Evening star. [volume] (Washington, D.C.) 1854-1972, 1929-03-01
BY KENNETH S. VAN STRUM.

are ItBdTucu ny Illdly 10 DC tllc ulUSb
liquid and safest short time investment
available. Many investors who are
looking for safe short-term investments
can here receive from per cent to SIS
per cent on investments which mature
in from 80 to 1870 days.
Many corporations and investors who
might we'll avail themselves of the adj
vantages of bankers acceptances have
not done so because OF their unfamiliar
ity with these securities.
To Duplicate London's Market.
Before the passage of the Federal
Reserve act, bank acceptances We're
practically unknown in this country, al
though in one form or another they
date back some 1000 years to Babylonia,
and they have been used in Europe for
centuries. One of the chief reasons the
Federal Reserve system was established
was because America was jealous of
London'S prominence in world banking
and desired to duplicate her discount
market" here. One of the principal
was to aid in the creation of discount
markets in New York and other finan-
cial centerS of the country.
Function of Acceptances.
A discount market dealing in bankers
acceptances greatly facilitates the
financing Of imports and exports. A
ferent countries would be apt to be
cumbersome, since the two principals
might not understand each others
credit position, whereas by lending an
internationally known banks credit ia
cilities the transactions would be
simpler.
The bank does not furnish the money,
but through its knowledge of the credit
responsibilities of the two parties, "ac-
cepts" financial responsibility for the
transaction. While the bill is of course
ultimately paid by the purchaser of the
goods to which it applies, the bank. by
accepting the note. has, from a legal
standpoint, virtually issued a promis-
sorry note. The note is then known as
bankers acceptance" and sold in the
open market to corporations, insurance
companies, private investors, other
banks. or any one else seeking tempo
rary employment for funds.
Bank Responsible.
As far as the investor is concerned
the bank Is responsible for payment.
and since the business of accepting"
Is confined largely to about 200 well
known banks, his investment Is most
secure. In fact 40 internationally
known banks issue about IS per cent of
total bankers acceptances.
While large part of the acceptance
business OF the country Is concentrated
in New York. many other financial CEN
tiers also have their acceptance dealers.
Last year more than seven billion dol
lars worth Of our trade was financed
through bank acceptances. Since IS
per cent OF this was to finance foreign
trade. 1t became especially important
that We develop our discount market,
which we had neglected so long, if we
are to become world banker" as We
so often like to consider ourselves.
Attractive Yield.
The Reserve banks have played a
vital part in widening the market for
bank acceptarces by buying those &C
ceptances for which there was not
ready market. But recently in the move
to tighten credit in order to curtail
stock market loans they have thrown
large blocks Of bills on the market.
Bank acceptance rates have thus been
raised to present high levels where the
yield is from S per cent to 5as per cent.
They are most attractive as short term
investments to those VINO consider 1t
advisable to place part of their funds in
liquid short term securities which can
not depreciate in value until such time
as the security market outlook becomes
clearer.
The ideal situation for a good dis
count market" according to the Ameri-
can Acceptance Council, would be to
have 40 per cent of bankers acceptances
held by banks, 35 per cent by investors
and for account of foreign purchasers
and not over 25 per cent by the Federal
Reserve Banks. The discount market is
now facing a severe test and banking
authorities hope that the bills will be-
come sufficiently we'll known so that
by wide distribution the bill market can
at last stand on its own feet. During
the last few years the high rates in the
call money market have offered severe
competition to the market for bankers
acceptances. since Others" have been
lending In increasing numbers. Many
believe more equitable apportionment
OF loanable funds between call loans and
bank acceptances would be great ben
eft to our position as a world money
market and to our foreign trade.
Commercial Paper.
Another form Of investment which at
tracts the attention of short term in
veStors Is commercial paper. The
amount Of commercial paper issued has
fallen of somewhat in recent years, be-
cause borrowers have been able to OBJ
tain satisfactory accommodations at the
banks. Then, too, the Federal Reserve
system has succeeded in diversifying
the loans which banks formerly accom-
plished by purchasing many different
pieces Of commercial paper rather than
by making one big loan.
Commercial paper is the promissory
note of business concern. 1t usually
natures in from three to six months.
These notes are usually split up into
lots of $4,000, $4,000 or even as low as
$4,000 to accommodate small investors.
They are sold to banks, business con-
Germs, financial institutions and in fact
very much the same group that buys
bank acceptanceS. There is group of
dealers known as commercial paper
houses" who used to specialize In the
purchase and sale of commercial paper
Now they often deal in other short
term securities, such as bank accept
ances, also.
Since only large and better known
companies can obtain credit through
commercial paper in the open market,
commercial paper has long been con-
Sidered a very safe form of investment
While it does not stand SO high In this
respect as bank acceptances and be-
cause it Is not quite as negotiable, 10
carries somewhat higher raet of re-
turn. Thus, at the present time, COM
mercial paper yields from 5h4 per cent
to 5s4 per cent, according to the char
acter of the borrower and the ma
turity date.
Copyright 1921
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