Definition of Forced loan


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historic definition...

Forced loan -- A forced loan originates more frequently in an overdraft than in any other way. Illustration : A depositor in a bank draws a check for a sum larger than the balance or amount standing to his credit in the bank. The bank pays the check in the expectation that the depositor will on notification that he has overdrawn his account make good the discrepancy or, as it is commonly called, overdraft. He is not able to do so and the bank is forced to make a loan to him of the amount of the shortage in order to cover the overdraft that is, in order to bring his credit up to a sum that equals the amount of the check. When a call loan is called (payment demanded) and not paid or when a time loan (a loan for a specified period) has matured and demand for its payment is not complied with and the loan is continued for a further period by the lender it is called a forced loan. In such a case the loan is continued because of the temporary inability of the borrower to repay it or because the state of the market is unfavorable for the sale of the collateral which secures the payment of the loan. The Bank of Venice, the forerunner of the modern bank, had its origin in 1171 in a forced loan which had been adopted as a means of relieving the financial necessities of the Republic of Venice. The wealthy citizens were required to contribute to a loan. Instead of the delivery of bonds to the citizens as certificates of the indebtedness of the republic to them the amounts in specie which were received from them were placed to their credit in a book or ledger. The republic paid punctually 4 per cent interest to the citizens who had been levied upon, but did not repay the principal (the original amounts exacted from the citizens). In transactions among themselves the citicens fell into the practise of transferring to each other portions of the indebtedness of the republic to them, or in other words, portions of their credits with the republic. This method of transacting business was found so convenient and superior to handling the coined money that the republic established the Bank" of Venice in order that the citizens generally might deposit their specie and obtain therefor bank credits.

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Mark McCracken

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