Evening star., 1920-01-18
RATES OF DISCOUNT
AND ACCEPTANCES
TOPIC DISCUSSED
American Council in January
Bulletin Considers CONNER
! ciaI Paper Transactions.

Tho American Acceptance Council.
Of which Paul NJ. Warburg is chair
at some length on the subject Of
discount rates on commercial paper
and bankers acceptances.
The council says the federal re-
serve banks must aim to reduce the
aggregate Of their investments. and
thereby increase their reserve posi-
tion. but there Is little chance for
their succeeding in that policy as
long as their discount rates oner
70 attractive q margin of profit to
rediscounters OF a single name paper.
Open Market and Reserve Rates.
The council sets forth the spread
between the open-market rate for
comm ercial paper and the federal re-
serve bank rate. The former is
per cent and the latter 4 per cent.
"as If the time had come for the
federal reserve banks to raise their
rates for single-name commercial
paper"
The American Acceptance Council.
in treating of this subject, further
says that while the reserve banks
holdings of bankers acceptances are
heavy. it would be a mistake to take
advance rates on this paper. as has
been suggested by some bankers.
Review by the Council.
In reviewing tho matter the council
says IN part.
''Since the beginning Of the opera
tfons the ninety-day rate for COM
mercial paper of the New York Fed
eraf Reserve Bank has advanced from
per cent to 4A per cent, while it's
rate for acceptances has moved up
from per cent to or above per cent.
In other words, the acceptance rate
from time to time has been adjusted
to world conditions, the official rate
for commercial paper has not. By
moving the latter to per cent and
leaving bankers acceptances at ap-
proximately their present level, a
proper relation between the two types
of paper would be re-established.
The British discount rate has been
reduced again to per cent. If our
acceptance market is to become
world factor our discount rate for
acceptances must not be unreasonably
high. Moreover. it must be borne in
mind that the borrower pays an ac-
ceptance commission equivalent to l
to per cent interest per annum in
order TO secure the bankers guaran-
tee, and his cost must be added to the
discount rate. On the other hand,
it is this guarantee that entities the
acceptance to the lower rate, and the
very fact that this preferential rate
exists tends to make the bankers ac
ceptance the favorite investment of
the banks;othat is, it assures its wide
market. dTsu
InaC' the 1eQeral reserve DankS
Investment in bankers acceptances is
a heavy one is natural and the better
our banking system develops the high
er will be athe proportion of bankers
acceptanees ito other investments in
normal times when the heaviest in
vestments of federal reserve banks
are likely always to be in that paper
which commands the lowest rate.
The total amount of acceptances
given by national banks. state banks
and trust. companies at the end of
September, was estimated by the fed
eral reserve board at approximately
$500, 100000 The federal reserve
banks holdings of acceptances
amounts today to $575. 200, 900, so that
an iml, ediate or excessive increase in
accepta nee holdings need not be ex-
pected aS consequence of proper
margin between commercial paper
and acceptance discount rates.
On the other hand, the federal re-
serve systems investments in COM
mercial paper and in war paper ought
to go down substantially if the per
cent rate would be established A ,
policy of this character would be like
ly to bring about contraction of loans
and circulation, which are desired at
this time. and would lead the system
back to basis more nearly in accord
with the principles originally laid
down by those in it's charge and more
in accord with the banking usages
that governe' the world before the
war emergen les arose"