Courtesy of Hugo Salinas Price @ Plata:
Leon, in the state of Guanajuato in Mexico, is a city of some 2,000,000 inhabitants and sprawls over miles of a countryside which used to be farmland. In the 1950’s Leon was much smaller, with only about 250,000 inhabitants.
In the 1950’s the city was the national center of a bustling shoe-manufacturing industry. Back then, the Mexican market for shoes was protected from foreign competition, and Mexico with a population of some 35 million obtained its shoes from Leon manufacturers.
The industrial activity in the production of shoes was intense, and Capital was always scarce. Money to finance the operations of a multitude of manufacturers of shoes and related industrial activities was very scarce and all business faced a constant struggle for liquidity to keep operations going.
Bank credit was extremely scarce; the productive enterprises related to the manufacture of shoes could not obtain any significant amount of bank credit; their discipline in accounting and elaborating financial statements was minimal – to produce, sell and collect was the immediate necessity – and could not meet the bureaucratic requirements of the banks.
The struggle to stay in business was an unrelenting ordeal.
The scarcity of money in the productive system led to entrepreneurial invention to cope with the problem; the entrepreneurs resorted to issuing post-dated checks, in lieu of money, which they did not have.
A successful businessman might have in a desk-drawer a number of post-dated checks. Some of the post-dated checks were signed by serious businessmen, and whoever received their post-dated checks in payment could rely on collecting cash for them at a future date; others were signed by less-creditworthy individuals who had a spotty history of not honoring their post-dated checks promptly on the stipulated date. The acceptability of an endorsed post-dated check depended on the reputation of the issuer.
The post-dated checks circulated among the producers, often with a long list (on adding-machine paper) of endorsers’ signatures pasted to the check.
Collection of post-dated checks therefore depended on the character of the individuals that issued them. Collecting could be a time-consuming problem, but the pressing need of the entrepreneurs to remain in business offered no other alternative than to accept them in lieu of cash. Continue reading