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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: International Acceptance Bank, New York Title: Acceptance financing and the international... Place: New YOrk Date: [1 923] RESTRICTIONS ON USE: MASTER NEGATIVE # COLUMBIA UNIVERSITY LIBRARIES PRESERVATION DIVISION BIBLIOGRAPHIC MICROFORM TARGET ORIGINAL MATERIAL AS FILMED - EXISTING BIBLIOGRAPHIC RECORD BusTnesT" In34 International acceptance bank, inc., Nnr YorJc. Accoptniicc fiiiniicino- niid the Tiiloniational acccptaucc bank, inc. New York [Intenialional aeeeptanee bank, inc., '=192'^ ^J 3 p. 1., 9-75, i4j p. 23'"'. 1. Acceptances. i. Title. Library of Congress CopyriRht A 699896 O HG 1655.1 6 23-5480 TECHNICAL MICROFORM DATA FILM SIZE: '^^r*,iy\ REDUCTION RATIO; 1^ IMAGE PLACEMENT: lA ® IB IIB DATE FILMED: i\'[(d'^^ TRACKING # : INITIALS: WW MAj^ nu^i FILMED BY PRESERVATION RESOURCES, BETHLEHEM, PA. a^ 3 3 0) CT O > qQ a -.m 3 X ox ^-< OOM to o ^: 3 3 > 0,0 o m OQ ^ o o C/) N ^ ^K^^ ^K^'^- A^ .•v^' ^^A ^^■ ^ '^^.^A. '^. V. e? <*■ ^^ o o 3 3 o 3 3 <^/ > ill a^^ ^. ^? %f4f o o 3 3 O f"i^i?P|SK|5|? 1^ 1^ CO a 00 b ro ro I bo In 1.0 mm 1.5 mm 2.0 mm ABCDEFGHIJKLMNOPQRSTUVWXYZ abcclefgh(|klmnopqrstuvwxy2l234567890 ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyzl234567890 ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 1234567890 2.5 mm ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 1234567890 V "^o %> ^^ •/^. i^ <^ fp :0 fp 'Sr m O O ■om -o OL,"0 > C Cd I TJ ^ 0\> Copyright, 1923, by International Acceptance Bank, Inc. Hi' I \ i \ 1" Introduction DURING recent years much has been written on the subject of foreign financing in general, and of the use of the acceptance in particular. There have been published by the American Acceptance Council and by various banks a considerable num- ber of articles and pamphlets dealing with various phases of the matter ; and several admirable com- pilations have been made of laws, regulations, and customs governing the creation of acceptances by American banks. It is not the purpose of this booklet to provide a guide for the initiated; it is not in any sense intended to be a technical trea- tise. For this reason it contains no appendix in which may be found the usual excerpts from sun- dry laws and regulations. Its object is rather to present the problems of foreign trade financing in such a way that the lay mind will see them, not as thorny theorems of academic discussion, but as everyday matters, which they really are. In a sense the chapters which follow are an attempt also to answer, cumulatively and generic- ally, some of the vast number of specific questions, which are constantly presenting themselves in the daily course of business. Furthermore, it is our aim to demonstrate the far-reaching applicability of the use of acceptance financing, which, though old in Europe, is still in its infancy here. And finally, — to confess frankly our ulterior motive, — it is our hope that the ensuing pages may give rise to the thought on the part of the reader that there may be some way in which the service of the In- ternational Acceptance Bank can meet his partic- ular need. i. The following list of chapter headings will serve to show the order in which the different subjects will briefly be touched upon. Part One contains a cursory sketch of the origin and development of the discount market in America. Part Two sets forth the different varieties of acceptance financ- ing, and attempts to show how they are adapted to the needs of some of our major industries. Part Three is concerned with the relationship between customer and bank, the analysis of risk, and a few technical features. And' finally, Part Four is devoted to a short statement of the facil- ities offered by the International Acceptance Bank. JAMES P. WARBURG Vice-President New York City Jan. 15, 1923 411 jA - J i CONTENTS PART ONE The Acceptance in the United States chapter page One The Origin of the Acceptance 9 Two The American Credit Structure. . . 12 Three The Acceptance as an Investment . . 17 PART TWO Variols Forms and Uses of Acceptance Financing Four Import Credits 23 Five Export Acceptance Credits 28 Six Domestic Acceptance Credits 32 Seven Acceptances to Create Dollar Exchange 35 Eight Grain and Foodstuffs 37 Nine The Textile Raw Materials 40 Ten Hides and Skins 44 Eleven Other Raw Materials and Manufac- tured Goods 46 PART THREE The Relation of the Customer to the Bank Twelve Becoming Acquainted with the Customer 51 Thirteen . . .The Analysis of a Customer's Business 54 Fourteen . .A Few Technical Pitfalls 58 PART FOUR The International Acceptance Bank, Inc. Fifteen The Organization of the I. A. B 65 Sixteen Particular Facilities for Domestic Clients 69 Seventeen . .Services to Foreign Customers 73 f f • CHAPTER ONE The Origin of the Acceptance THE story of the gradual erection of the pres- ent-day credit structure upon the original bed- rock of barter has been told so often and so fully, that we need not concern ourselves with it here. Every one, no matter how remotely he is con- nected with business, is familiar at least in a gen- eral way, with the history of the use of the pre- cious metals as a medium of exchange, and the subsequent evolution of credit, based upon the confidence of one man in the ability of another to pay in terms of the accepted medium. Every one knows that the establishment of general confi- dence in the ability of a government to redeem the accepted medium in gold or silver, — whatever its standard may be, — is the corner-stone of the entire credit structure. The acceptance of token money in lieu of actual metal rests on this con- fidence, and so does in turn the substitution for token money of checks and promises to pay, whether long or short, whether corporate or individual. What we are here primarily concerned with is the use of one particular kind of a promise to pay, namely, the banker's acceptance; but, inasmuch as this instrument developed out of what is known as the trade acceptance, we must first briefly consider the essential characteristics of the lat- ter. The trade acceptance is the obligation of a purchaser to a seller for a specific sum owed for certain goods or services, and this obliga- tion is expressed in the form of a draft drawn by the seller on the purchaser and accepted by the latter for payment at its maturity. The funda- mental feature is not simply that the acceptance 9 The Trade Acceptance is two-name paper; a note of hand bearing an accommodation endorsement is two-name paper, but it is a vastly different instrument from the acceptance. The endorsed note is simply the prom- ise of one man to pay, fortified by the guarantee of another; the trade acceptance represents an account receivable for merchandise or service ren- dered, in negotiable form. If Jones sells Smith a cargo of wheat, for $50,000. payable in thirty days, and carries this transaction as an open book account, he thereby Open ties up his $50,000. for one month. At the end of Account that time Smith may argue that the wheat was •^"'^ bad, or not the kind he ordered, and refuse to pay. In order to carry on his business pending the set- tlement of this dispute, Jones may have to borrow- some money, and, not having sufficient credit with the bank, he may induce some friend of means to endorse his note for him. If, on the other hand, Jones ships his wheat to Smith, and draws a thirty days draft on him for $50,000, with instructions to his bank to release Versus the wheat to Smith only after the latter has signed Trade his name across the face of the draft, all this Acceptance trouble would be avoided. In the first place, the seller would immediately have an instrument upon which he could realize by selling it to his bank or in the market; and second, the purchaser would have to pay at maturity and claim his adjustment afterwards, unless he desired to become involved in legal proceedings for default. The exact origin of the trade acceptance is not known, but obviously it was nothing more than a common-sense development out of the ordinary requirements of business. Similarly, the evolution Oriffin from the trade acceptance, where seller draws on purchaser, to the banker's acceptance, where the purchaser provides the seller with a bank upon which to draw, is nothing more than a further de- velopment of the original thought. For, to revert to our friends, Smith and Jones, if Jones knew 10 . Evolution of the Bank that Smith also lacked capital, and that the bank would not lend on Smith's acceptance of his draft, he would refuse to sell Smith, unless the latter could provide other means of payment. It is then not hard to conceive of Smith's going to his own bank and possibly prevailing upon it, because it had known him for a long time as an honest merchant, to lend its credit to the Acceptance transaction. If the bank agreed to accept Jones* draft on behalf of Smith, Jones would be satisfied. The bank might then protect itself by holding the wheat until Smith could sell it and pay in the proceeds some time during the thirty day period, and of course it would charge Smith for the accom- modation. Thus we can easily imagine the evolu- tion of the first banker's acceptance. Various circumstances have made for different developments in the use of the bank and trade acceptance in various countries. In England the bank acceptance has reached its highest develop- ment as a means of financing foreign business, while the trade acceptance has remained in vogue chiefly for domestic transactions. In various Con- tinental countries both trade and bank acceptances are employed, the extensive use of the trade ac- ceptance being particularly noteworthy in France. In Canada, likewise, the trade acceptance has en- tirely supplanted the single name note, and bank acceptances are rarely used, except for foreign business. Both forms are used in Germany, where the bank acceptance plays a particularly impor- tant part in the financing of the industries. The development of the credit structure in the various countries of Europe is an engrossing sub- ject, but it is unfortunately one which cannot even superficially be touched upon in a few paragraphs. Nor is it possible adequately to do what we shall nevertheless attempt in the next chapter, namely to present a condensed picture of what has hap- pened and is happening in our own country. 11 Use in Other Countries CHAPTER TWO The American Credit Structure ORIGINALLY, when this country was a British colony, and later, during the first half cen- ^ccepu^ncf *^^ ^^ ^*® independence, the credit structure was ^^^^ closely modelled on that of England. The trade acceptance was in common use as the means by which the interchange of goods was financed. Such bills of exchange were bought by the banks, and the latter were also in the habit of extending accommodation against the hypothecation of mer- chandise. During, and immediately after the Civil War, Civil War the entire economic life of the country became completely demoralized. Even in the victorious North the basis of the credit structure, — ^mutual confidence in the ability of the other man to meet his obligations, — ^was badly damaged. In the South, not only was the entire structure destroyed, but its very foundations were washed away ; for, not only had confidence been utterly shaken, but money as a medium of exchange had temporarily disappeared. Th€ Premium ^^ ^s only natural that under such circumstances on Cash of complete disintegration a high premium should be paid by the seller of goods for the immediate procurance of cash. This situation brought about the practice of giving cash discounts on sales, which has continued down to the present day, long after the need for it has passed. It is obvious that the offer of a 10% discount for cash as against payment on the customary trade terms of thirty, sixty, or ninety days, leads to a system of com- mercial financing in which the trade acceptance plays no part. A further consequence of this de- 12 velopment is that the seller, upon whom falls the burden of financing the transaction, will have to find some other way of borrowing funds than by sale of his accounts receivable in negotiable form, which in turn will lead to the practice of borrow- ing on single name notes. Under the National Bank Act of 1864, banks holding a national charter were given no power to accept, and furthermore these banks were by ^^J^t the Comptroller's ofiice strictly prohibited from allowing overdrafts. This piece of legislation, together with the post-war situation above-out- lined, the total lack of a discount market controlled by a rediscounting central bank, and the decentral- ization of note issues and reserves, led, more than anything else, to the development of the American credit structure, along lines differing so radically from European custom. In Europe it had become an old-established principle, that if a man was entitled to borrow on his single name, he did so by using a blank finance ^"^^^^J^ credit, or by overdrawing his account with his bank up to a certain limited amount. In no case was such single name borrowing done in the open market, the use of the latter being entirely con- fined to bank or trade acceptances. Here, on the other hand, by reason of the fact that trade acceptances no longer commanded con- fidence, and that bank acceptances were by law American impossible, the development led to the exact in- Single-name verse of European practice. The cash discount open account system made the accounts receivable of the seller illiquid and necessitated his borrowing from his bank, either on his straight name, or by giving security in one form or another. As this form of financing developed over a period of years, it became apparent that the stronger corporations could sell their single name unsecured obligations for short periods to banks other than their own, and this gradually led to the distribution of such paper through so-called commercial paper brokers 13 Money Rates The Federal Reserve Act to banks all over the country, and ultimately to other investors as well. As an obvious corollary of this condition, the price of money could never be governed here as it was in Europe by a free nation-wide interplay of demand and supply; whereas in European countries money rates are determined by an open discount market protected against over-violent fluctuations by the operations of the Central Bank, a natural regulation of this sort was precluded in this country. In the nrst place there was no dis- count market, and no central reserve system pre- sided over by a central note-issuing bank; in the second place, by the policy of jealously guarding individual state rights, the country was broken up into a large number of small units, with a lack of uniform law and regulation; and finally, since branch banking was not permitted, we soon had some 30,000 individual banks, instead of, as in Europe, a few large institutions with branches scattered throughout the country. The inevitable result of these conditions was that the focal point of the American money market centered in New York, as the only available meeting-ground for the demand of one section and the idle funds of another, and that consequently the price of money was governed very largely by the rate at which loans could be placed in the New York market against stock exchange collateral. When the Federal Reserve System was estab- lished in 1914 a modified central banking system was provided, and, by centralizing reserves and giving the banks of the country the power to accept, the first step was taken towards the crea- tion of a discount market. As is always the case when new powers are given to any group of indi- viduals, a grave danger was foreseen in the possi- ble abuse of the newly granted privilege. For this reason the Federal Reserve Act imposed certain rigid limitations upon the acceptance power, and vested in the Federal Reserve Board the function 14 of determining from time to time by the issuance of rulings and regulations, in what manner the ac- ceptance privilege was to be exercised. When the Act first went into effect. National Banks were given permission to accept drafts of not more than ninety days time, drawn upon them for the purpose of financing importations and exportations of goods. All National Banks were compelled by the Act to join the Federal Reserve System, and every reasonable inducement was offered to State Banks and Trust Companies to become voluntary members. The Federal Re- serve Banks were originally authorized to redis- count the acceptances of member banks, when drawn in accordance with the regulations, but the acceptances of non-member banks were also made eligible for rediscount, when properly endorsed. A general limit was fixed of 50% of a member bank's capital and surplus, beyond which it was not permitted to have acceptances outstanding, except where upon application the Federal Reserve Board approved of its accepting up to 100%. Since the System was established the acceptance powers of member banks have gradually been ex- panded, and the System itself has been enlarged by the fact that practically every important bank in the country has now become a member bank. The acceptance powers were added to, both by amendments to the Act, and by rulings and regu- lations of the Board. In the case of many of the larger banks the limit has been increased from 50% to 100%, and provision has been made for the eligibility of acceptances created by certain non-member banks, corporations, and firms, which make statements to the Federal Reserve Banks. Inasmuch as the demand for acceptance financing cannot be fully met by banks which have large deposits, and are therefore properly prohibited from increasing their liabilities beyond the legally proscribed limit, there is a need for special acceptance The Acceptance Power Widening of the Power 15 New Forms Permitted The PoUcy of the Federal Reserve Board houses, such as have long existed in London. To fill this need the Act was amended so as to pro- vide for special organizations which have no domestic deposit liabilities, and are therefore per- mitted to accept up to an amount not exceeding ten times their capital and surplus. The Inter- national Acceptance Bank, Inc., is a special cor- poration of this nature. Furthermore, in addition to widening the power, the field was expanded. Besides financing imports and exports, the power was granted to finance domestic shipments, and readily marketable staples m warehouse, pending sale or distribution; and later, banks were permitted upon application to accept an additional 50% of their capital and sur- plus for account of banks or bankers in certain countries, "to create dollar exchange." All these various forms of acceptance financing will be taken up in subsequent chapters. As time has gone on, and as the American banker has acquired a certain amount of knowl- edge in regard to the creation of acceptances, the Board has relaxed more and more the strin- gency of its control over the various types of operations. It has, in the case of import and ex- port credits, increased the maximum length of eligible bills from three to six months; it has permitted greater latitude in the handling of documents and the release of security; and, in short, it has given every indication of its intention to permit custom and common sense at least par- tially to supplant closely codified regulations, as soon as all danger of abuse arising from ignorance and inexperience has been eliminated. 16 CHAPTER THREE The Acceptance as an Investment IN regard to the security of bank acceptances we cannot do better than to quote from an article published some time ago by the First National Corporation : "From the point of view of security, a bank acceptance is analogous to a certified check, in that it constitutes a primary obligation of the accepting bank and a contingent obligation of the drawer and of any endorsers whose names may appear upon it. Unless issued to create dollar ex- change, in which case the drawer must be a bank or banker, it is always based on a commercial transaction, supported by the customer's agree- ment with the bank to place the latter in funds in advance of maturity, and often by his pledge of the actual goods involved. In due course it is liquidated by the sale of goods and is, therefore, essentially self liquidating. But the holder of a bank acceptance is not dependent upon the comple- tion of the commercial transaction for the collec- tion of his funds, since his paper is the direct, un- conditional obligation of the accepting bank to pay. It is secured by the bank's entire resources, and must be honored, even though the taker of credit should default on his part of the undertaking. The security of principal is therefore of a high order,) and, where the accepting bank is well known, the question of safety is rarely raised." A great advantage of bank acceptances is that they may be procured to meet almost the exact requirements of any maturity up to six months, and that furthermore, should it be desired to re- alize upon the investment before the anticipated 17 Security Liquidity maturity, bank acceptances, if held by a third party, are salable in the open market at a moment's notice without the holder's endorsement; and if endorsed by a member bank or other approved name as third party, they are bought freely by the Federal Reserve Banks. In this way they combine adaptability to various needs with the highest degree of liquidity. All National Banks are permitted to invest in bank acceptances without regard to the 10% limi- tation of loans to one borrower, which is imposed by the National Bank Act and which applies to purchases of single-name commercial paper. More- over, State Banks and Trust Companies, as well as Savings Banks and Insurance Companies, are being given the right to buy such paper in an increasing number of States, and during recent years the acceptance has become extremely popu- lar with these and other large corporations, as a means of affording liquidity, security, and at the same time, a good yield for their short time funds. What Is Behind The Acceptance of the International Acceptance Bank, Inc. Condensed Statement December 30, 1922 RESOURCES Stockholders' Uncalled Liability. . . $5,000,000.00 Cash on Hand and Due from Banks $ 7,154,615.18 Acceptances of Other Banks 2,115,254.74 U. S. Government Securities 10,885,686.10 Loans and Discounts. 2,699,975.05 Other Bonds, Securities, etc 3,428,553.62 Customers' Liability, Acceptances (less Anticipations $1,788,354.48) 27,045,621.51 Customers' Liability under Letters of Credit. . . 5,611,383.93 Total $58,941,090.13 LIABILITIES Subscribed Capital and Surplus. . $15,250,000.00 Capital Paid In $10,250,000.00 Undivided Profits 969,519.76 Reserve for Taxes, etc 202,067.15 Due to Banks and Customers 13,074,143.30 Acceptances Outstanding 28,833,975.99 Letters of Credit 5,611,383.93 Total $58,941,090.13 18 19 PART TWO Various Forms and Uses of Acceptance Financing WE have just seen briefly for what purposes the American banks are empowered to cre- ate acceptances. We shall now take up in turn each of the different forms of acceptance financ- ing; that is, the sundry varieties of import, ex- port, and domestic acceptance credits, as well as the acceptance to create dollar exchange. Having done this, we shall endeavor to show how these various forms apply to some of the more impor- tant general lines of business. I a ■» \f k\ IWf CHAPTER FOUR Import Credits THE sight import letter of credit serves the pur- pose of enabling an American merchant to buy goods deliverable and payable in the United States from a foreign seller to whom he is not suffi- ciently well known so that the seller would be willing to draw on him direct.* He can of course only obtain such accommodation if he enjoys the confidence of an American bank to such an extent that it is willing to say to the foreign seller, "I understand that Mr. Jones has bought certain goods from you. At his request I hereby assure you that if you will draw on me up to such and such an amount and send me the documents cov- ering the shipment, I will pay such drafts upon presentation, provided they are drawn and nego- tiated before a certain date, and that the docu- ments comply with the following instructions." Having this assurance from the American bank, only of course in a more precise form, the seller will not hesitate to prepare his goods, obtain the necessary shipping documents, draw his drafts, and take the drafts and documents, together with his advice from the American bank, to his own bank for negotiation. This foreign bank will then verify the credit and make sure that the docu- ments are those called for, and that the drafts are properly drawn. If everything is in order the bank will then buy the drafts at the prevailing rate for dollars, giving the seller the equivalent in local currency ; or, if it so happens that the seller desires to have dollars, it will forward the drafts for col- lection and deposit to the seller's credit in the U. S. • Or whose credit is not well enough established to enable the seller to finance himself by offering a bill drawn upon him (the buyer). 23 Function of the Import L/C The Seller's Negotiation So much for the seller. As to the American buyer, he has obligated himself to his bank in The Buyer's New York at the time he applied for the credit, to Arrangements ^he effect that he will place it in funds to enable it to pay the drafts when they are presented ; this he does as soon as he is notified by the bank. He thereupon receives the documents, which convey title to the goods he has purchased, and so the transaction is completed. All the Bank has done is to lend the merchant the use of its credit, and to attend to the documents. For this service it is compensated by a small commission. The transaction outlined above is an ordinary sight import credit. If the seller is willing to Sight and grant easier terms with payment after the goods Time Credits have actually had time to arrive, the credit would be made available by drafts drawn at a relatively longer tenor than sight. The only difference, so far as the seller is concerned, would be that when he sells his drafts he would receive a less favor- able rate of exchange, since the additional interest would be figured in the rate; for this he would make allowance in his price. The negotiating bank would forward the drafts and documents to its American correspondent, with instructions to release the documents to the accepting bank against its acceptance of the drafts. It would further instruct its correspondent either to hold the acceptances subject to instruc- tions or to be credited in account at maturity, or, if immediate funds were desired, to discount the acceptances .and credit the proceeds. The problem now arises as to what the im- porter's bank is to do with the documents, against Custody of which its acceptance has been given. When the the Goods arrangements for opening the credit were made, the importer undertook that he would place the bank in funds one, two, or more days before the maturity of its acceptance, according to the terms of the agreement. If in this agreement it was stipulated that the bank should remain absolutely 24 / I Trust Receipts secured so long as its acceptance was outstanding, it will place the goods in a warehouse until the importer has discharged his obligation, at which time it will release the warehouse receipts and thus conclude the transaction. If, however, the merchant has sold the goods prior to their arrival and desires immediate de- livery, the bank, if it is convinced of the actual necessity, will release the documents under a trust receipt. By this instrument the merchant declares that the goods are the property of the bank for which he holds them in trust, and that the pro- ceeds of their sale will immediately be applied towards liquidating the outstanding acceptance. If he collects from his customer before the time at which he has agreed to pay the bank, the merchant will receive from the bank an interest rebate amounting to approximately what the bank can obtain from investing the funds during the re- maining period. It may so happen that the importer will desire to obtain the goods as soon as they arrive, even though they have not been sold, as is often the case with a manufacturer who imports his raw material. It is then a matter for the bank to decide whether the circumstances call for turning over the goods, or whether it will release only if it receives other security in substitution. In the first case it will release under trust receipt ; in the second, it will take other raw material, or perhaps finished goods, stored in an independent warehouse ; or it will accept as collateral trade acceptances, as- signed accounts, or other security. In a ninety day import letter of credit such as this, the bank has once more lent the use of its name, and in certain cases, as we have seen, has Commission released the goods to the importer during the period that its acceptance is outstanding. For this service the importer pays a commission which varies according to the risk and is determined in a similar manner as an insurance premium. The 25 Substitutions Other Costs Re-finance Agreements I ^ For Sight Dollar Credits standing of the customer, the character of the transaction and of the commodity, the countries and the length of time involved, all figure in the question of what the charge should be. In the case of the usual import letter of credit involving the acceptance of time drafts, the im- porter pays nothing but his bank's acceptance commission and cable costs, unless he desires the credit confirmed to the beneficiary, in which case an additional small charge is incurred. The inter- est for the time which elapses between the nego- tiation and ultimate payment of the draft is de- frayed by the foreign shipper, being as we have seen, figured by the negotiating bank in the rate it applies when it purchases the draft. There are some cases in which the seller is will- ing to ship under a ninety days credit, but only if the cost of the discount is borne by the purchaser. In such an instance the purchaser will ask his bank to open the credit in the usual manner, adding that the shipper is to draw for invoice amount plus dis- count at whatever rate is agreed upon. Or, the shipper may include ninety days' interest in his invoice price. The more usual procedure, however, in circum- stances such as the above, is for the importer to bring in his goods under a sight credit, and re- finance the latter by a ninety days acceptance. This simply means that he arranges with his bank to open a sight credit in the usual manner, with the additional understanding that, instead of hav- ing to pay the bank with his own money when the drafts are presented, he shall be permitted to draw on the bank at ninety days sight and ask it to accept, so that he may sell the acceptances and use the proceeds to meet the sight drafts. The im- porter will of course bind himself to place the bank in funds before the maturity of its acceptance, and will either receive the goods in trust or ware- house them for the bank's account, as in the ordinary import letter of credit. For this two-fold 26 1 service the bank will charge its usual sight credit commission, plus its acceptance commission for ninety days. In this case the seller pays the in- terest for the time the sight draft is on the water, while the importer bears the cost of discounting the ninety day bill. There is one other form of import acceptance credit which is not very frequently used, where the importer desires to make payment for goods in foreign currencies and finances his cash remit- tance by drawing a long dated dollar draft on his domestic bank. In a case of this sort the bank will agree to accept the importer's drafts only upon condition that during the life of the acceptances the shipping documents will pass through its hands, and that it will be put in funds at maturity, or before, whenever the underlying transaction has been liquidated. It is also possible under the most recent regula- tions of the Federal Reserve Board, for a bank to accept such long drafts, with nothing more than a letter from the importer stating that the pro- ceeds of the sale of the acceptance will be used for financing an importation. This, however, can only be done provided the importer furnishes definite evidence that the importation has been contracted for and will be liquidated before the maturity of the acceptance. This recent regulation brings us very much nearer to the condition which prevails in London, where an acceptance bank in lending the use of its name is guided solely by its own judgment and the composite judgment of the market, as expressed in its willingness or unwillingness to buy the acceptances which it creates. 27 For Foreign Currency Payments Clean Import Credits Exporting Under a Bank Credit I Direct Drawing Sight D/P D/A Open Invoice CHAPTER FIVE Export Acceptance Credits WE have just discussed the manner in which an American importer is assisted by his bank to purchase from a foreign seller, to whom he is not sufficiently well known to be able to obtain direct shipments. The reverse of this picture is pre- sented when the American merchant is selling to a foreign customer from whom he demands a letter of credit opened in New York. In this case the foreign purchaser asks his bank to open a credit with an American bank, and the American seller simply prepares his documents in accordance with the terms of the credit and negotiates his drafts with his own bank, — or with the bank at which the credit has been established. Where, however, the foreign purchaser is of sufficiently good standing so that the exporter is willing to dispense with a letter of credit, there are several other ways in which the transaction may be financed. 1. The exporter may draw at sight on his pur- chaser, with documents attached, and give these documentary drafts to his bank for collection. 2. He may draw a time draft on the purchaser and give it to his bank for collection, with instruc- tions to obtain acceptance of the draft and hold the documents until the acceptance is paid. 3. He may draw as above and instruct his bank to release the documents when the draft is ac- cepted. 4. He may simply invoice the goods on open account to the purchaser. In all four of these cases it may be that the importer is in a sufficiently strong cash position 28 so that he does not require any advance from the bank. Under such circumstances he uses the bank merely as a collecting agent. For this service the usual charge is a nominal commission plus what- ever the bank's foreign correspondent will charge for obtaining acceptance and payment. Very often, however, the exporter is anxious not to tie up his funds, and therefore will request the bank to carry the transaction for him. This can be done in several ways: 1. If the drafts are drawn in foreign currency, the bank may purchase them outright from the exporter, in which case it will not charge a com- mission, but will figure the interest for the ap- proximate time the funds will be outstanding in the rate of exchange it applies. Should the drawee refuse payment or be unable to pay, the bank will then look for payment to the maker of the bill, namely, the exporter. If the bank so desires, it may require the additional protection of a fixed deposit of a certain percentage of the outstanding collections. 2. If the drafts are drawn in dollars the pro- cedure is much the same, except that the interest for the time the funds will be outstanding is de- ducted as discount instead of being calculated in the rate of exchange. When the bank does not want to advance the full amount of the draft, it will, instead of asking for a cash deposit, simply advance whatever portion of the face amount it deems proper, thus creating a margin in the bill itself. Sometimes, also, it is so arranged that the exporter will draw for only a certain portion of the invoice value, so that the bank is protected by having title to goods worth more than the amount of its advance. 3. If the exporter is unable to obtain a letter of credit established in his favor, and would only draw direct if he were relieved of all liability should the buyer default in meeting his acceptance, the bank may in certain cases be willing to assume 29 Straight Collections Sale of Foreign Currency Drafts Discount of Dollar Drafts Del Credere The Export Acceptance Credit Operation this risk and buy the foreign bills without recourse to the exporter. This, however, the bank will only do either where it knows the drawee and has abso- lute confidence in him, or where it can reinsure the risk in one way or another. For assuming this additional liability, usually known as the "del credere," the bank will charge a fairly heavy com- mission, commensurate with its judgment of the hazard. The methods just discussed all involve the use of the bank's funds, and the willingness of any bank to finance its export customers by making such advances depends to a large extent upon how much money it has available for the purpose. The same end can, however be accomplished by the use of the acceptance market, in such a way that the bank lends nothing further than its credit. The export acceptance credit is based upon an agreement signed by the exporter to the effect that, in consideration of the bank's willingness to accept drafts drawn upon it against certain spe- cified collections, he the exporter, will guarantee that in the event that the proceeds of the collec- tions should not be received in time to meet the outstanding acceptance at maturity, he himself will place the bank in funds. Assuming, for example, that the exporter has sold three lots of merchandise of $10,000, $20,000, and $30,000. to three different parties in Holland on thirty day sight drafts, he will bring these drafts with their respective documents to the bank, together with an agreement such as we have out* lined. The bank will then let him draw upon it for $50,000. at sixty days, thus allowing time for the collections to reach their destination and for the proceeds to be remitted before its acceptance falls due. If remittances are to be made by cable the drafts on the bank would be for a cor- respondingly shorter time. The bank's factor of safety over and above the solvency of the exporter, lies in the margin be- 30 tween the total amount of the pledged collections Margin of and the amount which it accepts against them. Security and this margin is of course adjusted to suit the individual case. Where the exporter is a very powerful corporation with large resources and a good reputation, the margin may be entirely dis- pensed with. In a few exceptional cases a bank will even permit such a corporation to draw upon it against shipments made abroad on open account, provided the evidence of such shipments passes through its hands during the life of its accept- ances. This practice, however, is strictly confined to a very small class of large concerns of un- doubted standing. For this service the bank will charge its usual acceptance fee plus its collection commission and costs. The great advantage of such financing is Advantage that it makes the exporter more independent of temporary periods of stringency during which his banks are reluctant to advance cash, while accepting institutions would be more willing to lend their credit and let the market absorb their acceptances. 31 I Kinds of Domestic Acceptance Credits Domestic Shipment for Buyer's Account CHAPTER SIX Domestic Acceptance Credits BEFORE we proceed to apply the principles of import and export acceptance financing to a few concrete examples, it may be well to consider for a moment the two other forms of acceptance credits which American banks are permitted to extend. One of these, the acceptance for the pur- pose of creating dollar exchange, which we shall discuss in the next chapter, is of little interest to the American merchant, since it can be given only for foreign banks and bankers in certain countries. The domestic acceptance credit is, however, of very great importance to the American commer- cial enterprise, and has perhaps the widest appeal of all. For this reason it is also the form which tends the most readily to invite abuse. It may be given for either of two purposes ; to finance a do- mestic shipment of goods; or to finance readily marketable staples stored in independent ware- house pending their sale or distribution into the processes of manufacture. The financing of a domestic shipment may be done by a bank for the account of either the buyer or the seller. Where it is done for the buyer the procedure is substantially the same as in opening an import letter of credit, except of course that the transaction itself is very much less compli- cated. A New England cotton spinner who is buy- ing cotton in New Orleans will, for instance, ask his bank to open a commercial letter of credit in favor of the Southern shipper. At the same time he will sign an acceptance agreement binding him to provide funds before maturity of the bank's acceptance. The shipper obtains his railroad bills 32 of lading and negotiates with his New Orleans bank, thus receiving his funds. The Southern bank forwards the drafts to Boston releasing against the acceptance of the buyer's bank. The latter, in turn, either releases the cotton under trust re- ceipt, or has it warehoused, as the case may be. If the cotton is liquidated before the acceptance has matured, the buyer will anticipate and receive his rebate ; if not, he will provide funds when the due date arrives. This very same transaction could be financed by the New Orleans bank for account of the seller, but this would be less desirable for two reasons: in the first place the commodity, which underlies the transaction, immediately passes out of the control of the bank, leaving it with nothing but the assurance that a distant debtor will pay, and only a secondary recourse to its customer, the shipper ; in the second place, the shipper's bank is not usu- ally in a position to supervise the liquidation of the transaction. The first objection can be partially overcome by having the shipper draw a supple- mentary draft of like maturity on the buyer, which the latter must accept in order to obtain the documents, thus making the transaction similar to an export acceptance credit, in so far as the acceptance is secured by a collection. Even though the transaction is in this way made technically self -liquidating, the fact remains, as has been ad- mirably pointed out in a recent article by Mr. Wilbert Ward, that "The bulwark against inflation is the careful valuation of the absorptive power of buyers" and that "The best judges of this situation are the buyers' banks." The second form of domestic acceptance credit is the one whose purpose is the financing of "read- ily marketable staples" stored in warehouse. This rather baffling term has been defined by a number of rulings, and is intended, generally speaking, to cover such articles as are constantly being dealt in in free markets and at readily ascertainable 33 Domestic Shipment for Seller's Account Credit Against Warehoused Staples operation Abuses prices, so that they can at any time be realized upon without difficulty. Under the regulations of the Federal Reserve Board acceptances made against such commodities in warehouse are eligi- ble only if the commodity is stored pending a rea- sonably immediate sale, shipment, or distribution into the process of consumption or manufacture. Furthermore, the warehouse must not be under the control of the borrower. If, therefore, a merchant desires to obtain an acceptance credit against grain, he will either give the bank negotiable elevator receipts and insur- ance policies, or better still, he will have the grain stored and insured in its name. He will then sat- isfy the bank that he is not holding the grain on speculation, but expects to deliver it against sales, either domestic or foreign, within a reasonable time. Upon his executing the usual acceptance agreement, the bank will then allow him to draw upon it for not longer than three months. As the grain is sold the bank will deliver the receipts against cash, or shipping documents, which will convert into cash, and it will rebate interest for the unexpired time of the acceptance. In both forms of domestic acceptance credits there is a distinct danger of abuse; the peril in credits for domestic shipment lurks in the fact that through carelessness such credits are easily permitted to run on after the underlying transac- tion has been liquidated; with credits against goods in warehouse there is a risk that these credits may be misused to finance speculative pur- chases, and that the banks may not effectively control the warehouse companies and the colla- teral. ^ » 34 ¥ CHAPTER SEVEN Acceptances to Create Dollar Exchange UNDER section thirteen of the Federal Reserve Act, American banks are empowered to accept drafts of not longer than three months, drawn upon them by banks or bankers in certain coun- tries for the purpose of creating dollar exchange. The object of granting this privilege was to pro- vide a means whereby dollar exchange could easily be obtained in such countries where the customs of the trade require it. Any member bank desir- ing to create such acceptances must apply for permission to the Federal Reserve Board, and the Board's rulings in such cases are published from time to time in the Federal Reserve Bulletin. This form of financing applies primarily in Central and South America, where the American dollar is the dominating factor, and to the insular possessions of the United States. It further ap- plies, and is gradually being extended to other parts of the world, where the United States dollar plays an important part, and where the foreign banks consequently experience a demand from their customers for American funds. This demand may arise from the fact that the foreign country is a heavy purchaser of American goods, and that United States funds are there- fore required in order to make the necessary pay- ments, while it is still some time before the crop movement will provide any dollar drafts. This situation frequently arises in countries which are dependent upon one crop, such as wool or coffee. At the same time prospective shippers may wish to secure the existing dollar rate of exchange by 85 Legal Restrictions Application Methods of Operation selling future dollars to the local foreign banks, and these banks, having bought forward dollars, can now supply the demand for spot through their sales of dollar exchange drafts. A dollar exchange drawing, once permission is obtained from the Board, may be handled by the accepting bank in one of several ways. Under all circumstances the foreign bank must agree to pro- vide cover before the acceptance matures, but during the life of the credit various things may happen. The accepting bank may require the for- eign bank to deposit the equivalent of its dollar drawing in local currency with a third party, gua- ranteeing also to make further deposits if from time to time required in order to maintain full cover. Such a deposit may also be made in a third currency, as, for instance, where an Argentine bank would draw dollars and deposit the equiva- lent in Sterling to the American bank's credit with its London correspondent. Again, the accepting bank might be willing to take local government bonds as collateral ; and in some cases, where the borrower is an exceptionally strong institution, the accepting bank might go even further in facilitating the transaction. «#» 36 CHAPTER EIGHT i ■•■*■■■"-■* Grain and Foodstuffs HAVING outlined in the preceding chapters the general operation of the various forms of acceptance financing, it may now be interesting to see how these methods apply to a few of the major industries. Since the most fundamental requisites for the existence of man are food and protection of his body, it is natural to consider first how foodstuffs and clothing materials may be more easily procured by means of the acceptance credit. The United States produces far more grain than it consumes. During 1921 we exported: 280,057,601 Bushels of Wheat, 128,974,505 Bushels of Corn, 29,811,721 Bushels of Rye, 25,834,000 Bushels of Barley. The bulk of this grain was sent to European countries, the largest purchasers of American grain being England, France, Italy, Germany, Holland and Scandinavian countries. The acceptance credit can be used to finance grain from the moment it is harvested until the proceeds of its sale abroad are collected. When the grain is first stored in elevator pending its shipment to seaboard, the originating grain mer- chant may properly finance his purchases from the grower by a domestic acceptance credit against warehouse receipts lodged with his bank. As the grain moves to seaboard, railroad bills of lading will be substituted, and usually these are accom- panied by shippers' drafts drawn on an export merchant in one of the principal ports. The export merchant will again require the assistance of banks to enable him to take up these drafts and 37 The U. S. an Exporter of Grain Use of Domestic Acceptance Credits Export Credits Meats Sugar and Other Foodstuffs assemble his grain at tide-water, and eventually to make his shipments abroad. This may give rise either to an acceptance credit for domestic ship- ment or against warehoused grain, which again will gradually be converted into an export accept- ance credit. If the foreign shipments are to be made immediately when the grain is received from the West, an export credit is often resorted to in the first instance. A certain amount of grain is of course sold under letters of credit established here by Euro- pean purchasers through their banks. Another very large proportion is sold on foreign currency drafts which are not ordinarily used as the basis for an export acceptance credit. By far the largest proportion, However, is sold abroad in dollars and is most easily financed by an export acceptance credit with the documentary shippers'-drafts as the underlying collateral. The United States is both an importer and ex- porter of meat and meat products. The so-called Big Five Packers are large shippers to Europe, chiefly of lard and similar meat products, and these transactions again are most suitably financed by export acceptance credits. Imports of frozen meat from the Argentine, on the other hand, are most readily handled by means of the import letter of credit. The bulk of the sugar consumed in the United States is grown in Cuba, whence it is imported on credits opened by American banks on behalf of the large refineries and produce merchants. A number of the big Cuban sugar companies, which are American owned and controlled, also make it a practice to finance the actual growing of the sugar crop by means of acceptance credits. In such cases the drafts are drawn during the so- called dead season, and during their life become secured by sugar in warehouse, being ultimately liquidated by the sale of this sugar. In some cases this same raw sugar is then re-financed during the 38 A refining process by an import acceptance credit, or by a domestic acceptance credit against refined sugar in warehouse pending sale. The importation of coffee from Central and South America, of nuts from South America, and of teas and spices from the Orient, is financed largely by the use of import letters of credit. So also are financed shipments of cocoa, beans, rice, vegetable oils, fruits, and many other foodstuffs. H^ \ 39 CHAPTER NINE The Textile Raw Materials T^HE three chief raw materials from which tex- -■• tile fabrics are made are cotton, wool and silk. '^^^ United States is the world's largest producer uj. Imports of cotton, and therefore exports a heavy surplus and Exports Cotton Domestic Acceptance Credits of raw material which is not consumed by do- mestic spinners. On the other hand, all the silk which is used in the United States is imported from foreign countries. Of the wool consumed in the United States about one-third is grown in this country, the other two-thirds being imported chiefly from South America, Australasia and South Africa. The United States produces, roughly speaking, two-thirds of the cotton which is grown in the entire world, and consumes approximately one- fourth of the world's cotton supply. The average cotton crop of, let us say nine million bales, is therefore divided roughly into a little over a half which is exported, and a little less than a half which is used by domestic mills. The use of the acceptance credit in financing the cotton crop of the United States is manifold. In the first place when the cotton is collected at concentration points and compressed into bales, it is usually stored in warehouse pending sale or shipment by the Southern cotton merchants. A great deal of the cotton stored in this manner is financed during the preliminary stage of distribu- tion by domestic acceptance credits against ware- house receipts. That portion of the cotton which is destined for domestic consumption is then fre- quently financed by a second acceptance credit opened by the consumer or the consumer's pur- 40 J i i \ chasing agent, and this second credit may either be against domestic shipment, or a credit under which the cotton is warehoused by the mill await- ing manufacture. In other words, for the cotton which is consumed in this country two credits come into question ; the first for the merchant who collects the cotton in the South, and the second for the ultimate consumer. It may, however, easily occur that one or more intervening middle men will in turn make use of acceptance financing to carry the cotton before it ultimately reaches the mill. As for the cotton which is exported, the pro- cedure usually starts in the same way, that is, with a domestic acceptance credit against warehouse receipts. This credit is then gradually converted into an export credit under which ocean bills of lading and shippers' drafts take the place of the warehouse receipts. If the cotton is sold in fairly stable foreign currencies, the credit is usually liquidated at the time that the foreign currency drafts are sold.* If, on the other hand, the cotton is sold abroad in dollars, the dollar drafts on the foreign purchasers are used as underlying se- curity for an export acceptance. Quite a large proportion of the cotton exported, however, is shipped under letters of credit opened here by for- eign purchasers, so that the actual shipment is financed by them and not by the American ex- porter. The manufacturers of tire fabric, who require long-staple cotton, import a certain amount from Egypt, and certain kinds of cotton are also im- ported from Haiti, Brazil, Peru and China. These shipments are usually financed by the customary import letters of credit. ♦ * * 4t In the assembling and marketing of the do- mestic wool crop the acceptance credit plays much ♦Under the present chaotic circumstances there are a number of foreign countries on which most American banks will take foreim currency drafts only for collection. lorcign 41 Export Credits Imports Wool The Domestic Crop Foreign Wool Import Financing i Danger of Trust Receipts the same part as in the distribution of the coun- try's annual output of cotton. Whether for do- mestic shipments, or for financing warehoused wool preparatory to its being sold, the banks every year lend their credit for the purpose of bringing the wool "off the back of the sheep to the back of the man." The United States imports a large quantity of wool from South America, chiefly from Buenos Aires and Montevideo. These importations are al- most entirely financed by letters of credit opened by the American wool merchants, most of whom are located in Boston. There are a few large manufacturers who import for their own account, but the bulk of the foreign wools brought into the country are purchased by merchants, who in turn sell to the domestic manufacturers. Inasmuch as wool imports are seasonal, the import letters of credit are frequently extended by domestic accep- tance credits against warehoused wool, so as to enable the merchants during the purchasing sea- son to carry large stocks, which are ultimately distributed to manufacturers. Inasmuch as wool is rarely sold to the mills in the original lots as received from foreign coun- tries, it is necessary to permit the wool merchant to obtain the shipping documents under trust receipt, so that he may regrade the wool into such lots as will suit the requirements of the trade. It is almost impossible to trace a given lot of wool after it has been regraded, and therefore an ac- ceptance credit which is secured by wool released under trust receipt, is an exceedingly dangerous operation which can only be risked with mer- chants who have a large capital and enjoy the very best standing. Much the same situation holds true as to im- ports from Australia, New Zealand, South Africa and China, from all of which countries some wool is imported on dollar import letters of credit. There is, however, this difference that the bulk of 42 , Australian and New Zealand wool is handled via London and is often imported on Sterling letters of credit. « * * * No silk whatsoever is produced in the United States, the chief sources of import being Japan, China and Italy. A large proportion of the im- ports from Japan are handled by Japanese houses having agencies in New York, and of recent years these Japanese merchants have obtained dollar import letters of credit from American banks to finance such operations. These credits are almost invariably fully secured by warehouse receipts covering silk in storage, or by trade acceptances, resulting from the sale of silk. There are a certain number of domestic consumers of silk who are large enough to import their own raw material, and these manufacturers frequently open their own import letters of credit through their banks and receive a partial release of the merchandise under trust receipt for manufacture. A few of the most important American silk manufacturers are so well known in Japan that they receive direct shipments with drafts drawn upon themselves. Silk Imports 43 Proportion of Imports Sources of Hides for Sole Leather CHAPTER TEN Hides and Skins SHOES rank next to food and clothing as the most important articles of our daily life. The raw material for sole-leather consists of the hides of cattle, whereas most upper leather is produced from the skins of smaller animals, such as calves, sheep and goats. (Hides are also used in making upper leather by the splitting process). Of all the materials consumed in this country in the manu- facture of various kinds of leather, about 45% of the cattle hides, 52% of the calfskins, 60% of the sheep-skins and almost 100% of the goat-skins, are imported from foreign countries. By far the heaviest importations of cattle hides are from the Argentine, with Canada and Uruguay in second and third places. Calfskins are imported chiefly from France as well as from India and a number of other countries. The largest imports of sheep skins are from Australia and New Zealand, and the next largest from the Argentine and Canada. Goat-skins are most heavily imported from Brit- ish India, while the second greatest supply is obtained from China. Sole leather tanners derive their raw material from two sources; first from the domestic pack- ing industry ("Packer Hides"), and second from the large Argentine packing plants ("Frigorifi- cos"). A further supply is obtained from the smaller killing plants throughout this country and South America. A few special kinds of hides are imported from other countries. Most of the sole leather tanners of any conse- quence import their own Frigorificos from the Argentine and these imports are almost invariably financed by dollar import letters of credit. The 44 'I smaller tanners buy through merchants of com- mission dealers, who again make use of the same sort of financing. In some cases the American im- porter maintains his own establishment in the Argentine which does his buying for him. It is then customary for the importer's bank either to open sight credits under which the South Amer- ican agent may draw, and to refinance these sight credits by a ninety day acceptance in New York; or to cable Pesos to Buenos Aires for the importer, for which he pays out of the proceeds of drawing a ninety day draft. Imports of China hides and goat-skins are very frequently financed by import letters of credit, but as purchasing in China has to be done in small lots by agents who travel through the country, such imports are almost entirely handled by mer- chants who specialize in this business, and who often have to provide a part of the financing out of their own capital. The same is true of imports from India and other points in the Far East. Shipments of calfskins and light hides from Europe are sometimes financed by import letters of credit, but more frequently the American im- porters enjoy the confidence of the European sell- ers to such an extent that shipments are made to them direct, either on consignment or on sight or time drafts. The import of sheepskins from Aus- tralia is financed partially through London on Sterling credits, and partially on dollar import letters of credit issued through Australian banks. The releasing of hides and skins under trust receipt to a manufacturer is far less dangerous than in the case of cotton, silk or wool. It is quite feasible to mark hides and skins in such a way that they may be traced straight through the tan- ning processes and identified as finished leather, whereas, the identity of cotton, silk, or wool is lost at the moment that the bales are opened and their contents mingled. Financing Frigorificos China Hides Sheepskins Trust Receipts < 45 t r I CHAPTER ELEVEN Other Raw Materials and Manufactured Goods 'T would be impossible, at least within the con- fines of this pamphlet, to follow out the possible and actual uses of the acceptance credit in all the various ramifications of our import and export Manifold Use trade. Our object here is not to present a complete of the picture, but merely to sketch in the outlines by CredU**^^ choosing a few of the most prominent features. As in the case of the commodities we have just considered, so also the acceptance credit is used to bring oil from Mexico, hemp from the Philip- pines, dyes from Germany, tin from the Straits Settlements, lumber from Alaska, rubber from the East and from Brazil, jute and burlap from India, woodpulp from Sweden, and any number of other things from different parts of the world to the United States. So also are the surplus raw ma- terials produced in this country, and the products of its variegated industries distributed to every country on the face of the globe. In the metal industries shipments of ore from the mine to the furnace, of pig iron from the furnace to the foundry, and of finished steel from the foundry to its ultimate destination, are all fit cargo for the acceptance credit. The same is true of the non-ferrous metals, particularly of copper and copper products. And silver and even gold, — curious as it may seem that they should require a credit vehicle to carry them, — are frequently shipped from one country to another by means of the banker's acceptance. We have seen in a superficial manner how the acceptance credit provides a means for financing 46 Metals our export of grains, foodstuffs, and cotton. In a similar way it serves to float the burden of our foreign sales of finished textiles, leather and lea- ther goods, and all the vast quantity of manu- factured articles that fall between the extremes of simple tools, such as hammers and saws, and com- plicated machinery such as agricultural tractors, automobiles and railroad equipment. To take only one example, the exports of the automobile industry, exclusive of trucks and motor-cycles, have for the last ten years aver- aged in excess of one hundred million dollars per annum. At the present time a very large part of these exports are being financed by commercial letters of credit. For the most part the American automobile manufacturers are unwilling to as- sume any risk whatsoever in connection with their foreign sales, and insist, therefore, that the for- eign purchaser provide them with cash against shipping documents in New York. This is done, in practically every instance, by means of a letter of credit, opened on behalf of the purchaser by his own bank with its New York or middle-western correspondent. The manufacturer is advised by the bank how to prepare his documents, and whether to draw at sight or for a specified length of time, with or without discount included, as the case may be. Having negotiated his documents, he has nothing further to worry about, unless, having drawn a time draft on a bank and dis- counted its acceptance thereof in the open market, he should be called upon to make good this accep- tance to a bonafide holder, by reason of the bank's inability to meet its obligations. This contingency, while remote, should nevertheless be borne in mind by the manufacturer, so that he will not con- sent to ship under credits opened with banks of whose solvency he is not absolutely certain. A few automobile companies ship to their own agencies abroad on a consignment basis. Others have a few preferred foreign customers to whom Exports of Manufactured Goods The Automobile Business as an Example Credits Opened from Abroad 47 Credits Abroad Direct they make direct shipments on documentary Shipments drafts. This latter class of shipment is ideally financed by an export acceptance credit secured by collections, and it is only reasonable to assume that, as conditions in Europe inspire more confi- dence, a larger proportion of the business will be transacted in this manner. In a general way the automobile situation is analogous to a great many other lines. Our country is young in the export of manufactures; it has, as every one knows, become a real export factor The Necessity chiefly by reason of the incapacitation of Euro- f or Giving pean competition. Whereas the export trade of England, Germany, and France was built up by years of endeavor, and by a willingness to extend credit in foreign countries, the demand for our goods abroad is due almost entirely to the absolute necessity for them which has arisen during recent years. It is true that American industry was quick to take advantage of the opportunity; true also that a great number of American goods have be- comefirmly established, not because no others were obtainable, but because of their intrinsic merit; but the fact remains that if we are to hold our newly acquired foreign customers, we must, as soon as conditions warrant, grant them the credit facilities which they are used to receiving from British and German merchants. To this end there is to be found no greater assistance for the ex- porter than the export acceptance credit. PART THREE The Relation of the Customer to the Bank HAVING surveyed hastily the general operation of the acceptance credit, and having seen in a rather impressionistic manner how this form of financing serves some of the major needs of mod- ern business, we shall proceed now to an equally brief consideration of some of the factors that determine the relation between a bank and its customers. The object of this part of our discussion is to indicate upon what grounds a bank bases its atti- tude towards business which may be proposed to it, and also to point out a few of the pitfalls which beset the path of acceptance financing. Since we are not here concerned with the usual form of banking business, that is, with the deposit ac- count, the use of the word, "Client," is in every instance intended to designate an actual or poten- tial borrower. 48 I 'li 1'! CHAPTER TWELVE Becoming Acquainted with the Customer THE first requirement of a bank in forming any relationship is confidence, based on full know- ledge. This it can obtain in two ways; by ask- ing the customer, and by asking about the cus- tomer. By inquiring among competitors, from those who sell to and buy from the customer, from commercial agencies, and from other banks who share the customer's business, a bank may learn a great deal worth knowing ; but in the last analy- sis, it will never feel absolute confidence unless the customer lays all his cards on the table. For a client to conceal anything from his bank is as foolish as if he concealed it from his doctor or his lawyer, and if the client fears that his banker will not preserve absolute discretion in regard to his affairs, the thing for him to do is to take his busi- ness to a banker concerning whom he has no such apprehensions. The three chief points concerning which a bank wishes to satisfy itself are : the moral integrity of the client; his business ability; and his financial responsibility. In answering the question "Do I want this man as a business associate?" the banker's own per- sonal impression is weighed in conjunction with whatever outside opinions he has been able to col- lect. If the answer is negative, no further con- sideration of other factors is necessary. If, on the other hand, the banker feels confidence in the client's moral character, he will proceed to investi- gate his business ability and financial means. 61 How a Bank Learns What It Needs to Know Character I The question of capability is again answered by a composite picture in which first hand impression Capability is combined with the results of judicious inquiry, but a third factor enters into the consideration, in that business ability will usually show concrete results. Careful study of a series of the annual balance-sheets of an enterprise, together with full knowledge of the attendant circumstances, will, in most cases, yield a fairly clear conception as to the ability of the management. This same analysis will also provide the answer to the third question, which is the financial condi- Capitai tion of the client's business. The intelligent read- ing of a balance-sheet is an art which cannot be described in a few words ; certainly it is not the mere application of the hackneyed formula, that quick assets must bear a certain minimum propor- tion to current liabilities. We are here concerned, however, not so much with the problem of reading a financial statement,— which after all is the banker's business, — ^as of preparing it. From this point of view, there is just one all important axiom: that the object of a balance- Balance sheet is not to make a certain kind of showing, but Sheets to present the facts as they are. Moreover, a bank is not merely concerned with the present, but is vitally interested in the probable future condition of its client's affairs. A mere statement of assets and liabilities and a summary of profit and loss accounts as of a certain day is therefore not in it- self sufficient. Only too often a concern that makes an excellent showing in July is hopelessly insolvent in December, because of certain ele- ments which do not figure in the usual balance- sheet, but which are nevertheless vitally im- portant. It is impossible to enumerate the supplementary information with which a client should provide his bank. Obviously he should make a clean breast of all contingent liabilities, no matter how remote they may seem, and of all contractual commit- 62 I ments. He should prepare also a full schedule of his inventory valuation and accounts receivable, imparting to the bank any doubts he may enter- tain concerning the ability of his customers to pay, or the possibility of disputed items. But beyond all these concrete factors, once the relationship is established, he should take the bank into his con- fidence in regard to all his hopes and fears, for only in this way can he receive from the bank the intelligent advice and support to which he is en- titled. The Invisible Figures k 53 The Credit "Line" 1 1 Kinds of Business The Cotton Merchant $1 CHAPTER THIRTEEN The Analysis of a Customer's Business ASSUMING that a bank has satisfied itself as to the standing of a given customer and is in principle prepared to finance a part of his business, two general questions then arise: first, how large a total commitment the bank is willing to make to this customer: and, second, into what classes of business this commitment is to be subdivided. The establishment of a general "line" of credit depends chiefly upon the factors already consid- ered in the analysis of the customer, that is, his standing and the amount of working capital he has at his disposal. In addition, the character of his business and of the articles in which he deals, and the amount of accommodation he is receiving from other banks, are the most important ele- ments. Here once more we are faced with the unpleas- ant necessity for inadequate generalization, both as regards different kinds of business and differ- ent articles of trade. To take only one example, the cotton merchant and the cotton manufacturer will serve to illustrate what is meant by different kinds of business. The dealer in raw cotton ordi- narily requires no fixed assets in the way of plant or machinery; his entire invested capital, what- ever it may be, is represented either in cotton, or in money paid or owing to him by reason of his sales of cotton. Similarly his debts will consist of accounts payable for cotton he has bought, or of bank loans or credits against cotton in warehouses or sales in the process of collection. With him it is therefore largely a question of what proportion 54 f i his assets bear to his liabilities, whether his un- sold cotton is hedged by sales of future contracts, whether all his sales are covered by purchases, and what unused borrowing facilities he has at his disposal from other sources. The cotton manufacturer, on the other hand, has a large part of his invested capital tied up in plant and machinery, another part temporarily immobilized in material which is in the process of manufacture, and only the remainder in the form of quickly realizable assets, such as unused raw cotton, finished goods and accounts receivable. His liabilities may consist of bonds, secured by mortgage on the plant ; bills payable for cotton, supplies or machinery ; and bank loans and credits of various kinds. What is more he has a heavy payroll to meet, labor conditions to contend with, sales campaigns to organize, and a number of other things to worry about, all of which tend to complicate his business. In deciding what commit- ment to make to a client of this sort, a bank will obviously have to consider a variety of factors in addition to those affecting the case of the cotton merchant. The difference of risk arising from the char- acter of the underlying commodity is again best demonstrated by a concrete instance. In dealing with a grain merchant the bank knows that his funds, and consequently borrowed funds as well, are invested in wheat, corn, oats, rye, or barley, all of which are quoted every day and can readily be realized upon at any time. In contemplating a credit to an importer of nuts, on the other hand, the bank takes into consideration that it is dealing with a commodity which not only lacks a wide and reasonably steady market, but is perishable as well. mm** Having established by careful study the amount of general credit to be held at the disposal of a given customer, it remains for the bank to decide 55 As Against the Cotton Manufacturer Kinds of Commodities Distribution of the "Line" In Financ- ing Sales W In Financing Purchases how this line is to be used for different kinds of transactions, and what conditions are to govern each particular piece of business. Where it is a question of financing sales, the distribution of risks among different purchasers and different countries is an important consideration. A bank might, for instance, easily object to financing sales of more than $50,000 worth of goods to one foreign concern, even though it were willing to give its customer credits up to $500,000. It might also be unwilling that, out of a total commitment of $500,000, more than $100,000 should at any time be outstanding in collections on any one coun- try where conditions are somewhat unstable. Again, while it might be willing to finance collec- tions in one place releasing documents against ac- ceptance, it might insist that documents be de- livered in another only against payment. It might grant a credit of 90% of the value of collections on certain stable countries and refuse to advance more than 50% on bills drawn on others in whose economic conditions it lacked confidence. Where the problem is that of financing pur- chases, various other factors are involved. Pri- marily, the bank must gauge the actual buying power of its customer and be constantly on its guard to discourage him from over-heavy pur- chases. Further, the bank must to a certain ex- tent consider the market conditions for the article which is to be purchased, not only from the point of view of any one customer's business, but taking into consideration its own total commitments in that particular article of trade. For example, a bank might refuse without special protection to open a credit of $200,000 for the importation of rubber, not because the amount was in excess of the importer's established line of credit, but be- cause it thought that the rubber market was weak. Feeling that crude rubber prices were likely to suffer a sudden drop, the bank might refuse, either because it considered the business unwise 56 for its client to undertake, or because its own com- mitments based on rubber transactions were as heavy as it desired them to be for the moment. Finally, in the financing of purchases, there is the problem of deciding to what extent any given credit shall remain secured. This is very largely a matter which depends upon the nature of the business. Leaving aside those customers who are not strong enough to be entitled to any unsecured credit whatsoever, the question is one which crops up with almost every client at one time or another, and frequently a customer will falsely construe a bank's unwillingness to release goods from ware- house as indicating a lack of confidence. The fact of the matter is that all banks must restrict within certain limits the amount of unsecured credits which they extend, and that they can only per- form the maximum service to the business com- munity if they reserve such credits for the cases in which they are really required. There is no valid reason why every export credit should not be self-liquidating and self-secured, but in the case of imports or domestic purchases there are cases where the borrower must obtain the goods, either for delivery under sales, or for manufactur- ing purchases. In some of these latter instances it is possible for the borrower without hardship to substitute other collateral, but where this cannot be done the bank must either extend unsecured credit or decline the business. The Question of Collateral / li /. 67 It I I I' ' Standardised Forms The Import L/C Application Beneficiary CHAPTER FOURTEEN A Few Technical Pitfalls AVAST amount of trouble could be avoided in the use of commercial letters of credit if phrases always meant the same thing to different people, and if more care were exercised in the wording of the terms and instructions given by one party to another. Much has been accomplished by a recent conference at which most of the lead- ing banks and bankers agreed upon certain stand- ard forms* to be used in connection with letter of credit financing, but even more remains to be done in the way of disseminating knowledge among the users of such credits. For this reason we shall mention briefly a few of the most frequent causes of misunderstanding. When a customer requests his bank to open an import letter of credit he signs two documents, an application and a letter of credit agreement, the latter being printed on the reverse side of a copy of the credit as issued by the bank. In making out the application the client states : 1. In whose favor the credit is to be opened, by mail or cable. 2. For what amount it is to be opened. 3. For how long it is to remain available. 4. Whether it is to be revocable or irrevoc- able. 5. How it is to be available. Number One requires no explanation, since it consists merely of the name and address of the • These standard forms have been published by the American Ac- ceptance Council and will be furnished on request by the International Acceptance Bank, Inc. 58 Revocable or Irrevocable beneficiary. Nevertheless many credits have been delayed because this name was mis-spelled or slightly incorrect in the application. Number Two states the maximum amount which may be drawn and names the currency in Amount which the credit is to be established. If the credit is to be revolving, that is, to be used over again several times, it must be clearly so stated. Number Three determines the last day on which drafts may be drawn and negotiated. The expira- Expiration tion date has nothing to do with the presenting of drafts for payment in New York, which may take place considerably later. Number Four makes the credit either subject to cancellation by the party which has opened it (revocable) , or expressly waives all right to cancel or in any way amend without the consent of the beneficiary (irrevocable). A revocable credit, moreover, can only be cancelled for such portion as has not been availed of prior to actual payment or negotiation of draft drawn thereunder. This is a matter which has frequently been misunder- stood.* Number Five, however, is the greatest cause of trouble and annoyance. In this paragraph the im- porter instructs the bank how and under what terms the beneficiary is to be permitted to use the credit. In the first place he states whether the drafts are to be drawn at sight, or some other tenor. Then he enumerates what documents are in each case to accompany the drafts. These docu- ments usually consist of: a) Invoices for a stated number of units (bales, boxes, pounds, casks, etc.) of whatever merchandise is to be shipped. If the clause "10% more or less" is added, or the words "about," "approximately," etc., are used, a certain leeway is permitted. *A confirmed irrevocable credit, which must be specially requested, is confirmed to the beneficiary by the bank which advises the credit, and becomes the irrevocable obligation of that bank. 59 Drafts and Documents I Importance of Careful Instruction The L/C Agreement The merchandise must also be described if invoices are to evidence a certain quality b) Ocean Bills of Lading. It must be clearly stated whether only "On Board Steamer" ^ills are to be accepted, or "Received for Shipment" Bills as well. c) Insurance. It must be definitely stated whether policies or certificates are re- quired ; and what sort of insurance is to be provided by the shipper (unless purchases are on a C. I. F. basis). d) Consular invoices, where required e) Weight certificates, or other special certi- ficates if required. 1^2.1 i°'*'""'=*'°"« i'^ '•^^ard to invoices, bills of lading, and insurance cannot be too carefully pre- pared. The importer's bank will pass them on ex- actly as received, and the negotiating bank in the foreign country will comply with them to the let- ter, or else make itself liable for wrong negotiation. tSrT"^.™^"^^^ °^*«° ^^ °«t understand that he bank's sole duty is to procure the docu- ^r^^^^^^^^' ^""^ *^** " *^« documents are in be b[am"i!'' ^"'^ ''"""' *'^ ^'""^ ^° ^° - -«" In signing the acceptance agreement the im- porter accepts the credit as issued and guarantees to the bank, m consideration of its opening the credit as requested, v^i^^g tne 1. That he will provide the bank with funds before maturity of the acceptance, or,-in drafts''"^'''*''"'" *™^ *° ™^^* *^^ ^'«^^ 2. That he will pay whatever commission is agreed upon and assume the cost of cable charges. 3. That he will not hold the bank responsible lor the genuineness or validity of the documents presented under the credit, or for the quantity or quality of the mer- cnandise. 60 A great number of misunderstandings arise from the fact that, under clause three above- mentioned, a bank will accept drafts when ac- companied by proper documents and insist upon the importer's receiving and paying for them even though it eventually develops that the quality of the merchandise is not as specified in the invoice. The importer, who is naturally put out, often vents his indignation, not on the shipper, who is properly to blame, but on the bank. The letter of credit is entirely independent of the purchase contract. It remains the duty of the buyer to satisfy him- self as to the standing of his seller, since he buys his goods at his own risk. Vice versa, when an exporter negotiates drafts under a credit opened in his favor, he is often annoyed with the bank for insisting on full com- pliance with all the technical details. The necessity for absolute observance of the terms of the credit is obvious from the fore-going paragraphs. When a credit specifies bills of lading to order of the bank, it does not permit of bills-of-lading to shipper's order and endorsed to the bank. When insurance policies are stipulated, insurance cer- tificates are not in order. Steamer bills-of-lading are on-board-bills, or received-for-shipment bills, but not inland-through-bills. One hundred tons, 10% more or less, does not mean that 112 tons will be accepted, and so on. Where there is good reason to do so a bank may at its discretion waive a minor technicality, but it will only do this on the shipper's guarantee in writing to hold it harm- less. More often, if the shipper cannot comply with some requirement of the credit, he will ask the bank to cable requesting an amendment. Amendments to irrevocable credits can only be made with the consent of both accreditor and accreditee. Revocable credits may be amended by the accreditor, provided the accreditee has not already negotiated. 61 Purchase Contract Distinct from L/C Waiver of Technicalities Amendments Collection Instructions Export Acceptance Agreement Under export acceptance credits there is pre- cisely the same need for accuracy in preparing instructions, although the number of points to be covered is not so great. Since the underlying collections are drafts drawn by the shipper on the purchaser, the matter of how they are drawn and what documents are required concerns these two parties alone. The shipper, however, must inform the bank whether the documents are to be re- leased against acceptance or payment in part or whole. He must also instruct how payment is to be effected, whether by check or cable, and if by check, what checks will be acceptable. By the terms of the export acceptance agree- ment he binds himself, as with an import credit, to provide cover and to pay commissions and costs ; in addition he agrees to hold the bank harm- less from the acts of its collecting agents except in cases of negligence on the part of these agents or of the bank itself in selecting them. If, for instance, a foreign correspondent becomes in- solvent while funds arising out of collections are in its hands, the American bank is only liable for any eventual loss sustained by its customer, if it can be reasonably maintained that the American bank should have been aware of the situation, and was negligent in using the foreign bank as its agent. m * * m We have mentioned here only a few of the many possible causes of annoyance and misunder- standing, our purpose being not to provide a hand- book of "Don'ts," but to point out the necessity for accuracy and complete co-operation on the part of both customer and bank. It is not over- stating the case to say that punctiliousness in giving and carrying out instructions is the oil without which the motor knocks and the gears grind. PART FOUR The International Acceptance Bank, Inc- BEFORE concluding our birds-eye consideration of the general principles of foreign trade financing, we shall devote a brief space to a glance at the particular services offered by a bank which was organized for the specific purpose of perform- ing this function. We shall outline first the general organization of the bank and the various kinds of business for which it is equipped. Next we shall endeavor to show how this organization is adapted to the needs of American banks and commercial enterprises, and finally, how it is especially de- signed to serve the banks and commercial houses of foreign countries. 62 »M CHAPTER FIFTEEN The Organization of the International Acceptance Bank THE International Acceptance Bank, Incorpo- rated, was organized in April, 1921, under the laws of the State of New York and under a special license from the Federal Reserve Board of the United States. It has an authorized capital, fully paid in, of $10,250,000, and a surplus, fully sub- scribed of $5,000,000. On December 31, 1921, it showed undivided profits of $82,000. On Decem- ber 30, 1922, it showed undivided profits of $969,500. Since it does not take domestic deposits, it is permitted to accept up to a total amount equal to several times its capital and surplus.* On De- cember 31, 1921, it had acceptances outstanding, of $11,000,000. On December 30, 1922, it had $28,800,000. Inasmuch as a majority of the shareholders of the Bank are leading banks and private banking houses in the United States, Europe and Canada, the board comprises representatives, — ^in most cases the chief executives, — of those stock-hold- ing institutions which are located within easy traveling distance of New York. The following are the officers and directors of the Bank. Organisation and Capital Acceptance Limit Officers and Directors * The Federal Reserve Board supervises acceptance corporations such as the I. A. B. and determines from time to time the limits up %o which they may accept. 65 OFFICERS F. ABBOT GOODHUE President L. NACHMANN Vice-President P. J. VOGEL Vice-President JAMES P. WARBURG FLETCHER L. GILL Vice-President and Secretary Vice-President and Treasurer JOHN E. SHEA Aidditor Assistant Secretaries A. BENJAMIN H. B. KINGMAN W. H. SCHUBART Assistant Treasurers JOHN P. COLLINS L. D. PICKERING E. GUGELMANN, Mgr. Foreign Exchange Dept, H. E. BARKER, Mgr. Commercial Credit Dept. H. J. ROGERS, Mgr. CollecHon Dept. W. T. KELLY, Mgr. Credit Information Dept. DIRECTORS Chairman PAUL M. WARBURG Vice-Chairman DANIEL G. WING President First National Bank of Boston NEWCOMB CARLTON President Western Union Telegraph Co., New York EMORY W. CLARK President First National Bank in Detroit WALTER E. FREW President Corn Exchange Bank, New York F. H. GOFF President Cleveland Trust Company, Cleveland 66 F. ABBOT GOODHUE President ROBERT F. HERRICK Herrick, Smith, Donald & Farley, Boston L. NACHMANN Vice-President JOHN T. PRATT Financier LAWRENCE H. SHEARMAN W. R. Grace & Co., New York WILLIAM SKINNER William Skinner & Sons, New York H. C. SONNE Huth & Co., New York PHILIP STOCKTON President Old Colony Trust Co., Boston CHARLES A. STONE President American International Corporation HENRY TATNALL Vice-President Pennsylvania Railroad Co. FELIX M. WARBURG Kuhn, Loeb & Co., New York THOS. H. WEST, Jr. President Rhode Island Hospital Trust Co., Providence The Bank is organized to handle all kinds of financial transactions which arise out of the com- merce between one nation and another, as well as to finance certain particular kinds of domestic business, which involve movements of merchan- dise. 67 ll I ( i Commercial Credit and Collection Departments Foreign Exchange Department Securities Department Information Department Bullion Department The Commercial Credit and Collection Depart- ment is prepared to open import letters of credit in all parts of the world, either in dollars or in foreign currencies; It is equipped to handle for- eign collections and open export acceptance cred- its; to open dollar exchange credits where per- mitted ; and in certain cases, it is prepared to open credits against domestic shipments or staple com- modities in warehouse. The Foreign Exchange Department maintains its accounts in all the principal countries of the world, and is equipped with a cable relay station in London, as well as with private wire connections to Canada and thirty of the principal cities of the United States. It is therefore admirably equipped to execute cable transfers, to buy or sell checks in any of the foreign currencies, or to purchase long- dated foreign currency bills. This department does not issue drawing equipments, nor undertake to handle small remittances ; it is organized primarily to do a wholesale business on a minimum margin of profit. The Securities Department is equipped to buy or sell in all markets, or to obtain information concerning any domestic or foreign investments. In conjunction with affiliated interests the Bank is also prepared to negotiate new issues, domestic or foreign. The Information Department has extensive files on domestic and foreign concerns, and is always ready to procure any confidential information for clients of the bank. The Bullion Department deals extensively in gold and silver and is equipped to handle sales or purchases for the account of foreign and domestic customers. These, in bare outline, are the departments of the Bank. The working staff of these departments is comparatively small and highly specialized. 68 * CHAPTER SIXTEEN Particular Facilities for Domestic Clients BY reason of its extensive foreign connections, the International Acceptance Bank is partic- ularly adapted for handling the foreign business of domestic corporations. Instead of establishing branches abroad, the policy of the International Acceptance Bank has been to obtain as stockholders some of the oldest and best banks and banking firms in Europe and Canada, and thus to secure the benefit of their support and co-operation through the creation of a community of interest. This plan not only avoids the expense, risk and responsibility of operating branches in distant countries, but opens to the Bank a wider and safer avenue to foreign fields than could be obtained in any other way. Further- more it provides the great benefit of information and advice from these stockholding correspond- ents, which, in times as uncertain as the present, is invaluable, not only to the bank but to its cus- tomers and associates. The foreign stockholding corporations of the International Acceptance Bank have an aggregate capital and surplus in excess of $270,000,000 and resources of approximately $2,300,000,000. Some of the principal stockholders in various countries are the following: ARGENTINE The First National Bank of Boston, Buenos Aires BELGIUM Banque Centrale Anversoise, Antwerp Banque de Bruxelles, Brussels 69 Stockholders Instead of Branches Foreign Bank Shareholders I I CANADA Bank of Montreal, Montreal With 246 branches in trade centers of Canada, Newfoundland, Mexico, Europe and the U. S. DENMARK R. Henriques, Jr., Copenhagen FRANCE Banque de Paris et des Pays Bas, Paris With branches in Amsterdam, Brussels, Geneva and Rotterdam GERMANY M. M. Warburg & Company, Hamburg GREAT BRITAIN N. M. Rothschild & Sons, London National Provincial & Union Bank of England, Ltd., London With over 1,000 branches in all the leading com- mercial cities of the United Kingdom and with affiliated institutions having offices and branches in Belgium, France, Italy, Switzerland, Germany, India, and the Far East NETHERLANDS Hope & Company, Amsterdam Nederlandsche Handel-Maatschappij, Amsterdam, The Hague, Rotterdam Foreign branches in the following places: Dutch East Indies: Batavia, Sourabaya, Sama- rang, Medan, Weltevreden, Bandoeng, Cheribon, Tegal, Pecalongan, Djokjakarta, Solo, Tjilatjap. Djember, Padang, Kota-Radja, Palembang, Bandjermasin, Pontianak, Mascassar. Straits Settlements: Singapore, Penang. 70 V V British India: Rangoon, Calcutta, Bombay. China: Hongkong, Shanghai. Japan: Kobe. Dutch Guiana: Surinam NORWAY Den norske Creditbank, Christiania. SWEDEN Skandinaviska Kreditaktiebolaget Gothenburg — Stockholm — ^Malmo With 109 branches in Sweden Svenska Handelsbanken, Stockholm, With 228 branches in Sweden SWITZERLAND Swiss Bank Corporation, Basle With branches in London, Zurich, St. Gall, Geneva, Lausanne, La Chaux-de-Fonds, Neuchatel, Schaff- house, Bienne, Chiasso, Herisau, Le Locle, Nyon, Aigle, Bischofszell, Morges, Rorschach, Vallorbe, Les Ponts, Rolle. Credit Suisse, Zurich With branches in Basle, Berne, Frauenf eld, Geneva, Claris, Lausanne, Kreuzlingen, Lucerne, Lugano, Neuchatel, St. Gall, Horgen, Oerlikon, Romanshorn, Weinfelden. In addition to these stockholding banks which form the nucleus of the foreign connections of the International Acceptance Bank, Inc., other corres- pondents are located in all the principal cities of Europe, Central and South America, Australia and New Zealand, China, Japan, India, and Africa. 71 Additional Correspondents special Advantages Treuhand Companies The exceptional character of the facilities of- fered for opening import credits in dollars or for- eign currencies, or for collecting drafts drawn on all parts of the world, is evident without further comment. Furthermore it will readily be seen that operations in foreign exchange in all countries are enormously facilitated by the intimate relations existing between the International Acceptance Bank and its foreign stockholders. Similarly, the bank is provided with the means whereby it can not only obtain information in regard to investment securities, which are dealt in in various markets of the world, but also exe- cute under most favorable circumstances orders to buy and sell such securities, which it may re- ceive from its domestic customers. The salient feature about this bank in so far as the domestic client is concerned, is that the client has at his disposal, not only the facilities of the bank itself, but of the leading banks in the foreign countries of the world. The International Acceptance Bank acts as agent in obtaining for American banks and com- mercial houses the services of the Deutsche Waren Treuhand A. G. of Hamburg, and of the Allgemeine Waren Treuhand A. G. of Vienna. These two companies were formed some time ago for the specific purpose of safeguarding cred- its extended by American enterprises to various concerns in Central Europe. They are equipped, not only to attend to the warehousing and insur- ance of goods, — as well as to handle collateral of all sorts as trustee, — ^but also to look after the preserving of liens on raw materials during the process of manufacture. / / \ / CHAPTER SEVENTEEN Services to Foreign Customers TUST as the International Acceptance Bank was J organized to place at the disposal of its Ameri- can customers the services of the leading foreign banks, so also it was designed to provide for its friends in foreign countries a means whereby they could avail themselves of the cumulative facilities of a group composed of dominant banks and pri- vate banking and commercial houses in this coun- try. The combined capital and surplus of the American stock-holding corporations, exclusive of private firms, is approximately $276,000,000 and their total resources aggregate in excess of $2,200,000,000. The following is a list of the principal stock- holding banks and firms in the United States : BIRMINGHAM, ALABAMA First National Bank of Birmingham BOSTON, MASSACHUSETTS The First National Bank of Boston Old Colony Trust Company CHICAGO, ILLINOIS The First National Bank of Chicago CLEVELAND, OHIO Central National Bank Savings & Trust Co. The Cleveland Trust Company DETROIT, MICHIGAN First National Bank in Detroit Network of Domestic Bank Stockholders 72 73 I I Private Wires KANSAS CITY, MISSOURI Fidelity National Bank & Trust Co. LOS ANGELES, CALIFORNIA The First National Bank of Los Angeles MINNEAPOLIS, MINNESOTA Northwestern National Bank NEW YORK, NEW YORK American International Corporation Com Exchange Bank Huth & Company Kuhn, Loeb & Company The New York Trust Company PHILADELPHIA, PENNSYLVANIA Franklin National Bank PORTLAND, OREGON The First National Bank of Portland PROVIDENCE, RHODE ISLAND Rhode Island Hospital Trust Co. SAN FRANCISCO, CALIFORNIA Wells Fargo Nevada National Bank SEATTLE, WASHINGTON Seattle National Bank ST. LOUIS, MISSOURI First National Bank in St. Louis YOUNGSTOWN, OHIO The First National Bank With the majority of these institutions, as well as with a large number of other correspondents in the United States and Canada, the International Acceptance Bank is connected by private telegraph or telephone wires, which is of particular value in foreign exchange dealings. Furthermore, a relay 74 I t station is maintained in London for the particular service of European clients. The International Acceptance Bank makes a specialty of serving foreign banks in caring for their current business of all sorts in this country. 1. It will carry accounts current on its books and grant what facilities are needed in connection therewith. 2. It will make or receive payments in all parts of the country. 3. It will attend to collections and discount bills forwarded for acceptance. 4. It will execute orders in all foreign ex- changes, valeur compensee. 5. It will grant reimbursement credit facilities up to a maximum tenor of six months. 6. It will make cash advances and extend mail credits. 7. It will accept drafts drawn upon it to create dollar exchange, wherever it is permitted. 8. It will execute purchases and sales of se- curities on any of the American stock ex- changes. 9. It will buy or sell Bank or Trade Accep- tances for investment under its guarantee. 10. It will attend to purchases or sales of gold and silver bullion. 11. It will provide information of all sorts, and particularly credit information. 12. It will act as intermediary in financial ne- gotiations. The Bank is also glad to serve foreign corpora- tions, firms, or individuals in much the same man- ner, and makes a specialty of safe-guarding the American holdings of such clients. Furthermore it is willing to assist the business man in foreign countries to establish suitable connections here, just as it serves the American enterprise to find its affiliations abroad. 75 Service to Foreign Banks Service to Foreign Indi- viduals and Corporations INDEX A Acceptances (See Bank and Trade Acceptances) Acceptance Powers of National Banks 15 Allgemeine Waren Treuhand A/G 72 American Credit Structure (See "Credit Structure") 12 Automobiles *'' Bank Acceptances B Abuses ^ Against Cotton 40 Domestic Credits 32 For Creation of Dollar Exchange 85 Evolution 11 Export Acceptance Agreement 62 Export Acceptance Credits 28 Forms, and Uses of 21 As Applied to Grain and Foodstuff Transactions 37 As Investments 17-67 Liquidity 17 Against Miscellaneous Raw Materials and Manufactured Goods 47 Powers of National Banks, Widening of the Power 15-16 Uses in Other Countries H Security 17 Balance Sheets Customers' 52 Invisible Figures 53 Business of Customers (See Customers' Business) 52 C Cash Discount 12 China Hides 45 Coffee 39 Collection Instructions Under Letters of Credit 62 Commodity Risks 55 Cotton 40 Export Credits 41 Imports 41 Credits (See "Export," "Import," and "Domestic" Credits) Lines 54-56 Credit Structure American 12 Development of in Foreign Countries 11 Following Civil War 12 Money Rates 14 ! I f I Customers' Balance Sheets 52 Capital 52 Invisible Figures 53 Customers' Business Analysis 54 Credit Line 54 Character of 54 Commodity Risks 55 Financing Purchases 56 Financing Sales 56 D Del Credere 29 Deutsche Waren-Treuhand A/G 72 Direct Drawing 28 Discount of Dollar Drafts 29 Discount Market Creation of 14 Dollar Exchange, Acceptances for Creation of 35 Domestic Acceptance Credits 32 Export Acceptance Credits E Advantages 31 Export Acceptance Agreement 62 Operation of 30 Security Margin 31 Exports Automobiles 47 Export Cotton Credits 41 Grain and Foodstuff Ebcport Statistics 37 Manufactured Goods 47 Under Bank Credits 28 Federal Reserve Act F Acceptance Powers 14-16 Creating Discount Market 14 Policy of Board 16 Foodstuffs and Grain 37 6 Grain and Foodstuffs 37 Export Statistics 37 Export Credits 38 Meats 38 Sugar, etc 38 Hides and Skins 44 China Hides 45 Financing 44-45 Frigorificos 45 Imports 44 Sheepskins 45 Sources for Sole Leather 44 Trust Receipt Releases " 45 I I Import Credits 23 Buyers Arrangements ] 24 Clean Import Credits 27 Commissions * " 25 Custody of Goods 24 Foreign Currency Payments [[[ 27 Functions of * ' * 23 Other Costs ','.'" 26 Refinancing 26 Seller's Negotiation . 23 Sight Dollar Credits ...............[ 26 Sight and Time Credits 24 Substitutions 25 Trust Receipts 25 Irrevocable Letters of Credit 59 International Acceptance Bank, Inc. Acceptance Limit gr Bullion Department ] gg Capital gg Collection Department gg Commercial Credit Department i . ' gg Foreign Exchange Department gg Functions g« Information Department gg OflScers and Directors 65-67 Organization gg Private Wires 74 Services To Foreign Banks 73-75 To Foreign Individuals and Corporations 75 Special Advantages Y2 Statement ^ o Stockholding Banks, Domestic !73-75 Stockholding Banks, Foreign 69-71 Unique Organization gg Legal Restrictions L On Dollar Exchange Drafts 35 Letters of Credit Collection Instructions g2 Amendments g ^ Agreement qq Amount go Beneficiary ' " gg Distinction of Purchase Contract ]... gi Drafts and Documents ] 59 Exportation ' gg Import Application gg Revocable go Standardized Forms gg Waivers 61 1^ Money Rates M Regulation of 14 Meats 38 Metals 46 Manufactured Goods, Exports of 46-48 National Banks N Acceptance Investment Limitations of 18 National Bank Act 13 Nuts 39 Open Account O Versus Trade Acceptance 10 Overdrafts European Practice 18 Origin of Acceptance Banking 9 P Purchase Contracts 61 Raw Materials ^ Manifold Use of Acceptance Credits for 46 Relation of Bank to Customer 49 Revocable Letters of Credit 59 Rice 39 S Sale of Foreign Exchange Drafts 29 Single Name Notes American and European 13 Silk 43 Sheepskins 45 Straight Collections 29 Sugar 38 Trade Acceptances T Definition 9 Comparison with Open Account 10 Versus Open Account 10 Trust Receipts Against Hides and Skins 45 Against Wool 42 Technical Pitfalls 58 Two Name Paper 10 U U. S. Imports and Exports 40 Warehoused Staples W Acceptance Credits Against 33 Wool Domestic Crop 41 Foreign Wool Import Financing 42 Trust Receipts — Dangers 42 Date Due * %VMi XD725-QI ^v^v. International acceptance bank I Acceptance financing H^ 06m £?*'- FEB 28 1995 I END OF TITLE