New-York tribune., 1918-03-11


will be the more readily absorbed by
the banks and the open market, because
OF type IN class by itself-distinct-
ly self-hquidatng, of short commercial
maturity and acceptable above all
others to the Federal Reserve Bank
either from bankers or in open market
transactions. AS an instrument OF this
kind, fulfilling all these functions, ere
atlng an elastic credit currency, cx-
pandlng and contracting automatically
corresponding to the volume of legiti-
mate commercial business, the ideal
credit instrument is the commercial
trade acceptance" There is no mys-
terry about them-they stand for what
they are. This, of all forms of credit
IS the one against which there can be
the least discrimination.
What Trade Acceptance Represents
The trade acceptance represents
goods that have been actually sold. A
plain note may represent borrowing for
any purpose, and does not necessarily
represent transactions of a self-lqu-
dating character, and may be borrowed
against goods that have not or may not
be sold, or are unstable, or against
book accounts of an unknown charac-
ter or for speculation, or for diversion
into outside enterprises, or for capital
or plant account, or for purposes of an
unllqud or of an obscure character.
Large interests have recently been
apprehcnsive of finding themselves
credit, owing to their extensive re-
quircments. They were doubtful of the
future, and they sought in certain in
stances to obtain absolute assurance of
round amounts on bankers acceptances
Tor period of two or three years
ahead, through the medium of synd-
cate operations involving a high rate
OF interest, making their paper in
nfnety-day periods under guarantee of
renewal for the time mentioned. To
establish a market for large volume
of such offerings, the underwriters
have found it necessary to sound the
attitude of the Federal Reserve Board
as to the eligibility Of such paper for
redlscount, and have found it unfavor-
able for several sound reasons, of
which it is only necessary to mention
that it is regarded as really long time
borrowing, not essentially self-lqudat-
ing, and Of an inhexible and unscien-
tific character as to rate, which would
be demoralzinE element in the bank
ing machinery. The necessity of such
methods indicates a shortening of in
termediate avenues of credit, which
would be available if the paper were
eligible for rediscount with the Federal
Reserve Bank. Had these borrowers
been in a position to negotiate with
the same Underwriters, on the other
hand, to convert into cash the same
stated volume of trade acceptarces, for
the same period Of time, a very broad
market could be developed for the lat
ter, for reasons which | shall later en-
deavor to make evident.
In our open-account system mer-
chants, in borrowing to carry their
customers, are usurping the functions
of the bankers and carrying an unnec-
essarily heavy load Is there a means
transfer the load where it belongs
to the bankers and through them to the
Federal Reserve Bank? I think there
is-the Trade Acceptance.
A Matter of Selling Terms
Let us suppose that, as war meas
ure made necessary by the present
crisis. the various wholesale merchants
Associations of the country should "take
the bull by the horns" and for that
reason alone, utterly ignoring any dis
cusslon OF the many other sound and
excellent reasons which exist and are
capable of demonstration, should join
together forthwith and announce firmly
that for this supreme reason, hereafter
all sales of goods for the period OF
tho war must be closed on the basis
of cash or trade acceptance Compe-
tent legal authority has ruled that such
concurrent action Is not subject to PEN
alties under the Sherman law. 1t can
enly be effectively done in that way
by combined effort and backbone on
the part of the merchants themselves.
Ii you wait for the bankers to do it it
will never be done, for it is altogether
a matter Of selling terms.
If this could De done, what would be
the result?
Credits arising from the sale of
goods would not be locked up until ma
turity or indefinitely but would take
the form OF negotiable credit instru-
ments of the most liquid type, com
mandIng the broadest possible market.
Locally, they would be absorbed by
banks, the open market and the Fed
eral Reserve Bank.
The banks, the Federal Reserve
banks and the open markets of the
whole country would furnish broader
market.
They would constitute an ideal
means of settlement between the re-
spective Federal Reserve banks under
the management of the Federal Re-
serve Board, in lieu of settlements
through the gold settlement fund on
occasions when the general situation
requires tightening the load on one
district and distributing it among the
Federal Reserve banks in theot her dis
| trictS.
Ideal Type of Investment
tt would be an ideal type of instru-
ment for the investment of the funds
of country bankers, particularly where
the acccptors are merchants of stand
ing scattered over the country, whose
home banks would be glad to buy
their paper when in available funds.
especially SO if reinforced by the ad-
ditional strength. of the selling firm on
the paper and the knowledge that this
double-name paper carries with it
prima facic evidence that it represents
the sale of goods out of which the
debt is to be liquidated, and is not bor
rowing for operations of an obscure
character. The bank holding q trade
acceptance knows that it can immedi-
ately be converted into cash at the
Federal Reserve Bank; also, the pur-
chasing bank is permitted, when in
surplus funds, TO invest in trade ac-
ccptances without reference to it's loan
limit. whereas it can led not exceeding
its loan limit to any one borrower. In
Vulnerable small banks have surplus
funds out of all proportion to their
loan limits 1t will be seen, therefore.
how broad the market could be made
GDt V>c ev2tt