The New York herald., 1921-04-22
Right and Wrong Finance.

Right and Wrong Finance.
From the first report of the Fed
eral Reserve Board on the condition
of the discount market for CONNER
cial acceptance drafts. survey which
will hereafter be published in con-
nection with the monthly report op
business conditions, a birdseye view
Of the progress in the development
OF broader money market in this
country may be obtained.
The commercial acceptance draft,
when indorsed by bank, becomes a
bankers acceptance and is identi-
cally the same as cashiers check
Of deferred date. convertible by dis
count into immediate cash, and Is
therefore secondary cash reserve Of
the highest type.
1t is curious fact that the bank
ing and commercial institutions on
the eastern seaboard have been the
first to realize the convenience and
the elasticity Of this instrument and
their holdings of acceptance paper
exceed those Of all the rest of the
country put together. The wide use
of acceptances by the purchasers and
sellers of goods here and abroad Is
no more necessary to the development
Of broad discount market to help
the nation finance It's own trade than
the existence Of great number Of
investors to provide a market for the
paper when drawn.
In the Boston and New York dis
tricts the open discount market has
developed spontaneity which re-
quires fine shading of interest rates
to balance supply, furnished by the
drawer Of drafts against goods In
process of sale, and demand, fur
nished by the investor with funds
available for short dated paper. When
the funds available are more than
equal to the bills on the market In
terest rates are lowered. This hap
pened In February at both Boston
and New York.
In Chicago, Cleveland and st. Louis
encouraging signs appear to show that
not only banks but a number of cor
porations and private individuals have
adopted acceptances as a means Of en-
ploying funds temporarily idle. Be-
fore and during the war, when Lon
don was the cashier for our interna-
tlonal trade, day to day loans were
usually made against Stock Exchange
collateral In the various large cities
No call loan market In acceptances
was In existence and loans against in
dustrlal or railroad securities were
the most convenient way of keeping
money at work for short periods while
waiting an opportunity for reinvest-
ment In long term stuff.
Without recourse to a reservoir OF
outside capital the banks making
commercial loans were compelled in
most cases to carry ordinary promis-
sorry notes until maturity or discount
them with some other bank. This
was still the method followed last
year to finance large part Of the
food and cotton crops. 1t accounts
for the congested condition of the
banks In the agricultural regions
at the present time.
This Is the wrong kind Of finance.
The farmer draws his fixed capital,
representing unsold products, from
the banks. az well as his working
capital representing products in the
process of sale. The greater number
Of the banks In the agricultural re-
gions are handicapped by loans OF a
fixed character, condition which
was made possible because loans were
made against what were supposed to
be readily marketable staples, but
which cannot actually be sold fol-
months TO come. 1t Is no more logi.
cal and IL IS not any sounder finance
to float these huge crop carryovers on
banking capital which Is supposed to
be kept liquid than 1t would be to
finance the purchase Of farms on
promlssory notes renewable every
sixty or ninety days
The farmer should be supplied with
bank funds only against products ac-
tually in process Of sale or for which
there Is an assured market within a
prescribed time. The rest Of his
needs should be met out Of farm loan
bond sales or out OF the proceeds Of
other long term securities which
would dnd their lodgment outside the
banks. The use Of acceptances tends
to this goal because they are renew