offs and counter claims of the debtor, thus involving further delay and expense. The open book account system breeds unfairness and discriminations. It allows the weak or injudicious buyer to use the seller as an involuntary banker after the former has reached his safe credit limit at the bank, and that, too, without paying interest for the accommodation; and it permits the strong buyer to exact excessive discounts from the seller, thus tending to build up big business at the expense of the small dealer. It compels sellers to borrow money at interest, often with the necessity of pledging security, and to lend goods without security or interest. It follows that sellers in order to cover risks, interest and costs must quote higher prices, which are passed on at continually increasing levels to the consumer. The cash discount, which quite generally accompanies the open account system, is abused by buyers withholding remittances for days or weeks after the discount date and still taking the discount. Even where the terms of cash discount sales are strictly observed, the seller must figure his prices high enough to cover the discount; it is merely a bait to encourage prompt payment, and in so far as it accomplishes its purpose it is a high premium to have to pay for it. The open book account is expensive and illiquid. The expense involved in collecting slow accounts, in extensions of payment, in the cancellation of orders and return of goods, in the abuse of terms of sale, in trade discounts, and in the assignment of accounts receivable involving larger bank margins and higher interest rates-these and other costly disadvantages constitute a heavy tax upon business operations. As an asset the open book account is neither quick nor dependable; if pledged at the bank as collateral to a loan it is regarded as inferior security, and many banks refuse to handle it at all.

58. Trade acceptances.-These disadvantages and abuses arising out of the open book account have long been recognized and deprecated in the mercantile and credit world, and a strong movement has set in for the substitution of the trade acceptance in place of the open account. The

wide adoption and use of the former will eliminate most of the disadvantages of the latter. It will stabilize and liquefy commercial credit by converting the sale of merchandise into a liquid credit immediately available at reasonable interest rates to meet the financial needs of the seller.

A trade acceptance is a bill of exchange of definite maturity, drawn to order on a buyer by a seller, and bearing across its face the signed acceptance of the buyer without qualification or condition. To be eligible for rediscount with a Federal reserve bank, the acceptance must bear on its face or be accompanied by a certificate to the

TRADE ACCEPTANCE

FORM APPROVED BY THE
AMERICAN ACCEPTANCE COUNCIL

THE OBLIGATION OF THE ACCE FOR HEREOF ARIES OUT OF THE PURCHASE OF GOODS FROM THE DRAWER, THE DRAWEE MAT' ACCEPT THIS BILL PAYABLE AT ANY BANK. ANKER

TRUST COMPARY IN THE UNITED STATES WHICH HE MAY DESIGNATE.

Printay and weld by J. I Weldin Co., 413-415 Woul street, Pittsbu

'FORM OF TRADE ACCEPTANCE

To pre

effect that "The obligation of the acceptor of this bill arises out of the purchase of goods from the drawer.” serve the negotiability of the instrument where it is made payable at a place other than the domicile of the acceptor, it is well to have the following notation inserted in the form: "The drawee may accept this bill payable at any bank, banker, or trust company in the United States which he may designate.

The use of the trade acceptance can be illustrated as follows: A of New York sells a bill of merchandise to B in Boston with the understanding that the transaction is to be closed by a 60-day draft. Accordingly A draws his draft on B when he sends the invoice or soon thereafter, and B

accepts it by writing or stamping across the face of the draft the word "Accepted" together with the date, the bank where he wants to pay it, and his signature. He then returns it to A, who discounts it at his bank, or if he is not in need of the money he holds it until maturity, when it is presented to B's bank for payment. A trade acceptance may be drawn for any period but its maturity at time of purchase or discount by a Federal reserve bank may not exceed 90 days, except that when drawn for agricultural purposes or against the sale of live stock it may have a maturity at time of discount of not more than six months.

The advantages arising from the substitution of the trade acceptance for the open book account will accrue not only to the seller but to the buyer and the banker as well. The chief advantages may be briefly stated as follows:

To the seller

1. Completion of the transaction upon acceptance of the draft, and the implied acknowledgment by the buyer of the correctness of the account, thus avoiding or reducing the evils of extensions, counter claims, unearned discounts, return of goods, etc.

2. Elimination of the costly and inconvertible open book account and the substitution of an instrument of credit readily and economically negotiable.

3. Automatic provision of funds necessary to finance each account, thus releasing the seller's own capital for use in the upbuilding of his business in other ways.

4. Substitution for the practice of borrowing on accounts receivable or on single-name paper of the sounder practice of discounting double-name paper convertible at will into cash at much better rates.

To the buyer

1. Improvement of business standing and credit by giving the seller a negotiable evidence of indebtedness with a fixed maturity.

2. Enhancement of credit standing with sellers, by furnishing a means of liquidating sales at preferential discount rates, entitling the acceptor to the best prices and service.

3. Assumption by the buyer of an obligation which must be met at maturity will tend to check the pernicious habit of over-buying.

4. Improvement of buyer's credit, not a reflection upon it, for the acceptance shows on its face that the obligation is made for the purchase of goods. The use of the trade acceptance need not interfere in any way with legitimate cash discounts.

To the banker

1. Increase in volume of double-name paper, representing current business transactions and not past due accounts, offered for discount in place of single-name paper which is less liquid and often does not represent a commercial transaction at all.

2. Trade acceptances discounted and held by the bank furnish additional reserve, for they are readily rediscountable at the Federal reserve banks at preferential rates.

!

3. A customer who habitually settles his accounts by trade acceptances is less likely to sell his book accounts, or to borrow through brokers, or to apply to a competitor bank for credit, for his bank if a member of the Federal reserve system can furnish him ample accommodation.

4. The bank is primarily a dealer in credit, and the acceptance system will aid greatly in keeping the credit system sound.

The benefits attending the wide use of the trade acceptance cannot fail to be felt directly or indirectly by the entire business public. A stronger sense of responsibility toward commercial obligations; a check upon over-buying and over-selling; better system in financial arrangements; closer relationship between buyer and seller; reduction of losses from bad debts, of collection expenses, of the abuses of unwarranted discounts, and of the need for borrowing through brokers or on open accounts; the substitution of liquid, double-name paper, based upon actual current commercial transactions, for the "frozen" credit of book accounts; and the release for business requirements of a vast volume of working capital heretofore tied up for indeter

minate periods on the books of manufacturers, jobbers and banks-these advantages will inure to the benefit of the general public, affording an additional safeguard against those periods of business depression which so often in the past have resulted from or have been intensified by the lack of a system of liquid commercial credits.

59. Other instruments of commercial credit.-Other important instruments of commercial credit are the promissory note and the bill of exchange. A promissory note is

a written promise to pay a certain sum of money to the payee on demand or at the end of a definite time. The payee, by endorsing it, may make it payable to a third person, and he in turn may transfer it to a fourth person, and so on. Each indorser makes himself responsible in case the maker of the note fails to pay it when due. In most lines of business the interval between buying and selling stocks of goods necessitates borrowing from the banks. Though the practice of giving promissory notes to cover purchases of goods has declined in this country, it is still common in certain lines of business. Such paper when indorsed by the payee can readily be exchanged for bank credit by being discounted at the bank. It is probable that under the Federal reserve system, which provides for the rediscount of commercial paper held by the banks, acceptances and notes will regain much of their former popularity in business and banking usage.