that might be interposed to it between the original parties, but this is not true of certain absolute defenses which affect the very existence of the contract, and which we will consider later. To bring the instrument under the rule, the holder must be an innocent purchaser for value, or, as it is often expressed, a "bona fide holder for value" or a "holder in due course." The term "bona fide holder" means a holder who has acquired the instrument in good faith, without knowledge or notice of any defenses or defects that could be set up against any prior holder. To constitute notice, the holder must have had actual knowledge of the defect, or his carelessness must have been so great as to amount to "bad faith."

Defenses: general statement.-It can be stated as a general proposition that a bona fide purchaser before maturity and for value takes title free from all defects and defenses, or, as is often stated, "free from equities," except such as affect the very existence of the instrument and which are said to constitute absolute defenses. The absolute defenses are either cases in which no valid contract ever existed or where the contract is declared illegal and void by statute. No delivery. The instrument may never have been delivered. It is considered by the law merchant to be a sufficient delivery to hold the maker or acceptor if it is handed over by the party himself or his agent either with or without authority, or if it gets into circulation through the negligence of the maker. The question is, Did the maker deliver the instrument or was his actor representation responsible for its coming into the hands of bona fide holders? If this be true, he must suffer, although it was not his intention to deliver the instrument. On the other hand, if he has been deprived of the possession of the paper by fraud or theft, he cannot be compelled to pay the amount named to anyone, as in this case the instrument was never delivered and no contract existed. If in the making of the instrument there was such fraud as would vitiate a contract, then no contract exists, and the maker or acceptor cannot be held.

Alteration or forgery.-Another failure of contract arises when there has been a material alteration or forgery, for in these instances the minds of the parties have not met in the contract. To alter the terms of a negotiable instrument without authority after it has been signed destroys its validity even in the hands of a bona fide holder. Any alteration of a negotiable instrument which changes its legal effect is a material alteration. There must be an intent to make the alteration, and it must be made, of course, without the consent of

the maker or acceptor of the instrument. The alteration must also be made by a party to the instrument or one in lawful possession of it. The holder cannot be prejudiced or injured by the act of a stranger without his consent. It will be seen from the foregoing paragraphs that when a signature to a negotiable instrument is forged the party whose name is so used cannot be held.

Want of capacity to contract.-The contract represented by the instrument may not be binding, for the reason that the party or parties did not have the capacity to contract; as, the note or bill of an infant or lunatic. Still, if a valid negotiable instrument comes into the hands of an infant, he may, if of full mental capacity, transfer it to another. The mere fact that a contract is illegal is not an absolute defense to a negotiable instrument in the hands of a bona fide holder; but if the contract is expressly made illegal and void by statute an absolute defense is created.

Equities. Other defenses than those described as absolute are termed "equities," and are valid defenses between the original parties to the instruments, but, as we have learned, cannot be set up against bona fide holders. Lack of consideration is a good defense as between the original parties, but not as against a bona fide holder for value. It is an equity and not an absolute defense. The fact that there is an absolute defense to an instrument does not discharge all of the parties to it or through whose hands it has passed. As we have seen, such defense exonerates the maker or acceptor of a negotiable instrument, but it does not relieve the liability of the indorser, because every person who negotiates such an instrument warrants that it is genuine, that he has a good title to it, and that all prior parties have capacity

to contract.

18. UNIFORM NEGOTIABLE INSTRUMENTS LAW1

BY WILLIAM GREEN HALE

As early as 1890 a movement was started in the United States to bring about a codification of the law merchant in the several states with a special view to securing uniformity in the different jurisdictions. Following the lead of New York, commissioners were appointed in other states, and in 1895 at a meeting of these commissioners a Committee on Commercial Law was instructed to have prepared a codification of the law relating to bills and notes. The draft was forthwith Adapted from Law of Negotiable Instruments, pp. 9-11. (Blackstone Institute, 1915.)

I

prepared and submitted to the conference which met at Saratoga in August, 1896, and, with some amendments, was adopted, and is known as "The Negotiable Instruments Law."

Following this, steps were at once taken to secure the adoption of the bill, thus approved, in every state in the Union. Again the state of New York took the lead by passing the law in 1897. Since then this bill has become a law in forty-three states, Alaska, the District of Columbia, Hawaii, and the Philippine Islands; in a few instances, however, with more or less important modifications.

IV

PRINCIPLES OF "COMMERCIAL" BANKING

Introduction

As has been indicated in chapter ii above, credit in its various forms has come to play so important a rôle in the modern business world that present-day economy is often called a credit economy. Within this great and complicated credit structure banking institutions occupy a position of unique importance. In fact, banks are often called credit institutions, or manufactories of credit, because they create credit instruments that are used as currency quite as are the ordinary media of exchange. While, as we shall presently find, this is a more or less narrow view of the relations of banking to business in general, it is none the less true that banking is vitally related to the entire system of credit that has been developed.

In our study of banking we are to consider first the so-called commercial bank. It is necessary to say so-called commercial bank, or to place the word commercial in quotation marks, for the reason that much of the business performed by the banks thus designated is really of an investment nature. A commercial bank is generally defined as an institution which exchanges present for future rights, that is, which gives an individual the right to receive funds now, or on demand, in exchange for the right of the bank to receive funds from the individual at some future date. Under this definition come all our national banks and a large proportion of the banks chartered under the laws of various states. When viewed from the standpoint of the uses to which the funds borrowed are put, however, these banks which thus create demand obligations are by no means strictly engaged in furthering commercial as distinguished from investment business. It was originally intended that the banks which created these demand obligations in exchange for short-time promises to pay would as a matter of course, and virtually of necessity, make loans for strictly commercial purposes, for unless they made commercial loans the obligations could not be liquidated within a short time. In practice, however, a large proportion of the loans made by "commercial" banks are for investment purposes, and out of this practice

have grown some of our most serious banking problems. It is highly important, therefore, at the very beginning of the study of banking to bear in mind that "commercial" banking is only partly commercial. The full significance of this fact, however, will not be apparent until the last chapter of the volume is reached. Our present purpose is merely to discuss the working of the "commercial" bank as a type of business institution.

An understanding of the practical operations and the functions of a bank may best be gained by approaching the subject through the medium of a bank's accounts or financial statement. The practical problems based on the statements given below serve to elucidate the everyday business transactions of a bank in dealing with its

customers.

In connection with the economic functions that are performed by banks while conducting their daily operations, selections Nos. 21 and 22 discuss the subject from different points of view; together they serve to bring out clearly the essential nature of the commercial banking business as the economist sees it. However, from the point of view of the business man who is interested in banks from the standpoint of the use he may make of them, as distinguished from that of the economist who is interested in banking from the standpoint of its relation to the entire economic system, "commercial" banks are primarily loaning institutions to which he may look for assistance in carrying on his business. Similarly, from the standpoint of the banker himself, a bank is an institution out of which profits may be made, and its practical operations are conducted with this single end in mind. It is important to an understanding of the entire problem of banking that all these points of view be kept in mind; to consider the subject from any one angle alone is to get but a very inadequate grasp of its manifold nature.

From every point of view, however, the granting of loans is the most important part of banking. It is from this source that the banker derives his chief profits; it is in this way that the commercial bank chiefly serves the business world and justifies its right to exist from a business point of view, and it depends upon the character of the loans made whether the bank will be sound and safe and whether it properly fulfils its functions in relation to the economic system as a whole. It is in connection with the analysis of the loan items, moreover, that one may expect to find the investment operations, already noted, that are so commonly conducted in the name of