MASTER NEGATIVE NO. 95-82503 16 COPYRIGHT STATEMENT The copyright law of the United States (Title 17, United States Code) governs the making of photocopies or other reproductions of copyrighted materials including foreign works under certain conditions. In addition, the United States extends protection to foreign works by means of various international conventions, bilateral agreements, and proclamations, Under certain conditions specified in the law, libraries and archives are authorized to furnish a photocopy or other reproduction. One of these specified conditions is that the photocopy or reproduction is not to be "used for any purpose other than private study, scholarship, or research." If a user makes a request for, or later uses, a photocopy or reproduction for purposes in excess of "fair use," that user may be liable for copyright infringement. The Columbia University Libraries reserve the right to refuse to accept a copying order if, in its judgement, fulfillment of the order would involve violation of the copyright law. Author: Guaranty Trust Company of New York Title: Acceptances Place: [New York] Date: [1918] MASTER NEGATIVE # COLUMBIA UNIVERSITY LIBRARIES PRESERVATION DIVISION BIBLIOGRAPHIC MICROFORM TARGET ORIGINAL MATERIAL AS FILMED - EXISTING BIBLIOGRAPHIC RECORD f rousincss IG931 Guaranty trust company of New York. Acceptances. [New York, etc.] Guaranty trust companv of New York rl918i * 72 p. \7i"". 1. Acceptances. Library of Congress Copyright A 499626 o HG165S.G8 1918 18-13635 *-«HM# RESTRICTIONS ON USE: TECHNICAL MICROFORM DATA FILM SIZE: . 3 5 ir)M/i DATE FILMED: TRACKING # : REDUCTION RATIO: . 7y IMAGE PLACEMENT: lA (^ IB IIB . 6 €^ ^o f^ m 39 o -o m "o O O O > o m Ooo m > O m r ! HHIBI ^^9 , ' *» i- '. f ^' Acceptances SCHOOL OF BUSINESS T, 1920 Guaranty Trust Company of New York / LIBRARY School of Business ♦1 i "^ f Acceptances ^'■^ /^ LIBRARY HOOL OF BUSINESS >l . Guaranty Trust Company of New York f 140 Broadway FIFTH AVENUE OFFICE Fifth Avenue and 43rd Street MADISON AVENUE OFFICE Madison Avenue and 60th Street LONDON OFFICE 32 Lombard St., E. C. PARIS OFFICE Rue des Italiens, 1 & 3 ^^mmm^mmmmaltlmmmmtt^ COPYRIGHT, 1918 GUARANTY TRUST COMPANY OF NEW YORK ^^U_lS.\.W€5fcl> iAA^4yrr ■ ' kf t-» ' ^ ^m-A^ ZDl2.5'2Ll ^ (mm u ^ •• Contents Foreword Trade Acceptances Open Account and Acceptance Methods Compared General Advantages of Trade Acceptances Discount Companies Bank Acceptances Advantages of the Bank Acceptance Acceptances under the Federal Reserve Act Acceptances by Member Banks Eligibility Discount by Federal Reserve Bank Discount of Bankers' Acceptances PAGB 14 19 22 24 28 34 38 48 48 54 Purchase of Acceptances by Federal Reserve Banks 59 Acceptances Under the Laws of New York 64 Market for Acceptances 69 ^.> n/ v,^ Foreword* \ 71 TIE must bear in mind that if we wish '^ ^ to retain a prominent place, to say nothing of supremacy, in the world's money market, we must have an effective organiza- tion for the creation and proper distribution of credit instruments when the war is over. We must not forget that, notwithstanding the non-adherence of the banking customs in the United States to the acceptance prin- ciple, probably 75 per cent, of the world's foreign commerce is financed, at some time or other, by means of either bank or trade acceptances. We have the largest trade figures, and it behooves us, not only for our own trade but for the sake of our international position, to adopt as generally as possible in the United States a system of credit extension that has been in use by, and of value to, the rest of the world. As in the past and the present, we shall undoubtedlv in the future have a heavv trade ^Extract from report presented by Albert Breton, Chairman of the Com> mittee on Trade Acceptances to the Convention of the Reserve City Bankers Association, New York, June 7, 1918. [4] ¥ 4 ■• balance in our favor. Besides this, all the indications are that the hitherto heavy ad- verse invisible trade balance will to a large extent disappear. America will have its own merchant marine and we shall pay to our- selves our own freights. Our marine insur- ance companies will increase and develop, owing to the necessities that have been thrown upon them by the war. There has been a large absorption in the American market of American securities hitherto held abroad, which means a cessation of interest and dividend payments to for- eigners. Further, there have been heavy absorptions of foreign bond issues in this market, which after the war will be a source of strength in our international position. In short, almost every one of the items which before the war went to make up the offset to our heavy sales of merchandise we shall in the future retain ourselves. We shall undoubtedly have a better basis for the extension of foreign credit than any other country in the world; but this resource will lie in our hands useless and without [5] iHi :1 effect unless now, while we have the oppor- tunity, we teach ourselves how to use it. With respect to our foreign competitors we must remember that while they are simply "marking time," they are keeping in touch with and retaining their influence in those parts of the world that have heretofore been their customers and which are now our customers. International events only have given us this opportunity— so let us prepare to hold this new trade against the resumption of normal conditions and the opening of the rivalry and competition that are most likely to ensue at that time. June, 1918 [6] .^ ,/ M Acceptances There are two kinds of acceptances — Trade Acceptances and Bank Acceptances. Trade Acceptances Use in Europe In Great Britain and in many countries of Continental Europe practically every com- mercial transaction is financed by means of a time draft, or bill of exchange. The draft is drawn by the seller of the merchandise and presented to the buyer, who, if he finds it satisfactory, writes across its face the word "Accepted," signs his name, and returns the draft to the seller. It then becomes a trade acceptance — a sound, circulating medium of finance which commands a low rate of interest and which the seller, if he desires, may dis- count at his bank. Although European countries have long realized the many advantages gained by the use of the trade acceptance in place of the open book account in financing commercial [7] ''' gij i ji ! !% \ ^ li transactions, merchants in America have been slow to grasp and utilize the oppor- tunities oflFered by the acceptance method. Not an Innovation in United States The use of the trade acceptance in this country prior to the Civil War was more or less general, but after that conflict, the in- creasing financial disorganization, and the risk attending the grantmg of long credits, created a demand for cash, which made the cash discount system so popular that it has since continued in favor. This led to the open book account. While the trade accept- ance today is being used to a much greater extent than a few years ago, goods are still bought and sold largely on open account. A very active and aggressive propa- ganda is being made throughout the prin- cipal commercial centres of the coimtry in favor of trade acceptances, and their use has considerably increased. Many of the lead- mg commercial and industrial concerns have adopted this new system of credit and most banks are already inclined to give preference to the purchase of such two name paper 181 *> t' fi . arising from actual commercial transactions between the drawer and the acceptor. It is interesting to note that in the rates established by the Federal Reserve Bank of New York, domestic trade acceptances with from 15 to 90 days to run are rediscounted at 43^ per centum, whereas commercial paper having the same period to run re- discounts at 4^ per centum. This prefer- ential rate in favor of trade acceptances by all Federal Reserve banks shows the official endorsement by the Federal Reserve Board of the trade acceptance system of credit. The actual open market rates for prime bankers' eligible bills in June, 1918, ranged from 4i}i per centum in New York to 4^ per centum in other cities, whereas commercial paper was quoted at 6 per centum. Trade Acceptance Defined A trade acceptance is a time draft or bill of exchange, drawn by the seller of goods on the buyer for the purchase price, and ac- cepted by the buyer, payable on a certam date at a place designated on the face of the [9] instrument. A trade acceptance, amounts to a negotiable guarantee by the purchaser of goods that at a specified time and place, he will pay the purchase price. In other words, a trade acceptance evidences a transaction fully completed, and, it being a negotiable instrument, the seller, by means of it, may reimburse himself, owing to the fact that acceptances are readily salable. Distinguished from Sight Draft or Promissory Note A note is ordinarily used to borrow money or to settle over-due obligations. A trade acceptance shows on its face that it is drawn by the seller on the purchaser of merchandise for the price of the goods. When accepted, it becomes a valid promise to pay on a speci- fied date, a negotiable instrument equally as binding upon the person accepting it as his promissory note would be. As a trade acceptance is an obligation of the buyer indorsed by the seller, the bank dis- counting it is secured by two name instead of by one name paper, as is the case with a promissory note. [10] ^*r^ a. Trade and bank acceptances are instru' ments of credit which should be employed in the financing of business and industry — in the moving of crops, and in a thousand other ways. In this time of war we should make the best possible use of these instruments of credit, and, as a patriotic duty, should place first of all the Government's needs for cash with which to carry on the war until we win the victory. Method of Using The seller desiring to use the acceptance method, in making out an invoice for a sale of goods, forwards with the invoice, a time bill or draft drawn on the purchaser for the purchase price, payable at a specified date; or where the buyer makes several purchases of small amounts during the month, the seller in making up the monthly statement for- wards with it a draft or bill made out for the total amount due. When the purchaser of goods receives the draft or bill he may pay it at once, having deducted whatever is al- lowed as a discount for prompt payment in [11] I i Si M'*^ [12] cash, or he may write across the face thereof the date and the words, for example, "Ac- cepted — payable at Guaranty Trust Com- pany of New York/' The buyer then signs his name and returns the instrument to the seller. The latter either keeps it until a few days before it matures, when he sends it to his bank, which makes collection from the bank at which the instrument is payable, or if he desires funds, discounts it at his bank or sells it in the open market through an acceptance dealer. The place of payment is at the oflBce of the buyer of the goods, namely, the acceptor, if no other place is so designated. To facilitate the collection of acceptances, the paper should be made payable at the acceptor's bank, and the banker and acceptor should make arrangements so that maturing accept- ances are charged to the acceptor's account on the date of maturity. When Not to be Used In countries abroad where bills of exchange and acceptances have reached their highest development as credit instruments and cir- [13] ciJatiiig mediums, it has been the custom that they shall be issued for commercial purposes or against actual business trans- actions. They should represent current mer- chandise transactions connected with the purchase and sale of goods, and should never be given for overdue accounts or borrowed money. The custom in this country follows the rulings of the Federal Reserve Board respecting eligibility for discount and purchase by Federal Reserve banks. Open Account and Acceptance Methods Compared Open Account Ties up Capital The open account system with its indefinite time of payment, is a business habit with many disadvantages. One defect is that it forces the seller to carry the financial burden of the buyer. The open account ties up the seller's invested or borrowed capital for an indefinite period, during which he receives no stated compensation for it. The trade acceptance does not lessen the advantage of the buyer. He obtains his [14] 4v credit for a definite instead of an indefinite period of time. It is of service to the seller, for he can take the acceptance to his bank, discount it at a lower rate than is accorded to any other commercial paper, and have the use of the money. The bank — ^not the seller — carries the credit, and all parties to the transaction are placed on an equitable basis. Trade acceptances are not meant to defer payment in ordinary transactions where the buyer usually pays cash on the spot or within ten days. They are not needed when busi- ness is done on that basis, and the buyer is not forced to use acceptances if he prefers paying cash and saving the discount allowed for cash payments. Uncertainty of Open Accounts As assets, open accounts are neither quick nor sure. They are frequently slow and un- certain of realization. Even the best of them are seldom marketable for more than fifty per centum of their face value. In the form of eligible trade acceptances, accounts can [15] i be converted in full into cash at a better rate of interest than is commanded by promis- sory notes. Unreasonable Extensions of Time A disadvantage of the open account system is the ease with which payment can be post- poned, thus enabling purchasers to abuse their credit by putting off the settlement of their obligations for long periods of time without even paying interest. This results from the fact that since the time of payment is usually not fixed, the privilege of obtaining an extension is regarded as a matter of course. Difficulties in Event of Suit If it becomes necessary to sue on an open account, in order to collect, the correctness of the book entries must first be proved. The buyer thereupon may raise objections which may cause much delay. The trade acceptance is an acknowledgment of the receipt of the goods and of a proper invoice, and is proof of the validity of the debt, since the debtor has already admitted the [16] *.. existence of a valid contract by his accept- ance of the terms of the bill. When an innocent third party becomes a bona fide holder of the paper, payment can- not be avoided by seeking refuge in the usual technical defenses, since only the signature of the acceptor needs to be proved and no off-sets or counter-claims of any sort can be urged. Costliness of Open Account System The open account is costly. The expense involved in collecting slow accounts, in ex- tensions of the time of payment, and in trade discounts — all characteristic of the open ac- count system — constitutes, in the aggregate, a heavy tax on business. All these disad- vantages are eliminated by the use of the trade acceptance which gives stability to commercial credit and transforms deferred obligations into definite assets and liabilities. Conveniences of Open Account Retained The right to make partial payments, which is one of the conveniences of the open ac- [17] count, may be arranged with the bank; and if the trade acceptance cannot be conven- iently met by the customer upon its maturity, the merchant, if he desires to help him, may do so by taking the customer's promissory note with interest. Thus the merchant granting the extension does so without the loss of interest, which results under the open account system. Since trade acceptances are not given for renewals or for old accounts, they should be settled with notes which draw interest. Other Disadvantages Eliminated Among other disadvantages of the open account method which will be eliminated by the general adoption of the trade acceptance may be mentioned the habit of over-buying and over-selling, the returning of goods and cancellation of orders for trivial reasons, the taking of unwarranted discounts, the secret assignments of accounts and losses from un- collectible debts. ♦ [18] General Advantages of Trade Acceptances Business Conditions Improved The trade acceptance releases funds tied up in outstanding accounts, and invested capital acquires more liquidity under a system which offers negotiable paper in place of non- negotiable open book accounts. Relations between buyer and seller are vastly improved by paper which clearly defines their respective rights and obligations, and extravagance is checked by the constant reminder to the debtor that his credit is apt to be tested at any time. Advantages to the Buyer The buyer derives certain advantages from the use of the trade acceptance. It develops in him the habit of careful buying, enables him to judge how he stands financially and what he can do with his capital, and it strengthens his credit. He is able definitely to fix the dates of his payments, thus develop- ing a habit of promptness in fulfilling obli- gations. [19] The small buyer is better able to compete with larger firms since the trade acceptance gives him a better credit rating and places his business on a definite financial basis, which cannot be the case when his debts are in the form of open accounts with no means of ascertaining when they will be liquidated. Advantages to the Seller Sellers or manufacturers with limited capi- tal, by the adoption of the trade acceptance method, avoid the necessity of heavy borrow- ing, and the tying up of their capital and borrowed money in open accounts, and as their operating expenses are reduced, their profits are accordingly increased. Moreover, the merchant can estimate with a consider- able degree of certainty, what his income will be from month to month, for with its fixed date of maturity, payment of a trade acceptance can usually be counted upon. Merchants receiving trade accept- ances may discount them at a bank for ap- proximately one hundred per centum of their face value. [80] <* 4] The practical eflfect of the ordinary book account is to burden the seller with the financing of the customer's business. This not only ties up the capital of the seller, thus narrowing the scope of his business, but also weakens his financial statement because of the character of his accounts. By de- manding trade acceptances, the seller is able to overcome these diflSculties, since eligible acceptances are considered an excellent in- vestment for banks, and may be readily negotiated. Advantages to the Banker From the standpoint of a banker, the trade acceptance is a very advisable form of invest- ment, since it represents sales actually made and oflFers paper secured by two names in- stead of by one, as in the case of a promissory note. The trade acceptance oflFers security upon which the banker can easily borrow by reason of the fact that eligible trade acceptances may be rediscounted at any Federal Reserve bank at lower rates of interest than any other commercial paper. [21] Under this system, banks finance the sales of goods, whereas under the old system, the manufacturer or seller was forced to do this. The bank also is enabled, through the general use of trade acceptances, to ascertain more readily the credit of its customers as well as their business methods. Discount Companies The report of the Committee on Trade Acceptances to the 1918 Convention of the Reserve City Bankers' Association, says, in part : "Immediately after the development of the accept- ance principle in banks there appeared in New York City, a number of bill brokerage houses. Prom their small beginnings, these houses have extended their business and clientele farther and farther into the coimtry, "New York bankers have done their best to facilitate their operations, and, on their own part, the bill brokers have proved to be a source of welcome assistance to those bankers who are desirous of developing a discount market. "Quite lately there have appeared the pioneer Ameri- can discount companies. One has been organized and [ 22 ] is operating in New York, and another one will open for business shortly under the auspices of ten leading banking concerns in New York with a capital of $5,000,- 000 and a surplus of $1,000,000. "There has been developed in Boston under first- dass auspices a discount company whose avowed field will be New England. The interests that have fathered these discount companies are thoroughly conversant with their primary function which is to act as a reservoir to take up a temporary glut of bills into the market, and subsequently, as the demand appears, to let them out as the need may be, thus eliminating the situation existing heretofore in which there have been from time to time offerings of bills without a spontaneous demand, and vice versa. "The advent of such enterprises has been welcomed, and it is to be hoped that each important city of the country will organize a local discount company. They have a fertile field, and the consequent augmenting use of acceptances will soon put them on a lucrative basis. "It is gratifying to all of us who are interested in the propagation of the acceptance principle to realize that most of the responsible means of creating senti- ment, banking and trade policy are with us. Nobody realizes more than the banker how much prejudice and inertia must be overcome.'* [23] Bank Acceptances Trade and Bankers^ Acceptances Distinguished Some confusion has arisen as to the differ- ence between trade acceptances and bankers' acceptances. The former is the result of a transaction between the buyer and seller; the latter the result of the granting of credit by a banker. In the former case, it is the buyer who accepts the draft; in the latter it is the bank. Definition A banker's acceptance is defined by the Federal Reserve Board as "a bill of exchange of which the acceptor is a bank or trust com- pany, or a firm, person, company or corpo- ration engaged in the business of granting bankers' acceptance credits." How Acceptance Credit is Extended In other words, a bank acceptance consists of the extension of the bank's credit to a customer, wherein the bank, for a considera- [24] il\^ tion, permits the customer to use the bank's credit. This credit may be either secured or unsecured, depending upon the business, character, and financial responsibihty of the applicant. Distinction Between a Bank's Acceptance and its Note According to an opinion of the counsel of the Federal Reserve Board, when a member bank of the Federal Reserve System accepts a draft or bill of exchange drawn against it, it enters into a contract substantially similar to that of the maker of a note, so that while the form of the instrument differs, the legal eflfect is the same. The use of a bank's acceptance, however, diflfers from the use of its promissory note. When a bank accepts a draft or bill of exchange for one of its cus- tomers, it merely lends its credit responsi- bihty to its customer in order that he may procure the funds elsewhere. The holder of a bank's acceptance has the same legal rights against the bank as the holder of its promissory note. [25] Method of Using A bank acceptance may be created as follows : Richard Brown, in New York, buys of John Doe, in Galveston, a quantity of mer- chandise. In order to reimburse John Doe in a convenient manner. Brown arranges with his bank in New York to accept, on presenta- tion, the drafts of John Doe with documents attached. Doe thereupon, under the terms of the sale, draws on the bank, which accepts the drafts, taking possession of the docu- ments. The drafts drawn by Doe on the bank after they have been accepted become bank acceptances. Then ensues a credit operation between the bank and Richard Brown to determine what disposition is to be made of the documents and upon what terms the bank will surrender them. This adjustment is easily made. The bank hav- ing agreed to pay the acceptances when they fall due. Brown undertakes to provide the bank with funds for that purpose prior to the maturity of the acceptance. (It must be borne in mind that the bank is primarily [26] •OiO p iuaaidi^sVpjjsatuop 30p ?ujclctiq]Mq' pdiued •-Si \\ [27] • liable upon its acceptance, and that the security for its acceptance is the merchandise, which is the basis for the transaction. The bank also has the guarantee of the purchaser of the merchandise.) Commercial Credit Bills The foregoing case describes a documentary bill. Another form of acceptance is created when the customer draws his own draft directly on the bank, and the bank accepts it for payment at a future time. Such an acceptance would be called a commercial credit bill and might be secured by warehouse receipts or other collateral, or simply by the general credit of the customer. AdvanUges of the Bank Acceptance Bank acceptances offer certain distinct advantages, not only to merchants but also to the banks through which they deal. The specific advantages may be summarized as follows : The use of acceptances makes it possible [28] ■ for trust companies and banks to finance legitunate business transactions of their cus- tomers properly and conveniently. Banks having surplus money which cannot readily be employed at the time can invest It m prune acceptances which can either be held until maturity or sold in the open market, should such action be necessary. Because of their ready marketability, ac- ceptances of well-known institutions will be sought more and more as short-term invest- ments and will be especially valuable as such. Advantages in Foreign Trade At this time, when plans for fostering and buildmg up our foreign trade are being for- mulated, the advantages of the adoption of the acceptance in foreign transactions is of especial importance. Exporters who have desired to enter into foreign trade have experienced much diffi- culty in their inability to grant as good terms of credit as have been accorded foreign buyers by competitors abroad. It has been the practice of many American exporters to re- [29] •^zjr quire payment in cash at New York against documents, and the foreign trade of this country has thus been handicapped. This difficulty may be overcome by the use of bank acceptances, as the credit which is required for the goods may be established by drawing at sixty or ninety days' sight on a New York accepting bank or trust company, the accept- ance being discounted at an agreed fixed rate. Another advantage to the exporter is that he is immediately reimbursed for the value of his products or merchandise and, instead of having his capital tied up in credits, it is released for re-employment in new business. Acceptances, based principally on the commodities exported from this country, form a valuable security. This was particu- larly evidenced in London at the outbreak of the war, when acceptances amounting to more than £500,000,000 were in circulation. The greater part of these were subsequently liquidated by the "self -liquidating'' process; that is, by the sale of the commodity which formed the basis of the transaction, thus proving the soundness of the accepting busi- ness, in general. [30] i ' > High Class of Security The standing and credit of the accepting bank make the paper it accepts a security of the highest class. The bank acceptance at once eliminates the necessity and trouble of closely investigating the drawer or the en- dorsers, as the primary responsibihty rests with the accepting bank. If its credit is good, all other names on the paper may be of secondary importance. Field of Buyer Broadened Bank acceptances enhance the credit and broaden the buymg field of the merchant. By means of a letter of credit from his bank to the affect that, under certain conditions and up to a certain agieed figure, it will ac- cept all bills drawn for his account, the merchant is able to make his purchases ad- vantageously, even in markets where he is unknown. Bank Acceptances Quick Assets "No opposition seems to exist today against bank acceptances on the part of the American banks, but [31] many of them are still somewhat hesitating to execute such an obligation or to have their name oflfered in the open discount market," says the report of the Com- mittee on Acceptances to the 1918 Convention of the Reserve City Bankers' Association. "Strange to say many of these latter institutions are, however, good buyers of other banks' acceptances, realizing the advisability of carrying an extra reserve in such quick or convertible assets. "It is the opinion of the Committee that every member of this association should return to his home town and his bank with the purpose of developing this idea not only in his own bank, but among his neighbors; to lose no opportunity to assist in the dis- tribution and redistribution of his and his neighbor's acceptances; to give all proper preference that he con- sistently may to encourage the development of this form of operation in banks." Broadening Market for Acceptances The Fourth Annual Report of the Federal Reserve Board says: "This year (1917) has witnessed a continued increase in the volume of bankers' acceptances created, and a steadily broadening open market in which they circu- late. At the dose of the year 1916 it was stated that there were outstandmg about $250,000,000 of dollar acceptances, including bills of foreign origin, on Ameri- [32] ' > A can merchants. It is probable that the volume of such paper in the United States at the close of 1917 is from four to five hundred million dollars. "The increases, while general in all classes of bills eligible for discount with Federal Beserve banks, are most notable in the bills arising from domestic trans- actions and from the increasing trade between the United States and the Orient. "The more general recourse during the year to bankers' credits for financing the large seasonal move- ments in commodities is an indication of a wider understanding and appreciation by the borrower and banker alike of the advantages of this form of financing transaxitions that in themselves furnish the means of discharging the obligations incurred by the taker of credit and the acceptor. "With the increased volume of business, the number of accepting banks and purchasers of bills also has steadily increased. The names of many well-known institutions located in the larger cities of the country have now become known as acceptors through their acceptances oflFered in the open market in New York. Also dealers report an increasing interest on the part of out-of-town banks as investors in prime bills evi- denced both in the number of new buyers and the volume of their purchases." [33] Acceptances Under the Federal Reserve Act* The Federal Reserve Board has unquali- fiedly designated the trade acceptance as a favored form of commercial paper and gives preference in rates of discount to such accept- ances when they conform to the require- ments of the Federal Reserve Act and of the regulations of the Federal Reserve Board. In order, therefore, that much of the mis- understanding and uncertainty which has tended to discredit the merit and use of such paper may be avoided, the trade acceptance should comply with the rules and regula- tions of the Federal Reserve Board. Defined by Federal Reserve Board The Federal Reserve Board has defined the trade acceptance as "a bill of exchange drawn by the seller on the purchaser of goods sold, and accepted by such purchaser." The word "goods" as here used, means goods. *SutemenU contained under this heading are hased on the Federal Reserve Act, Regulations of the Federal Reserve Board, and opinions of Counsel of the I^eral Reserve Board. [34] i -> wares, merchandise, and all agricultural prod- ucts, including live stock. A bill of exchange is defined by the Federal Reserve Board as "an unconditional order in writing, addressed by one person to another, other than a banker, signed by the person giving it, requiring the person to whom it is addressed, to pay, in the United States, at a fixed or determinable future time, a sum certain in dollars to the order of a specified person." Qualifications Essential to Negotiability To be negotiable, a bill of exchange must be an unconditional order to pay on demand, or at a fixed or determinable future time, a certain sum of money to order or to bearer, and if payment is made dependent upon a condition or contingency, the bill becomes conditional and non-negotiable. A general acceptance of a conditional bill does not make it negotiable and a conditional acceptance of an unconditional bill destroys its negotiability, because the acceptance is [35] i! Iiir 1:111 thereby made a conditional one. A qualified or conditional acceptance of a bill of exchange releases the drawer and prior indorsers. A bill drawn payable "at sight" and accepted payable in three months, has been held to be a conditional acceptance. Likewise, an ac- ceptance to pay at a designated place different from the residence of the acceptor, when the bill stipulates that it is to be paid there and not elsewhere, qualifies the terms of the bill and renders the acceptance conditional. Reference to Particular Consignment If payment is confined to the proceeds of a particular fund, and is not chargeable to the general credit of the drawer, the bill is conditional and non-negotiable. Whether reference to a particular consign- ment of goods renders the bill conditional has been a source of conflict in the courts, some holding that it is a mere indication of a fund out of which the drawer is to reimburse him- self, others holding that the bill is thereby made conditional because limiting payment 18«1 A \ k f to proceeds of the particular shipment men- tioned. A reference, however, in general terms on the face of the accepted bill to the fact that it is based on exportation or importation of goods does not make it con- ditional and impair its negotiability. Such acceptance, would, therefore, not be ineligible for rediscount under the Federal Reserve Act. Bills made payable "in exchange" are not payable "in money," and are therefore not negotiable. A provision in a bill that it is payable with interest at a designated rate per annum after maturity if payment is delayed, does not impair the instrument's negotiability. Likewise by waiving demand, notice, and protest or waiving homestead exemption rights, the negotiability of the bill is not affected. 1 r Place of Payment The drawer may make the draft payable at the bank against which it is drawn or at another place, and when accepted, it will be payable according to its terms, namely, at the bank of the drawee or other designated place. If payable at the drawee's bank, the latter IS7] •:• 111 * it navable elsewhere, as at the may accept it pay aWe ^^^^^_ Federal Reserve bank,pr(mci ance does not stipulate that it is pay only at the Federal Reserve bank. Discharge of Draper and Iruiorsers The acceptor is the principal debtor af^r ! / Notice of demand and protest "TbTS;en Tp-ties secondarily liable in must be given to p ^^^^^ *^ ^^:nlfand^^^^^^^ by drawer and X:: ^be laiver hav^g no effect on the acceptor or P;;^- jf^^f ^^^^^ i,,txunient The drawer and indorsers oi a made payable at the time specified m the biu ^ not released by failure to present ^r ; „o ,mless the bill expressly provides that It °^^t '>e P ^^^^^^^^ ^^„ or unless it is maae pay ,^,:aence of the at the place of business or residence drawee. Acceptances by Member Banks • • ^o r^f the Federal Re- :S;t tofts which, excludmg days of gn^. 1881 have not more than six months' sight to run if one of the following conditions is present. The bill must 1. Have origin in a transaction involving the importa- tion or exportation of goods, or i. Arise from a transaction involving domestic ship- ment of goods and have shipping documents at- tached at the time of acceptance seeming or convey- ing title to the goods, or 8. Be secured at the time of acceptance by warehouse, receipt or other such document conveying or secur- ing title to readily marketable staples. Bills of the classes above designated may be accepted by member banks up to fifty per centum of their capital and surplus, or where permission is obtained from the Federal Reserve Board, up to one hundred per centum. However, acceptances arising from domestic transactions may not exceed fifty per centum of the capital and surplus of the bank, which is prohibited also from accepting for any one person, firm, company or corpo- ration, drafts aggregating more than ten per centum of the capital and surplus of the member bank. The latter limitation has no application where the draft accepted carries [39] the attached documents above referred to, or other actual security arising from the transaction covered by the acceptance. Bills drawn on member banks by banks and bankers in foreign countries to furnish dollar exchange, where the usages of trade make it necessary, may be accepted by the former to an amount not in excess of fifty per centum of their capital and surplus, provided such drafts have not more than three months' sight to run. Applications to Federal Reserve Bank The Federal Reserve Board has provided that any member bank with an unimpaired surplus equalling at least twenty per centum of its paid-up capital, desiring to accept up to one hundred per centum of its paid-up and unimpaired capital stock and surplus, as above described, shall file an application with the Board through the Federal Reserve bank of its district. The Federal Reserve bank then reports the financial status of the applying bank to the Board and states whether the general financial conditions in the district are such as to make the granting of the [40] ' <) application advisable, whereupon the applica- tion is approved or rejected. Any approved application may be rescinded by giving ninety days' notice to the member bank. Limitations as to Amount The fifty per centum limitation on drafts accepted for the purpose of furnishing dollar exchange is entirely separate from and not included in the limits placed by the Act upon the acceptance by a member bank of drafts and bills of exchange drawn against the shipment of goods or against warehouse receipts covering readily marketable staples. Member banks purchasing their own ac- ceptances before maturity need not include them in the aggregate of acceptances author- ized by the Federal Reserve Act. Maturity to Approximate Duration of Shipment Although the Act fixes a maximum matur- ity of six months, yet in cases where a draft is drawn against a shipment of goods in a transaction not involving the sale, the matur- [41] i ity of the draft should approximate the dura- tion of the transit of the goods, the law con- templating that the acceptance should be to finance the shipment and that it should not be the means of furnishing a credit for any other purpose. Where a draft is drawn against the ship- ment of goods in a transaction involving their sale, the draft may be drawn and ac- cepted for the purpose of financing not merely the shipment but also the sale of the goods. In this connection, it has been held that a draft drawn against goods shipped from a corporation to its agent may be accepted by a member bank even though no actual sale is involved. Guarantee as to Exportation A member bank cannot accept drafts drawn by an exporter in a foreign country to provide funds for the purchase of farm products from farmers in such country unless the foreign exporter has a contract to ship the com- modities in question to some other country. Unless the member bank has a guarantee to this effect, the transaction is not one involv- [421 i- ing importation or exportation of goods, and the fact that the foreign exporter intends a sale of the goods in a foreign country is not sufficient. An actual contract of sale must exist and it must appear that the drafts are merely drawn in advance of the actual ship- ment of goods under the contract of sale. Acceptances Financing Future Importations A member bank may accept drafts drawn for the purpose of importing goods, whether or not the sale under consideration has been consummated at the time of the acceptance, but the accepting bank must be reasonably sure that the draft is drawn to finance a trans- action involving importation or exportation of goods, that its proceeds will be used for that purpose and that there is a definite bona fide contract for shipment within a reason- able and specified time. If the accepting bank believes that the proceeds will ulti- mately be used solely for the purpose of financing the transaction involving the im- portation of goods, it is immaterial whether or not the goods have been actually sold at the time of the acceptance, and it is not even [43] necessary that the goods be identified at that time. If the credit is granted before the importa- tion takes place, the acceptance may be con- tinued or renewed with propriety, while the goods are on the docks. Drafts of Persons Doing Both Export and Import Business Where a dealer engaged in the purchase of the same character and class of goods for export and domestic use, desires to finance the purchase and sale of goods to be exported, his agreement with a member bank accepting drafts should show that he has a contract for the exportation of the goods, that the total amount of drafts drawn under such credit will not exceed the aggregate amount involved in the export contract, that the pro- ceeds of the drafts are to be used in connec- tion with the export transaction, and that the proceeds of the sale of the goods exported will be applied to pay acceptances, unless the dealer has meanwhile provided the bank with funds to meet such acceptances at maturity, or has properly secured them. [44] Option of Dealers to Secure Drafts A dealer having drawn drafts accepted by a member bank in an export transaction, should, with the consent of the accepting bank, be given the option to secure such drafts in the manner required of bills drawn in domestic transactions, if he desires to use the proceeds derived from the sale of the goods exported for purposes other than the payment of such drafts. Renewals Based on Import or Export of Goods An accepting bank, upon payment of an acceptance, may for a reasonable period, accept new drafts for the financing of the original transaction even after shipment and delivery of the goods, if such renewals are stipulated in the original contract as an in- cidental condition of the transaction of im- portation or exportation upon which the acceptance is based. Miscarriage of Export Transaction If fully secured, a member bank may accept drafts drawn by a domestic firm, having a contract to sell to foreign buyers, when the [45] transaction is made in good faith, though resulting in the ultimate sale of the goods to an American instead of to a foreign purchaser. Attached Documents in Domestic Transactions The provision which authorizes member banks to accept drafts based on domestic shipment of goods when shipping documents are "attached," does not mean that the documents must be physically fastened to the draft. Shipping documents must, how- ever, be made out or endorsed so as to convey or secure title to the accepting bank. Purchase hy Member Bank of Its Own Acceptances In the past banks were accustomed to buy many of their own acceptances because it was necessary in order to develop the acceptance market. While it is undesirable in the opm- ion of the Federal Reserve Board for a bank to buy its own acceptances, it is essential that the credit of the accepting bank >e protected, through such purchase, where the market conditions prevent absorption. [46] Purchase by a bank of its own acceptances is equivalent to a loan or advance to the cus- tomer for whom the acceptance is made, and the liability of the customer is subject to the limitations placed on loans. The power of a member bank to accept drafts is entirely distinct from the power to discount accept- ances of others. Dollar Exchange In order that a draft drawn by a foreign bank on a member bank for the purpose of furnishing dollar exchange may be accepted by the latter, the drawer must be in a foreign country or dependency or insular possession of the United States where the usages of trade have been determined by the Federal Reserve Board to require the drawing of this character of paper. Application must first be made to the Board setting forth the usages of trade in the place where the drawer bank is located. If the board deems the granting of the application expedient, it will notify the member bank of its approval which, however, may be revoked upon ninety days notice to the member bank. [47] M 'I Eligibility A bill or acceptance is said to be "eligible" when it may be purchased or discounted by a Federal Reserve bank. In order to be eligible, it must conform to all the require- ments of the Federal Reserve Board, smce otherwise it cannot be purchased or dis- counted by Federal Reserve banks and will thereby Jose one of its greatest assets. Discount by Federal Reserve Bank A Federal Reserve bank may discount for any of its member banks any note, draft or bill of exchange provided it has the follow- ing requisites : 1. It must have a maturity at the time of discount of not more than ninety days, excluding days of grace, but where drawn for agricultural purposes* it may have a maturity of not more than six months. 2. It must have arisen out of actual commercial trans- actions, namely, it must be an instrument drawn for agricultural, industrial, or commercial purposes, or the proceeds of which have been or are to be used for such purposes. S. It must not have been issued to carry or trade in *See definiUon of "AgrioutaiMl P«per" on puge 52. [48] stocks, bonds, or other investment securities, ex- cept bonds and notes of the United States. 4. The aggregate of negotiable paper bearing the signa- ture or indorsement of any one borrower, whether person, firm, company or corporation, rediscounted for any one member bank must not exceed at any time, ten per centum of the unimpaired capital and surplus of such bank, this restriction, however, not applying to the discount of bills of exchange drawn in good faith against actually existing values. 5. It must be indorsed by a member bank. 6. It must conform to all regulations of the Federal Reserve Board. General Character of Eligible Instruments The Federal Reserve Board has determined that the instrument itself to be eligible for rediscount at a Federal Reserve bank must meet the following requirements : 1. It must be an instrument whose proceeds have been used or are to be used in producing, purchasing, carrying, or marketing goods in one or more of the steps of the process of production, manufacture, or distribution. 2. It must not have been used nor contemplate use for permanent or fixed investments of any kind, such as lands, buildings, or machinery. [49] ;'^t 3. Its proceeds must not have been used nor contem- plate use for investments of a purely speculative character. 4. It may be secured by the pledge of goods or col- lateral, if it is otherwise eligible. Applications for Rediscount A member bank must make application for rediscoimt to the Federal Reserve bank, which will satisfy itself as to the eligibility of the instrument. Member banks must furnish with all applications for the rediscount of notes, drafts or bills of exchange, a certificate in form prescribed by the Federal Reserve bank that to the best of their knowledge and belief, the instrument has not been is- sued for prohibited purposes. Syndicate Paper Where syndicates are formed for the pur- pose of granting acceptance credits for more than moderate amounts. Federal Reserve banks should be consulted with regard to the transaction and will then decide the question of eligibility, both as to the character and amount of the bill, subject to the approval of the Federal Reserve Board. [501 Use for CommercM or Industrial Purposes Where the proceeds of paper have been or are to be used to purchase coal or to provide funds for payment of other expenses of operation, if the paper is otherwise in con- formity with the law, and the regulations of the Board, it is eligible for rediscount at Federal Reserve banks. If doubt exists whether the proceeds are to be used for com- mercial or industrial purposes or whether for permanent or fixed investments, then the Federal Reserve bank may accept a statement of the borrower showing a reasonable excess of quick assets over current liabihties to evidence the fact that it is not drawn to make a fixed investment. Bills Drawn Against Actually Existing Values A bill of exchange discounted before ac- ceptance may be said to be drawn against actually existing value only when accom- panied by shipping documents, or warehouse receipts, or other papers securing title to the goods sold. An accepted bill of exchange unaccompanied by shippmg documents or [51] other such papers may be considered as drawn against actually existing value if drawn against the drawee at the time of, or within a reasonable time after the ship- ment or delivery of the goods. In the latter case, there must be reasonable grounds for belief that the goods are actually in existence in the hands of the drawee in their original form, or in the shape of the proceeds of their sale. Agricultural Paper Six months' agricultural paper has been declared eligible for rediscount at a Federal Reserve bank if it conforms to the regulations which would apply if its maturity were ninety days or less, instead of six months. The term "six months' agricultural paper'' has reference to a note, draft, bill of exchange or trade acceptance drawn or issued for agri- cultural purposes, or based on the sale of live stock. It is an instrument whose pro- ceeds have been used or contemplate use for agricultural purposes, including the breeding, raising, fattening or marketing of live stock, and which has a maturity at the time of discount of not more than six months, ex- clusive of days of grace. [52] Commodity Paper The term ''commodity paper" refers to notes, drafts or bills of exchange, which are accompanied and secured by shipping docu- ments or warehouse, terminal or other re- ceipts covering approved, readily marketable, non-perishable staples, which are properly insured. To be eligible for rediscount at the special rate established for commodity paper, the instrument must comply with regulations applicable to it and conform to all the re- quirements of the Federal Reserve bank, especially those relating to shipping docu- ments, receipts and insurance, and must be an instrument on which the rate of interest or the discount charged the maker, including the commission, does not exceed six per centum per annum. The special rate on this paper is intended to aid producers during crop moving periods, and not to assist speculators. Hence, the Federal Reserve Board may suspend the special rates when- ever it is apparent that the movement of the crops which is intended to be facilitated, has been practically completed. [53] ;: ' .. I ■t Discount of Bankers' Acceptances A Federal Reserve bank may discount for any member bank, bankers' acceptances hav- ing a maturity at the time of discount of not more than three months' sight, exclusive of days of grace, which are indorsed by at least one member bank, and which grow out of transactions involving the importation or exportation of goods, or which grow out of transactions involving the domestic ship- ment of goods, where shipping documents are attached at the time of acceptance; or, which are secured at the time of acceptance by a warehouse receipt or other such document conveying or securing title covering readily marketable staples. Federal Reserve banks may likewise acquire drafts or bills of ex- change drawn on member banks by banks and bankers in foreign countries or dependencies or insular possessions of the United States for the purpose of furnishing dollar exchange. Eligibility of Banker^ s Acceptances A banker's acceptance, which has been defined elsewhere, in order to be eligible for rediscount must have been drawn under a [54] credit opened for the purpose of conducting or settling accounts resulting from trans- actions involving: 1. The shipment of goods between the United States and a foreign country, or between the United States and any of its dependencies or insular possessions, or between foreign countries, or 2. The domestic shipment of goods, where shipping documents are attached at the time of acceptance, or 3. It must be a bill secured at the time of acceptance ' by warehouse receipt or other such document con- veying or securing title covermg readily marketable staples. A Federal Reserve bank may acquire bills drawn to furnish dollar exchange which have been accepted by a member bank in accord- ance with the regulations relating to accept- ances by member banks, and these bills may be acquired prior to acceptance where in- dorsed by a member bank. Evidence as to Eligibility Federal Reserve banks must be satisfied from the acceptance itself or otherwise that it is eligible for rediscount. The evidence of eligibility may consist of a stamp or certifi- cate affixed by the acceptor in a form satis- [55] factory to the Federal Reserve bank, but no evidence^is required where a bill is accepted by a national bank. Acceptance Pledged as Collateral Security Where an acceptance house purchases an acceptance based on the importation or ex- portation of goods and desires to reimburse itself by drawing a bill upon a national bank, the acceptance, which was based upon the transaction involving the importation or exportation of goods, being pledged as col- lateral security for the bill, the new bill cannot be said to grow out of the original export transaction in the sense contem- plated in the Federal Reserve Act. Hence, a national bank cannot accept a draft drawn under these circumstances, since it is not an acceptance growing out of a transaction involving the importation or exportation of goods, and because it is not an acceptance of that class authorized by the amendment of September 7, 1916. It is not drawn by a bank or banker located in a foreign country and does not grow out of a transaction involv- ing the domestic shipment or storage of goods. [56] Readily Marketable Goods If a new transaction is entered into after importation has been completed, it would constitute a domestic transaction, in which case it must be decided whether or not the goods are to be considered "readily market- able.'' If they are, the acceptor must be seciu-ed by warehouse receipts or other documents. It has been held that cattle are a readily marketable commodity, and a banker's ac- ceptance secured by a chattel mortgage there- on may be rediscounted at a Federal Reserve bank. Potatoes properly graded, packed and stored in a responsible and weather-proof warehouse constitute a readily marketable, non-perishable staple within the meaning of the regulations. Bona Fide Sale Necessary Where a transaction against which a draft is drawn, involves a direct sale to a foreign purchaser, the fact that it may be consum- mated before the exportation actually com- mences is immaterial, if the transaction is bona fide and the accepting bank has no [57] reason to believe that the purchaser will divert the goods from their foreign destination. Trust and Warehouse Receipts as Security When an acceptance is secured by shipping documents which are surrendered by the acceptor for a trust receipt, which permits the purchaser to retain control of the goods, the accepting bank is not seciu-ed "by some other actual security." A trust receipt, however, which does not permit the pur- chaser to procure control of the goods may be said to be actual security within the mean- ing of the act. Warehouse receipts on other goods may be substituted by a mill for cotton receipts during the life of the acceptance, but Federal Reserve banks should make sure that the receipt belonging to the mill receiving the credit is issued by a warehouse which is independent of the borrower. Discount of Renewals First acceptances which have matured may be renewed by member banks provided the original contract so specifies, and Federal Reserve banks may discount such renewed [58] acceptances, although they may not engage in advance to make such discount of a re- newal. A bank may resell or reissue its own ac- ceptances and they may be treated as accept- ances outstanding and not as loans. This applies to those sold or discounted with the Federal Reserve bank, and also to accept- ances sold in the open market. Purchase of Acceptances by Federal Reserve Banks Federal Reserve banks may purchase and sell in the open market, bills of exchange and bankers' acceptances of the kinds made eligible for rediscount with or without in- dorsement of a member bank. General Character of Eligible Instruments The Federal Reserve Board has ruled that to be eligible for such purchase, the bill or acceptance : 1. Must not have been issued to carry or trade in stocks, bonds or other investment securities, except bonds and notes of the United States Government. 2. Must not be a bill whose proceeds have been used or contemplate use for permanent or fixed invest- [59] t ments of any kind, such as land, buildings, or ma- chinery, or for investments of a purely speculative character. 3. Must have been accepted by the drawee prior to purchase by the Federal Reserve bank, unless ac- companied and secured by shipping documents or by a warehouse, terminal, or other similar receipt, conveying security title. 4. May be secured by the pledge of goods or collateral, if otherwise eligible. Evidence as to Eligibility Federal Reserve banks must satisfy them- selves that the bill offered for purchase has all the requirements of eligibility. This evi- dence usually appears on the face of the bill, which bears a stamp or certificate affixed by the drawer or acceptor showing it to be a trade acceptance. Bills of Exchange and Trade Acceptances The above are general requisites applicable to all acceptances. In the case of trade acceptances, in addition to the conditions prescribed in the definition of eligibility, the bill must have arisen from an actual com- mercial transaction, and must have a matur- ity of not more than ninety days, excluding [60] days of grace. It must carry also the in- dorsement of a member bank or else a satisfactory statement must be supplied as to the financial status of at least one of the parties to the bill. Acceptances of Non-Member Trust Companies Bills drawn on and accepted by a trust company not a member of the Federal Reserve System, where the proceeds are to be used for purchasing raw material or in the payment of labor, where the goods have not been sold and no warehouse receipt or other instrument can be furnished, are in- eligible for purchase by a Federal Reserve bank. Purchase of Bankers^ Acceptances by Federal Reserve Banks The Federal Reserve Board regulations prescribe that in order for a banker's accept- ance to be eli^ble for purchase, the bill must have a maturity at the time of purchase of not more than three months, exclusive of days of grace, and must have been drawn under a [61] credit opened for the purpose of conducting, or settling accounts resulting from a trans- action or transactions involving — 1. The shipment of goods between the United S totes and any foreign country, or between the United Stotes and any of its dependencies or insular pos- sessions, or between foreign countries; or C The shipment of goods within the United States, provided the bill at the time of its acceptance is accompanied by shipping documents; or S. The storage within the United Stotes of readily marketoble goods provided the acceptor of the bill is secured by warehouse, terminal or similar receipt; or 4. The storage within the United Stotes of goods which havfj been actually sold, provided the acceptor of the bill is secured by the pledge of such goods; or tf . It must be a bill drawn by a bank or banker in a foreign country or dependency, or insular possession of the United Stotes for the purpose of furnishing dollar exchange. In the latter case the country, dependency or possession where the foreign banker resides, must have been one whose usages of trade have been determined by the Federal Reserve Board to require the drawing of such bills. [621 Statements Federal Reserve banks may purchase or sell in the open market, with or without in- dorsement by a member bank, drafts having not more than three months* sight to run, whether accepted by member banks, or by non-member banks, trust companies, or pri- vate bankers, but before bills not accepted or indorsed by member banks are eligible for purchase by Federal Reserve banks, the acceptor must present a satisfactory state- ment of his financial condition to the Federal Reserve bank and must agree in writing to furnish the Federal Reserve Board, upon request, with any information regarding the transaction which underlies the acceptance. [631 f i ii« III 111 ■i? Acceptances Under the Laws of New York iVetc; York State Banking Law The New York State Banking Law permits greater latitude than does the Federal Re- serve Act, In New York, state banks and trust companies may issue acceptances with- out security and without reference to the exportation and importation of goods. Section 185, subdivision 10, of the New York State Banking Law relating to trust companies, and Section 106, subdivision 2 of the New York State Banking Law relating to state banks, permit them "To accept for payment at a future date drafts drawn upon it by its customers, and to issue letters of credit authorizing the holders thereof to draw drafts upon it or its correspondents, at sight or on time, not exceeding one year." Section 108 of the New York State Banking Law, relating to banks, and Section 190, relat- ing to trust companies, limit the liabilities re- sulting from extensions of credit by means of letters of credit, acceptance of drafts, or discount or purchase of notes or bills of exchange, or other obligations of any indi- [64] ill ■n jL vidual, partnership, unincorporated associa- tion, corporation or body politic to ten per centum of the capital stock and surplus of such bank or trust company. These restric- tions do not apply to loans to, or investments in the interest-bearing obligations of theUnited States, the State of New York or any city, county, town or village of such State. Institutions in Boroughs with Population of Two Millions Where the bank or trust company is located in a borough having a population of two mil- lions or over, its loans to any state, other than the State of New York, or to any foreign nation, or municipal or railroad corporation, subject to the jurisdiction of a public service commission of New York State, may equal but not exceed twenty-five per centum of the capital and surplus of the lending institution. It may, likewise, lend to any individual, partnership, unincorporated association, or to any other corporation or body politic amounts not exceeding twenty-five per cen- tum of its capital and surplus, but the liabili- [65] ties or loans in such case must be upon drafts or bills of exchange, drawn in good faith against actually existing values, or upon com- mercial or business paper actually owned by the person negotiating same to the lending institution, and be indorsed by such person without limitation; otherwise such liabilities in excess of ten per centum of the capital and surplus and not in excess of an additional fifteen per centum, must be secured by col- lateral having an ascertained market value of at least fifteen per centum more than the amount of liabilities secured. Other Institutions If the bank or trust company is located else- where in the State, its loans to any state, other than the State of New York, or to any foreign nation or a municipal or railroad corporation or corporation subject to the jurisdiction of a public service commission of New York State may equal but not exceed forty per centum of the capital and surplus of such institution. The total liabilities to such institution of any individual, partnership, unincorporated [66] f association, or of any other corporation or body politic may equal but not exceed forty per centum of the capital and surplus of such institution, but the liabilities or loans in such case must be upon drafts or bills of exchange drawn in good faith against actually existing values, or upon commercial or business paper actually owned by the person negotiating the same to the lending institution, and be en- dorsed by such person without limitation; otherwise such Uabilities in excess of ten per centum of the capital and surplus and not in excess of an additional thirty per centum, must be secured by collateral having an accer- tained market value of at least fifteen per centum more than the amount of liabilities secured. In computing the total loans to an individ- ual, all loans to any partnership or unincor- porated association of which he is a member, made for his benefit or for that of his firm, shall be included. Loans to a partnership or unincorporated association shall include all those made for its benefit as well as for the individual members, and in loans to a cor- [67] -v I II poration there shall be included all those made for the benefit of the corporation. Savings Banks in New York By virtue of an amendment to the New York banking laws which was signed by the Governor, on April 19, 1918, the deposits and guaranty fund and the income derived there- from of savings banks may be invested in bankers' acceptances and bills of exchange of the kind and maturities made eligible for rediscount with Federal Reserve banks, where the same are accepted by a bank, national banking association or trust com- pany, incorporated under the laws of New York State or under those of the United States, and having its principal place of business in the State of New York. Limitations in Purchases Under this amendment, savings banks can- not invest in such acceptances more than twenty per centum of their assets, less the amount of the available fund held pursuant to the Banking Laws for the purpose of paying withdrawals in excess of receipts and [68] / meeting current expenses, or for the purpose of awaiting a more favorable opportunity for investment. The aggregate hability of any bank, national banking association or trust company to any savings bank for acceptances held and deposits made by the latter is limited to twenty-five per centum of the paid-up capital and sur- plus of such bank, national banking associa- tion or trust company. Not more than five per centum of the aggregate amount credited to the depositors of a savings bank can be invested in the acceptances of or deposited with a bank, national banking association, or trust com- pany of which a trustee of such savings bank is a director. Market for Acceptances In New York, where the largest open market for discounts has been established, most of the business is a matter of trading. One banker or broker calls up another and ofl'ers or inquires for a certain volume and [69] w kind of acceptance; for instance, *' $100,000 Guaranty Trust." In London the method of procedure is similar, but in Paris and other cities, the buying and seUing are done in an established exchange which fixes the discount rates. Amounts Most in Demand On the London market it has been the rule for some years to limit the amount of a single bill of exchange to £5,000. The reason for this is that acceptances of £5,000 and less are more quickly negotiable than those of larger denominations. In the New York market — while the London practice is being followed to some extent — acceptances in de- nominations of $10,000 or less are most in demand. Beginning of the Market in New York The acceptance business in the United States had its actual beginning shortly after the outbreak of the European War. When the London market had to restrict its accept- ances, owing to the new conditions arising [70] A from the war, the Guaranty Trust Company immediately began issuing dollar letters of credit payable in New York. The diflSculty at that time was the absence of a market for acceptances. At first, when bills were offered from abroad, drawn under the Guaranty Trust Company's dollar letters of credit, that Company itself at first had to bid for them. Gradually other banks began bidding and this action resulted in lowered discount rates. Later, rates dropped still further until, at the beginning of 1915, the ruling rate was from three per centum to three and one-half per centum. About the same time, the situation began to clear in the American money market. Bankers and brokers were freely bidding for acceptances, thus showing that a discount market was near at hand and that the only thing lacking was the acceptances. The Guaranty Trust Company suppKed this deficiency with the issuance of further acceptance credits for account of its customers. The market soon indicated that it could absorb more, and the result was that the discount rate fell to about [71] tt two and one-haK per centum. A number of brokers who saw the possibilities in this new line of business, advertised all over the coun- try, recommending the purchase of accept- ances- This, together with the amendments to the Federal Reserve Act which have been favorable to this class of paper, has done much to develop the growth of the accept- ance market. / d [721 / -♦.-___,^— . Date Du6 I- ^ rl APR27193;sj 1^ hi €CC^ m 1 a ^JMirUL COLUMBIA UNIVERS 0044248229 TY LIBRARIES S^ ^0 X^'H ii:^^f^r I IS -h i:^^ M I \ i*.:-l-r^jJHj^_