New-York tribune., 1920-11-14
acceptance Enables Bank,
Out Of Cash, to Lend Credit
Division of Banking Functions Through the Use of
the New Credit instrument Puts the Supply of
FUNDS ON National Basis, Rovensky Saws


chant or manufacturer and shall not
discuss it further here.
The Federal Reserve Board has
issued III pursuance of the Federal Re
serve act u number of rules and regu-
lations defining and limiting bankers
acceptance operations, and the statue.
together with these rules and reguln
tons. constitutes the legal answer to the
question now before us. y
we ave more concerned, however
with the principles involved In such
transactions than with the law. The
law and the regulations have been
carefully formed with the view of con-
forming to and making effective these
pnncsples, and clear understanding OF
the latter will make clear the motives
'hat prompted the trainers of the law
and regulations.
Contributing to Reservoir
hat Is the underlying principle that
ought to determine what clasaes of
credit operations should be financed by
means OF bankers acceptanccs The
answer to this question is found by
observing what becomes of the bankers
acceptance after it has been offered for
sSlc IN the open market II is bought
ny amy bank that happens to have
funds available for investment. That
n"nS looks upon 1t as II secondary re
serve. Should deposits decline, the
p"nA knows It can instantly rcsel the
%o0eptance IN the open market. The
oankers' acceptance market is the
hqu'd reservoir Of banks secondary re-
serves. To this reservoir each bank
contributes when it buys an acceptance
and from. it each bank may draw BY re
selling.
1t follows that this reservoir should
contain nothing but the most LIQUID
form OF credit 1t would be funda-
mentally unsound if this rese rvoir con.
talned items not issued with tho intent
OF actual liquidation at maturity.
therefore, bankers acceptance should
always be based upon self-liquidat
ing transaction, such as merchandise
sold and in process of collection, mer-
chandise imported. etc
With this principle clearly before US
that the bankers acceptance should al.
ways be based upon self-lisuidatinc
transaction let US now return to the
provisions OF the Federal Reserve act
1t was the intent OF the trainers of the
act to adhere strictly to this principle
OF llquidity. AS in the case of every
other human law. there are devations
that seem unavoidable at present and
Gag be eliminated only as we find
remedies whose effects would not be
worse than the existing defects On
the whole, however, the intent Of the
law and regulations is to promote the
soundness and liquidity of the accept
ance, and consequently its value as a
credit instrument.
First-Acceptances growing out Of
exports and imports. The intent here
vas to furnish an instrument that
would bridge over the gap between the
foreign and the American merchants.
The Federal Reserve Board has ruled
that such acceptances must be based
upon actual shipments of merchandise
sold and not Vpon more contracts be-
tween principal and his foreign agent.
Second-Acccptances growing out Of
the domestic shipment of goods The
law provides that shipping documents
conveying or securing title are attached
at the time 5f acceptance.
Third-Acceptances secured BY ware.
house receipts or similar documents
covering readily marketable staples
With reference to the latter two classes
Of acceptances, the Federal Reserve
Board has, BY its regulations, made it
clear that the acceptance shall be used
only to finance a definite step in the
merchandising of commodities and not
for the purpose of financing unsold
comm odities held for speculative pur-
poses. Ii the goods are warehoused no
acceptance based thereon should have
maturity longer than is necessary to
effect reasonably prompt sale, ship
ment or distribution. The goods must
consist of staples that have ready
market, so that their value is readily
certainable and so that the goods
can be easily sold at any time. If
the goods are in process of shipment.
the acceptance should not be drawn
for term that is in excess of the
usual or customary period necessary
to finance the transaction.
| have covered only a small part of
the field of bankers acceptances 1t is a
broad subject and there is danger in try
ing to cover the entire field in a super
ficlal manner within the short time at
my disposal. have, therefore, deemed
1t best to contine myself to the two most
important principles that govern bank
ers acceptances. These / will restate.
Sound Chedt Essential
First-Thc bankers acceptance sep
arates the two elements of banking
credit; the merchants local bank fur
nshes the credit element. while the
cash element is drawn from the coun-
try's general reservoir of bank funds
Through this separation the borrower
is given access, not simply to local
credit resources, which are subject to
local variations in availability, but to
the broad national credit resources.
winch are much more constant in their
supply.
Second-In order that the bankers
acceptance may have a broad market
1T must be IN absolutely sound credit
instrument n which any banks sec
ondary reserves may be invested. It
must be based on self-liquidating com
merclal transactions and not on any
transaction that cannot reasonably be
expected to jetire the acceptance at its
maturity.
Butte and Superior Earnings
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