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Chapter 01 - Functions and Roles of Financial Institutions and Markets in the Global Economy
Chapter 1
Functions and Roles of Financial Institutions and Markets
in the Global Economy
Chapter Outline
1.1. Introduction to the System of Financial Institutions and Markets
1.2. The Global Economy and the System of Financial Institutions and Markets
1.2.1. Flows within the Global Economic System
1.2.2. The Role of Markets in the Global Economic System
1.2.3. Types of Markets
1.2.4. The Financial Markets and the Financial System: Channel for Savings
and Investment
1.2.4.1. Nature of Savings
1-1
Chapter 01 - Functions and Roles of Financial Institutions and Markets in the Global Economy
1-2
Chapter 01 - Functions and Roles of Financial Institutions and Markets in the Global Economy
2. What are the principal links between the financial system and the economy?
Why is each important to the other?
Answer: The principal link between the financial system and the economy is the
Financial Markets. The financial markets channel savings to those individuals and
institutions needing more funds for spending than are provided by their current
incomes. The financial markets are the heart of global financial system, attracting and
allocating saving and setting interest rates and prices of financial assets (stocks, bonds,
etc.).
1-3
Chapter 01 - Functions and Roles of Financial Institutions and Markets in the Global Economy
3. What are the principal functions or roles of the global financial system? How
do financial institutions and markets fulfill those roles or functions?
Answer: The principal function or role of the global financial system is to move scarce
loanable funds from those who save to those who borrow to buy goods and services and
to make investments in new equipment and facilities so that the global economy can
grow and increase the standard of living enjoyed by its citizens. Those who supply
funds to the financial market receive promises packaged in the form of financial claims
(future dividends, interest, etc.) and financial services (stocks, bonds, deposits, and
insurance policies) in return for the loan of their money.
4. What exactly is saving? Investment? Are these terms often misused by people on
the street? Why do you think this happens?
Answer: Saving: For households, savings are what is left from current income after
current consumption expenditures and tax payments are made. For the business sector,
savings include current earnings retained inside business firms after payment of taxes,
stockholder dividends , and other cash expenses. For government, savings arise when
there is a surplus of current revenues over current expenditures in a government’s
budget.
Investment: Investment generally refers to the acquisition of capital goods, such as
buildings and equipment, and the purchase of inventories of raw materials and goods to
sell. For households, investment is the purchase of a home. For business firms,
investment is the expenditures on capital goods (buildings, equipment and other fixed
assets) and inventories (raw materials and goods for sale). For government, investment
is the expenditures to build and maintain public facilities (buildings, monuments,
highways, etc.).
The terms may be misused since their definitions depend on the type of unit in the
economy that is doing the saving or investment.
5. How and why are savings and investment important determinants of economic
growth? Do they impact our standard of living? How?
Answer: The role of the financial system in channeling savings into investment is
absolutely essential to the growth of the economy. For example, if households set aside
savings and those funds are not returned to the spending stream through investment by
businesses and governments, future income payments will decline, leading, in turn to
reduced consumption spending. Then, the public's standard of living will fall. On the
other hand, if the households save and these savings are channeled into investment, the
economy's productive capacity will increase. In turn future income payments will rise,
making possible increased consumption spending and a higher standard of living.
1-4
Chapter 01 - Functions and Roles of Financial Institutions and Markets in the Global Economy
6. What seven vital functions does the financial system of money and capital
markets perform?
Answer: Savings Function: Bonds, stocks, and other financial claims produced and
sold in financial markets by financial institutions provide a profitable, relatively low-
risk outlet for the public’s saving which flow through the financial markets into
investment. Wealth Function: A stock of assets (the financial instruments) sold by
financial institutions in financial markets provide an excellent way to store of wealth.
Liquidity Function: Financial markets provide liquidity (immediately spendable cash)
for savers who hold financial instruments but are in need of money. Credit Function:
Global financial markets furnish credit to finance consumption and investment
spending. Payments Function: The global system of financial institutions and markets
provides a mechanism for making payments for goods and services. Risk Protection
Function: The financial institutions and markets around the world offer businesses,
consumers, and government protection against life, health, property, and income risks.
Policy Function: The financial markets are a channel through which governments may
attempt to stabilize the economy and avoid inflation.
8. What exactly do we mean by the term wealth? How does it differ from net worth?
Why is it important?
Answer: Wealth is the sum of the values of all assets we hold at any point in time. The
increase (or decrease) in the total wealth we own in the current time period equals to
our current savings plus the value of all previously accumulated wealth multiplied by
average rate of return on all previously accumulated wealth. While the measure of an
individual’s wealth is important measure of their financial position, a more accurate
measure is that of net worth. Net worth is the difference between an individual’s assets
and their liabilities. It is important because wealth holdings represent stored purchasing
power that will be used as income in future periods to finance purchases of goods and
services and to increase the society's standard of living.
9. What is net financial wealth? What does it reveal about each of us?
Answer: Net financial wealth equals to financial assets - total debt. Net financial wealth
indicates our net value, i.e., the residual value of all our assets after fulfilling all our
financial obligations.
1-5
Chapter 01 - Functions and Roles of Financial Institutions and Markets in the Global Economy
10. Can you explain what factors determine the current volume of financial wealth
and net financial wealth each of us has?
Answer: The volume of financial wealth is thus dependent on current savings (which
is in turn dependent on current income - current expenditures) and the size of previously
accumulated wealth. The volume of net financial wealth is thus dependent on the
current volume of financial wealth and the total debt. The average rate of return is one
of the factors in the volume of financial wealth. Furthermore, different units in the
economy have different wealth and net wealth due to their different inheritances of
wealth, capabilities of creating and retaining wealth, luck, foresight, debt preferences,
opportunities, etc.
12. If we follow financial institutions and markets around the world each day, it
soon becomes apparent that the interest rates and asset prices in different markets
tend to move together, albeit with small leads and lags. Why do you think this is
so?
Answer: For the common commodity and credit, borrowers can switch from one credit
market to another, seeking the most favorable credit terms wherever they can be found.
The shifting of borrowers among markets helps to weld the parts of the global financial
system together and to bring the credit costs in the different markets into balance with
one another. Also, speculators work to equilibrate asset prices by purchasing assets that
they believe are under priced and by selling those that they believe are overpriced.
Similarly, arbitrageurs purchase underpriced assets in one market in order to sell them
in a market which overvalues them.
1-6
Chapter 01 - Functions and Roles of Financial Institutions and Markets in the Global Economy
13. What are some of the forces that appear to tie all financial institutions and
markets together and often result in common movements in prices and interest
rates across the whole financial system?
Answer: Credit, the common commodity, can help the borrowers shift between markets
and weld the parts of the financial system together, thus bringing the credit costs in the
different markets into balance with one another. The speculators are continually on the
lookout for opportunities to profit from their forecasts of future market development.
The arbitrageurs help to maintain consistent prices betweens markets aiding other
buyers in finding the best prices with minimal effort.
14. What is meant by the dynamic financial system? What trends appear to be
reshaping the financial system of financial institutions and markets?
Answer: The global financial system is rapidly changing into a new financial system,
powered by innovation as new financial services and instruments continually appear o
attract customers. Major trends are under way to convert smaller national financial
systems into an integrated global system, at work 24 hours a day to attract savings,
extend credit, and fulfill other vital roles. Many countries have begun to harmonize their
regulations so that financial service firms operate under similar rules no matter where
they are located.
ANSWER: False – household’s wealth must also take into account the value of the
individuals asset holdings as well as their liabilities.
b. The market value of a household’s home is equal to the equity that the
household has in the home and is therefore part of the household’s net worth.
ANSWER: False – Market value of a home is not equal to the equity that the
household has in the home. Market value of the home is the going price for such a
home in current time, while equity is the new sales price minus the debt outstanding
on the home.
ANSWER: True
1-7
Chapter 01 - Functions and Roles of Financial Institutions and Markets in the Global Economy
Answer: b
3. John Jacobs looks over his balance sheet from the beginning of the month. He
observes that his assets include: (i) a market value of $120,000 for his home;
(ii) $25,000 in corporate stock; (iii) a Treasury bill with a face value of $1,000
to be received at the end of the month, for which the current market value was
$983; (iv) a bank deposit account of $6,000; and (vi) some miscellaneous items
that he values at $35,000. His only outstanding liability is the mortgage on his
house, which has a balance totaling $40,000. It is now the end of the month
and he just received his $6,000 salary, along with the income from the maturing
T-bill and interest on his bank deposits, which were paying an annualized
interest rate of 2 percent (2/12 percent per month). His mortgage payment was
$1,500, of which $500 would go toward the principal. His other expenses for
the month came to $4,000. He had planned to make an additional house
payment for the month, all of which would go to paying down the principal on
the loan. However, his daughter is in college and wants to go to the Bahamas
for spring break. The expense of her trip would be an additional $1,800.
a. Would he be able to make the additional house payment and fund his
daughter’s trip without reducing his account balance in the bank deposit
account?
ANSWER: His total monthly income, including the bond and interest payments
equal $1,000 + $6,000 + $10 = $7,010.
His total expenses this month if he chooses to fund his daughter’s trip and make
the additional payment on the house is $1,500 + $4,000 +$1,500 + $1,800 =
$8,800.
Therefore he would have to draw down his savings account by $7,010-$8,800
= $1,790.
b. What would his net worth be if he funded his daughter’s trip and made the
additional mortgage payment?
ANSWER: His total assets would consist of a home valued at $120,000,
$25,000 in corporate stock, a bank account of $4,210, and miscellaneous items
totaling $35,000. This brings his total assets to $184,210.
1-8
Chapter 01 - Functions and Roles of Financial Institutions and Markets in the Global Economy
His only liability is the outstanding balance on his mortgage. His made two
payments of $1,500 on his mortgage this month. One of the payments included
a $500 payment on the principal of the loan. The other payment was a principal
only payment. Thus the new outstanding balance of his mortgage is $40,000 -
$500 - $1,500 = $38,000.
So his net worth is given by his total assets less his total liabilities, or $184,210
- $38,000 = $146,210.
c. What would his net worth be if he did not fund his daughter’s trip and
made the additional mortgage payment?
ANSWER: If he did not fund his daughter’s trip, but he did make the extra
payment, then his monthly expenses would be $1,500 + $4,000 +$1,500 =
$7,000. His monthly income, including the maturing bond and interest
payments, would still be $7,010. This means that he would be able to increase
his deposit account by $7,010 - $7,000 = $10 this month.
Given this, his assets would be a home valued at $120,000, $25,000 in corporate
stock, a bank account of $6,010, and miscellaneous items totaling $35,000. This
brings his total assets to $186,010.
Since he still made the extra payment, his total liabilities remain the same as in
part b. So his net worth would be $186,010 - $38,000 = $148,010
d. Would his net worth change if he decided to fund the trip, but did not make
the additional mortgage payment? Explain.
ANSWER: If he funded his daughter’s trip, but did not make the extra payment,
his monthly expenses would be $1,500 + $4,000 + $1,800 = $7,300. His income
would still be $7,010. This means that he would need to draw on his savings by
$7,010 - $7,300 = $290.
Given this, his total assets would be $120,000 + $25,000 + $5,710 + $35,000 =
$185,710. Since he did not make the extra mortgage payment, his liability is
only reduced by the $500 principal payment of the original mortgage payment.
So his total liabilities are given by $39,500.
This means that his net worth is $185,710 - $39,500 = $146,210.
Coming into the month his net worth was given by
$120,000 + $25,000 + $6,000 + $1,000 + $35,000 - $40,000 = $147,000
So his net worth fell by $147,000 - $146,210 = $790.
This happened because the $1,000 matured and was spent, reducing his assets,
while at the same time his liabilities was reduced by $500 from the principal
payment on his mortgage. Together this results in a $500 reduction in net worth.
The other $290 in net worth reduction comes from the drawing down of his bank
account to cover current expenses.
So in summary, the principal payment boosted his net worth by reducing his
liabilities by $500, but the spending of the bond and the drawing down of his
1-9
Chapter 01 - Functions and Roles of Financial Institutions and Markets in the Global Economy
1-10
Chapter 01 - Functions and Roles of Financial Institutions and Markets in the Global Economy
b. How much discretionary income would she have each month if she bought
the new car? Would it be feasible for her to save $250 per month and make
all her payments?
ANSWER: Assuming she lives in a world without income tax, her monthly
salary would be $3,000. If she bought the new car, she could use $1,000 of her
bank account balance along with the $1,000 her parents gave her to cover the
down payment.
Her monthly expenses would equal $120 + $550 + $150 + $350 + $1600 =
$2,770. Again, her monthly income, assuming no income tax, is $3,000. This
means she would have $3,000 - $2,770 = $230 left over every month. So she
would not be able to save $250 a month.
c. What would her discretionary income be after the first month if she bought
the used car? Could she now save that $250 per month?
ANSWER: If she bought the used car, here expenses would fall by the amount
of the new car payment to $2,420. Her leftover monthly income would now be
$3,000 - $2,420 = $580.
6. Classify the market in which each of the following financial transactions takes
place as: (i) money versus capital, (ii) primary versus secondary, (iii) open
versus negotiated, or (iv) spot versus futures or forward.
a. A contract to receive wheat three months from today
ANSWER: (iv) spot versus futures or forward
b. The purchase of a share of IBM on the New York Stock Exchange
ANSWER: (iii) open versus negotiated
c. A six-month CD purchased from your bank
ANSWER: (i) money versus capital
d. A newly issued three-month Treasury bill purchased at the government’s
weekly auction
ANSWER (ii) primary versus secondary
e. You open a bank savings account
ANSWER (iii) open versus negotiated
f. You write a check to purchase for cash
ANSWER (i) money versus capital
1-11
Chapter 01 - Functions and Roles of Financial Institutions and Markets in the Global Economy
7. At the end of the calendar year, a firm has total financial assets amounting to
$4.32 billion, while its total liabilities are $3.58 billion. What is the firm’s net
financial wealth? If the firm saved $50 million over the previous year,
representing the amount by which its financial assets rose relative to its
liabilities, and it had begun the year with 3.72 billion in total financial assets,
how much did it earn on its previously accumulated assets?
ANSWER: The firm’s net financial wealth is given by $4.32 billion - $3.58 billion
=$ 0.74 billion
1-12
Chapter 01 - Functions and Roles of Financial Institutions and Markets in the Global Economy
terms of the dollar value of assets required to create one dollar of market value?
Answer: You can use the website http://finance.yahoo.com. These are the financial
data on December 2006:
For Citigroup, C: The Total Asset 1,884,318 million dollars
The Total Liabilities 1,764,535 million dollars
Net Wealth 119,783 million dollars
The Market Capitalization 265,430 million dollars
$1 of market value equal $7.1 of value of assets
For Caterpillar, CAT: The Total Asset 50,879 million dollars
The Total Liabilities 44,020 million dollars
Net Wealth 6,859 million dollars
The Market Capitalization 52,170 million dollars
$1 of market value equal $0.98 of value of assets
For Microsoft, MSFT: The Total Asset 69,597 million dollars
The Total Liabilities 29,493 million dollars
Net Wealth 40,104 million dollars
The Market Capitalization 289,110 million dollars
$1 of market value equal $0.24 of value of assets
2. A large share of household wealth is held in the form of corporate stock. How
much wealth does the entire stock market represent? To find an approximate
answer, go to the web site for Wilshire Associates at www.wilshire.com and
click Indexes from the menu. Locate the information that explains how the
Wilshire 5000 index is constructed. This index is weighted by the market
capitalization of the firms included in it, such that if you add the right amount
of zeros to the index, you obtain the total value of all the firms represented in
the index. Why is this number a good approximation to the entire U.S. stock
market? Now obtain a chart for the index. How much stock market wealth has
been created or destroyed over the past 12 months? Determine how much stock
market wealth was created or lost per person in the United States over this
period. (Hint: You can find the U.S. population at
http://www.census.gov/main/www/popclock.html). Compare this with the
average after-tax annual income per person in the U.S. Use the disposable
personal income figure that can be found under “Selected NIPA Tables: Table
2.1” at www.bea/gov.doc/bea/dn/nipaweb/index.asp to make the comparison.
Answer: As of June 6, 2007, the total wealth that the entire stock market represents is
15,291.15 billion (from http://www.wilshire.com/quote.html?symbol=dwc). The Dow
Jones Wilshire 5000 base is its December 31, 1980 capitalization of $1,404.596 billion.
The index is an excellent approximation of total value of the U.S. equity market because
it measures the performance of all U.S. headquartered equity securities with readily
available price data.
The following is a chart of the index over a year (from 6/22/06 to 6/21/07):
1-13
Chapter 01 - Functions and Roles of Financial Institutions and Markets in the Global Economy
1-14
Chapter 01 - Functions and Roles of Financial Institutions and Markets in the Global Economy
3. One of the world's most important financial markets that we will study
throughout this book is the market for U.S. Treasury securities. It is important
because it is one of the few default-free, highly liquid debt instruments
available anywhere in the financial marketplace. To determine the size of this
market go to the Treasury Department’s website at www.treasurydirect.gov
and find the Monthly Statement of the Public Debt (MSPD). How much debt
does the U.S. government owe per person in the United States? (See the
previous problem on how to find the U.S. population figure.) How much of this
debt is held by the public and how much by government agencies? Only a
portion of this debt - termed “marketable” - is traded daily in the system of
financial markets and institutions. The remainder is held by the buyer until it
matures. How much of this public debt is “marketable”?
Answer: http://www.treasurydirect.gov/govt/reports/pd/account/2007/2007_may.pdf
As of May 31, 2007, the amount of debt outstanding held by the public (Non-
governmental) is $4,977,832 millions. When we divide the amount of debt outstanding
by the size of the U.S. population, we obtain the debt that the U.S. government owes
per person in the United States - $16,475. The amount of debt held by the public (Intra
& Non-governmental) is $9,142,527 million, while the amount of debt held by
government agencies is $4,164,695 millions. Of the total amount of $9,142,527
millions of public debt outstanding, $4,977,832 millions, or approximately 54.45 %, of
it is marketable.
1-15
Another random document with
no related content on Scribd:
The Project Gutenberg eBook of Off duty: A
dozen yarns for soldiers and sailors
This ebook is for the use of anyone anywhere in the United
States and most other parts of the world at no cost and with
almost no restrictions whatsoever. You may copy it, give it away
or re-use it under the terms of the Project Gutenberg License
included with this ebook or online at www.gutenberg.org. If you
are not located in the United States, you will have to check the
laws of the country where you are located before using this
eBook.
Language: English
NEW YORK
THE CENTURY CO.
1919
Copyright, 1919, by
The Century Co.
Published, August, 1919
TO MY BROTHER
LIEUTENANT FRANCIS HARPER
FOREWORD
By Irving Bacheller
From “Keeping Up with Lizzie,” copyright, 1911, by Harper
& Brothers. Used by special permission of the author.
(In part)
“Sam Henshaw’s girl had graduated an’ gone abroad with her
mother. One Sunday ’bout a year later, Sam flew up to the door o’
my house in his automobile. He lit on the sidewalk an’ struggled up
the steps with two hundred an’ forty-seven pounds o’ meat on him.
He walked like a man carryin’ a barrel o’ pork. He acted as if he was
glad to see me an’ the big arm-chair on the piaz’.
“‘What’s the news?’ I asked.
“‘Lizzie an’ her mother got back this mornin’,’ he gasped. ‘They’ve
been six months in Europe. Lizzie is in love with it. She’s hobnobbed
with kings an’ queens. She talks art beautiful. I wish you’d come over
an’ hear her hold a conversation. It’s wonderful. She’s goin’ to be a
great addition to this community. She’s got me faded an’ on the run. I
ran down to the store for a few minutes this mornin’, an’ when I got
back she says to me:
“‘“Father, you always smell o’ ham an’ mustard. Have you been in
that disgusting store? Go an’ take a bahth at once.” That’s what she
called it—a “bahth.” Talks just like the English people—she’s been
among ’em so long. Get into my car an’ I’ll take ye over an’ fetch ye
back.’
“Sam regarded his humiliation with pride an’ joy. At last Lizzie had
convinced him that her education had paid. My curiosity was excited.
I got in an’ we flew over to his house. Sam yelled up the stairway
kind o’ joyful as we come in, an’ his wife answered at the top o’ the
stairs an’ says:
“‘Mr. Henshaw, I wish you wouldn’t shout in this house like a boy
calling the cows.’
“I guess she didn’t know I was there. Sam ran up-stairs an’ back,
an’ then we turned into that splendid parlor o’ his an’ set down. Purty
soon Liz an’ her mother swung in an’ smiled very pleasant an’ shook
hands an’ asked how was my family, etc., an’ went right on talkin’. I
saw they didn’t ask for the purpose of gettin’ information. Liz was
dressed to kill an’ purty as a picture—cheeks red as a rooster’s
comb an’ waist like a hornet’s. The cover was off her show-case, an’
there was a diamond sunburst in the middle of it, an’ the jewels were
surrounded by charms to which I am not wholly insensible even now.
“‘I wanted ye to tell Mr. Potter about yer travels,’ says Sam.
“Lizzie smiled an’ looked out o’ the window a minute an’ fetched a
sigh an’ struck out, lookin’ like Deacon Bristow the day he give ten
dollars to the church. She told about the cities an’ the folks an’ the
weather in that queer, English way she had o’ talkin’.
“‘Tell how ye hobnobbed with the Queen o’ Italy,’ Sam says.
“‘Oh, father! Hobnobbed!’ says she. ‘Anybody would think that she
and I had manicured each other’s hands. She only spoke a few
words of Italian and looked very gracious an’ beautiful an’
complimented my color.’
“Then she lay back in her chair, kind o’ weary, an’ Sam asked me
how was business—just to fill in the gap, I guess. Liz woke up an’
showed how far she’d got ahead in the race.
“‘Business!’ says she, with animation. ‘That’s why I haven’t any
patience with American men. They never sit down for ten minutes
without talking business. Their souls are steeped in commercialism.
Don’t you see how absurd it is, father? There are plenty of lovely
things to talk about.’
“Sam looked guilty, an’ I felt sorry for him. It had cost heavy to
educate his girl up to a p’int where she could give him so much
advice an’ information. The result was natural. She was irritated by
the large cubic capacity—the length, breadth and thickness of his
ignorance and unrefinement; he was dazed by the length, breadth,
an’ thickness of her learning an’ her charm. He didn’t say a word. He
bowed his head before this pretty, perfumed casket of erudition.
“‘You like Europe,’ I says.
“‘I love it,’ says she. ‘It’s the only place to live. There one finds so
much of the beautiful in art and music and so many cultivated
people.’
“Lizzie was a handsome girl, an’ had more sense than any o’ the
others that tried to keep up with her. After all, she was Sam’s fault,
an’ Sam was a sin conceived an’ committed by his wife, as ye might
say. She had made him what he was.
“‘Have you seen Dan Pettigrew lately?’ Lizzie asked.
“‘Yes,’ I says. ‘Dan is goin’ to be a farmer.’
“‘A farmer!’ says she, an’ covered her face with her handkerchief
an’ shook with merriment.
“‘Yes,’ I says. ‘Dan has come down out o’ the air. He’s abandoned
folly. He wants to do something to help along.’
“‘Yes, of course,’ says Lizzie, in a lofty manner. ‘Dan is really an
excellent boy—isn’t he?’
“‘Yes, an’ he’s livin’ within his means—that’s the first mile-stone in
the road to success,’ I says. ‘I’m goin’ buy him a thousand acres o’
land, an’ one o’ these days he’ll own it an’ as much more. You wait.
He’ll have a hundred men in his employ an’ flocks an’ herds an’ a
market of his own in New York. He’ll control prices in this county, an’
they’re goin’ down. He’ll be a force in the State.’
“They were all sitting up. The faces o’ the Lady Henshaw an’ her
daughter turned red.
“‘I’m very glad to hear it, I’m sure,’ said her Ladyship.
“I wasn’t so sure o’ that as she was, an’ there, for me, was the
milk in the cocoanut. I was joyful.
“‘Why, it’s perfectly lovely!’ says Lizzie, as she fetched her pretty
hands together in her lap.
“‘Yes, you want to cultivate Dan,’ I says. ‘He’s a man to be
reckoned with.’
“‘Oh, indeed!’ says her Ladyship.
“‘Yes, indeed!’ I says, ‘an’ the girls are all after him.’
“I just guessed that. I knew it was unscrupulous, but livin’ here in
this atmosphere does affect the morals even of a lawyer. Lizzie grew
red in the face.
“‘He could marry one o’ the Four Hundred if he wanted to,’ I says.
‘The other evening he was seen in the big red tourin’-car o’ the Van
Alstynes. What do you think o’ that?’
“Now that was true, but the chauffeur had been a college friend of
Dan’s, an’ I didn’t mention that.
“Lizzie had a dreamy smile on her face.
“‘Why, it’s wonderful!’ says she. ‘I didn’t know he’d improved so.’
“‘I hear that his mother is doing her own work,’ says the Lady
Henshaw, with a forced smile.
“‘Yes, think of it,’ I says. ‘The woman is earning her daily bread—
actually helpin’ her husband. Did you ever hear o’ such a thing! I’ll
have to scratch ’em off my list. It’s too uncommon. It ain’t
respectable.’
“Her ladyship began to suspect me an’ retreated with her chin in
the air. She’d had enough.
“I thought that would do an’ drew out o’ the game. Lizzie looked
confident. She seemed to have something up her sleeve besides
that lovely arm o’ hers.
“I went home, an’ two days later Sam looked me up again. Then
the secret came out o’ the bag. He’d heard that I had some money in
the savings-bank over at Bridgeport payin’ me only three and a half
per cent, an’ he wanted to borrow it an’ pay me six per cent. His
generosity surprised me. It was not like Sam.
“‘What’s the matter with you?’ I asked. ‘Is it possible that your
profits have all gone into gasoline an’ rubber an’ silk an’ education
an’ hardwood finish an’ human fat?’
“‘Well, it costs so much to live,’ he says, ‘an’ the wholesalers have
kept liftin’ the prices on me. Now there’s the meat trust—their prices
are up thirty-five per cent.’
“‘Of course,’ I says, ‘the directors have to have their luxuries. You
taxed us for yer new house an’ yer automobile an’ yer daughter’s
education, an’ they’re taxin’ you for their steam-yachts an’ private
cars an’ racin’ stables. You can’t expect to do all the taxin’. The
wholesalers learnt about the profits that you an’ others like ye was
makin’, an’ they concluded that they needed a part of ’em. Of course
they had to have their luxuries, an’ they’re taxin’ you—they couldn’t
afford to have ’em if they didn’t. Don’t complain.’
“‘I’ll come out all right,’ he says. ‘I’m goin’ to raise my whole
schedule fifteen per cent.’
“‘The people won’t stand it—they can’t,’ says I. ‘You’ll be drownin’
the miller. They’ll leave you.’
“‘It won’t do ’em any good,’ says he. ‘Bill an’ Eph will make their
prices agree with mine.’
“‘Folks will go back to the land, as I have,’ says I.
“‘They don’t know enough,’ says Sam. ‘Farmin’ is a lost art here in
the East. You take my word for it—they’ll pay our prices—they’ll have
to—an’ the rich folks, they don’t worry about prices. I pay a
commission to every steward an’ butler in this neighborhood.’
“‘I won’t help you,’ says I. ‘It’s wicked. You ought to have saved
your money.’
“‘In a year from now I’ll have money to burn,’ he says. ‘For one
thing, my daughter’s education is finished, an’ that has cost heavy.’
“‘How much would it cost to unlearn it?’ I asked. ‘That’s goin’ to
cost more than it did to get it, I’m ’fraid. In my opinion the first thing to
do with her is to uneducate her.’
“That was like a red-hot iron to Sam. It kind o’ het him up.
“‘Why, sir, you don’t appreciate her,’ says he. ‘That girl is far above
us all here in Pointview. She’s a queen.’
“‘Well, Sam,’ I says, ‘if there’s anything you don’t need just now it’s
a queen. If I were you I wouldn’t graft that kind o’ fruit on the grocery-
tree. Hams an’ coronets don’t flourish on the same bush. They have
a different kind of a bouquet. They don’t harmonize. Then, Sam,
what do you want of a girl that’s far above ye? Is it any comfort to
you to be despised in your own home?’
“‘Mr. Potter, I haven’t educated her for my own home or for this
community, but for higher things,’ says Sam.
“‘You hairy old ass! The first you know,’ I says, ‘they’ll have your
skin off an’ layin’ on the front piaz’ for a door-mat.’
“Sam started for the open air. I hated to be ha’sh with him, but he
needed some education himself, an’ it took a beetle an’ wedge to
open his mind for it. He lifted his chin so high that the fat swelled out
on the back of his neck an’ unbuttoned his collar. Then he turned an’
said: ‘My daughter is too good for this town, an’ I don’t intend that
she shall stay here. She has been asked to marry a man o’ fortune in
the old country.’
“‘So I surmise, an’ I suppose you find that the price o’ husbands
has gone up,’ I says.
“Sam didn’t answer me.
“‘They want you to settle some money on the girl—don’t they?’ I
asked.
“‘My wife says it’s the custom in the old country,’ says Sam.
“‘Suppose he ain’t worth the price?’
“‘They say he’s a splendid fellow,’ says Sam.
“‘You let me investigate him,’ I says, ‘an’ if he’s really worth the
price I’ll help ye to pay it.’
“Sam said that was fair, an’ thanked me for the offer, an’ gave me
the young man’s address. He was a Russian by the name of
Alexander Rolanoff, an’ Sam insisted that he belonged to a very old
family of large means an’ noble blood, an’ said that the young man
would be in Pointview that summer. I wrote to the mayor of the city in
which he was said to live, but got no answer.
“Alexander came. He was a costly an’ beautiful young man, about
thirty years old, with red cheeks an’ curly hair an’ polished finger-
nails, an’ wrote poetry. Sometimes ye meet a man that excites yer
worst suspicions. Your right hand no sooner lets go o’ his than it
slides down into your pocket to see if anything has happened; or
maybe you take the arm o’ yer wife or yer daughter an’ walk away.
Aleck leaned a little in both directions. But, sir, Sam didn’t care to
know my opinion of him. Never said another word to me on the
subject, but came again to ask about the money.
“‘Look here, Sam,’ I says. ‘You tell Lizzie that I want to have a talk
with her at four o’clock in this office. If she really wants to buy this
man, I’ll see what can be done about it.’
“‘All right, you talk with her,’ says he, an’ went out.
“In a few minutes Dan showed up.
“‘Have you seen Lizzie?’ says I.
“‘Not to speak to her,’ says Dan. ‘Looks fine, doesn’t she?’
“‘Beautiful,’ I says. ‘How is Marie Benson?’
“‘Oh, the second time I went to see her she was trying to keep up
with Lizzie,’ says he. She’s changed her gait. Was going to New York
after a lot o’ new frills. I suppose she thought that I wanted a grand
lady. That’s the trouble with all the girls here. A man might as well
marry the real thing as an imitation. I wish Lizzie would get down off
her high horse.’
“‘She’s goin’ to swap him for one with still longer legs,’ I says.
‘Lizzie is engaged to a gentleman o’ fortune in the old country.’
“Dan’s face began to stretch out long as if it was made of injy-
rubber.
“‘It’s too bad,’ says he. ‘Lizzie is a good-hearted girl, if she is
spoilt.’
“‘Fine girl!’ I says. ‘An’, Dan, I was in hopes that she would
discover her own folly before it was too late. But she saw that others
had begun to push her in the race an’ that she had to let out another
link or fall behind.’
“‘Well, I wish her happiness,’ says Dan, with a sigh.
“‘Go an’ tell her so,’ I says. ‘Show her that you have some care as
to whether she lives or dies.’
“I could see that his feelin’s had been honed ’til they were sharp
as a razor.
“‘I’ve seen that fellow,’ he says, ‘an’ he’ll never marry Lizzie if I can
prevent it. I hate the looks of him. I shall improve the first opportunity
I have to insult him.’
“‘That might be impossible,’ I suggested.
“‘But I’ll make the effort,’ says Dan.
“As an insulter I wouldn’t wonder if Dan had large capacity when
properly stirred up.
“‘Better let him alone. I have lines out that will bring information.
Be patient.’
“Dan rose and said he would see me soon, an’ left with a rather
stern look on his face.”
“Lizzie was on hand at the hour appointed. We sat down here all
by ourselves.
“‘Lizzie,’ I says, ‘why in the world did you go to Europe for a
husband? It’s a slight to Pointview—a discouragement of home
industry.’
“‘There was nobody here that seemed to want me,’ she says,
blushin’ very sweet.
“She had dropped her princess manner an’ seemed to be ready
for straight talk.
“‘If that’s so, Lizzie, it’s your fault,’ I says.
“‘I don’t understand you,’ says she.
“‘Why, my dear child, it’s this way,’ I says. ‘Your mother an’ father
have meant well, but they’ve been foolish. They’ve educated you for
a millionairess, an’ all that’s lackin’ is the millions. You over-awed the
boys here in Pointview. They thought that you felt above ’em,
whether you did or not; an’ the boys on Fifth Avenue were glad to
play with you, but they didn’t care to marry you. I say it kindly, Lizzie,
an’ I’m a friend o’ yer father’s, an’ you can afford to let me say what I
mean. Those young fellows wanted the millions as well as the
millionairess. One of our boys fell in love with ye an’ tried to keep up,
but your pace was too hot for him. His father got in trouble, an’ the
boy had to drop out. Every well-born girl in the village entered the
race with ye. An era of extravagance set in that threatened the
solvency, the honor, o’ this sober old community. Their fathers had to
borrow money to keep agoin’. They worked overtime, they
importuned their creditors, they wallowed in low finance while their
daughters revelled in the higher walks o’ life an’ sang in different
languages. Even your father—I tell you in confidence, for I suppose
he wouldn’t have the courage to do it—is in financial difficulties. Now,
Lizzie, I want to be kind to you, for I believe you’re a good girl at
heart, but you ought to know that all this is what your
accomplishments have accomplished.’
“She rose an’ walked across the room, with trembling lips. She
had seized her parachute an’ jumped from her balloon and was
slowly approachin’ the earth. I kept her comin’. ‘These clothes an’
jewels that you wear, Lizzie—these silks an’ laces, these sunbursts
an’ solitaires—don’t seem to harmonize with your father’s desire to
borrow money. Pardon me, but I can’t make ’em look honest. They
are not paid for—or if they are they are paid for with other men’s
money. They seem to accuse you. They’d accuse me if I didn’t speak
out plain to ye.’
“All of a sudden Lizzie dropped into a chair an’ began to cry. She
had lit safely on the ground.
“It made me feel like a murderer, but it had to be. Poor girl! I
wanted to pick her up like a baby an’ kiss her. It wasn’t that I loved
Lizzie less but Rome more. She wasn’t to blame. Every spoilt
woman stands for a fool-man. Most o’ them need—not a master—
but a frank counsellor. I locked the door. She grew calm an’ leaned
on my table, her face covered with her hands. My clock shouted the
seconds in the silence. Not a word was said for two or three minutes.
“‘I have been brutal,’ I says, by-an’-by. ‘Forgive me.’
“‘Mr. Potter,’ she says, ‘you’ve done me a great kindness. I’ll never
forget it. What shall I do?’
“‘Well, for one thing,’ says I, ‘go back to your old simplicity an’ live
within your means.’
“‘I’ll do it,’ she says; ‘but—I—I supposed my father was rich. Oh, I
wish we could have had this talk before!’
“‘Did you know that Dan Pettigrew was in love with you?’ I put it
straight from the shoulder. ‘He wouldn’t dare to tell ye, but you ought
to know it. You are regarded as a kind of a queen here, an’ it’s
customary for queens to be approached by ambassadors.’
“Her face lighted up.
“‘In love with me?’ she whispered. ‘Why, Mr. Potter, I never
dreamed of such a thing. Are you sure? How do you know? I thought
he felt above me.’
“‘An’ he thought you felt above him,’ I says.
“‘How absurd! how unfortunate!’ she whispered. ‘I couldn’t marry
him now if he asked me. This thing has gone too far. I wouldn’t treat
any man that way.’
“‘You are engaged to Alexander, are you?’ I says.
“‘Well, there is a sort of understanding, and I think we are to be
married if—if—’
“She paused, and tears came to her eyes again.
“‘You are thinking o’ the money,’ says I.
“‘I am thinking o’ the money,’ says she. ‘It has been promised to
him. He will expect it.’
“‘Do you think he is an honest man? Will he treat you well?’
“‘I suppose so.’
“‘Then let me talk with him. Perhaps he would take you without
anything to boot.’
“‘Please don’t propose that,’ says she. ‘I think he’s getting the
worst of it now. Mr. Potter, would you lend me the money? I ask it
because I don’t want the family to be disgraced or Mr. Rolanoff to be
badly treated. He is to invest the money in my name in a very
promising venture. He says he can double it within three months.’
“It would have been easy for me to laugh, but I didn’t. Lizzie’s
attitude in the whole matter pleased me. I saw that her heart was
sound. I promised to have a talk with her father and see her again. I
looked into his affairs carefully and put him on a new financial basis
with a loan of fifteen thousand dollars.
“One day he came around to my office with Alexander an’ wanted
me to draw up a contract between him an’ the young man. It was a
rather crude proposition, an’ I laughed, an’ Aleck sat with a bored
smile on his face.
“‘Oh, if he’s good enough for your daughter,’ I said, ‘his word
ought to be good enough for you.’
“‘That’s all right,’ says Sam, ‘but business is business. I want it
down in black an’ white that the income from this money is to be paid
to my daughter, and that neither o’ them shall make any further
demand on me.’
“Well, I drew that fool contract, an’, after it was signed, Sam
delivered ten one-thousand-dollar bills to the young man, who was to
become his son-in-law the following month with the assistance of a
caterer and a florist and a string-band, all from New Haven.
“Within half an hour Dan Pettigrew came roarin’ up in front o’ my
office in the big red automobile of his father’s. In a minute he came in
to see me. He out with his business soon as he lit in a chair.
“‘I’ve learned that this man Rolanoff is a scoundrel,’ says he.
“‘A scoundrel!’ says I.
“‘Of purest ray serene,’ says he.
“I put a few questions, but he’d nothing in the way o’ proof to offer
—it was only the statement of a newspaper.
“‘Is that all you know against him?’ I asked.
“‘He won’t fight,’ says Dan. ‘I’ve tried him—begged him to fight.’
“‘Well, I’ve got better evidence than you have,’ I says. ‘It came a
few minutes before you did.’
“I showed him a cablegram from a London barrister that said:
“‘Inquiry complete. The man is pure adventurer, character nil.’
“‘We must act immediately,’ says Dan.
“‘I have telephoned all over the village for Sam,’ I says. ‘They say
he’s out in his car with Aleck an’ Lizzie. I asked them to send him
here as soon as he returns.’
“‘They’re down on the Post Road. I met ’em on my way here,’
says Dan. ‘We can overtake that car easy.’
“Well, the wedding-day was approaching an’ Aleck had the
money, an’ the thought occurred to me that he might give ’em the
slip somewhere on the road an’ get away with it. I left word in the
store that if Sam got back before I saw him he was to wait with Aleck
in my office until I returned, an’ off we started like a baseball on its
way from the box to the catcher.
“An officer on his motor-cycle overhauled us on the Post Road. He
knew me.
“‘It’s a case o’ sickness,’ I says, ‘an’ we’re after Sam Henshaw.’
“‘He’s gone down the road an’ hasn’t come back yet,’ says the
officer.
“I passed him a ten-dollar bill.
“‘Keep within sight of us,’ I says. ‘We may need you any minute.’
“He nodded and smiled, an’ away we went.
“‘I’m wonderin’ how we’re agoin’ to get the money,’ I says, havin’
told Dan about it.
“‘I’ll take it away from him,’ says Dan.
“‘That wouldn’t do,’ says I.
“‘Why not?’