Sec. 16] THE RISK ELEMENT 289 
for the separation of securities into two great classes called 
stocks and bonds. In any large enterprise the stockholders 
take the risks, and by so doing guarantee to the bond- 
holders a fixed income. As was remarked in a previous 
chapter, the capital stock acts as a buffer between the liabili- 
ties and the assets, which amounts to saying that it guaran- 
tees a fixed income to the holders of the liabilities. Presi- 
dent Hadley has emphasized the fact that a bondholder 
“commutes” the precarious income of an enterprise into 
a fixed annuity and that the system by which one class re- 
ceives “interest’’ and another “profits” has its origin in the 
desire of one class to avoid and the willingness of another 
to assume risks.! 
Nevertheless the general relation between creditor and 
debtor necessarily carries with it a certain amount of risk to 
the creditor. This risk may be reduced by the deposit of 
collateral security or endorsement * as in the case of bank 
loans and discounts; by mortgage on real estate, or occa- 
sionally on chattels; by legal regulations, as in the case 
of notes of national banks, and by other methods. 
§ 17 
The method of guaranties is really a method of shifting 
risks rather than of avoiding them. The second method 
aims to reduce risk by special safeguards. Some articles 
! But the “rate of commutation” is not a rate of interest, since 
any ratio of commutation is necessarily a ratio between two incomes; 
those respectively of the stockholders and the bondholders, whereas 
the rate of interest is a ratio of income to capital. 
2 The influence of endorsement in reducing risk is greater than 
would appear on the surface. Thus, if there is one chance in a hun- 
dred that the signer of a note will default, and a like chance for his 
endorser, both these risks being independent, the chance that the bank 
will lose is the product of these two, or only one chance in ten thou- 
sand. Hence, two-name commercial paper is ordinarily a safe se- 
curity, provided, of course, the names are those of reliable business 
men, such as have a high “rating” in Bradstreet’s or other standard 
commercial agency. 
U