THE THEORY OF INTEREST

These same principles apply also to loans contractedin the commercial world at large. A short time commercialloan is contracted for the purpose of buying goods, withthe expectation of repayment after their sale. A commonform is what is called commercial paper. A ready-made-clothing house may buy overcoats in summer in orderto sell them in the fall. If these operations were con-ducted on a strictly cash basis, the tendency would befor the income of the clothier to suffer great fluctuations.He could realize but little during the summer, on accountof the enormous expense of stocking in for fall trade,whereas in the fall he could obtain large returns and liveon a more elaborate scale. This would mean the alterna-tion of famine and feast in his family. One way to avoidsuch a result would be to keep on hand a large supplyof cash as a buffer between the money income and per-sonal expenditure. In this case the fluctuations in hisincome would not affect his personal enjoyment, butwould cause an ebb and flow in his volume of cash. Buta more effective and less wasteful method for the mer-chant to take the kinks out of his stream of real incomeis by negotiating commercial paper. The clothier, insteadof suffering the large cash expense of stocking up insummer, will make out a note to the manufacturer ofovercoats. After the fall trade, this note is paid, havingfulfilled its function of leveling the income stream ofthe clothier.

Sometimes business men contract short term loans, notfor some specific transaction such as the purchase ofstock in trade, but for general business purposes, as, forinstance, improvement or enlargement. In this case, theextraordinary expense involved may be met by a speciesof loan called accommodation paper. Evidently its func-

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