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 bondholders
 a fixed income. As was remarked in a previous
chapter, the capital stock acts as a buffer between the liabilities
 and the assets, which amounts to saying that it guarantees
 a fixed income to the holders of the liabilities. President
 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 receives
 “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 occasionally
 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 hundred
 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 thousand.
 Hence, two-name commercial paper is ordinarily a safe security,
 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.
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