The New York herald., 1921-01-31
War and After War Financing.

| W tetSu lulc touutis snc uovuhtu6c
of the commercial acceptance draft
as an instrument for creating broad
and efficient discount market, but the
lesson has been worth all it cost.
The financial uncertainty following
the civil war caused the substitution
Of the rigid and wastefuls open book
account and cash discount system In
the place of the acceptance draft,
which almost disappeared from the
commercial money market, though 1t
continued in Europe the chief instru-
ment for financing domestic and for
eign trade. When a money ;trin-
gency afflicted this country under the
stress Of Liberty Loan dotations and
banks found 1t necessary to take ad-
vantage of the rediscounting faclli-
ties of the Federal Reserve system
the need for the safe and easily ne
gotiated trade and bank acceptances
became at once apparent
Unlike promissory note or ordi-
nary commercial bill with single in
dorsement. the trade acceptance
drawn against merchandise in process
of distribution bears the names of
both buyer and seller. and the bank
er's acceptance contains three in
dorsements-those of buyer, seller and
the accepting bank which furnishes
the credit. The acceptance, passing
from hand to hand with facility
equalled only by the currency Of the
nation. offered means of loosening
up hundreds OF millions Of rigid credit,
spiked down by the open book ac-
count and cash discount system. Bills
discounted against such accounts be-
came fixed assets In the hands of the
discounting banks until the mer-
chandise against which they were
drawn had been liquidated and the
proceeds applied to retiring the drafts.
An acceptance. with Its superior ele-
ment Of safety due to It's indorse-
ments, circulated freely from one
bank to another and from one broker
to another, lodging at last where
there happened to be the necessary
free funds to hold II until maturity.
Such obvious advantages were not
to be ignored in money crisis.
Banks began to urge merchants to
use ncceptances in preference to sim
gle name bills. In 1919 the money
market was still easy enough to per-
NIT the merchant with name suffi-
ciently good to continue selling his
own paper and applying the proceeds
to his debts, thns taking advantage Of
cash discount for prompt payment.
Acceptances we're adopted by some
houses, but up to the time when the
money stringency first made itself felt
in 1910 It was estimated that not
more than $500, 100000 of them were
being used In our domestic and for
eign trade. and probably Ave times
that amount still remained outstand-
ing In commercial paper. overdrafts
and open book accounts otherwise
financed.
with tight money. merchants small
and large having established reputa-
tious In the money market and high
credit ratings found that the supe-
riorlty of their names was of less
avail. A bank did not want to dis
count single name bill which could
not he lodged with the Federal Re
serve Bank when II could indorse an
acceptance. collecting practically the
anne commission, but with the assur-
ance that in cnse II needed funds the
instrument could be passed on to an
other bank or to the Federal Reserve
central bank.
The movement toward acceptances
gained as the money scarcity became
acute. BY the end of 1920 II was esti-
mated that the quantity Of trnde and
bankers acceptances had trebled to
about $500. 100000. while the guam
tlty of commercial single name paper
had been more than halved to about
81 900. 100000 To the extent that
acceptances multiplied the money
market benefited and available capital
increased in efficiency because II was
not rendered impotent during the In
terim between the discountlng and
the maturity Of the paper.
Discount houses which had been es-
tablishctf with the coming Of the new
acceptance era pursued languorous
existence until the turn OF events at
the end of 1919 completely altered
their position. The annual report Of
the Discount Corporation of New
York Is an example. This institution
was founded several years ago by n
number Of New York banks. not with
view 10 making large profits but
TO promote the use Of acccptances and
form centre for n discount mar
lSet In 1910. despite considerable
amount OF business nj the end Of the
year. Its turnover was only SS54.-
9s6.121. But IN 1920. with thousands
Of merchants using acceptances who
had formerly chung 20 other methods
OF financing their business. the cor
porations turnover doubled to 81 .7So