Commercial Paper

By commercial paper is meant the credit instruments or documents which

the credit system now in general use throughout the commercial world

regularly brings into existence and liquidates.

The essence of this system is buying and selling on time. The farmer

buys seed, implements, fertilizer, labor, etc., and pays for them

after the crops have been harvested and sold. The manufacturer buys

raw materials and
pays for them after they have passed through the

transformation process which he conducts and the completed goods have

been marketed. He frequently sells them to jobbers or wholesalers on

time and these in turn sell them on time to retailers and these to

consumers. Farmers, manufacturers, and merchants both buy on time and

sell on time, and are thus both debtors and creditors, and each

expects that his sales will ultimately pay for his purchases.

The obligations involved in these transactions are represented and

recorded in the form of book accounts, promissory notes, or bills of

exchange, the latter being written or printed, or partly written and

partly printed, orders of creditors on debtors to pay to themselves or

to third parties the sums indicated. These documents are being

constantly made and constantly paid as the processes of agriculture,

industry, and commerce proceed. Indeed, their creation and liquidation

is a normal phenomenon of our modern economic life.

The term commercial paper, as we are using it, applies to such

promissory notes and bills of exchange as belong to this credit

system. It does not apply to such notes and bills when they owe their

existence to credit operations of a different kind, such for example

as accommodation loans or investment operations. Indeed, the

essential characteristic of commercial paper is not revealed in the

form of the credit document but in the fact that it is a link in this

chain of exchange operations by which modern commerce is carried on.

This use of the term should also be distinguished from the one common

among bankers and others. In this popular usage these documents are

called commercial paper because they are themselves objects of

commerce. In our use of the term the adjective "commercial" applies to

them only when they play the role of intermediary in a process of

exchange through credit. In this sense it is a matter of indifference

whether they pass through the hands of brokers or not, and the fact of

their being objects of purchase and sale does not confer the quality

of commercial paper upon documents having an origin and character

other than that above described.