assume for the purposes of trade any name not prohibited by law, and will be protected in its use, the same as if he had The choice used his own name. If a person assumes an for*a^^^ arbitrary or fanciful name under which to con- duct his business, he may acquire the exclusive right to its use. But if a person uses his own name, or a selected name, he cannot exclude another person, having the same name from using it honestly and in good faith PATENTS, TRADE NAMES AND SECRETS 377 as a trade name, because every person has a right to use his own name in the conducting of his business. The use of one's own name can only be limited when such a name has become the trade name of another. Limitations and the later user is using it in a manner to upon the use of a deceive the purchasers or defraud the party person's who made it valuable. When it can be proven ^^*™®* that the use of a trade name is unfair to the former user of the name, the court interferes and prohibits the later user, not from the use of the name, but from using it in such a way as would deceive the people. Every man has a right to use his own name in his business, even though he may thereby interfere with or injure the business of another person bearing the same name, provided he does not resort to any scheme or artifice to produce the impression that the establishments are identical. The name of a place where a business is located usually constitutes a valid trade name. It is immaterial whether the name is original with the user, or had been used in other places sufficiently remote so that no conflict oc- curs. Thus, there may be a Columbia Hotel in every town, and the name is a valid trade name for vaUd trade every one. But if a person opens a hotel in a ^a^^es. town and calls it the Astor House, the court will pro- tect him in his trade name and not allow any person to open another hotel by the same name in that town. ** Saratoga" and ''What Cheer" have been protected as trade names for restaurants, "New York Dental Rooms," ''Mechanics' Store," "Six Little Tailors," "Christy's Minstrels" are cases of other protected names. 378 ECONOMICS OF BUSINESS Goodwill is the advantage or the benefit which comes to a business by reason of good name, reputation, situa- tion or connection. The probability that old customers will continue to patronize a business in conse- GoodwUi. quence of the way in which the business had been previously conducted is often a valuable asset. Goodwill is the advantage which an old estab- lished business has over a new business at its first start. However extended its influence may be, goodwill is worth Character- nothing unless it has the power of attrac- istics. ^Jqj^ sufficient to bring customers to the busi- ness of which it is a part. Goodwill has no separate, independent existence, and no meaning unless connected with some trade, business, or calling. Destroy the busi- ness unit and the goodwill is destroyed, though some elements may remain, which may be gathered together and be revived again. Goodwill was formerly held as closely related to the place where the business was conducted rather than to Importance the business itself. Location is usually a to gwT^^^^ ^^^y important factor, and in many business wiu. units there can scarcely be any goodwill apart from the place where the business is carried on. But where the reputation of the business is widely known, and where the product rather than the place of production or its manufacturers has won public favor, it is difficult to locaHze goodwill. The goodwill of a magazine, news- paper, or widely known goods are good examples. With a magazine or an article like Coca-Cola, it is immaterial whether the place of production is New York or Boston, as far as the goodwill is concerned. The location of the PATENTS, TRADE NAMES AND SECRETS 379 parent business unit is of little consideration. But with a hotel or a retail store, location is a very valued part of goodwill. A long-estabhshed firm, on retiring from busi- ness will have little difl&culty in finding a person who, wishing to go into a similar business, will be willing to give a certain amount, frequently a large amount, for the probabiHty that customers who have patronized the old firm will continue to trade with the new. The im- portance of location, as an element of goodwill, varies in every instance with the character of the business. The name of a business is a very important factor in the goodwill of many enterprises. A firm stamps its name upon its articles as a guarantee that they were sold or produced by the firm. Its name rather „ 1 . 11 1 1 Name of than its members becomes known to the business public. Frequently the members have been j^po^nt entirely changed and not a single member re- factor in mains whose name is exposed in the firm. The business is nevertheless continued under the old name because customers are accustomed to it, satisfied with the treatment received, and will continue to pat- ronize it. A long-estabhshed firm has its long hst of customers, who are satisfied with their goods and methods of doing business, and this means the assurance of con- siderable business. The good name and estabHshed reputation connected with the firm's name are frequently the most important assets of many business enterprises. As early as the eighteenth century, the goodwill of a business was recognized as of considerable ooodwiUis value. By the first quarter of the nineteenth Property- century, legal enforcement of contracts for the sale of 38o ECONOMICS OF BUSINESS goodwill were of frequent occurrence. Goodwill to-day, like any piece of property, may be bought, sold, be- queathed, or treated in bankruptcy proceedings the same as the bankrupt's other property. The person possess- ing it, is entitled to its exclusive use and will be protected in the same by the courts. A trade mark or a trade name cannot exist separate from the goodwill of the business with which it is con- nected. If a trade secret is a part of an enter- Close con- . ^ nection prise, the goodwill cannot be sold without the bushTcM secret. The connection between the business and good- and its goodwill is so close that the sale of a business or a share of it carries with it, the goodwill or a corresponding share in the goodwill even if not specifically mentioned. A secret is that which is concealed from general knowl- edge. Secrets of various kinds play an important part Trade i^ business. A secret composition or secret secret. process of manufacture, a recipe for a medi- cine, confidential information of various kinds, are some of the trade secrets which sometimes are valuable assets in business enterprises. The owner of a trade secret has absolute control over it. He may use it in making goods for sale or he may not. He fixes his own price for his product, but his control over his goods ceases with his sale of them. The law does not protect a person who makes an Protection article from a secret in the same way that not of same protection is given to a patent or a trade mark. nature as .•,.■.. that for He has a property right m his secret, but not trade mark. ^ special property right as the owner of a PATENTS, TRADE NAMES AND SECRETS 381 patent. A secret is valuable only so long as it is a secret. When it becomes general knowledge, its advantage to the owner usually ceases, and the former protection is with- drawn. The owner of a trade secret discovered by unfair means will be protected against its use by others. If a person has a trade secret and employs persons under contract, expressed or implied, these per- given if sons cannot use the knowledge obtained of the i^dtscovered secret against the employer. Secrets given to ^y ^^^ , TTIftHnS. confidential employees must not be dis- closed, and the court will restrain any party from using them. If a clerk leaves an employer and goes to a com- petitor, and tells a trade secret, the rival will be enjoined from using it, and may be compelled to account for any profits that may have accrued from the use of the infor- mation. The court simply protects the employer's property right in the secret. The disclosure of methods of business, processes of production, recipes for medicines, and all sorts of confidential information is illegal and protection will be given by the courts. A secret legally discovered may be used by the dis- coverer. If a person by his own efforts discovers a secret, he has a right to use it. The ingredients of a formula of a medicine sold publicly may be secret obtained by a study of the medicine itself legally discovered and used. The secret of the method of manu- may be facturing may honestly be obtained by a "^®^* study of the manufactured article. If a person ac- quires the secret information honestly, he may, assum- ing that there is no patent, use it as he likes. After 382 ECONOMICS OF BUSINESS the death of an owner of any unpatented process, any- one who honestly discovers it, may use it for mercantile purposes, and even use the name of the original discoverer. Persons employed for the purpose of devoting time and brains to discovering new methods relating to the business of their employer have no claim Employer to their discoveries. The employer is en- aulnven-** titled to all inventions and secrets discovered tionsand by his employees, who are paid to devote made by their time to that work. If a person, while employees employed as an inventor, discovers a valuable purpose. process and tries to get more for it than his salary, the court will compel the employee to disclose the process, as legally it belongs to his employer. A trade secret is property just as much as a piece of land. The owner of a secret has absolute control over it. Trade secrets may be transferred by sale, secret bequest or gift. If a person sells for a valuable property. consideration a trade secret, he has no right to reveal it to a third party. The assignment of a trade secret carries with it the right of protection. QUESTIONS 1. What are the requirements for an application for a patent ? 2. What is a conceived invention? What is its impor- tance? 3. What is a specification? Why should it be carefully worded ? 4. What is an interference? State its purpose. Give procedure. PATENTS, TRADE NAMES AND SECRETS 383 5. What is a caveat ? State its purpose. What rights does it confer ? 6. What is patent infringement? What determines an infringement ? 7. Why is it necessary to mark patented articles ? What is the punishment for fraudulent marking ? 8. What may a person do in case his application is rejected ? What are the different appeals ? 9. What is an abandoned application? What is a for- feited application ? 10. What are design patents? Give requisites. What is the punishment in case of infringement ? 1 1 . What is a trade name ? When is it protected by court ? 12. What is the limitation upon the use of a person's name in business? 13. What is goodwill and give its characteristics? 14. What is the importance of location in goodwill ? 15. What is a trade secret and when is protection given to it? REFERENCES E. J. Prindle, "Patents"; B. Singer, "Patent and Trade Mark Laws of the World"; E. R. Newell, "Patents, Copy- rights and Trade Marks" ; K. R. Swan, "Patent Designs and Trade Marks"; Howson and Howson, "Patents"; R. J. Frank, "Science of Organization and Business Development," Ch.V. INDEX Administrative expenses, how diffused, 131. Advertisement, appeal of, to the senses, 272 ; confusion in, 273 ; crowding in, 274; drawing points for, 278. Advertising, twofold purpose of, 261 ; classes of, 261 ; definition of, 262 ; no rigid rules for, 263 ; aims of, 263- 264; repetition in, 274; continuous, 276; magazine, 283-284; news- paper, 284-285 ; trade journal, 285- 286 ; mail order, 291 ; fake values in, 297; outdoor, 299-303; street car, 303-304; novelty, 304. Air, efficiency and, 197. Apprenticeship, revival of, 188; prin- ciples of new, 189 ; schools, 189. Attendance, punctuality in, 203 ; irreg- ularity in, 204. Attention, methods of attracting, 264- 265. Auditor, duties, 59. Bank notes, 319; legal tender of, 321. Bankruptcy, voluntary and involun- tary, 69. Barter, disadvantages of, 307 . Bland- Allison act, 314. Blotter, requirements for, 296. Bond, definition of, 61 ; mortgage, 61 ; income, 61 ; convertible, 62 ; col- lateral trust, 62; debenture, 62. Bondholder, definition of, 61 ; rights of, 62. Bookkeeping, cost accounting and, 133- Booklet, definition of, 286; essentials in writing, 287. Brassage, 312. Business, an unworthy occupation, i ; definition of, 2; in the broadest sense, 8; its limited meaning, 9; units, 9; methods of conducting, 20. Business organizations, types of, 25. Buyers, calculations of, 220-228. Buying, importance of, 218; on fu- ture delivery, 230. By-laws, definition of, 45; necessity of, 46 ; requisites for, 46. Calendar, essentials for, 295-296. Capital, definition of, 19; kinds of, goods, 19; to start new enterprise, 107. Capitalization, definition of, 63; basis of, 63. Carnegie, Andrew, 76, 99, 103. Catalogue, preparation of, 294-295. Chairman, of board of directors, duties of, 56. Charter, methods of terminating, 35; definition of, 40; special, 40; general, 40; essentials for, 41-43. Climatic conditions, manufacturing and, 146. Coinage, definition of, 309; free and restricted, 310; charges for, 311. Coins, standard, 310; subsidiary, 310; gold, 312; silver, 315; minor, 316, Collective bargaining, 214. Command, direct, 278. Commerce, definition of, 11. Commercial imdertakings, classes of, 12. Conceived invention, 362. Confidence, importance of, 106, 255. Contentment, effect on output, 191; a factor in efficiency, 192. Cooperation, definition of, 84; forced, 8s ; means of obtaining, 85 ; true spirit of, 85. 385 386 INDEX CoSperative enterprises, barriers to, 20; kinds of, 21. Coordination definition of, 86; es- sentials for, 87 ; importance of, 105. Copartnership, articles of, 30. Copy, definition of, 270; essentials for, 271 ; individuality in, 273. Copyright, definition of, 347 ; privileges conferred by, 348 ; productions sub- ject to, 348; ad interim, 352; affi- davit for, 353 ; assignment of, 355. Copjrwriter, requisites for, 277. Corporation, definition of, 31 ; sole, 31; public, 31; private, 32; non- stock, 32 ; stock, 32 ; advantages of, 34 ; control of, 38 ; disadvantages of, 38; domestic, 43; alien, 43; foreign 44; powers of, 44; special powers of, 45- Cost accounting, definition of, 1 23 ; successful system of, 132 ; impor- tance of, 134; check on wastes, 134; assists in price making, 135 ; pre- vents ruinous competition, 136; care in installation of, system, 137. Cost period, 130. Cost records, essentials of, 123. Costs, material, definition of, 121. Costs of production, division of, i2i. Counsel, duties and pwwers, 59. Coupon, definition of, 279. Credit, definition of, 322; fundamen- tals of, 323-326; information, 326- 331- Credit exchanges, 329. Credit system, development of, 13. Cumulative voting, 54. Customers, methods to attract, 243; holding, 24s ; viewpoint of, 246 ; study of, 247 ; information about, 256. Decorations, how used, 268. Demand, definition of, 15. Depredation, definition of, 178; of buildings, 181 ; determination of, 182; Cole's method for, 184; for small tools, 185. Design patents, 375. Details, old method of dealing with. 108; elimination of, 108; evils of, 109. Directors, agents of a corporation, 52 ; liability of, 52 ; qualifications of, 53 ; must act as body, 53 ; dummy, 54. Discipline, iii. Dispatching system, definition of, 159; emergency, 160. Display, demands of a good, 270. Dissipation, effects of, 77. Dividends, definition of, 59 ; power to declare, 59 ; granting of, 60. Division of labor definition of, 7; effects of, 7; based on cooperation, 84. Domestic system, 4. Dress, importance of, 250-251. Driving, effects of, 191. Dust, and low efficiency, 198. Economic activities, definition of, 2. Efficiency, definition of, 87; standard for, 87; determination of, 88; in labor force, 89; in factory, 89; measure of, 92 ; in moving goods, 160; in retail and wholesale enter- prises, 163 ; contentment and, 192 ; healthy workmen and, 195 ; tem- perature and, 197; dust and, 198; light and, 198-199 ; saving of energy and, 200 ; demands of, 201 ; fatigue and, 211; soldiering and, 212, 213; trade unions and, 213-214. Electric sign, use of, 301-302. Energy, saving of, 200. Enthusiasm, 255. Entrepreneur, a separate factor, 19; duties of, 97-102 ; quaUties of, 102- 107; director of broader policies, 108; aims of, in; demands on, to reach efficiency, 112; place of, in business, 118. Entrepreneurship, single, definition of, 25 ; adapted to few enterprises, 26. Experimenting with men, 192-193. Extractive industries, 10. Factors of production, 17. Factory, efficient, 90; towns, 145; buildings, 149; equipment, 150. INDEX 387 Factory system, definition of, 5 ; effects of, 5 ; introduced new problems, 6. Familiarity, effects of, 106. Family system, 3. Fatigue, definition of, 211; efficiency and, 211. Follow-up system, use of, 292. Forecasting, the future, 100, 103; supply and demand, 224, 247. Foreclosure, 73. Free samples, how to use, 298. General manager, duties and powers of, s8. Gold certificates, 318. Gold coins, 312. Good judgment, in business, 104. Goods, to carry in stock, 233. Goodwill, satisfied customers, 245 ; definition of, 378; property, 379. Greenbacks, 3i6;''"I:edemption of, 317. Gross income, 122. Guilds, 4. Hamilton, Alexander, 80. Hand bills, use of, 297-298. Handicraft system, 3 ; weakness of, 4. Harmony, 104. Headlines, definition of, 267 ; how used, 267-268. Holding company, definition of, 67 ; purpose of, 67. House organ, definition of, 288 ; classes of) 289; how to write, 289-290. Human element, importance of, 79-80. Illustration, essentials for a good, 265 ; various forms of, 266. Incorporators, definition of, 40; quali- fications of, 43. Indexing and fiUng systems, importance of, 124. Industrial leader, characteristics of, 91. Inefficiency, causes of, 191 ; tardiness and, 202. Insolvency, causes for, 68. Interference, trade mark, 340 ; patent, 367. Inventory, permanent, 158; defini- tion of, 171; old method of, 172; preparations for, 172; in progress, 173-174; importance of, 175. Investment, early forms of, 37. Irregularity in attendance, causes of, 204 ; treatment of, 204. Jobber, definition of, 237. Joint inventors, 374. Joint stock company, definition of, 28; characteristics of, 29, Knowledge, of goods, 220, 253, 277; of costs, 221; of markets, 222-223; of firm's finances, 224; of how goods are shipped, 226; of inventions and improvements, 227 ; of market con- ditions, 247 ; of trade conditions, 257 ; of buyers, 277. Labor, definition of, 18; physical and mental, 18; direct and indirect, 121 ; productive and non-productive, 121 ; cost of direct, 125 ; supply of, 144. Laboratories, to determine quality, 161. Labor efficiency, demands of, 215. Land, definition of, 17; its aid in production, 17-18. Legal tender, definition of, 320; of the present currency, 320-321. Letter, requirements of, 293. Liability, single entrepreneurship and, 26 ; partnership and, 27 ; limited, 35 ; subscription, 35 ; double, 35. Light and efficiency, 198. Location, chief factors affecting, 141 ; markets and, 141-142 ; transporta- tion and, 142 ; power agents and, 143; labor supply and, 144-145; climatic conditions and, 146; water supply and, 147 ; capital and, 147 ; suburb, 148 ; of store, 148. Luck, factor in business, 117, 133. Machinery, care of, 150. Magazine, for advertising purposes, 283-284. Mail order, advantages of, 240; dis- advantages of, 241 ; advertising, 262, 291. Maintenance, definition of, 179. 388 INDEX Managerial ability, 6. Manufacturer, early, 4; old and new meaning of, 11. Manufacturing, definition of, 10; in- cludes commercial activity, 1 1 ; chief aim in, 155. Market, importance of, 8 ; early mean- ing of, 14; extension of, 15; modem meaning of, 15; kinds of, 16; limi- tations to, 16; nearness to consum- ing, 141. Materials, direct, 125, 156; classifica- tion of, iss; storage of, 156; move- ment of, 160; buying of, 161; eco- nomical use of, 162. Mediums, definition of, 282 ; varieties, 282; choice of, 282. Mercantile agencies, 328. Merchant, during the handicraft period, 34. Money, definition of, 307; materials used as, 307 ; functions of, 308. Natural forces, assistance to man, 18. Newspaper, use in advertising, 284- 28s. Non-staples, definition of, 228; buy- ing, 228; overbuying, 231. Nourishment, proper, 199. Novelties, advertising, 304. Nurses, importance of, 196. Obsolescence, definition of, 180 ; reasons for, 180-181. Orders, how given, no. Organization, definition of, 75; busi- ness, 76 ; object of, 76 ; aims of, 77 ; elements necessary for success in, 79. Outdoor advertising, 298-303. Overbuying, limitations on, 229; when justifiable, 230; non-staples, 231. Overcapitalization, definition of, 64. Overhead expenses, definition of, 121; division of, 122; methods of diffu- sion 126; percentage-to-direct labor method, 126; hourly rate method, 127; sales method, 128; machine hovir method, 128; distributed directly, 129. Overstocking, 219. Painted signs, purpose of, 300; kinds of, 300; requirements of, 301. Partners, liabiUty of, 27 ; special, 27. Partnership, definition of, 26; forma- tion of, 27 ; liability in, 27 ; disso- lution of, 28; general, 28; special, 28 ; advantages of, 29. Patent, congress power over, 361 ; def- inition of, 361 ; requirements for a, 363 ; persons who may acquire, 363 ; application for, 364; time of, 369; foreign, 369; infringement of, 369; search for, 370; is property, 372; appeal in, cases, 373 ; abandonment of, 374; design, 375. Permanency, in service, 193. Personality, source of, 91 ; importance of, 91 ; in large corporations, 92. Pictures, use in advertising, 265; objections to use of, 267. Piece rate, definition of, 206 ; requi- sites for, 206 ; causes of antagonism to, 207 ; old system of, 207 ; proper method for fixing, 208; scientific, 209. Posters, definition of, 299; use in advertising, 299-300. Preferred positions, 268-269. President, duties of, 56 ; powers of, 57. Producers, classes of, 5. Production, center of business activity, 2 ; systems of, 3 ; units of, s ; limit to, 8. Profits, definition of, 113; division of, 114; minimum, 115; vary in amount, 116; compensation for risk taking, 116. Profit sharing, definition of, 209; objections to, 210. Promises, how kept, 226. Promoter, definition of, 65; work of, 65 ; pay of, 67. Promotion, methods of, 65. Promptness, in filling orders, 225. Public ownership, 20. Punctual attendance, 203. Quality, in goods purchased, x6i ; in goods produced, 161. INDEX 389 Receiver, definition of, 69 ; powers of, 70 ; duties of, 70. Receivership, purposes of, 69. Redemption act, 1875, 317. Red tape, definition of, 82. Reorganization, definition of, 71 ; method of, 71 ; requires imanimous consent, 73. Repair man, duties of, 150. Reports, importance of, 108; sales- men's, 257. Retail merchants, methods of reaching, 239. Retail stores, location of, 148; ad- vantages and disadvantages of, 242. Risks, assumed by entrepreneur, 99 ; of markets, 100 ; shifted to specialists, loi ; in a corporation, 107 ; com- pensation for, 116. Sale, how to close a, 252. Sales manager, qualifications for, 248. Salesmanship, fundamental principles of, 249-250. Salesmen, selecting, 248; training of, 249; classes of, 256 ; reports, 257. Satisfaction, importance of, 245. Secretary, duties of, 57. Securities, markets for, 16. Seigniorage, 312. Selling, importance of, 236; methods of, 237 ; direct to consumers, 240. Selling expenses, how diffused, 131. SelUng price, factor in profits, 122, Seniority, when recognized, 194. Service, its demands, 244. Sherman act, 314. Shipping department, 166; system necessary in, 167. Silver certificates, 318. Silver dollar, redemption of, 311; origin of, 313 ; amount coined, 315. Single entrepreneurship, definition of, 25 ; Umitations to, 25 ; liability of, 26. Smith, Adam, 8. Soldiering, definition of, 212; methods of, 212; elimination of, 213. Specialization, 187. Specification, definition of, 364; every essential must be disclosed in, 365. Standard, quality, 176; tools and machines, 177; methods, 177; sell- ing talks, 253-254. Standardization, definition of, 175; necessary in factory, 177. Staples, definition of, 228. Stock, capital, 46 ; certificate, 47 ; methods of issuing, 47 ; dividend, 47 ; common, 48; preferred, 48; pre- ferred, cumulative, 48; preferred, non-cumulative, 48. Stockholder, definition of, 47; powers of, 55 ; the risk taker, 107. Store, location of, 148. Storeroom, location of, 157; a neces- sity, 157. Stores, definition of, 155. Stream of modem industry, 12. Street car, use in advertising, 303-304. Strenuousness, definition of, 90. Style, importance of, in buying, 227- 228; a factor in selling, 244. Success, essentials for, 106. Suggestion, importance of, 254. Supplies, definition of, 156. Supply, definition of, 15. System, definition of, 80; a workable system, 81 ; installation of, 81 ; lack of, 83 ; advantages of, 84. Tact, definition of, 255. Tardiness, deaUng with, 202. Technical knowledge, importance of, 105. Time wages, 205. Tool room, a necessity, 153 ; functions of, 153- Tools, old method of providing, 151 ; necessity of modem, 153; repairing of, 154; making of, 155. Trade dollar, 313. Trade journal, 285. Trade mark, definition of, 33s ; appli- cation for, 338 ; registration of, 339 ; cancellation of, 340; attached to goods, 342 ; infringement of, 346. Trade name, definition of, 375 ; when protected, 376; vaUd, 377. Trade secret, definition of, 380 ; when protected, 381. 390 INDEX Trade unions activity of, 145 ; effi- ciency and, 213-214. Transmission of intelligence, 14. Transportation, definition of, 13; methods of, 14; good facilities of, 142. Treasurer, duties and powers of, 58. Treasury notes, 318. Understocking, 219. Underwriter, 66. United States Steel Corporation, 37, 38, 42. Utilities, definition of, 18. Ventilation, elements of, 197. Vice-President, duties and powers of 57- Wages, problem of, 204; time, 205; based on productivity, 211. Wages of management, definition of, 114; vary in amount, 115. Waste, definition of, 168; in buying materials, 169; in use of materials, 169; of time, 170; of energy, 170; detection of, 171. Watered stock, 64. Wholesale stores, location of, 149. T HE following pages contain advertisements of a few of the Macmillan books on kindred subjects. Business Organization and Combination An Analysis of the Evolution and Nature of Business Or- ganization in the United States and a Tentative So- lution of the Corporation and Trust Problems By lewis H. HANEY, Ph.D. Professor of Economics in the University of Texas. Author of " A Congressional History of Railways " and " History of Economic Thought." Dr. Haney in his treatment of business organization recog- nizes two kinds : business that is productive from the social point of view, and business that is productive only from the individual point of view. According to the social point of view, business is productive when it adds to the net sum of goods and services which men want ; that is, when the amount of food, clothes, books, automobiles, teaching, medi- cal service, etc., is increased. But individuals may grow rich in ways which do not increase the net sum of goods and services and still be actively engaged in business, or in pro- duction from the individual standpoint. A large part of ad- vertising is merely acquisitive, not adding anything, but tak- ing for one business man what another business man loses. So it is with some " speculation " and some middlemen's ac- tivities. But all this, when recognized as lawful and when the price is freely paid, Dr. Haney calls "business "; and in the long run, he holds, the test of a good business man is simply the amount of income or private gain which he ac- quires legally. 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"An important contribution to the literature of business psychology." — The American Banker. THE MACMILLAN COMPANY Publishers 64-66 Fifth Avenue New York Elementary Principles of Economics By IRVING FISHER Professor of Political Economy, Yale University Clothy i2mo, jj/ pages, $2.00 net EXTRACTS FROM THE PREFACE Of the many possible methods of writing economic textbooks, there are three which follow well-defined, though widely different, orders of topics. These are the "historical," the "logical," and the "pedagogical." . . . The pedagogical begins with the student's existing experience, theo- ries, and prejudices as to economic topics, and proceeds to mold them into a correct and self-consistent whole. The order of the first method, therefore, is from ancient to modern; that of the second, from simple to complex; and that of the third, from familiar to unfamiliar. The third order is the one here adopted. That the proper method of studying geography is to begin with the locality where the pupil lives is now well recognized. Without such a beginning the effect on the student's mind may be like that betrayed by the schoolgirl, who, after a year's study in geography, was surprised to learn that her own playground was a part of the surface of the earth. . . . This book, therefore, aims to take due account of those ideas with which the student's mind is already furnished, and to build on and trans- form these ideas in a manner adapted to the mind containing them. This is especially needful where the ideas are apt to be fallacious. The economic ideas most familiar to those first approaching the study of economics concern money, — personal pocket money and bank accounts, household expenses and income, the fortunes of the rich. Moreover, these ideas are largely fallacious. 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Eco- nomic history and economic development are not considered in any set chapters, being touched only as they happen to illustrate one or another of the problems of contemporary society. Among the important chapters are those on Wealth and Labor ; The Division of Labor and the Development of Modern Industry ; Quantity of Money and Prices ; Differences of Wages ; Wages and Value ; General Wages ; Trade-Unions and Labor Legislation. Of these perhaps the most important is that dealing with General Wages. Here the fundamental questions as to general wages as raised by the case of hired laborers is discussed ; also the notion that lavish expenditure creates demand for labor and makes wages high. The author explains why hired laborers universally desire that employment should be created and dislike labor-saving appliances. 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THE MACMILLAN COMPANY Publishers 64-66 Fifth Avenue New York The Purchasing Power of Money A STUDY OF THE CAUSES DETERMINING THE GENERAL LEVEL OF PRICES AN EXPLANATION OF THE RISE IN THE COST OF LIVING BETWEEN 1896 AND 1910 By IRVING FISHER Yale University Author of " The Rate of Interest," " The Nature of Capital and Income," " A Brief Introduction to the Infinitesimal Calculus," etc. Cloth J 8vo, 505 pages J $3.00 net; by mail, $3.18 "The work is well and authoritatively written and forms a splendid addi- tion to economic literature." — Bulletin of the Chamber of Commerce. " A searching and thorough restatement and amplification of the old * quan- tity theory ' of money and a plea for the recognition as an exact science of the branch of economics which treats of the factors in its purchasing power." — Chicago Evening Post. *' By far the most important work yet published on that special phase of economics with which it is concerned." — Saturday Chronicle. **No more important work on money has recently appeared." — Newark Evening News. " A volume which has practical as well as academic value." — Boston Globe, PUBLISHED BY THE MACMILLAN COMPANY 64-66 Fifth Avenue, New Tork 14 DAY USE RETURN TO DESK FROM WHICH BORROWED LOAN DEPT. This book is due on the last date stamped below, or on the date to which renewed. Renewed books are subject to immediate recall. 8Wa» 'ggPTj y REC'D LD FEB22l9fi? NOV 2 8 1982 LD 21A-507n-8,'61 General Library YB 05904