New-York tribune., 1920-11-14
BY John f. Rovenskv

es eS eAa"ine the reasons for the
existence of bankers acceptances.
What advantages to commerce and in
dustry result from their use? To an
swer this question we must analyze the
elements that make up bank credit.
When John Smith borrows $500 from
the Tenth National Bank on his three
month promissory note the transac-
tion is composed of two distinct ele-
ments. One is credit-the other il
cash.
The Tenth National Bank has faith
IN the credit of John Smith. It is conf
dent that at the end of three months
he will be willing and able to repay
the $500. That is the credit element
OF the transaction. This element, how
ever, would be impotent by itself. II
the Tenth National Bank was 'loaned
up and did not have the $500 avail
able it would be of little help to John
Smith to know that it has faith in
his credit. The TENN National Bank
must have the funds to loan-that il.
the cash element Of the transaction
The Chief Advantage
A study Of the results that follow
this simple proposition reveals way
the bankers acceptance is an advan-
l..
issory note method of EXTENDING bank
credit inseparably binds together the
two elements of borrowing operation
the borrower must find loaner who
has both the cash and the faith in the
borrowers credit. The bankers &C
ceptance, on the contrary, separates the
two elements of the loaning operation.
John Smith needs $500 for three
months. He is known to the Tenth
National Bank, which has full faith in
his credit.
The Tenth National Bank. however,
is located in q section OF the country
where there is an abnormal demand for
funds and it cannot conveniently ex-
pand its loans further. 1t is willing
to give John Smith the credit, but it
does not have the cash. This is q
situation which could not be met by
the promissory note method Of tinanc-
ing. Under these conditions the Tenth
National Bank will permit Smith to
draw on it at three months sight. The
bank accepts his draft and by so doing
becomes the primary obligor. The
Tenth @National Bank is bound abso-
lutely to pay the draft at its maturity
to a holder in due course, regardless
of three months or not. At the matur-
ity of the draft the holder presents
it TO the Tenth National Bank and re-
ceives his money just as surely as if
he presented certified check.
The draft drawn by Smith and ac-
cepted by the Tenth National Bank,
which thereby has become a prime
bankers acceptance. has a broad, ready
market, because the accepting bank is
widely known and its condition is a
matter Of public record which can be
quickly checked. A large volume OF
such acceptances can be sold on a few
minutes notice through the medium Of
brokers and dealers.
Separates Functions
Smith, having had his draft accepted
by the Tenth National Bank, obtains
the cash by selling the draft in the
open market. Usually the Tenth Ma
tional Bank will handle the sale of the
miliar with this business than he.
Thus you see how the bankers &C.
ceptance splits the loaning operation
into its two elements. The Tenth Ma
tional Bank, by placing its acceptance
on Smiths draft, grants him the credit
The bank takes the risk Of Smiths be-
ing willing and able to repay the
money at the end of three months The
Tenth National Bank, however, is not
itself called upon to advance any cash.
The cash is obtained by selling the ac
ceptance in the open market. It is fur
nished by any bank in the country that
happens to have funds to spare
By this separation of functions the
bankers acceptance enables the bor-
rover to tap the great national reser-
voir of bank funds, otherwise almost
unavailable to him. His credit is GER
titled to by his home bank, and thus
equipped he enters the national mar
ket.
There is another use to which this
interesting operation of separating the
cash and the credit elements of bank
credit is frequently put. Suppose
Smith, in New York, wishes to buy
hides from Gonzales, in Buenos Ayres,
on three months credit terms. Con
zales is willing and able to sell the
he is willing to furnish the material
part Of the transaction, but he is not
sufficiently in toneh with Smiths af-
fairs to grant him the credit. The
bankers acceptance, by separating the
credit and the cash or material ele
ments of the transaction, solves the
difficulty.
Smith arranges with the Tenth Ma
tional Bank to authorize Gonzales to
ship Smith the hides and draw three
months sight draft, with the shipping
documents attached, on the Tenth Ma
tional Bank. The Tenth National Bank
accepts the draft, and thus Gonzales
is assured that he will receive his
money at the end of three months,
while Smith obtains his hides on three
months credit terms, as he desired.
For the purpose of clearly illustrat-
ing the principles involved | have as
sumed in the foregoing example that
Gonzales intended to hold the accepted
draft until maturity; that is, to wait
for three months before receiving pay
rQent, just as if she had sold the goods
Oh open account However, he usually
does not do this. AS rule, he sells
the draft in the open market in Buenos
Ayres as soon as he has made the ship
ment, so that he receives his cash i'm
mediately. Therefore, in such cases
the cash element is furnished first by
Buenos Ayres bank. 1t in turn usually
resells the bill in New York. Thus
Smith, whose financial standing is
known only to the Tenth National Bafk
in New York, by means of the bank
ers' acceptance credit obtained access
to the general reservoirs Of credit Of
two great countries.
Marketability Important
Many other less important reasons
for the use of bankers acceptances
might be cited, but the foregoing are