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TeachMeFinance.com - explain Forced loan 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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