New-York tribune., 1918-05-19
Trade Acceptance Market
Develops Rapidly in u. S.
Exponents of New Method of Finance Urge Creation of
Special Call Money Market Against Acceptance.
and Bills Of Exchange

lateral. This arises from the fact that
the bankers acceptance is in direct
competition with call money as
liquid means for the investment of
funds by banking institutions and in
vestors. Inasmuch as this call money
rate is based upon the daily settle
ment of security transactions it is sub
ject to violent and rapid changes and
is not proper rate upon which the
discount market can be based. The
results of this situation are manifested
in number of ways and affect par
ticularly the operations Of the discount
houses and discount dealers. If we are
to have broad discount market it is
necessary that agencies be developed
for the wide distribution of bank and
bankers acceptances.
Discount dealersshot only act as dis
tributers of bills, but provide a market
at all times and act as shock absorbcrs,
preventing the erratic fluctuations
which would otherwise occur in periods
Of. money disturbances. Such discount
dealers already exist in this country,
but their activities have been severely
hampered by the conditions under
which they must operate. To conduct
their business properly the discount
houses must at all times carry large
portfolios Of bills of diversified names
and maturities on which they must nee
essarily borrow large amounts Of call
or short time money.
American Discount
Houses at Disadvantage
The practice in the London market,
where discount houses carry large port
folios with correspondingly large loans,
is only possible because there is large
open market for call money against ac-
ceptances based upon the fact that the
discount houses can secure accommo-
dations directly from the Bank of Eng
land, if necessary, and this call money
rate in England is on the average lower
than the level Of the open market dis
count rate for prime acceptances.
Lacking such facilities their position as
large borrowers would be untenable.
Such facilities, however, are not avail
able to American discount houses. Call
money, as the term is known here, is
the lending Of money on demand
against investment securities. Discount
houses in this country, therefore, car
rying portfolios of bills are compelled
in order to finance themselves to bor-
row money at the same rate that is
commanded by loans secured on stock
exchange collateral, and this rate as a
rule is considerably above the rate at
which the bills are discounted. 1t will,
therefore, Immediately be seen that
a disadvantage as compared with the
older markets abroad.
The margin of profit in trading in
bills is usually 1-16 of 1 per cent per
annum-that is, the dealer, for ex
ample, buys at 41-16 per cent in the
hope Of selling at 4 per cent discount.
If he has to pay per cent for bor-
rowing money on bills which he is dis
counting at per cent it means that
on thirty-day bill he would lose his
Lie of per cent per annum profit in
one day; on sixty-day bills he would
lose it in two days, and on ninety-day
bills he would lose it in three days.
A continuation of such conditions
would obviously force the discount
houses ou. of business. Of course,
discount houses by withdrawing from
the market at times of advances in
money rate would be able to obviate
the necessity of taking such losses,
but such withdrawal would merely
tend to aggravate conditions and to
renalize the merchant. 1t has become
increasingly custom on the part of
commercial concerns to use the dis
count houses for the discount of &C.
ceptances which they create for the
financing of their business, and the
dealers are under a moral obligation
to protect their clients in so far as NAV
be possible against sudden advances
In rates.
This situation affects not only the
discount houses; its results are seen
Immediately in the. contraction which
takes place in the amount of outstand-
Ing bills in the open market, for upon
occasion of sharp advances in money
rates (and they have frequently risen
during recent months from per cent
to 6 per cent overnight) discount
houses not only do not increase their
portfolios, but iquidate wherever pos
sible, and usually at the Federal Re-
serve banks, provided the, Federal Re-
serve banks are buyers. AS soon as
the stress in money rates is relieved
the open market again becomes a
buyer Of bills. and the discount houses
find themselves without diversified
supply Of bills to satisfy the demand,
as most of the outstanding bills have
in the meantime found Judgement in the
Federal Reserve banks. AS long as
these conditions continue broad mar
ket is manifestly impossible, as
steady supply of bills under such con-
ditions cannot exist. A rather serious
consequence also Of the situation
which has been outlined is that such
conditions tend more and more to cause