his own bill on the bank (see 158), or borrowing upon the trade bill as security. The security lies in the worth of the goods and the credit of the drawer. Goods are sometimes hard to sell at a fair price, and charges for storage and fines may mount up rapidly. Depending upon the goods and their destination, the security resting in the pay to the order of IRVING BANK - COLUMBIA TRUST CO., NEW YORK Five hundred 00/100 Dollars PAYABLE WITH EXCHANGE, COMMISSION, STAMPS AS WELL AS INTEREST AT 6% PER ANNUM, FROM DATE HEREOF Value received, and charge the same to account of goods may not be high. They must be staple and readily marketable. They must not be "easily subject to the risk of decay, waste, breakage, loss of weight, or leakage." The amount advanced by a bank varies all the way from 40% to 90% of the invoice. The standing of the shipper may be so poor as to get nothing, or so high as to obtain even 100%. 158. Bank acceptances and their advantages. — The seller may be unwilling to ship goods on open account or upon a time draft, because he is unacquainted with the credit standing of the buyer. He desires cash at the time of shipment. Even if he did sell on credit and draw a draft, he might get such a poor price for it, that he must sell at an enhanced price. The buyer, on the other hand, does not want to pay an inflated price. He wishes a cash price, but he is unwilling for the seller to get his money until the goods are shipped. At the same time he does BANK ACCEPTANCES 219 not want to pay for the goods until they arrive. Everybody can be pleased at small cost through the medium of a bank acceptance. The bank pledges itself to accept and pay the seller's draft, providing the terms of sale are met, while the buyer bargains to put the bank in funds just before the acceptance is due. The buyer should get an enough-better price to enable him to profit by the arrangement. The buyer has had a loan at a lower rate than he could borrow to pay cash. The bank acceptance is also used to borrow in the general discount market. The borrower on his general credit, on security attached to the bill, or on security deposited with the bank, arranges with a bank to accept his draft, so that he may sell it in the open market. The rate charged depends on the credit standing of the drawer of the bill. It may be %% a month, equal to 12% a year, as low as 14% for ninety days, or higher. Paul M. Warburg before the New York Credit Men's Association said that "Farmer Jones may be able to secure money from his bank on his own note only at 6, 7, or 8%, but if he can store his grain or cotton with a properly organized warehouse and secure the acceptance of a good bank, the bill will sell at the lowest rate (2 to 4%), provided the accepting bank is sound." 4 The state banks of many states have the power to accept drafts and can help finance trade between points within the United States. National and other member banks of the Federal reserve system can accept bills growing out of transactions involving domestic shipment of goods if the shipping documents are attached or if warehouse receipts or documents of title for readily-marketable staples are used as security. All national banks, state banks that are members of the Federal reserve system, and the state banks of some states, have the power 4 Federal Reserve Bulletin, March 1, 1916, p. 104. to accept bills involving foreign trade transactions. The Federal reserve act gives the power to any member to "accept drafts or bills of exchange drawn upon it and growing out of transactions involving the importation or exportation of goods having not more than six months sight to run." "An American merchant desiring ultimately to export merchandise can, under proper arrangements with his banker, draw on time in anticipation of the actual export, using the funds in the purchase or the preparation of his shipment, and when actually ready to export, use the proceeds of the drafts that he draws on the buyer, or the buyer's banker, in liquidation of the acceptance." 5 This method was extensively used during the Great War and served its purpose admirably. No member bank can accept bills to an amount equal at any time in the aggregate to more than one-half its paid-up capital and surplus, except that by special authorization of the Federal Reserve Board a bank may accept up to 100% of its capital and surplus, provided the amount of its acceptances growing out of domestic transactions can never exceed 50%. Unless a member bank is given documents conveying or securing title or some other actual security growing out of the same transaction as the acceptance, its acceptances for any one person, firm, or corporation, is limited to 10% of its paid-up capital and surplus. 159. American market for acceptances. - The Federal reserve act not only gives member banks power to lend their credit by accepting bills, but creates a home market in which bills can always be sold by providing in section 13 for the purchase by Federal reserve banks of either trade or bankers' acceptances based on the importation or exportation of goods and having a maturity at discount of not more than three months, if indorsed by at least one 5 John E. Gardin, Commercial Letters of Credit, p. 9. (The National City Bank of New York, 1915.) GROWTH OF DOLLAR EXCHANGE 221 member bank. Section 14 authorizes the reserve banks to buy and sell in the open market at home or abroad bankers' acceptances, either domestic or foreign, of not more than three months' maturity, whether they are indorsed by member banks or not. The intermediate credit banks recently established and the larger agricultural credit corporations which were provided for have the powers of rediscount (see 222, 223). The number of rediscount banks created under state law is steadily increasing. 160. The growth of dollar exchange. - Legislation permitting acceptances by United States banks, foreign branch banking, and creating an acceptance market, gave an impetus to dollar exchange. Formerly an American business house had to arrange through an American bank for a bank in London, Paris, or Berlin, to accept the drafts of those who sold to it. It had to require its customers to permit it to draw against their accounts at some foreign center. Banks of the United States are now encouraging their customers and foreign banks to establish dollar credits with them. There is little risk with the best customers, and the bank makes a profit without advancing any funds, when the acceptances are sold in the open market. Sterling exchange is most widely used because there is everywhere a demand for it at the best price. This demand is due (1) to the fact that all the world has debts to pay in London, and (2) usually bills have been discounted there more cheaply than elsewhere. During the World War all parts of the world rolled up large debts to the United States and New York furnished the cheapest discount market in the world. At the same time American branch banks and agencies were established abroad, all of whom were anxious to buy and sell dollar exchange. This affected the willingness of the foreigner to use the dollar. The willingness of the foreign exporter to draw in dollars depends upon the presence of a purchaser for the draft who needs it to pay for what he has bought or borrowed in the United States. The choice of both the importer and the exporter is affected by the rate of discount. The purchaser will pay more for a bill which he can rediscount at 3% than for one he must sell at 4% off. Because the seller can get more for his draft, the buyer can get better terms. The American prefers a draft payable in U. S. currency because he has no fluctuations in exchange to risk. There are also other economies for the importer. If the bank sells sterling credits it has to provide for London acceptances, for which it pays; it charges less for a home credit. Interest for several days is saved, as the funds for payment do not have to be provided so soon. Because of all the varying factors, one exchange will be used in trade to one place, another to another. Again as the economies change, the choice will change. แ 161. Commercial credits. The arrangement whereby a bank agrees to honor bills drawn upon it or some other bank for its account is called a commercial credit." If the bank assumes no responsibility in case the credit is canceled by the buyer it is an unconfirmed credit and is revocable by the buyer. When the drawee bank confirms the credit to the seller it is a confirmed credit and is irrevocable except with the consent of the seller. The letter of credit specifies a maximum amount of credit, the quantity and the quality of the goods to be bought, the time within which they are to be shipped, and full instructions as to the shipment, the drawing of the draft, and the disposal of the documents. The buyer gets a copy, the bank keeps a copy, if a bank elsewhere is the drawee, it gets a copy, and the original is sent by the buyer to the seller. If the 6 Jos. T. Cosby. "The Economies and Advantages of Dollar Credits," The Americas, Oct., 1915, p. 18. "Bank Acceptances and Dollar Credits," The Americas, Nov., 1914, p. 42. |